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14 Cards in this Set
- Front
- Back
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when do you recognize revenue
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when it is earned or realizable
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how do we faithfully represent economic activity when delivery occurs perhaps years later?
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impose an assumed pattern of earnings that allows us to recognize some revenue now
we can recognize revenue this way by using the percentage of completion method |
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what conditions must hold true for percentage of completion to be used
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reasonable estimation of completion
enforceable contract buyer is expected to honor contract contractor expects to perform contract |
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how do you calculate the amount of revenue to recognize under the percentage of completion
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use percent of completion method:
first, determine percent completed of project second, multiple total expected revenue by the percent completed third, subtract any revenue that has already been recognized in prior periods fourth, the amount left over is the revenue recognized in this period |
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but before any revenue can be recognized you need to know what value to use for percent that is completed...
how do you determine the percent completed |
cost-to-cost method is most accepted
% completed = (cost incurred to date) / (expected total cost) **cost incurred to date means cost in current and all previous years, just in case you were unsure** |
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so if we find that percentage of completion is necessary, at what point would you recognize the revenue and gross profit
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revenue and gross profit is recognized each period based on the percent completed.
**remember, revenue is being earned as the project is completed but we focus on recognizing it each period to be consistent with our financial statements** |
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In addition to recognizing gross profit each period, an accountant should recognize the costs associated with this profit
What is the account title for the combination of costs and gross profit associated for a project? |
Construction in Progress (CIP)
This is an asset account and can be considered as inventory All the costs and gross profit are debited into this account title CIP can be interpreted as the value of construction to date Fair Value = Market Value the amount you pay for something is the market value. this is the fair value for managing the supply chain process Fair Value = costs that are necessary to make the item + profit |
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What entries are made with regard to CIP
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Two CIP entries
-one records the cost -one records the profit |
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As costs are incurred how is this recorded?
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make a debit to CIP for amount of cost
make a credit to liability for same amount Ex. CIP 2000 Wages payable 2000 |
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Now that you've added the value of cost to CIP how do you recognize the profit?
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Profit = revenue - expenses
one journal entry will record the expense as a debit, the revenue as a credit, and the profit as a debit to CIP Ex. CIP 1000 Wage Exp 2000 Construction Revenue 3000 *this adds the profit value of 1000 to CIP which will bring the total value of CIP to 3000* the equation is in balance because the expense and revenue are still recorded |
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After CIP has accumulated all its costs and profits the customer will be billed
Where does this billing take place? |
billing is recorded as a contra inventory account to CIP
represents the portion of CIP "owned" by the customer |
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now that you know where billing takes place, how is this billing recorded on the books?
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you have to debit accounts receivable and credit billings on CIP
when the customer pays you would: debit cash for payment amount credit accounts receivable |
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When the contract is totally over with how would you finalize the contract on the books?
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you want to zero out the CIP and billings on CIP accounts with this journal entry:
billings on CIP xxxx CIP xxxx since they should equal the same amounts you will return their values to zero with this journal entry (JE) |
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what if costs rise unexpectedly? how would you record this loss?
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remember that you have to make two JE for CIP. one for cost and one for profit. you would record the JE for cost just like before but when recording the profit you would not debit the profit value to CIP, you would instead credit the loss to CIP
it's suppose to look like this remember? CIP 1000 Wage Exp 2000 Construction Revenue 3000 lets say your expense jumps to 4000. you're now taking a 1000 loss so your JE would look like this CIP 4000 Wages payable 4000 Wage Exp 4000 Construction Revenue 3000 CIP 1000 this way your CIP is lowered by 1000 which represents the loss incurred |
