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19 Cards in this Set
- Front
- Back
- 3rd side (hint)
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When to recognize revenue
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1) The economic substance takes precedence over the legal form.
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.
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Revenue Recognition at time of sale
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1) realization has taken place (converting non-cash assets into cash)
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2) Recognition - formally recording and reporting an item in the financial statements
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Construction in Progress
CIP |
Inventory Account, includes all costs incurred on the projects
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Gross profit is added to the account so at the end of the period the account shows Net Realizable Value for the project.
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Partial Billings ( Revenue Recognition During Production)
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Contra account to inventory (Construction in Progress)
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eg. Dr Accounts Receivable 130
Cr Partial Billings 130 When company bills the customer, the net value of the inventory is reduced to the selling price less the amount billed (150-130) or $20. |
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Provision for Loss
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Contra account to Construction in Progress
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Deferred Gross Profit
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Contra account to accounts receivable
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Dr Accounts Receivable 150
Cr Inventory 100 Cr Deferred Gross Profit 50 |
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Percentage of completion method for long term contracts
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1) Co. can make reasonably dependable estimates of the extent of progress toward completion,contract revenues, and contract costs.
2) the contract specifies enforceable rights regarding goods and services to be provided by both the company and the buyer, the consideration to be exchanged and the manner and terms of settlement. |
3) The buyer can be expected to satisfy its obligations under the contract.
4) The company expects to perform its contractual obligations. |
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Revenue Recognition During Production
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Dr Production Expense (vs COGS) 100
Dr Inventory 50 Cr Revenue 150 |
Inventory is increased from its cost to its selling price. Since the company recognized a gross profit, it must also increase the value of its net assets. (inventory)
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Revenue Recognition at Time of Cash Receipt
Company manufactures inventory Dr Inventory 100 Cr Cash 100 |
Company Sells Inventory and defers recognition of revenue
Dr Accounts Receivable 150 Cr Inventory 100 Cr Deferred Gross Profit 50 |
Since the Co. transferred the item, it records the receivable of $150, removes inventory of $100 and records difference as Deferred Gross Profit. The net Value of the receivables is 100 (150 -50)
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Revenue Recognition at Time of Cash Receipt
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Dr Cash 60
Cr Accounts Receivable 60 Company Records Revenue based on cash received. Dr Cost of Goods Sold 40 Dr Deferred Gross Profit 20 Cr Revenue 60 |
Since the company collects 60 it recognizes revenue of 60 The collection is 40% (60/150) of total sale price of $150. It recognizes $40 as cost of goods sold (40%x100) It reduces deferred revenue by $20 (60-40) thereby increasing the value of the net receivable.
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Proportional Performance Method
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When a long term service contract requires services to be performed in more than one act, revenue is recognized by the proportional performance method.
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Proportional Performance Method
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1) Specific Number of Similar Acts. Recognize equal amount of revenue for each act.
2) Specific Number of Acts but not similar acts. Recognizes revenue based on ratio of direct costs |
3) Unspecified Number of Similar Act. Recognize revenue on a straight-line method over the performance period.
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Proportional Performance Method -Costs
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1 Initial direct costs - costs associated with signing a contract- legal costs-
2 Direct costs - costs that have a clear causal relationship to the services performed. |
3 Indirect Costs - costs other than initial direct and direct costs. advertising and depreciation
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Proportional Performance Method Costs Recognition
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Initial costs - defer and allocate over the performance period in proportion to the recognition of revenues, expensed when revenue is recognized
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Direct Costs- expensed as incurred - relationship between direct costs and performance
Indirect Costs- expensed as incurred, no discernible future benefit |
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Construction in Progress loss on Project
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Recognize the loss for total project in year when it is recognized.
1) reduce current year revenue to 0 (becomes construction expense for the year) 2) Subtract out gross profit to date |
3) Subtract out amount of loss after gross profit has been eliminated to account for the loss
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Construction in Progress loss for the year
(overall profit on the contract) |
Recognize overage expense subtracted from the revenue for the year. Revenue is not backed out to zero and gross profit to date is not subtracted since there will be overall profit on the project
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Revenue loss below zero is ok because it is only a loss for the year. If loss on long term project revenues are backed out to equal 0.
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When Construction in Progress exceeds Partial Billings
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Carried as an asset on the balance sheet
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When Partial Billings exceeds Contstruction
in Progress |
Carried as liability on the balance sheet
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Construction Grid
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Balance Sheet
CIP inventory account Accounts Receivable Partial Billings - Contra account to CIP Provision for Loss - Contra account to CIP |
Income Statement
Construction Expenses Revenue |
