Download - Kieso chap 18
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18-1
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C H A P T E RC H A P T E R 1818
REVENUEREVENUE
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
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18-3
1. Apply the revenue recognition principle.
2. Describe accounting issues for revenue recognition at point of
sale.
3. Apply the percentage-of-completion method for long-term
contracts.
4. Apply the cost-recovery method for long-term contracts.
5. Identify the proper accounting for losses on long-term contracts.
. Describe the accounting issues for service contracts.
!. Identify the proper accounting for multiple-deliverable
arrangements.
Learning Objeci!e"Learning Objeci!e"
Learning Objeci!e"Learning Objeci!e"
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18-#
Curren
En!ironmen
"uidelines forrevenue
recognition
Departures from
sale basis
Re!enue
Recogniion $A
Poin o% &ale'
Re!enue
Recogniion $Long-
Term Conrac"'
Re!enue
Recogniion
$O(er'
#easurement
$ecognition
%ummary
%ervice contracts
#ultiple-
deliverable
arrangements
&ther
%ummary of
methods
'ercentage-of-completion method
(ost-recovery
method
)ong-term contract
losses
Disclosures
Re!enue
Re!enue
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18-)
Re"aemen" for im*ro*er re!enue recogniion are
relatively common and can lead to significant share price
ad*ustments.
Re!enue recogniion is a top fraud ris+ and regardlessof the accounting rules follo,ed I$% or /.%. "AA'0
the ris+ or errors and inaccuracies in revenue reporting is
significant.
T(e Curren En!ironmenT(e Curren En!ironmen
T(e Curren En!ironmenT(e Curren En!ironmen
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Re!enue recogniion *rinci*le, $evenue is recognied
ui.eline" %or Re!enue Recogniion
T(e Curren En!ironmenT(e Curren En!ironmen
T(e Curren En!ironmenT(e Curren En!ironmen
LO 1 Apply the revenue recognition principle.LO 1 Apply the revenue recognition principle.
10 ,hen it is probable that the economic bene%i" /ill
%lo/ o (e com*an0 and
20 ,hen the bene%i" can be mea"ure. reliabl0.
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&ale o% *ro.uc
%rom in!enor0
T0*e o%
Tran"acionRen.ering a
"er!ice
Permiing u"e
o% an a""e
&ale o% a""e
o(er (an
in!enor0
ae o% "ale
$.ae o%
.eli!er0'
&er!ice"
*er%orme. an.
billable
A" ime *a""e"
or a""e" are
u"e.
ae o% "ale or
ra.e-in
ain or lo"" on
.i"*o"iion
Re!enue %rom
inere" ren"
an. ro0alie"
Re!enue %rom
%ee" or
"er!ice"
Re!enue %rom
"ale"
e"cri*ion
o% Re!enue
Timing o%
Re!enue
Recogniion
T(e Curren En!ironmenT(e Curren En!ironmenT(e Curren En!ironmenT(e Curren En!ironmen
LO 1 Apply the revenue recognition principle.LO 1 Apply the revenue recognition principle.
4llu"raion 18-1
Re!enue Recogniion Cla""i%ie. b0 Naure o% Tran"acion
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Earlier recognition is appropriate if there is a high degree of
certainty about the amount of revenue earned.
ela0e. recognition is appropriate if the
degree of uncertainty concerning the amount of revenue
or costs is sufficiently high or
sale does not represent substantial completion of theearnings process.
e*arure" %rom (e &ale 5a"i"
T(e Curren En!ironmenT(e Curren En!ironmenT(e Curren En!ironmenT(e Curren En!ironmen
LO 1 Apply the revenue recognition principle.LO 1 Apply the revenue recognition principle.
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$evenue should be mea"ure. at the %air !alue o%
con"i.eraion recei!e. or recei!able.
Tra.e .i"coun" or !olume rebae" should reduceconsideration received or receivable and the related
revenue.
4% *a0men i" .ela0e. seller should impute an interest
rate for the difference bet,een the cash or casheuivalent price and the deferred amount.
7ea"uremen o% &ale Re!enue
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
4llu"raion 18-2
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
%ansung ma+es the follo,ing entry on #arch 31 211.
Accounts receivable !
%ales !
4llu"raion 18-2
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
Assuming %ansung6s customers mee (e .i"coun (re"(ol.
%ansung ma+es the follo,ing entry.
(ash !
Accounts receivable !
4llu"raion 18-2
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
If %ansung6s customers %ail o mee (e .i"coun threshold
%ansung ma+es the follo,ing entry upon payment.
(ash !
Accounts receivable !
%ales discounts forfeited 21
4llu"raion 18-2
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7hen a sales transaction involves a %inancing arrangemen the
%air !alue i" .eermine. b0 .i"couning the payment using an
im*ue. inere" rae.
4m*ue. inere" rae is the more clearly determinable of either
1. the prevailing rate for a similar instrument of an issuer ,ith a
similar credit rating or
2. a rate of interest that discounts the nominal amount of the
instrument to the current sales price of the goods or services.
7ea"uremen o% &ale Re!enue
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
4llu"raion 18-3
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
8he *ournal entry to record %9:6s sale to "rant (ompany on;uly 1 211 is as follo,s ignoring cost of goods sold entry0.
<otes receivable
%ales
4llu"raion 18-3
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
%9: ma+es the follo,ing entry to record interest revenue.
<otes receivable 54
Interest revenue 12= > ? > @0 54
4llu"raion 18-3
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Re!enue %rom (e "ale o% goo." is recogni9e. /(en all the follo,ing
conditions are met
1. (ompany has transferred to the buyer the significant ris+s and
re,ards of o,nership of the goodsB
2. (ompany retains neither continuing managerial involvement to the
degree usually associated ,ith o,nership nor effective control over
the goods soldB
3. 8he amount of revenue can be measured reliablyB
4. It is probable that the economic benefits ,ill flo, to the companyB and
5. 8he costs incurred or to be incurred can be estimated reliably.
Recogniion o% &ale Re!enue
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 LO 2
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5ill an. Hol. &ale"
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
5u0er i" no 0e rea.0 o a:e .eli!er0 but does ta+e title and
accept billing.
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
4llu"raion 18-#
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 LO 2
&oluion, Cutler should record the revenue at the time titlepasses provided
1. it is probable that delivery ,ill be madeB
2. the item is on hand identified and ready for delivery at
the time the sale is recogniedB
3. Caristo ac+no,ledges the deferred delivery arrangementB
and
4. the usual payment terms apply.
4 a**ear" (a (e"e con.iion" /ere *robabl0 me and
therefore revenue recognition should be permitted at the time
the agreement is signed.
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
Cutler ma+es the follo,ing entry to record the bill and hold sale.
Accounts receivable 45
%ales 45
4llu"raion 18-#
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&ale" &ubjec o 4n"allaion or 4n"*ecion
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
4llu"raion 18-)
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La0a/a0 &ale"
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
4llu"raion 18-+
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&ale" /i( Rig( o% Reurn
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
8,o possible revenue recognition methods are available ,hen
the right of return e>poses the seller to continued ris+s of
o,nership
1. not recording a sale until all return privileges have e>pired
or
2. recording the sale but reducing sales by an estimate of
future returns.
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
4llu"raion 18-
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 LO 2
'esido sold 3 of laser euipment on August 1 211 and
retains only an insignificant ris+ of o,nership. &n &ctober 15
211 1 in euipment ,as returned.
Augu" 1 211
Accounts receivable 3
%ales 3
Ocober 1) 211
%ales returns and allo,ances 1
Accounts receivable 1
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
At December 31 211 based on prior e>perience 'esido
estimates that returns on the remaining balance ,ill be 4 percent.
