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136C 1_6_11 Notes

136C 1_6_11 Notes - 136C Company that sells a so.ware...

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Unformatted text preview: 1/6/10 136C Company that sells a so.ware package sold to a buyer Sale price: 100,000 ((10 hrs)) ((500hrs)) Sale date 7/1/1 (Year 1) >>> So.ware + 5 years of service (support) as well as installaGon (So.ware and installaGon at 6/25 ­7/1) *1,000 dollars a year to support service 3 ways that you can approach this situaGon *10,000 cost for installaGon 1) Recognize the revenue at the end of the enGre contract *100,000 hours to develop so.ware (conservaGsm, rev. rec. rule) >AmorGzaGon of this= $1,000/pckg 2) Allocate over Gme (over 5 years for this situaGon) 3) Recognize now  ­ ­> 7/1/1 a.er you have installed the so.ware and they have accepted it. >>Primary issue with this: the earnings process. * What is going on with the money? Do you have it already? * Legality: contracts? Must support your choice from the above 3 with the correct issues What will be the revenue? What will be expenses? What will you recognize as profit? Compare all three above opGons ((Rev  ­ Exp = Profits)) Op#on 1: CONSERVATISM, REFUNDABILITY Sale price of 100,000 paid on date of installaGon >>Money on your side, beder chance of moving down the line. But what will be the ramificaGons for the financial statements? Revenue: $0 Expenses: $0 **Matching principle: expenses should relate to Profit: $0 the revenues. Defer revenues, defer expenses. Overall, all revenues and expenses should relate. >>What about liabilGies and assets? * You get the check and debit cash, what do you credit if you cant credit revenue? * A 100,000 liability will be incurred, and you'll have the 100,000 as cash in assets. * You also incurred 11,000 dollars of expenses, which you can't recognize, so they become deferred assets. (10,000 + 1,000 for setup and service, etc.) Op#on 3: 100,000 20,000 80,000 80,000 40,000 Assets Op#on 2: EARNINGS PROCESS Revenue Expenses Profit STE LiabiliGes 100,000 < ­ ­ you did most of the work, got the money, and it is highly unlikely that you will have any returns. *Have to recognize every cost for all the years of the life of the so.ware *Profits *4 years of service you have to provide everything that will happen during the rest of the life of the contract *The proceeds See the total cost to the total revenue relaGonship. Would use it if you feel that Revenue 10,000 you're earning it as you go along Expenses 2,000 *20 percent of the whole cost (from above) Profit 8,000 STE LiabiliGes 90,000 *Unearned income… you were paid 100,000 Assets but only recognized 10,000 as revenue >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> HW Problem: E18 ­7 % of compleGon= AllocaGon What is the best way to allocate when you have a 3 yr project? >equally each year >monitor your work and try to associate based on efforts **If you monitor costs that they are incurring, a good indicaGon of efforts… Gme is not such a good allocator. Contract Price $ 1,200,000.00 Cost (total) $ 800,000.00 *Cost to date plus costs expected Tot. Profit Expected $ 400,000.00 *How do we allocate this? Equal effort each year? (1/3?) >Much beder to do cost to cost formula Cost to cost formula= Costs incurred/Cost total Year 1: 250,000/800,000 >>>Everything is profit to date! ((35 percent)) Profit TO DATE: $ 140,000.00 Year 2: 600,000/800,000 ((75 percent)) Profit TO DATE: $ 300,000.00 ( ­)Profit prev. recognized Profit this year $ 160,000.00 **Add this line to all work from now on Year 3: *SGll expecGng 800,000 of total costs. *Stop and think about this… everything took exactly how much it was supposed to and took the amount of Gme expected? BS. 785,000 of costs now. ((100 percent complete)) Price $ 1,200,000.00 Cost $ 785,000.00 Profit to date $ 415,000.00 Actual profit, 100% complete at this point ( ­)prev yr prof: $ (300,000.00) (Already recognized this in the previous periods) Profit this year $ 115,000.00 (Where we're at now) Journal Entries for this company: (Only 2011) Cost of Construc+on ConstucGon in Progress AP  ­ ­> Cash $ 320,000.00 **This is an asset, expecGng to get your $ 320,000.00 money back eventually Billing A/R $ 350,000.00 Billings on CIP CollecGons Cash $ 120,000.00 A/R Balance Sheet Cash A/R CIP $ 350,000.00 **Contra account $ 120,000.00 End of 2nd year $ 320,000.00 $ 180,000.00 $ 600,000.00 **First year plus second year *( 30+150 ­200 ­120) = 180,000 (((went up 30 this year))) Billings $ 500,000.00 Net CIP $ 100,000.00 Income Statement $  ­ ...
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