ACCT 331 CH 5
Under the completed contract
Losses are recognized immediately only when OVERALL losses are indicated.
Under the percentage-of-completion method
Losses in ANY case are immediately recognized.
Input-based estimate
Measured as the proportion of effort expended thus far relative to the total effort expected to satisfy the performance obligation.
Output-based estimate
Measured as the proportion of the goods or services transferred to date.
Overall loss
Total loss > contract price
Long-term contracts
Usually have single performance obligation (don't meet the "separately identifiable" criterion necessary for goods & services to be viewed as distinct).
Percentage completed to date
Costs incurred to date / Estimated total cost
TrueTech Industries manufactures the Tri-Box System, a multiplayer gaming system allowing players to compete with each other over the Internet. i. The Tri-Box System includes the physical Tri-Box module as well as a one-year subscription to the Tri-Net multiuser platform of Internet-based games & other applications. ii. TrueTech sells individual one-year subscriptions to the Tri-Net platform for $60. iii- TrueTech sells individual Tri-Box modules for $240. iv. As a package deal, TrueTech sells the Tri-Box System (module plus subscription) for $250. On January 1, 2016, TrueTech delivers 1,000 Tri-Box Systems to CompStores at a price of $250 per system. TrueTech receives $250,000 from CompStores on January 25, 2016.
- Delivery of the Tri-Box module (single point in time) - Tri-Net subscription (over time) Tri-Box module $240 Tri-Net subscription $60 Fair market module $250 % allocated to module = $240/$300 = 80% % allocated to subscription = $60/$300= 20% $250 * .20 = $50 subscription revenue $250 * .80 = $200 module revenue 1/1 Dr. Accounts receivable $250,000 Cr. Sales revenue (module) $200,000 Cr. Unearned revenue (subscription) $50,000 1/31 Dr. Unearned revenue $4,167 ($50,000 * 1/12) Cr. Subscription Revenue $4,167i
A long-term contract may produce
- Either an INTERIM (or periodic) loss but an overall profit or - An OVERALL total loss for the project.
A customer is more likely to control a good or service if the customer has:
- Obligation to pay the seller. - Legal title to the asset. - Physical possession of the asset. - Assumed the risks & rewards of ownership. - Accepted the asset.
Percentage-of-completion
- Revenue is recognized based on percentage of progress towards completion. - CIP is updated each period to include gross profit.
Completed contract
- Revenue is recognized when the project is COMPLETED. - CIP is only updated to include gross profit at that point in time.
Revenue recognition at a single point in time
- Revenue recognized when customer controls the good or service.
Five steps to revenue recognition
1. Identify the contract 2. Identify the performance obligation(s) 3. Determine the transaction price. 4. Allocate the transaction price. 5. Recognize revenue when the performance obligation(s) satisfied.
Contracts that contain multiple performance obligations
1. Identify the performance(s) - Split the contract into distinct, stand-alone parts (i.e., distinct if "separately identifiable" from other goods or services in the contract. 2. Allocate the transaction price to each performance obligation.
TrueTech Industries sells the Tri-Box, a gaming console that allows users to play video games individually or in multiplayer environments over the Internet. A tri-Box is only a gaming module & includes no other goods or services. When should TrueTech recognize revenue for the following sale of 1,000 Tri-Boxes to CompStores? 1. December 20 2015: CompStore orders 1,000 Tri-Boxes at a price of $240 each, promising payment within 30 days after delivery. 2. January 1, 2016: TrueTech delivers 1,000 Tri-Boxes to CompStores, & title to the Tri-Boxes transfer to CompStores. 3. January 25, 2016: TrueTech receives $240,000 from CompStores.
1. No recognizing revenue because we haven't fulfilled the performance obligation to delivery the product, control has not been transferred. 2. Dr. Accounts Receivable $240,000 Cr. Sales Revenue $240,000 3. Dr. Cash $240,000 Cr. Accounts Receivable $240,000
CIP > BCIP
ASSET
Journalizing billings
Dr. Accounts Receivable Cr. BCIP
Journalizing construction in progress
Dr. CIP Cr. Various accounts/cash/payable
Journalizing amounts collected from customers
Dr. Cash Cr. Accounts Receivable
TrueTech Industries sells one-year subscriptions to the Tri-Net multi-user platform of Internet-based games. TrueTech sells 1,000 subscriptions for $60 each on January 1, 2016. At the end of each of the 12 months following the sale, TrueTech would record the following entry to recognize Tri-Net subscription revenue.
Dr. Cash $60,000 Cr. Unearned Revenue $60,000 Dr. Unearned Revenue $5,000 ($60,000 * 1/12) Cr. Service $5,000
Revenue on long-term contract & cost of construction
Income Statement
CIP < BCIP
LIABILITY
Revenue recognition over time
Revenue is recognized if one of the following three conditions hold: 1. Customer CONSUMES the benefit of the seller's work as it is performed (ex: cleaning service). 2. Customer CONTROLS the asset as it is created (ex: a building extension a contractor builds onto a customer's existing building). 3. Seller is creating an asset that has NO ALTERNATIVE USE to the seller & the seller has the legal right to receive payment for progress to date even if the contract is cancelled (ex: an order of jets customized for the U.S. Air Force). ** If a seller can't recognize revenue over time, it recognizes revenue at a point in time when the performance obligation has been completely satisfied, which usually occurs at the end of the contract.
Long-term contracts recognize revenue
When each performance obligation is satisfied 1. according to progress toward completion or 2. Upon contract completion.
When do companies recognize revenue?
When goods or services are TRANSFERRED to customers for the amount the company ENTITLED to receive in exchange for those goods & services.
Interim loss
current year expense > current year revenue - Contract is still profitable.