'esido ma+es the follo,ing entry to record the e>pected returns.
ecember 31 211
%ales returns and allo,ances 11
Allo,ance for sales returns and allo,ances 11
E3 - 10 > 4= F 11G
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
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Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
4llu"raion 18-8
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18-26
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
#organ records the sale and related cost of goods sold as
follo,s.(ash 135
%ales 135
(ost of "oods %old 115
Inventory 115
4llu"raion 18-8
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Princi*al-Agen Relaion"(i*"
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
Amounts collected on behalf of the principal are not
revenue of the agent.
$evenue for the agent is the amount of the commission itreceives.
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Con"ignmen"
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
#anufacturers or ,holesalers0 deliver goods but reain
ile o (e goo." until they are sold.
Con"ignor manufacturer or ,holesaler0 shipsmerchandise to the con"ignee dealer0 ,ho is to act as
an agent for the consignor in selling the merchandise.
Con"ignor ma+es a profit on the sale.
Con"ignee ma+es a commission on the sale.
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Tra.e Loa.ing an. C(annel &u%%ing
Re!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &aleRe!enue Recogniion a Poin o% &ale
LO 2 Describe accounting issues for revenue recognition at point of sale.LO 2 Describe accounting issues for revenue recognition at point of sale.
Tra.e loa.ing - a cray uneconomic insidious practice through
,hich manufacturersHtrying to sho, sales profits and mar+et
share they don6t actually haveHinduce their ,holesale
customers +no,n as the trade to buy more product than they
can promptly resell.
C(annel "u%%ing. 7hen a soft,are ma+er needed to ma+e its
financial results loo+ good it offered deep discounts to its
distributors to overbuy and then recorded revenue ,hen the
soft,are left the loading doc+.
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T/o me(o." of accounting for long-term constructioncontracts
'ercentage-of-completion method.
(ost-recovery ero-profit0 method.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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Raionale for using *ercenage-o%-com*leion accountingis that under most of these contracts the
Cuyer and seller have enforceable rights.
Cuyer has the legal right to reuire specific performance on
the contract.
%eller has the right to reuire progress payments that
provide evidence of the buyer6s o,nership interest.
As a result a continuous sale occurs as the ,or+progresses and companies should recognie revenue
according to that progression.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-3)
Com*anie" mu" u"e (e *ercenage-o%-com*leion me(o./(en all o% (e %ollo/ing con.iion" e;i"<
1. 8otal contract revenue can be measured reliablyB
2. It is probable that the economic benefits associated ,ith the
contract ,ill flo, to the companyB
3. Coth the contract costs to complete the contract and the stage
of contract completion at the end of the reporting period can
be measured reliablyB and
4. 8he contract costs attributable to the contract can be clearly
identified and measured reliably so the actual contract costs
incurred can be compared ,ith prior estimates.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-3+
Com*anie" "(oul. u"e (e co"-reco!er0 me(o. /(en oneo% (e %ollo/ing con.iion" a**lie",
1. 7hen a company cannot meet the conditions for using the
percentage-of-completion method or
2. 7hen there are inherent haards in the contract beyond the
normal recurring business ris+s.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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Calculaion %or Re!enue o 5e Recogni9e.
LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
4llu"raion 18-11
4llu"raion 18-12
4llu"raion 18-13
Percenage-o%-Com*leion 7e(o.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-38 LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
4llu"raion, :( (onstruction (ompany has a contract toconstruct a @45 bridge at an estimated cost of
@4. 8he contract is to start in ;uly 21 and the
bridge is to be completed in &ctober 212. 8he follo,ing data
pertain to the construction period.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-36 LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
4llu"raion, (ompute percentage complete.4llu"raion 18-+
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-# LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
4llu"raion, :( ,ould ma+e the follo,ing entries to record10 the costs of construction 20 progress billings and 30
collections.
4llu"raion 18-
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-#1
'ercentage-of-(ompletion $evenue and "ross 'rofit by ear 4llu"raion 18-1+
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-#2 LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
4llu"raion, :(6s entries to recognie revenue and grossprofit each year and to record completion and final approval
of the contract.
