Exam 6: Revenue Recognition

A company entered into a contract to construct a building for a fee of $50,000. Construction began in 2006 and was completed in 2008. Transactions related to the contract are summarized below: 2006 2007 2008 Construction costs incurred to date \ 8,000 \ 16,600 \ 15,900 Estimated costs to complete 32,000 16,400 -0- Billings and collections during year 7,500 20,000 22,500 Compute the income that should be recognized each year using (a) the percentage-of-completion method and (b) the completed contract method. [2006 | 2007 | 2008] (a) $____________ $_______________ $______________ (b) $____________ $_______________ $______________

Economic Value Added (EVA) is the difference between a product's input cost and final sales price. This figure is dependent up on the firm's earnings process.

Under the completed contract method, all construction costs are accumulated in an inventory account.

Why is construction-in-progress increased by the annual recognized profit on long-term construction contracts?

Given the following data, calculate profit recognized in 2008 under the percentage of completion method for a project begun in 2008 with a contract price of $1,000? 2007 2008 Costs incurred this year \ 100 \ 200 Total estimated costs remaining at end of year 700 400

Revenues must always be recognized at a single point in time.

P-Dog Inc. has a loyalty points program which awards two customer loyalty points for every $100 of goods purchased. During the year, the company sold $200,000 of goods in the store and awarded 4,000 points which can be redeemed and used towards future purchases. The stand-alone selling price for the goods sold is $150,000. Based on past experience, P-Dog expects that only 80% of the points will actually be redeemed. The stand-alone selling price of the points is $1.50 per point. Based on the information provided, the amount of revenue that P-Dog will report on its statement of comprehensive income for the year would be:

In 2005, Tamarack Corporation began construction work under a three-year contract. The contract price is $1,200,000. Evian uses the percentage of completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2005, follow: Balance Sheet: Contract billings \ 50,000 Construction in progress \ 150,000 Less contract billings 120,000 Cost of uncompleted contract in excess of billings \ 30,000 Income Statement: Income (before tax) on the contract recognized in 2005 \ 30,000 Accounts receivable construction Calculate how much cash was collected in 2005 on this contract.

The use of actual and expected costs to determine the percentage of completion on a long term project is an example of an output method approach to evaluating contract progress.

Receipt of cash by the seller at the time of sale is not required for the recognition of revenue.

Which of the following statements regarding the percentage-of-completion and completed contract methods of accounting for long-term construction contracts are true?

A corporation sold goods for $10 million during 2007. Of this amount, $6 million were in cash, and $4 million was on account. However, the company collected $2 million of the sales on account during 2007. In conformity with the revenue principle, the amount of revenue that should be recognized in 2007 is:

The percentage-of-completion and completed contract methods of accounting for long-term construction contracts will produce:

Most construction companies cannot afford to wait until the completion of the contract to collect their billings.

When using completed contract method of recognizing revenue, the billings to the customer are debited to cash and credited to progress billings.

In a normal sale, generally the most uncertain factor in the revenue recognition process is:

A firm sold merchandise costing $600 for $1,000 on January 1, 2001. The selling firm accepted a note with terms calling for two equal annual payments (which include 10% interest, and principal) beginning December 31, 2001. There is sufficient uncertainty about the realizability of the two payments to warrant the instalment method of revenue recognition. Required: assuming the 2 payments were received as expected, provide the entries to account for the sale and cash collections (assume a perpetual inventory system).

Biological assets are generally recognized at their net realizable values, with gains and losses flowing through income.

Which of the following is the most conservative (slowest to recognize) revenue recognition method?

Under the completed contract method of income recognition on long-term construction contracts: