Lecture%206-9%20PII_std

Lecture%206-9%20PII_std - Revenue Recognition Week 6-9 2 1...

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Unformatted text preview: Revenue Recognition Week 6-9 2 1. Conceptual framework for Financial Reporting 2. Concept issues for revenue recognition & Revenue recognition alternatives 3. Account for revenue recognition prior to the period of sale 4. Account for revenue recognition after the period of sale 5. Account for revenue recognition delayed until a future event occurs. 6. Understand software revenue recognition, franchises, real estate sales, retail land sales, and consignment sales Objectives Installment sales involve a financing agreement whereby the customer signs a contract,… Installment sales involve a financing agreement whereby the customer signs a contract,… …makes a small down payment,… …makes a small down payment,… 4. Account for revenue recognition after the period of sale--4. 1Installment Method 3 4 …and agrees to make periodic payments over an extended period, often several years. …and agrees to make periodic payments over an extended period, often several years. Installment Method 5 Two methods employed to defer revenue recognition until cash is received are the installment sales method and the cost recovery method . These methods are used only when the point-of-sale or other GAAP revenue recognition methods are not appropriate. These methods may be used only when there is uncertainty about whether the sales price will be collected and when an allowance for bad debts cannot be reasonably estimated. Revenue Recognized at Collection 6 1. Total sales, cost of goods sold, and collections are recorded in the normal manner during the year. 2. At the end of the year, installment sales are identified. The revenue and the related cost of goods sold are “reversed,” and the deferred gross profit is recognized. 3. At the end of the year, the gross profit rate on installment sales is computed. Installment Method Continued Continued Continued Continued 7 4. A portion of the deferred gross profit is recognized as gross profit for the year. 5. In future years the remaining deferred gross profit is reduced and the gross profit is recognized based on the cash collected on the installment sales. Installment Method 8 Consider the following information for the Lee Company for 2010: Consider the following information for the Lee Company for 2010: Total credit sales $500,000 Total cost of goods sold 390,000 Installment method sales 100,000 Installment method cost of goods sold 75,000 Gross profit rate on installment method sales 25% Cash receipts on installment method sales 20,000 Cash receipts on other credit sales 300,000 Lee Company uses the perpetual inventory method. Lee Company uses the perpetual inventory method. Installment Method 9 Installment Method The company records the total sales and cost of goods sold for the year: The company records the total sales and cost of goods sold for the year: During 2010 Continued Continued Continued Continued 10 Installment Method During 2010 Continued Continued Continued Continued The company recognizes cash collections—$20,000...
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Lecture%206-9%20PII_std - Revenue Recognition Week 6-9 2 1...

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