4llu"raion 18-1
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-#3 LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
4llu"raion, (ontent of (onstruction in 'rocess AccountH'ercentage-of-(ompletion #ethod
4llu"raion 18-18
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-## LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
=inancial &aemen Pre"enaion>Percenage-o%-Com*leion
4llu"raion 18-16
(omputation of /nbilled (ontract 'rice at 12J31J1
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-#)
=inancial &aemen>Percenage-o%-Com*leion
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
4llu"raion 18-2
LO 3LO 3
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18-#+
4llu"raion, or the bridge pro*ect illustrated on the preceding
pages Kardhat (onstruction ,ould report the follo,ing revenues and
costs.
Co"-Reco!er0 $?ero-Pro%i' 7e(o.Co"-Reco!er0 $?ero-Pro%i' 7e(o.Co"-Reco!er0 $?ero-Pro%i' 7e(o.Co"-Reco!er0 $?ero-Pro%i' 7e(o.
LO 4 Apply the cost-recovery method for long-term contracts.LO 4 Apply the cost-recovery method for long-term contracts.
4llu"raion 18-21
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18-#
4llu"raion, Kardhat6s entries to recognie revenue and gross profit
each year and to record completion and final approval of the contract.
Co"-Reco!er0 $?ero-Pro%i' 7e(o.Co"-Reco!er0 $?ero-Pro%i' 7e(o.Co"-Reco!er0 $?ero-Pro%i' 7e(o.Co"-Reco!er0 $?ero-Pro%i' 7e(o.
LO 4 Apply the cost-recovery method for long-term contracts.LO 4 Apply the cost-recovery method for long-term contracts.
4llu"raion 18-22
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18-#8
4llu"raion, (omparison of gross profit recognied under different
methods.
Co"-Reco!er0 $?ero-Pro%i' 7e(o.Co"-Reco!er0 $?ero-Pro%i' 7e(o.Co"-Reco!er0 $?ero-Pro%i' 7e(o.Co"-Reco!er0 $?ero-Pro%i' 7e(o.
LO 4 Apply the cost-recovery method for long-term contracts.LO 4 Apply the cost-recovery method for long-term contracts.
4llu"raion 18-23
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18-#6
=inancial &aemen>Co"-Reco!er0 7e(o.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
4llu"raion 18-2#
LO 4 Apply the cost-recovery method for long-term contracts.LO 4 Apply the cost-recovery method for long-term contracts.
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18-)
A' Pre*are (e journal enrie" %or 21 211 an. 212<A' Pre*are (e journal enrie" %or 21 211 an. 212<
LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
4llu"raion,
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
Ca"*er Con"rucion Co<
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18-)1 LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
4llu"raion,
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-)2 LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
4llu"raion,
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18-)3 LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
4llu"raion,
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18-)#
(ompanies recognie revenue only to the e>tent of costs
incurred that are e>pected to be recoverable.
&nly after all costs are incurred is gross profit recognied.
LO 4 Apply the cost-recovery method for long-term contracts.LO 4 Apply the cost-recovery method for long-term contracts.
Co"-Reco!er0 7e(o.
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-))
Co"-Reco!er0 7e(o.Co"-Reco!er0 7e(o.Co"-Reco!er0 7e(o.Co"-Reco!er0 7e(o.
4llu"raion,
LO 4 Apply the cost-recovery method for long-term contracts.LO 4 Apply the cost-recovery method for long-term contracts.
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18-)+
4llu"raion,
Co"-Reco!er0 7e(o.Co"-Reco!er0 7e(o.Co"-Reco!er0 7e(o.Co"-Reco!er0 7e(o.
LO 4 Apply the cost-recovery method for long-term contracts.LO 4 Apply the cost-recovery method for long-term contracts.
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18-) LO !dentify the proper accounting for losses on long-term contracts.LO !dentify the proper accounting for losses on long-term contracts.
)oss in the (urrent 'eriod on a 'rofitable (ontract
L 'ercentage-of-completion method only the estimated
cost increase reuires a current-period ad*ustment ofgross profit recognied in prior periods.
