Acc 406 Chapter 3 Review File (1)

Acc 406 Chapter 3 Review File (1) - Acc 406 Chapter 3...

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Acc 406 Chapter 3 Review File Note that this a combined “focus” and “review”file. I. Revenue Recognition Prior to Sale A. Revenue recognition prior to sale—Condition 1 (the “critical event”) and Condition 2 (“measurability”) from Chapter 2 are both satisfied prior to the time of the sale. 1. Percentage-of-completion method recognizes revenue, cost, and gross profit as progress toward completion is made and is used primarily for long-term construction contracts. a. This method requires fairly good estimates of progress. b. Cost-to-cost ratio: % complete = costs incurred to date ÷ estimate of total costs. c. Current revenue (gross profit) = % complete x estimated total revenue (gross profit) - revenue (gross profit) recognized in previous years. d. A change in cost estimate is accounted for in a cumulative catch-up manner, i.e., accounted for such that the balance sheet is as it would have been if the revised estimate had been the original estimate. e. A current asset results when total costs and recognized profit exceed billings. f. A current liability results when billings exceed total costs and recognized profit. Note that we tend to address this method regarding construction contracts. It is applicable as well in professional services, e.g. long-term consulting contracts. 2. Completed contract is used when interim estimates of progress cannot be made. a. Therefore, no interim revenue, costs, or gross profit are recorded. b. These items are accumulated on the balance sheet, but not reflected on the income statement until the project is completed. 3. Long-term contract losses: a. Cost increases require current period adjustment of excess gross profit recognized in earlier periods. b. With unprofitable contracts, the entire expected loss must be recognized in the current period (as well as the recovery of previously recognized revenue and gross profit). Problem applications (Exercises 3-1 and 3-2) are illustrated below:
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E3-1. Percentage-of-completion method Requirement 1: Let X = estimated cost. Costs to date x Estimated income = Income for 2011 Estimated total costs $100,000 x ($500,000 X ) = $25,000 a X X = $400,000 Estimated income = Revenue Estimated costs = $500,000 – $400,000 = $100,000 a $125,000 $100,000 Requirement 2: Cash collected = Billings – Ending receivable balance = $110,000 $7,500 = $102,500 E3-2. Determining gross profit using percentage-of-completion The gross profit for the percentage-of-completion method is as follows: Contract price $3,000,000 Cost to date $1,800,000 Est. cost to complete 600,000 Total cost 2,400,000 Expected gross profit 600,000 Percentage complete (18/24) 75 % Profit to date 450,000 Profit previously recognized (300,000 ) 2012 gross profit $ 150,000
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Hopefully this is basic review for you but please raise questions as you have them. B.
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This note was uploaded on 03/06/2012 for the course ACC 406 taught by Professor Wygal during the Spring '10 term at Rider.

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Acc 406 Chapter 3 Review File (1) - Acc 406 Chapter 3...

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