Exam 6: Revenue Recognition

In accounting, the term "revenue recognition" refers to measuring the expense related to the revenue for a specific period.

The sale of a company's land would necessarily result in a gain or loss, and not a revenue or expense.

A construction company has contracted with a major university to build a new sports complex. The contract calls for two sports arenas to be built in the next three years. The company will receive $24,000,000 for the project and their engineers originally estimated a total cost to construct the two arenas of $20,400,000. The two arenas are scheduled for completion in May of 2007. If an actual cost of $9,200,000 is expended in 2004, and the engineers estimate another $12,800,000 is to be expended to complete construction, how much income is to be recognized under the percentage-of-completion method in 2004?

The following data are available from a company for a long-term construction contract: 2006 2007 2008 Construction costs incurred to date \ 400,000 \ 1,600,000 \ 1,900,000 Estimated costs to completion 1,400,000 450,000 The contract price for the three-year contract was $2,100,000 and the estimated cost at the beginning of the contract was $1,800,000. (a) What is the amount of income that will be reported under the percentage-of-completion method in 2006? $ (b) What is the amount of income that will be reported under the percentage-of-completion contract method for 2007? $ (c) What is the amount of income that will be reported under the percentage-of-completion contract method for 2008? $

The earnings based and contract based approaches will both result in the same amount of revenue being recognized over time.

A corporation incurred $111,000 costs to extract a diamond. The diamond turned out to be flawed, so the company decided to break it into small pieces and sell diamond chips. The company was uncertain if the diamond chips would sell at all. The diamond chips did sell, and the company had the following sales and accounts receivable balances over the five following years: Accounts Receivable Balance Sales January 1, 2001 \ 0 \ 15,000 for 2001 January 1, 2002 10,500 30,000 for 2002 January 1, 2003 25,500 60,000 for 2003 January 1, 2004 40,500 24,000 for 2004 January 1, 2005 78,000 15,000 for 2005 The accountant recommended that the company use the cost recovery method of income recognition. Using this method, the company will recognize revenue as follows: 2013 2014 1 \ 60,000 \ 60,000 2 24,000 24,000 3 0 0 4 6,000 0 5 Not determinable based on the data given

When one company is acting as an agent on behalf of another company or individual, it will normally report revenues on a net basis.

The criteria for recognition of revenue at completion of production of precious metals and farm products include:

If a client presents an extreme credit risk, the seller would be more likely to use the Installment Sales method to account for the transaction than the Cost Recovery Method.

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 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 cost deferral approach to account for its warranties.

Under contract, ABC Corporation delivers 500 units to Customer A for $200 each on 1 March. ABC's documented policy is to allow a customer to return any unused product within 30 days and receive a full refund. The cost of each product is $150. ABC expects that the returned products can be resold. On March 15^th, the customer returned 8 units to ABC. No other returns were received during the month. Required: Record all of ABC Inc' journal entries for the month, assuming that ABC cannot reasonably estimate the amount of returns on March 15th.

The method most commonly used to report defaults and repossessions is:

A company began work on a government contract at the start of 2007. The contract was to construct a special building for $4,000,000. In making the bid, construction costs were estimated to be $3,000,000. Data during the construction period was: 2007 2008 Costs incurred this year \ 600,000 \ 2,550,000 Estimated cost to complete as of 12/31 2,400,000 -0- Billings to the government during the year 720,000 3,280,000 Cash collected during the year 500,000 3,500,000 How much income on the contract would be reported for each year assuming: (a) Completed contract method? 2007: $______________ 2008: $_______________. (b) Percentage-of-completion method? (basis: estimated costs to complete) 2007: $________________ 2008: $_______________.

Under the percentage-of-completion method of accounting for long-term construction contracts, revenue is recognized only when the construction is completed.

Given the following data for a firm which uses the percentage of completion method on long-term construction contracts, determine the ending balance of the account which is the net of Construction in Process, and Billings on Contracts, at the end of Year 1, the first year of this project. Costs incurred \ 20,000 Billings 26,000 Cash collected 15,000 Estimated remaining cost to complete, as of 12-31-2001 30,000 Contract price 60,000

Under the percentage of completion method, a company has recognized $40,000 of profit through to the beginning of the current year on a contract, and total estimated contract cost is $500,000 at that time. The contract price is $800,000. Calculate the percent of completion at the beginning of the current year.

Generally, expenses incurred to generate revenues should be matched to the revenues recognized in a given period.

The percentage-of-completion method of accounting for long-term construction projects is supported on the basis that it:

ABC Inc. uses the percentage of completion method to account for one of its long-term construction projects. Last year the company recorded revenue of $1 million during the first year of one of its projects, which at the time was expected to be profitable. Nearly one year later, the company has incurred substantial cost-overruns. The company now expects the contract to lose $500,000. This is an onerous contract. ABC should therefore record a loss of $500,000 on this contract for the current year.

On June 15, 2007, AB Construction Company signed a $180,000 contract to build a small structure for XY Company. AB estimated that total cost to construct would be $160,000. Construction started immediately because the required completion date was August 31, 2008. AB's relevant data relating to this construction project were as follows: 2007 2008 Total Contract price \ 180,000 Actual cost incurred by year \ 60,000 \ 102,000 Estimated costs to complete 100,000 -0- Progress billings (to XY) by year 56,000 124,000 Collections (XY) cash by year 55,000 125,000 Required: 1. How much income should AB recognize each year, assuming: Method Used For 2007 For 2008 (a) Completed contract \ \ (b) Percentage-of-completion \ \ 2. What amounts should AB report on the balance sheet at the end of each year for: (a) Accounts (billings) receivable assuming: 12/31/2007 12/31/2008 Completed contract method \ \ Percentage-of-completion method \ \ (b) Construction in process, assuming: 12/31/2007 12/31/2008 Completed contract method \ \ Percentage completion method \ \ 3. Give the entry to record income for 2007, assuming the percentage-of-completion method is used. Construction in process inventory \ 60,000 -0- Less: Billings on contracts 56,000 -0- Cost in excess of billings \ 4,000 -0-