)oss on an /nprofitable (ontract
L /nder both percentage-of-completion and completed-contract methods the company must recognie in the
current period the entire e>pected contract loss.
Long-Term Conrac Lo""e"
Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'Long-Term Conrac" $Con"rucion'
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18-)8
4llu"raion, )oss in (urrent 'eriod
Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"
LO !dentify the proper accounting for losses on long-term contracts.LO !dentify the proper accounting for losses on long-term contracts.
b0 'repare the *ournal entries for 21 211 and 212 assuming the estimatedcost to complete at the end of 211 ,as @21)#3+ instead of €1!1.
b0 'repare the *ournal entries for 21 211 and 212 assuming the estimatedcost to complete at the end of 211 ,as @21)#3+ instead of €1!1.
Ca"*er Con"rucion Co<
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18-)6
Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"
LO !dentify the proper accounting for losses on long-term contracts.LO !dentify the proper accounting for losses on long-term contracts.
4llu"raion, )oss in (urrent 'eriod
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18-+
Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"
LO !dentify the proper accounting for losses on long-term contracts.LO !dentify the proper accounting for losses on long-term contracts.
4llu"raion, )oss in (urrent 'eriod
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18-+1
4llu"raion, )oss on /nprofitable (ontract
Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"
LO !dentify the proper accounting for losses on long-term contracts.LO !dentify the proper accounting for losses on long-term contracts.
c0 'repare the *ournal entries for 21 211 and 212 assuming the estimatedcost to complete at the end of 211 ,as @ 2#+38 instead of @ 1!1.
c0 'repare the *ournal entries for 21 211 and 212 assuming the estimatedcost to complete at the end of 211 ,as @ 2#+38 instead of @ 1!1.
Ca"*er Con"rucion Co<
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18-+3
Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"
LO !dentify the proper accounting for losses on long-term contracts.LO !dentify the proper accounting for losses on long-term contracts.
4llu"raion, )oss on /nprofitable (ontract
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18-+#
Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"
LO !dentify the proper accounting for losses on long-term contracts.LO !dentify the proper accounting for losses on long-term contracts.
or the Co"-Reco!er0 method companies ,ould recognie the
follo,ing loss
4llu"raion, )oss on /nprofitable (ontract
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18-+)
(onstruction contractors should disclosure
$evenue recognied during the period and the methods used to
determine the contract revenue and stage of completion.
or contracts in progress
L aggregate amount of costs incurred and recognied net
income amount of advances received and amount of
retentions.
Any contingent assets or liabilities related to these contracts.
i"clo"ure" in =inancial &aemen"
LO !dentify the proper accounting for losses on long-term contracts.LO !dentify the proper accounting for losses on long-term contracts.
Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"Long-Term Conrac Lo""e"
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18-++
ollo, the same criteria as long-term contracts.
8o recognie revenue
It must be reliably measurableB
9conomic benefits are probableB
%tage of completion must be reliably measurableB and
(osts must be reliably measurable.
&er!ice Conrac"
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
LO " Describe the accounting issues for service contracts.LO " Describe the accounting issues for service contracts.
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18-+
&ingle Ac, $evenue recognied at the time of the act.
7ore T(an One Ac, $evenue recognied as various acts
occur.8hree circumstances
1. %pecified number of identical or similar acts.
2. %pecified number of defined but not identical acts.
3. /nspecified number of identical acts or similar acts ,ith a
fi>ed period for performance.
&er!ice Conrac"
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
LO " Describe the accounting issues for service contracts.LO " Describe the accounting issues for service contracts.
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18-+8
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
LO " Describe the accounting issues for service contracts.LO " Describe the accounting issues for service contracts.
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18-+6
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
LO " LO "
Assuming $OD services are provided according to the contract in
211 ;ac+son ma+es the follo,ing entries in 211 to recognied
revenue on the Andes contract.
anuar0 1 211
(ash 1
/nearned $OD service revenue 1
ecember 31 211
(ash 4
/nearned $OD %ervice $evenue 2
$OD %ervice $evenue
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18-
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
LO " Describe the accounting issues for service contracts.LO " Describe the accounting issues for service contracts.
