Exam 6: Revenue Recognition

The principal disadvantage of output measures in measuring progress toward completion of long-term contracts is

Contract identification Coffee Co. enters into a contract to delivery coffee to the House of Commons on July 1, 2020. The House agrees to pay the full price of $ 3,000 on August 1, 2020. The cost of goods is $ 1,400. Coffee Co. delivers the coffee to the House on July 1, 2020 and receives payment on August 1, 2020. Instructions Prepare the journal entries for Coffee Co. related to this contract.

Long-term construction project accounting Giants Construction Inc. specializes in the construction of commercial and industrial buildings. The company is experienced in bidding on long-term construction projects of this type, with the typical project lasting from fifteen to twenty-four months. Giants uses the percentage-of-completion method. Progress toward completion is measured on a cost-to-cost basis. Giants began work on a contract at the beginning of 2020. Data for 2020 follow: $\text {Contract price}\ldots \ldots \ldots \ldots \ldots \ldots \ldots\$2,000,000$ $\text {Estimated costs}$ $\quad\text {Labour}\ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots \ldots \ldots \ldots\$425,000$ $\quad\text {Materials and subcontracts}\ldots \ldots \ldots \ldots 875,000$ $\quad\text {Indirect costs}\ldots\ldots \ldots \ldots\ldots \ldots \ldots \ldots \ldots \ldots\underline{200,000}\quad\underline{1,500,000}$ $\text {Estimated gross profit}\ldots \ldots \ldots \ldots\ldots\ldots \ldots \quad\quad\quad\quad\quad\underline{\$500,000}$ $\text {At the end of 2020, the following was the actual status of the contract:Progress Billings to date}\quad\quad\quad\quad\quad\ldots \ldots \ldots \ldots\$ 1,115,000$ $\text {Costs incurred to date}$ $\quad\text {Labour}\ldots \ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots \ldots \ldots \ldots\$207,000$ $\quad\text{Materials and subcontracts}............................ \quad \$ 519,000$ $\quad\text{Indirect costs}\ldots \ldots \ldots \ldots \ldots \ldots \ldots\ldots \ldots \ldots \ldots\ldots \ldots\underline{75,000}\quad801,000$ $\text {Latest forecast of total costs}\ldots \ldots \ldots \ldots \ldots \ldots \ldots\ldots \quad \quad\quad\quad\quad\$1,500,000$ It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but NOT yet installed, costing $ 51,000. These costs should NOT be considered in the costs incurred to date. Instructions a) Calculate the percentage of completion on the contract at the end of 2020. b) Calculate the gross profit that would be reported on this contract for 2020. c) Prepare the journal entry to record the revenue and gross profit for 2020 on Giants’ books. d) Indicate the account(s) and the amount(s) that would be shown on Giant’s statement of financial position at the end of 2020 related to its construction accounts. Also show how these items would be classified on the statement of financial position. Cash collected during the year was $ 980,000. e) Assume, instead of $ 1,500,000, the latest forecast of total costs at the end of 2020 was $ 2,050,000. How much income (loss) would Giant then report for the year 2020?

Risks & rewards of ownership Describe the factors one must consider in determining who has the risk and rewards of ownership and, therefore, whether a sale has occurred at the point of delivery, under the earnings approach.

Coquel Company has a non-cancellable contract to construct a bridge for an estimated cost of $ 1,950,000. The contract is to start in July 2020, and the bridge is to be completed in September 2022. The following data pertain to the construction period. Assume that progress billings are non-refundable. Costs to date Estimated costs to complete Progress billings during the year Cash collected during the year 2020 \ 360,000 1,260,000 305,00 280.000 2021 \ 900,000 380,000 765,000 760.000 2022 \ 390,000 - 1,200,000 2,000,000 Instructions Assuming that Coquel Company uses the percentage of completion method prepare the appropriate journal entries.

In many cases, an entity may have an implicit obligation even if it is NOT explicitly noted in a sales contract. This is called a(n)

The journal entries to recognize the revenue from a consignment sale would likely be identical under the earnings and the contract-based approaches assuming

The appropriate approach to recognize long-term contract revenue under ASPE is

Explain what a bill-and-hold sale is and why a customer might engage in such an arrangement.

Long-term contract On January 1, 2020, Charger Corp., a management consulting firm, entered into a contract with Viking Company to provide advisory services over a four-year period. The contract price was $ 4,000,000 and was to be paid in four equal annual payments at the end of each year. Charger's expenses relating to this contract were $ 650,000, $ 730,000, $ 780,000 and $ 710,000 for 2020-2023. Collectibility was reasonably assured throughout the duration of the contract and measurement uncertainties were NOT an issue. Instructions Using the contract-based revenue recognition model, prepare journal entries for all four years.

Which of the following is NOT part of the definition of control?

Losses in a current period on a profitable contract

Performance obligations Island Foods Inc. has a promotional program whereby for every $ 10 spent in store, customers receive stamps which can later be redeemed for knives and cookware. Instructions Under IFRS does Island Foods have a single performance obligation to its customers in this revenue arrangement?

Under the earnings approach for the sale of goods, which of the following would NOT be a reason to recognize revenue?

When a vendor is exposed to continued risks of ownership because of potential return of the product, which of the following accounting procedures should NOT be used?

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 $2020 \ldots \ldots \ldots . . \quad \$ 105,000$ -What was the initial estimated gross profit on this contract?

Timing of revenue recognition Asana Inc. enters into a contract with Modo Company to develop and install a customized enterprise resource planning system (ERP). Progress payments are made upon completion of each stage of the contract. If the contract is terminated, the partly completely ERP will pass to Modo Company. Asana is prohibited from directing the software to another customer (and besides, it is likely too customized to do so, anyway). Asana Inc. prepares its financial statements in accordance with IFRS. Instructions At what point should Asana recognize revenue related to its contract with Modo Company?

Consignment sale In 2020, the following transaction occurred between Senators Wholesale Corp. (consignor) and Canadiens Stores (consignee): On March 2, 2020 Senators shipped merchandise costing $ 52,000 to Canadiens. Senators paid $ 4,000 for freight and Canadiens paid $ 3,000 for advertising (to be reimbursed by Senators). By the end of the third quarter of 2020 (September 30, 2020), Canadiens advised Senators that all the merchandise has been sold for $ 70,000, and forwarded the proceeds (net of a 15% commission and the outlay for advertising) to Senators. Instructions a) Prepare all entries for Canadiens to account for this transaction. b) Prepare all entries for Senators to account for this transaction.

Halo Company entered into a contract with Ringo Corporation, in which Halo agreed to provide Ringo with building supplies. Ringo agreed to pay a total of $ 27,000 at delivery. Under the contract-based view, Halo's net contract position can be assumed to be

Definitions Provide clear, concise answers for the following: 1. Explain the conceptual difference between the earnings approach and the contract-based approach to accounting for revenues. 2. How is revenue recognized under the earnings approach? 3. How is revenue recognized under the contract-based approach? 4. How are sales accounted for in the presence of collection and measurement uncertainty? 5. What are the two main methods to account for long-term construction projects allowed under ASPE? 6. Why is it important to understand the business perspective of selling transactions? 7. Explain the term onerous contracts and its implications.