Intermediate Accounting

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CHAPTER 18 Revenue Recognition LEARNING OBJECTIVES 1. Apply the revenue recognition principle. 2. Describe accounting issues for revenue recognition at point of sale. 3. Apply the percentage-of-completion method for long-term contracts. 4. Apply the completed-contract method for long-term contracts. 5. Identify the proper accounting for losses on long-term contracts. 6. Describe the installment-sales method of accounting. 7. Explain the cost-recovery method of accounting. *8. Explain revenue recognition for franchises and consignment sales. *This material is covered in an Appendix to the Chapter. CHAPTER REVIEW 1. One of the most difficult issues facing accountants concerns the recognition of revenue by a business organization. Although general rules and guidelines exist, the significant variety of marketing methods for products and services make it difficult to apply the rules consistently in all situations. Chapter 18 is devoted to a discussion and illustration of revenue transactions that result from the sale of products and the rendering of services. Throughout the discussion, attention is focused on the theory behind the accounting methods used to recognize revenue. Revenue transactions that result from leasing and the sale of assets other than inventory are discussed in other sections of the text. Revenue Recognition 2. (S.O. 1) The revenue recognition principle provides that revenue is recognized when (1) it is realized or realizable, and (2) it is earned. Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables). Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, that is, when the earnings process is complete or virtually complete. * Note: All asterisked (*) items relate to material contained in the Appendix to the chapter. 3. The conceptual nature of revenue as well as the basis of accounting for revenue transactions are described in the following four statements. a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. 18-1
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b. Revenue from services rendered is recognized when services have been performed and are billable. c. Revenue from permitting others to use enterprise assets, such as interest, rent, and royalties, is recognized as time passes or as the assets are used. d. Revenue from disposing of assets other than products is recognized at the date of sale. Point of Sale 4. (S.O. 2) Sales transactions result in the exchange of products or services of an enterprise for other valuable assets, normally cash or a promise of cash in the future. Although most sales transactions are fundamentally similar, differences in the method or terms of sale lead to real differences in the transactions themselves and thus to differences in the
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18_Lecture_Notes_12th_ed_KIESO.IAIM.cp18.v2 - CHAPTER 18...

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