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18-1 LO " Describe the accounting issues for service contracts.LO " Describe the accounting issues for service contracts.
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
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18-2 LO " Describe the accounting issues for service contracts.LO " Describe the accounting issues for service contracts.
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
O ( R R i i 4
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18-3
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
%enior)ife ma+es the follo,ing entries related to the contract.
anuar0 1 211
(ash 3
/nearned service revenue 3
ecember 31 211
/nearned service revenue
%ervice $evenue
ecember 31 212
/nearned service revenue 15
%ervice $evenue 15
O( R R ii 4
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18-#
7A" provide multiple products or services to customers as part
of a single arrangement.
7ajor accouning i""ue"
ho, to allocate the revenue to the various products and
services and
ho, to allocate the revenue to the proper period.
7uli*le-eli!erable Arrangemen" #DAs0
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
LO # !dentify the proper accounting for multiple-deliverable arrangements.LO # !dentify the proper accounting for multiple-deliverable arrangements.
O ( R R i i 4O( R R ii 4
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18-)
All units in a #DA are considered separate units of accounting
provided that
1. A delivered item has value to the customer on a standalone
basisB and
2. 8he arrangement includes a general right of return relative to
the delivered itemB and
3. Delivery or performance of the undelivered item isconsidered probable and substantially in the control of the
seller.
7uli*le-eli!erable Arrangemen" #DAs0
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
LO # !dentify the proper accounting for multiple-deliverable arrangements.LO # !dentify the proper accounting for multiple-deliverable arrangements.
O( R R ii 4O( R R ii 4
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18-+
7uli*le-eli!erable Arrangemen" #DAs0
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
LO # !dentify the proper accounting for multiple-deliverable arrangements.LO # !dentify the proper accounting for multiple-deliverable arrangements.
4llu"raion 18-33
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18- LO # !dentify the proper accounting for multiple-deliverable arrangements.LO # !dentify the proper accounting for multiple-deliverable arrangements.
4llu"raion 18-3#
O( R R ii 4O( R R ii 4
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18-8
Interest $oyalties and Dividends
Accretion
(ompletion-of-'roduction Casis
O(er Re!enue &iuaion"
O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"O(er Re!enue Recogniion 4""ue"
LO # !dentify the proper accounting for multiple-deliverable arrangements.LO # !dentify the proper accounting for multiple-deliverable arrangements.
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18-6
8he IA%C defines revenue to include both revenues and gains. /.%.
"AA' provides separate definitions for revenues and gains.
$evenue recognition fraud is a ma*or issue in revenue recognition. 8he
same situation occurs in the /nited %tates as evidenced by revenue
recognition brea+do,ns at telecom company "lobal (rossing /%A0
technology company )ucent 8echnologies /%A0 and utility company
9nron /%A0.
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18-8
A specific standard e>ists for revenue recognition under I$% IA% 1N0.
In general the standard is based on the probability that the economicbenefits associated ,ith the transaction ,ill flo, to the company selling
the goods rendering the service or receiving investment income. In
addition the revenues and costs must be capable of being measured
reliably. /.%. "AA' uses concepts such as realied or realiable and
earned as a basis for revenue recognition.
/.%. "AA' permits the use of the completed-contract method of
accounting for long-term construction contracts IA% 110. (ompanies
generally use the percentage-of-completion method. If revenues and
costs are difficult to estimate then companies recognie revenue only to
the e>tent of the cost incurredHa ero-profit approach under I$%.
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18-81
/.%. "AA' does not allo, the percentage-of-completion method for
service contracts. /nder I$% costs can be deferred if the company isusing percentage-of-completion. /nder "AA' costs are generally
e>pensed as incurred.
/.%. "AA' provides detailed guidance in multiple-deliverable
arrangements. I$% guidance is more general.
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18-82
=ranc(i"e"T/o "ource" o% re!enue,
1. %ale of initial franchises and related assets or
services and
2. (ontinuing fees based on the operations of
franchises.
LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
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18-83 LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
8he %ranc(i"or normally provides the %ranc(i"ee ,ith
1. Assistance in site selection.
2. 9valuation of potential income.
3. %upervision of construction activity.
4. Assistance in the acuisition of signs fi>tures and euipment.
5. Coo++eeping and advisory services.
. 9mployee and management training.
!. Puality control.
N. Advertising and promotion.
=ranc(i"e"
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18-8#
ranchisors record initial franchise fees as
revenue only ,hen and as they ma+e B"ub"anial
*er%ormance of the services they are obligated to perform and
,hen collection of the fee is reasonably assured.
&ub"anial *er%ormance occurs ,hen the franchisor has no
remaining obligation to refund any cash received or e>cuse any
nonpayment of a note and has performed all the initial services
reuired under the contract.
4niial =ranc(i"e =ee"
LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
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18-8)
4llu"raion, 8um6s 'ia Inc. charges an initial franchise fee of
5 for the right to operate as a franchisee of 8um6s 'ia. &f this
amount 1 is payable ,hen the franchisee signs the agreement
and the balance is payable in five annual payments of N each.8he credit rating of the franchisee indicates that money can be
borro,ed at N percent. 8he present value of an ordinary annuity of five
annual receipts of N each discounted at N percent is 3142. 8he
discount of N5N represents the interest revenue to be accrued bythe franchisor over the payment period.
E;am*le o% Enrie" %or 4niial =ranc(i"e =ee
LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
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18-8+
4llu"raion, 1< If there is reasonable e>pectation that 8um6s 'ia Inc.
may refund the do,n payment and if substantial future services remain
to be performed by 8um6s 'ia Inc. the entry should be
E;am*le o% Enrie" %or 4niial =ranc(i"e =ee
(ash 1
<otes $eceivable 3142
/nearned ranchise ees 4142
LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
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18-8
4llu"raion, 2< If the probability of refunding the initial franchise fee is
e>tremely lo, the amount of future services to be provided to the
franchisee is minimal collectibility of the note is reasonably assured
and substantial performance has occurred the entry should be
E;am*le o% Enrie" %or 4niial =ranc(i"e =ee
(ash 1
<otes $eceivable 3142
$evenue from ranchise ees 4142
LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
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18-88
4llu"raion, 3< If the initial do,n payment is not refundable
represents a fair measure of the services already provided ,ith a
significant amount of services still to be performed by 8um6s 'ia in
future periods and collectibility of the note is reasonably assured theentry should be
E;am*le o% Enrie" %or 4niial =ranc(i"e =ee
(ash 1
<otes $eceivable 3142
$evenue from ranchise ees 1.
/nearned ranchise ees 3142
LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
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18-86
4llu"raion, #< If the initial do,n payment is not refundable and no
future services are reuired by the franchisor but collection of the note
is so uncertain that recognition of the note as an asset is un,arranted
the entry should be
E;am*le o% Enrie" %or 4niial =ranc(i"e =ee
(ash 1
$evenue from ranchise ees 1
LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
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18-6
4llu"raion, )< /nder the same conditions as those listed in case 4
above e>cept that the do,n payment is refundable or substantial
services are yet to be performed the entry should be
E;am*le o% Enrie" %or 4niial =ranc(i"e =ee
(ash 1
/nearned ranchise ees 1
4n ca"e" # and 5 H ,here collection of the note is e>tremely uncertainHfranchisors may recognie cash collections using the cost-recovery method.
LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
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18-61
(ontinuing franchise fees are received in return for the
continuing rights granted by the franchise agreement and for
providing such services as management training advertising
and promotion legal assistance and other support.
ranchisors report continuing fees as re!enue ,hen they are
earned and receivable from the franchisee.
Coninuing =ranc(i"e =ee"
LO $ %&plain revenue recognition for franchises sales.LO $ %&plain revenue recognition for franchises sales.
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8/18/2019 Kieso chap 18
http://slidepdf.com/reader/full/kieso-chap-18 92/92
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