Exam 6: Revenue Recognition

Using actual and estimated cost figures to estimate the degree of completion of a long-term construction project is an example of an input-based approach to estimation.

Minty Inc. began work in 2006 on contract #3814, which provided for a contract price of $4,500,000. Other details follow: 2006 2007 Costs incurred during the year \ 800,000 \ 2,425,000 Estimated costs to complete as of December 31 2,400,000 0 Billings during the year 900,000 3,600,000 Collections during the year 600,000 3,900,000 Assume that Blaze uses the percentage-of-completion method of accounting, calculate the portion of the total gross profit to be recognized as income in 2006.

A construction company has consistently used the percentage-of-completion method of recognizing income. In 2007, the company started work on a $6,000,000 construction contract, which was completed in 2008. The accounting records disclosed the following data: Progress billings \ 3,800,000 \ 2,200,000 Estimated cost to complete as of 12/31 3,600,000 1,800,000 Billings to the government during the year 4,600,000 1,400,000 Cash collected during the year 3,600,000 Calculate the amount of income that should have been recognized in 2007.

A long-term contract is automatically considered onerous if a loss is recognized in any given year.

Which of the following methods of revenue recognition is appropriate for use by a real estate broker whose sole activity is sale of realty on a commission basis?

A firm using the instalment method of revenue recognition repossessed an item it sold for $40,000 (cost $24,000) after the customer stopped remitting cash. Only $26,000 was paid by the customer to the date of repossession at which time the item is worth only $8,000. (1) Determine the accounting gain or loss on repossession. (2) Determine the economic gain or loss-the change in the value of the firm-as a result of the sale and repossession. (3) Reconcile total accounting earnings with the value you computed in (2).

On January 1, 2016, XYZ Inc. delivers a machine to a buyer. The agreed-upon price is $9,000. Included in this price is a twenty-four-month service contract, which stipulates that the system will be fixed or replaced if it does not perform to certain specifications and 20 hours of service to maintain the system over this period. The stand-alone price for the maintenance service is $2,000. The buyer also opted for the twenty-four-month warranty, which XYZ sells separately for $1,000. The company also estimates that based on past experience, the warranty costs for defective machinery should be estimated at $450 per year. During Year 1, 8 hours of service are performed, as expected, at a cost of $800, and warranty work resulted in expenditures of $300. Required: Using the above information, provide the journal entries required for 2016, assuming that XYZ uses the revenue deferral approach to account for its warranties.

A firm uses the instalment method of revenue recognition on an item with a cash selling price of $1,000 and cost of $600. During the year of sale, the firm received $250 from the customer. Therefore, the net instalment account receivable equals which of the following amounts at the end of the year of sale?

A construction company entered into a three-year contract to erect a building for a customer. Its original bid on the job was for $3,600,000 but this was revised upward in year 3 to $3,900,000 because the customer negotiated for some "extras" (modification in the original specifications). A cumulative history of costs incurred and cost expectations throughout the three years the contract was in progress is set out below. Give the income to be reported (a) using the percentage-of-completion method, and (b) using the completed contract method. Year 1 Year 2 Year 3 Expected revenues \ 3,600,000 \ 3,600,000 \ 3,900,000 Actual costs (cumulative) 750,000 2,550,000 3,270,000 Expected future costs 2,250,000 525,000 -0-

The gross approach to recording revenues results in higher earnings than does the net method.

On January 1, 2007, a corporation signed a contract to build a specially designed plant; the relevant data were (in 000's): Contract price = $13,500 Estimated total construction cost = $10,500 Data during construction period (January, 1, 2007-December 31, 2008): Actual cost to date (cumulative) \ 2,160 \ 10,875 Actual progress billings to date (cumulative) 2,100 13,500 Actual collections to date (cumulative) 2,055 13,500 Estimated remaining cost to complete 8,640 -0- Required: (1) Give the following amounts that should be reported on the income statement and balance sheet: Item Completed Contract Percentage-of-Completion 2007 2008 2007 2008 (a) Income from construction (b) Accounts receivable (c) Invoice construction (net asset) (2) Give the entry to record 2007 construction income at December 31, 2008, for the percentage-of-completion method.

When goods are sold f.o.b. shipping point, the revenue earnings process is usually not considered to be complete until the buyer has received the goods and inspected them.

When a one year-lease-term is signed, the lessor earns revenue with the passage of time.

On January 1, 2007, a contractor started a construction project for $1,350,000; estimated construction costs (total) were $1,050,000. Data for the two-year period: 2007 Actual construction costs during the year \ 600,000 \ 465,000 Estimated remaining costs to complete the contract 450,000 -0- Actual amount billed to the customer during the year 540,000 810,000 Actual cash collected from the customer during the year 525,000 825,000 Based upon the above data, provide the following amounts for each method: Completed Contract Percentage-of-Completion 2007 2008 2007 2008 (a) Income on construction \ \ \ \ (b) Construction in progress \ \ \ \ (c) Costs in excess of billings \ \ \ \ \

A sale should NOT be recognized as revenue by the seller at the time of sale if:

A firm uses the instalment method of revenue recognition on an item with a cash selling price of $1,000 and cost of $600. During the year of sale, the firm received $250 from the customer. Thereafter, no more cash is received. The firm repossesses the item, worth $500 at that time. The entry to record the repossession includes:

A large construction firm, which uses the percentage of completion method, provided the following information concerning one of its contracts (contract price, $1,000). Year 1 Year 2 Year 3 Cost incurred in year \ 200 \ 300 \ 250 Remaining cost to complete at end of year Refer to the following two questions. The answer to question (b) depends on the answer to (a). (a) What is the balance in construction in process at the end of year 1? (b) Assume that $600 is the estimated remaining cost at the end of year 2. Provide the entry to record revenue for year 2. Explain the ending balance in construction in process.

Company A exchanges machinery with Company B. In addition, Company A gave $10,000 to Company B as part of the exchange. Company A's equipment had a book value of $20,000 and a fair value of $8,000. Company B's equipment had a book value of $25,000 and a fair value of $15,000. Provide the entry on Company A's books assuming that" i) The transaction has commercial substance. ii) The transaction has no commercial substance (use the book value method).

In a consignment arrangement, the seller is essentially acting as an agent of the manufacturer of the goods or their owner.

The earliest point at which all criteria for revenue recognition are met is known as a critical event.