Exam 6: Revenue Recognition

At the end of year 2, the accounting records for a multi-year construction project indicate actual costs incurred to date of $ 3,200,000, and the most recent estimate of total costs of $ 9,500,000. Assuming the percentage-of completion method is used, to one decimal, at the end of year 2 the project is

Accounting for long-term construction contracts The board of directors of Steelers Construction Corp. is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for long-term contracts in the company's financial statements. You have been engaged to assist Steelers' controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information: 1. Steelers commenced doing business on January 1, 2020. 2. Construction activities for the year ended December 31, 2020, were as follows: A B C D E Total contract \ 615,000 450,000 475,000 600,000 Billings through \ 340,000 135,000 475,000 240,000 Cash collections \ 310,000 135,000 390,000 160,000 A B C D E Contract costs incurred through \ 510,000 130,000 350,000 370,000 Estimated additional costs to \ 120,000 260,000 -0- 290,000 3. Each contract is with a different customer. 4. Any work remaining to be done on the contracts is expected to be completed in 2021. Instructions a) Prepare a schedule by project, calculating the amount of gross profit (or loss) for the 2020 calendar year, which would be reported under: (1) The completed-contract method. (2) The percentage-of-completion method (baged on etimated costy). b) Prepare the general journal entry to record revenue and gross profit on project B for 2020, assuming that the percentage-of-completion method is used. c) Indicate the balances that would appear in the statement of financial position at December 31, 2020 for the following accounts for Project D, assuming that the percentage-of-completion method is used. $\text {Accounts Receivable}$ $\text {Billings on Construction in Procect}$ $\text {Construction in Process}$ c) change (if at all) for Project D, if the completed-contract method is used? d) How would the balances in the accounts discussed in part

Under IFRS, when a vendor gives a volume rebate to a customer, the vendor should account for it as a(n)

When a contract becomes unprofitable to an entity, this is called a(n)

Under a consignment arrangement, the risk that merchandise might NOT sell is

The concept of commercial substance in purchase and sales transactions means that

Blues Construction Corp. has consistently used the percentage-of-completion method. During 2020, Blues entered into a fixed-price contract to construct an office building for $ 6,000,000. Information relating to the contract is as follows: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\underline{\text { At December } 31}$ Percentage of completion Estimated total cost at completion Gross profit recognized (cumulative) 15\% \4 ,500,000 225,000 45\% \ 4,800,000 540,000 Under the earnings approach, contract costs incurred during 2020 were

Under the completed-contract method,

The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it

Concessionary terms Explain what concessionary terms are, and give four examples.

Under the percentage-of-completion method, how should the balances of progress billings and construction in process be disclosed in the financial statements prior to the completion of the contract?

Use the following information for the following questions.: A product and service are bundled together and sold to customers for $ 450. The fair values of the product and service are $ 350 and $ 150 respectively. -The new IFRS standard, IFRS 15 Revenue from Contracts with Customers adopts a(n)

Earnings approach to revenue recognition Fabathletics sends an outfit to monthly subscribers each month. If the customer does NOT want the outfit in a given month they can send it back before the last day of that month free of charge in exchange for a store credit. Fab prepares its financial statements in accordance with ASPE. Instructions Describe when these transactions should be recognized as sales under the earnings approach.

Conditional rights should be reported on the statement of financial position

Percentage-of-completion method Oilers Construction was awarded a contract to construct an interchange at the junction of two major freeways in a Canadian city at a total contract price of $ 10,000,000. The estimated total costs to complete the project were $ 8,000,000, and it is expected to take two years. Instructions Using the percentage-of-completion method and the cost-to-cost basis, a) Prepare the journal entry to record construction costs of $ 4,400,000 for the first year. b) Prepare the journal entry to record progress billings of $ 5,000,000 for the first year. c) Prepare the journal entry to recognize the revenue and gross profit for the first year.

Bundled sales Canucks Inc., a software company sells new accounting software and user support bundled together. The fair value of the software is $ 1,500 and the fair value of the user support is $ 500. The user support is valid for a period of 12 months from the date of software purchase. To be able to compete with a competitor's offering, Loon decided to sell the bundle at a discount for $ 1,800. During its first month of sales, 100 units of this software bundle were sold at the discounted price, and expenses were $ 50,000. Instructions a) Calculate the sale price that should be allocated to each component of the bundle using the adjusted market assessment approach. b) Calculate the sale price that should be allocated to each component of the bundle using the residual approach. c) Assuming that the relative fair value method is used and income tax rate is 30%, calculate the net income applicable to Loon's first month of sales.

The actions a company takes to add value are referred to as the

Presentation & the percentage-of-completion method Thuxton Inc. began work on a $ 6,000,000 non-cancellable contract in 2020 to construct a retail building. During 2020, Thuxton incurred costs of $ 1,500,000 and billed its customers for $ 1,400,000 (non-refundable), and collected $ 1,000,000. At December 31, 2020, the estimated future costs to complete the project total $ 2,500,000. Instructions Prepare Thuxton's 2020 journal entries using the percentage-of-completion method.

A returned asset should be recorded

The completed contract method for accounting for long-term construction projects requires that