Exam 4: Revenue Recognition

Sunshine Contractors started a contract in January 2011 to build a bridge at a fixed price of $14 million. The bridge was to be completed by October 2013. Total cumulative costs incurred by the end of December 2011 and 2012 were $2 million and $6 million, respectively. Sunshine is unable to estimate the total costs of the project prior to completion. Final costs at the end of the project totaled $11 million. How much cost of sales will Sunshine report in 2013?

Explain how revenue should be allocated to the components in a multiple deliverable sales arrangement.

Which of the following statements about the value creation process is not correct?

Creation Construction Company (CCC)has contracted to build an office building for Property Corp. The construction started on January 1, 2012, and the project was completed on July 1, 2015. The contract price was $70 million. Due to uncertainties in the construction process, the two parties to the project agreed to a risk-sharing arrangement whereby Property Corp. covers 50% of all cost overruns in excess of the originally estimated cost of $65 million (e.g., if estimated total costs are $69 million, then CCC would receive an additional $2 million for the contract). The following data relate to the construction period. Required: Calculate the estimated gross profit (loss)for 2012, 2013, 2014, and 2015, assuming that the percentage of completion method is used.

What are some ways in which earnings management on construction contracts can be prevented?

Queensbridge Corp. started a contract in June 2011 to build a bridge at a fixed price of $45 million. The bridge was to be completed by October 2013 at a total estimated cost of $35 million. Total cumulative costs incurred by the end of December 2011 and 2012 were $7 million and $24 million, respectively. Because of cost overruns in 2012, it is now expected that the project will cost $5,000,000 more than originally estimated. Final costs at the end of the project totaled $36 million. Queensbridge Corp. follows the guidance in IFRS. Required: Determine the amount of gross profit to be recognized for the years ended December 31, 2011 and December 31, 2012.

Harris Corporation sold hardware and software for $70,000. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The normal selling prices are as follows: a. Determine how revenue should be allocated to the various components in this transaction. b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

You are an accountant working at Phantastic Pharmaceutical Inc. and have been asked to explain to your controller the possible points at which revenue could be recognized by your organization. Identify two alternatives that are conceptually valid for recognizing revenue at Phantastic.

ACME is investing in a new heavy oil rig operation in northern Alberta. ACME has hired Max Contractors to construct the facilities. The contract price is $4,450 million to be completed over four years. The following information pertains to this construction contract. Required: (Show all dollar amounts in millions.): a. Calculate the amount of revenue, expense and gross profit to be recognized in the accounts of Max Contractors in each of the four years. b. If Max were to underestimate the cost to complete to be $1,690 million instead of $1,840 in Year 3, how much gross profit or loss would be recognized in each year? How much more or less gross profit or loss would be reported in that year? How much more or less gross profit or less would be reported in Year 4, and in total for all four years? c. Explain how Max would account for this project if there were significant uncertainty over the outcome of the contract, such that Max could not clearly identify or measure the construction costs. d. Explain what the completed contract method is, and which entities can use this approach.

Explain why accounting standards generally prescribe a smaller set of alternatives for revenue recognition.

Nichols Construction Company (NCC)entered into a contract to build a shopping complex for $1,900,000. Construction commenced on July 1, 2011, with a planned completion date of December 31, 2013. A summary of the related accounting information is provided below: How much would the balance in accounts receivable be on the balance sheet of NCC at the end of 2013 if NCC uses the percentage of completion method?

DB Inc. sells goods on a variety of terms to its customers, such as some sales on credit, some on consignment, and some on an installment basis. Which of the following revenue recognition methods is most applicable for a company like DB?

On March 1, Pendant Textbook Publications delivers 100 copies of one of its accounting textbooks to the First University bookstore. The bookstore can return all unsold copies to Pendant. The retail price of each copy is $110, while the price charged to the bookstore is $80. Each book costs Pendant $40 to produce. On April 15, the distributor returns 30 unsold copies to Pendant. Based on these facts, how much revenue would Pendant recognize on April 15?

Which accounting method is permitted under ASPE for construction contracts?

Shear Company sells computer equipment with a 2-year warranty. Prior experience indicates that costs associated with this warranty average 1% in the first year and 2% in the second year. In 2012, Shear had sales of $1,800,000. It paid $250,000 for materials and labour to make warranty-related repairs in 2012. What amount should the warranty expense for 2012 be?

WestCoast Co. started a contract in June 2011 to build a bridge at a fixed price of $14 million. The bridge was to be completed by October 2013. Total cumulative costs incurred by the end of December 2011 and 2012 were $2 million and $6 million, respectively. WestCoast Co. is unable to estimate the total costs of the project prior to completion. Final costs at the end of the project totaled $11 million. Required: Determine the amount of revenue, cost of sales, and gross profit WestCoast Co. would report in 2011, 2012, and 2013.

RU FIT Centre opened for business on April 5, 2012. For revenue recognition purposes, all memberships are assumed to be issued at the beginning of the month, with 1-year memberships costing $600 and 2-year memberships costing $960. During April, 32 1-year memberships and 25 2-year memberships were sold. RU FIT Centre prepares monthly financial statements. Which of the following statements is correct?

Soorya Manufacturing makes educational toys that are sold to retailers on the following terms: Each type of toy has a fixed wholesale price, is shipped F.O.B. shipping point, and payment is due 45 days after the shipment. The retailer may return a maximum of 45% of an order at the retailer's expense up to 6 months after delivery. Sales are made only to retailers that have a good credit rating. In Soorya's 11 years of existence, the company has experienced a return rate of approximately 15%, a bad debt expense of 5% of sales and an average collection period of 90 days. Soorya provides a bonus to its senior managers based on annual revenues, net of returns. Required: a)Identify four different points in Soorya's value creation process that could be used for recording revenue. b)What are the basic revenue recognition criteria under IFRS? c)Discuss the pros and cons for two alternative recognition points mentioned in point (a). Remember to support your reasoning with case facts. d)Recommend the recognition point that Soorya should use in its financial statements. e)Explain why this is or this is not a consignment sales transaction. f)Explain why this is or this is not an installment sales transaction.

In the chart below, identify the expense recognition method that you feel is most appropriate and also explain why.

Compare and contrast the revenue recognition criteria for a transaction involving the sale of goods with a transaction involving the provision of services.