CH 18 401 ACC
On January 1, 2017, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $629,406 (imputed rate of 12%). The goods have an inventory cost on Fullbright's books of $240,000. What amount of Interest Revenue should Fullbright recognize in 2017?
$ 48,000 (400000*.12)
Bret Company sold 3,000 Holsks during 2017 at a total price of $12,000,000, with a warranty guarantee that the product was free of any defects. The cost of Holsks sold is $7,200,000. The term of the assurance warranty is two years, with an estimated cost of $80,000. In addition, Bret sold extended warranties related to 1,100 Holsks for 3 years beyond the 2-year period for $110,000. Bret should recognize Unearned Warranty Revenue in 2017 of
$110,000
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 (or as) each performance obligation is satisfied
Sherman Company enters into a contract with a customer to build a warehouse for $400,000, with a performance bonus of $100,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 20% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that Sherman has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 50% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed 1 week late, and a 20% probability that it will be completed 2 weeks late. What is the total transaction price for this revenue arrangement?
$486,000
Franchise companies derive their revenue from one or both of two sources:
(1) from the sale of initial franchises and related assets or services, and (2) from continuing fees based on the operations of franchises.
For the customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria should be met:
(a) The reason for the bill-and-hold arrangement must be substantive, (b) The product must be identified separately as belonging to the customer, (c) The product currently must be ready for physical transfer to the customer, and (d) the seller cannot have the ability to use the product or to direct it to another customer.
A product or service is distinct when a customer is able to
1.benefit from a good or service on its own or 2.together with other readily available resources.
Stossel Company sells 300 units for $200 each to Liberty Inc. for cash. Stossel allows Liberty to return any unused product within 30 days and receive a full refund. The cost of each product is $120. To determine the transaction price, Stossel decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the most likely amount. Using the most likely amount, Stossel estimates that ten (10) units will be returned, the costs of recovering the units will be immaterial, and the returned units are expected to be resold at a profit. What amount of refund liability should Stossel record at the time of sale?
2,000
Mocha purchases equipment, installation, and training from Lynne for a price of $1,000,000 and chooses Lynne to do the installation. Lynne charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The price of the installation service is estimated to have a fair value of $20,000. The fair value of the training sessions is estimated at $40,000. Other companies can also provide these training services. Mocha is obligated to pay Lynne the $1,000,000 upon the delivery and installation of the equipment. Lynne delivers the equipment on May 1, 2017, and completes the installation of the equipment on July 1, 2017. Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 8 years.
37,736
Novak Construction Inc. agrees to construct a boat dock at the Smooth Sailing Marina for $35,000. In addition, under the terms of the contract, Smooth Sailing will pay Novak a performance bonus of up to $10,000 based on the timing of completion. The performance bonus will be paid fully if construction is completed by the agreed-upon date. The performance bonus decreases by $2,000 per week for every week beyond the agreed-upon completion date. Novak has constructed a number of boat docks under similar agreements. Novak's management estimates, that it has a 60% probability of completing the project on time, a 20% probability of completing the project one week late, and a 20% probability of completing the project two weeks late. Management does not believe the project will be more than two weeks late.Determine the transaction price that Novak should compute for this agreement.
43800
Sales returns ex ACC REC: During 2020, its first year of operations, the Hawthorne Manufacturing Company sold merchandise for $2,000,000. This merchandise cost Hawthorne $1,200,000 (60% of the selling price). Industry experience indicates that 10% of all sales will be returned, which in this case equals $200,000 ($2,000,000 × 10%). Customers returned $130,000 of sales during 2020. Hawthorne uses a perpetual inventory system.
AR:2000000 Sal Rev 2000000 COGS 1200000 Inv 1200000 Sales returns130000 AR 1300000 Inv 78000 COGS78000 Sales returns70000 Allow for sale70000 Inv est. return 42000 COGS42000 allow for s ret 70000 AR70000 Inv 42000 Inv est ret 42000
Recognizing Revenue When (or as) Each Performance Obligation Is Satisfied
Change in Control Indicators: 1.Company has a right to payment for asset. 2.Company has transferred legal title to asset. 3.Company has transferred physical possession of asset. 4.Customer has significant risks and rewards of ownership. 5.Customer has accepted the asset.
New revenue recognition standard by FASB
Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services
Determining the Transaction Price:Consideration Paid or Payable to Customers Ex: Manual Company sells goods to Nolan Company during 2020. It offers Nolan the following rebates based on total sales to Nolan. If total sales to Nolan are 10,000 units, it will grant a rebate of 2%. If it sells up to 20,000 units, it will grant a rebate of 4%. If it sells up to 30,000 units, it will grant a rebate of 6%. In the first quarter of the year, Manual sells 11,000 units to Nolan at a sales price of $110,000. Manual, based on past experience, has sold over 40,000 units to Nolan, and these sales normally take place in the third quarter of the year. What amount of revenue should Manual report for the sale of the 11,000 units in the first quarter of the year?
