Exam 6: Revenue Recognition

Under ASPE, the profession requires that the percentage-of-completion method be used when certain conditions exist. Which of the following is NOT one of those necessary conditions?

When a company sells a bundle of goods or services, the selling price of the bundle

Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be

Concessionary or abnormal terms may

Timing of revenue recognition/percentage of completion Crush Inc. provides demolition services. In order to determine the progression of its projects, the company could use several measures, including estimated labour hours, total machine hours, and output of material demolished. A project Crush currently has underway has taken 400 labour hours, 900 machine hours, and 2,000 tons of material output. The estimated total resources required (and resulting outputs) for this project are 1,000 labour hours, 1,400 machine hours and 4,500 tons of materials. Instructions Consider the three alternative means of tracking percentage completion. Under each method, calculate the percentage-completion rate for this project.

Reporting of gross or net revenues Discuss three factors to consider in determining whether gross or net revenues should be reported on the income statement.

Use the following information for the following questions: In 2020, Cement Inc. began a three year construction contract for $ 3,500,000. Cement uses the percentage-of-completion method. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentation relating to this contract for calendar 2020 follow: Statement of Financial Position Current assets: Accounts receivable $\ldots \ldots \ldots \ldots \ldots \ldots \ldots\$150,000$ Contract asset/liability $\ldots \ldots \ldots \ldots \ldots \ldots \ldots105,000$ Contract costs $\$ 425,000$ less Billings of $\$ 320,000$ ) Income Statement Income (before tax) on the contract recognized in $2020 \ldots \ldots \ldots . . \quad \$ 105,000$ -How much cash was collected in 2020 on this contract?

Percentage-of-completion and completed-contract methods On June 15, 2020, Lion Construction signed a $ 360,000 contract to build a small building. Lion estimated that the total cost would be $ 320,000. Construction started immediately because the required completion date was August 31, 2021. Lion’s relevant data relating to this construction project were as follows: Actual costs incurred Estimated costs to complete Progress billings Collections \ 120,000 200,000 112,000 110,000 \ 204,000 -0- 248,000 250,000 Instructions Calculate how much gross profit that Lion should recognize each year, assuming: $\quad$ $\quad$ Method Used $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ For 2020 $\quad$ For 2021 a) Completed contract b) Percentage-of-completion

Bluegrass Builders Ltd. Is using the completed-contract method for a $ 2,000,000 contract that will take two years to complete. Data at December 31, 2020, the end of the first year, are $\text{Costs incurred to date}\ldots \ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \$925,000$ $\text{Estimated costs to complete}\ldots \ldots \ldots \ldots \ldots \ldots \ldots1,100,000$ $\text{Billings to date}\ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots \ldots\ldots 850,000$ $\text{Collections to date}\ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots 700,000$ The gross profit or loss that should be recognized for 2020 is

The earnings process

The most popular input measure used to determine the progress toward completion in the event a company qualifies to recognize revenue over a period of time is

According to the AcSB guidelines, the process of reporting an item in the financial statements of an entity is

Contract-based approach In January 2020, Bruins Construction Corp. contracted to construct a building for $ 6,000,000. Construction started in early 2020 and was completed in 2021. The following additional information is available: $\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\underline{2020}\quad\quad\quad\quad\underline{2021}$ $\text{Costs incurred}\ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots\ldots\$2,430,000\quad\$2,270,000$ $\text{Estimated costs to complete}\ldots \ldots \ldots \ldots\ldots2,600,000 \quad -$ $\text{Collections during the year}\ldots \ldots \ldots \ldots \ldots \ldots2,400,000\quad3,600,000$ Bruins uses the percentage-of-completion method. Instructions Under the contract-based approach, a) How much revenue should Bruins report for 2020 and 2021? b) Prepare all journal entries for 2020 and 2021 for this contract.

If the earnings process has a critical event, it is often referred to as a

Explain the advantages and disadvantages of the completed-contract method.

Transaction price Presented below are three revenue recognition situations: a) Bliss sells goods to Jusu for $ 10,000 payment due at delivery. b) Bliss sells goods on account to Saanich for $ 23,000 payment due in 30 days. c) Bliss sells goods to Nourish for $ 50,000 due in two instalments: the first instalment payable in 20 months, and the second payment due 4 months later. The present value of the future payments is $ 47,000. Instructions Indicate the transaction price for each of these transactions and when revenue will be recognized.

Which of the following is NOT a scenario under which a company may recognize revenue over a period in time?

Assume that Hemsworth uses the completed-contract method of accounting. The portion of the total gross profit to be recognized in 2021 is

Classical Ltd. Began work in 2020 on a contract for $ 1,250,000. Other data are: $\quad \quad\quad \quad\quad \quad\quad \quad\quad \quad\quad \quad\quad \quad\quad \quad\quad \quad \quad\quad \quad\quad \quad\quad\quad \quad\quad \underline{2020}\quad \quad\quad \quad\underline{2021}$ $\text { Costs incurred to date }\ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots\ldots \ldots \$540,000\quad\quad \$335,000$ $\text { Estimated costs to complete as of December } \ldots \ldots \ldots \ldots \ldots \ldots360,000\quad\quad-$ $\text { 31 Billings to date}\ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots420,000\quad\quad 1,250,000$ $\text { Collections to date} \ldots \ldots \ldots\ldots\ldots\ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots\ldots \ldots \ldots 300,000\quad\quad1,000,000$ If Classical uses the completed-contract method, the gross profit to be recognized in 2021 is

Under ASPE, when work to be done and costs to be incurred on a long-term contract can be estimated reliably, which of the following methods of revenue recognition is preferable?