Ch18 solutions P1-Sim

Ch18 solutions P1-Sim - PROBLEM 18-1 (a) 1. The point of...

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PROBLEM 18-1 (a) 1. The point of sale method recognizes revenue when the earnings process is complete and an exchange transaction has taken place. This can be the date goods are delivered, when title passes, when services are rendered and billable, or as time passes (e.g., rent or royalty income). This method most closely follows the accrual accounting method and is in accordance with generally accepted accounting principles (GAAP). 2. The completion-of-production method recognizes revenue only when the project is complete and the contract is completed. This is used primarily with short-term contracts, or with long-term contracts when there is considerable difficulty in estimating the costs remaining to complete a project. The advantage of this method is that income is recognized on final results, not estimates. The disadvantage is that when the contract extends over more than one accounting period, current performance on the project is not recognized and earnings are distorted. It is acceptable according to GAAP only in the extraordinary circumstances when forecasting the amount of work completed to date is not possible. 3. The percentage-of-completion method of revenue recognition is used on long-term projects, usually construction. To apply it, the following conditions must exist: (i) A firm contract price with a high probability of collection. (ii) A reasonably accurate estimate of costs (and, therefore, of gross profit). (iii)
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This note was uploaded on 09/20/2011 for the course ACC 319 taught by Professor Jones during the Fall '10 term at UNC Greensboro.

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Ch18 solutions P1-Sim - PROBLEM 18-1 (a) 1. The point of...

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