ACCT3111

ACCT3111 - Chapter 18 Income Recognition and Measurement of...

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Chapter 18 Income Recognition and Measurement of Assets Objectives 1. Understand the revenue recognition alternatives. 1. Explain revenue recognition at the time of sale, during production, and at time of cash receipt. 2. Explain the conceptual issues regarding revenue recognition alternatives. 2. Account for revenue recognition prior to the period of sale, including the percentage-of- completion and completed contract methods. 3. Account for revenue recognition after the period of sale, including the installment and cost recovery methods. (1) Recognition Alternatives (1.1) Alternative Methods Recognition is the process of formally recording and reporting items in the financial statements. Realization is the process of converting noncash recourses into cash or rights to cash. Alternative Revenue Recognition Methods 1. Revenue recognition in the period of sale. 2. Revenue recognition prior to the period of sale. 3. Revenue recognition at the completion of production. 4. Revenue recognition after the period of sale. 5. Revenue recognition delayed until a future event. Example 1: Revenue Recognition at Time of Sale T1: Ringwood Company manufactures the inventory. T2: Ringwood sells the inventory for $150. T3: Ringwood collects cash of $60. 1
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Example 2: Revenue Recognition during Production T1: Ringwood Company manufactures the inventory. T2: Ringwood recognizes the revenue during production (the manufacturing process). T3: The company bills the customer for a partial billing of $130. T4: Ringwood collects cash of $60. Example 3: Revenue Recognition at Time of Cash Receipt T1: Ringwood Company manufactures the inventory. T2: Ringwood “sells” the inventory and defers the recognition of revenue. T3: Ringwood collects cash of $60. (1.3) Conceptual Issues The decision as to when to recognize revenue focuses on three factors: 1 The economic substance of the event takes precedence over the legal form of the transaction. 2 The risks and benefits of ownership have been transferred to the buyer. 3 The collectibility of the receivable from the sale is reasonably assured. 2
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(2) Revenue Recognition Prior to the Period of Sale (2.1) Basics Percentage-of-Completion Method 1 It achieves the goals of accrual accounting. 2 It is consistent with the argument that revenue is earned continuously over the entire earning process. 3 It results in a more relevant measure of periodic income. AICPA Statement of Position No. 81-1 requires that a construction company use the percentage- of-completion method for long-term contracts when all the following conditions are met: 1. The company can make reasonably dependable estimates of the extent of progress toward completion, contract revenue, and contract costs. 2.
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ACCT3111 - Chapter 18 Income Recognition and Measurement of...

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