Additional Topics in Income Determination

Additional Topics in Income Determination -...

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Additional Topics in  Income Determination Revsine/Collins/Johnson: Chapter 3
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RCJ: Chapter 3 © 2005 2 Recall the criteria for revenue  recognition Condition 1: The critical event in the process of earning the revenue has taken place. Condition 2: The amount of revenue that will be collected is reasonably assured and is measurable with a reasonable degree of reliability. Time of sale is used in most industries
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RCJ: Chapter 3 © 2005 3 Revenue recognition prior to sale: Long-term construction projects Before construction begins, a formal contract has been signed. The buyer is assured and the contract price is specified. Consequently, both revenue recognition conditions are satisfied prior to the time of sale. Condition 1: The critical event is actual construction, thus revenue is earned over time as the project progresses toward completion. Condition 2: Measurability is satisfied because there’s a firm contract with a known buyer at a set price. In addition, construction costs can be estimated with reasonable accuracy so that expenses can be matched with revenues. Percentage-of-completion method : revenue is recognized in proportion to the “work done” each period.
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RCJ: Chapter 3 © 2005 4 Contract price is $1,000,000 and construction costs are estimated to be $800,000. Example: Solid Construction Corp. 
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Additional Topics in Income Determination -...

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