Consideration Paid or Payable to Customers •May include discounts, volume rebates, coupons, free products, or services. •In general, these elements reduce the consideration received and the revenue to be recognized. Ans:Manual reduces revenue by $6,600 ($110,000 X .06) because it is probable that it will provide rebates amounting to 6%. As a result, Manual recognizes revenue of $103,400 ($110,000 - $6,600) in the first quarter of the year.
On January 1, 2017, Purdy Company enters into a contract to transfer Blue and Rain to Georgia Co. for $300,000. The contract specifies that payment for Blue will not occur until Rain is also delivered. In other words, payment will not occur until both Blue and Rain are transferred to Georgia. Purdy determines that standalone prices are $110,000 for Blue and $190,000 for Rain. Purdy delivers Blue to Georgia on February 10, 2017. On March 15, 2017, Purdy delivers Rain to Georgia. Purdy should record
Contract Asset of $110,000 on February 10.
Variable Consideration
Expected Value Most Likely Amount Only allocate variable consideration if it is reasonably assured that it will be entitled to the amount.
Conditional rights should be reported separately on the balance sheet as contract liabilities.
False
In a principal-agent relationship, the agent should use the gross method to recognize revenue.
False, net method
Manual Company sells goods to Nolan Company during 2020. It offers Nolan the following rebates based on total sales to Nolan. If total sales to Nolan are 10,000 units, it will grant a rebate of 2%. If it sells up to 20,000 units, it will grant a rebate of 4%. If it sells up to 30,000 units, it will grant a rebate of 6%. In the first quarter of the year, Manual sells 11,000 units to Nolan at a sales price of $110,000. Manual, based on past experience, has sold over 40,000 units to Nolan, and these sales normally take place in the third quarter of the year. What amount of revenue should Manual report for the sale of the 11,000 units in the first quarter of the year?
Manual reduces revenue by $6,600 ($110,000 X .06) because it is probable that it will provide rebates amounting to 6%. As a result, Manual recognizes revenue of $103,400 ($110,000 - $6,600) in the first quarter of the year.
Expected Value
Probability-weighted amount in a range of possible consideration amounts. •May be appropriate if a company has a large number of contracts with similar characteristics. •Can be based on a limited number of discrete outcomes and probabilities.
Most Likely Amount
The single most likely amount in a range of possible consideration outcomes. •May be appropriate if the contract has only two possible outcomes.
Long-Term Construction Contracts: Revenue Recognition Over Time
Two Methods of accounting: •Percentage-of-Completion Method Recognize revenues and gross profits each period based upon the progress of the construction Buyer and seller have enforceable rights •Completed-Contract Method Recognize revenues and gross profit only when the contract is completed
•Other contracts, companies must consider:
Variable consideration: expected val/ most likley Time value of money Noncash consideration Consideration paid or payable to the customer
Determining the Transaction Price:Time Value of Money ex: Groupo sells goods to Magnus for $500,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is $464,000.
When contract (sales transaction) involves a significant financing component. Interest accrued on consideration to be paid over time. Fair value determined either by measuring the consideration received or by discounting the payment using an imputed interest rate. Company reports as interest expense or interest revenue. Companies are not required to reflect the time value of money if the time period for payment is less than a year. ans: Groupo would recognize revenue of $464,000 at the point of sale and recognize interest revenue of $36,000 ($500,000 - $464,000) over the payment period.
Hendrix Inc., an equipment dealer, sells equipment on January 1, 2016, to Jimi Company for $200,000. Also, on January 1, 2016, Hendrix agrees to repurchase this equipment from Jimi Company on December 31, 2017, for a price of $233,280. At 1/1/16, Hendrix should record
a liability of $200,000.
2.Separate Performance Obligations
a promise to provide a distinct product or service to a customer. The objective is to determine whether the nature of a company's promise is to transfer individual goods and services to the customer or to transfer a combined item (or items) for which individual goods or services are inputs.
Revenues
are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.
A nonrefundable upfront fee should generally be recorded
as revenue over the periods which benefit.
Companies.................incremental costs if these costs are incurred to obtain a contract with a customer.
capitalize
Under the completed contract method, the Construction in Process account balance consists of
construction costs only. Gross profit is not recognized until the contract is completed.
Billings on Construction in Process is reported as a.................... depending on whether its balance is larger or smaller than the Construction in Process account balance.
current asset or current liability
A performance obligation may be
explicit, implicit, or based on customary business practice.
The principal advantage of the completed-contract method
is that reported revenue reflects final results rather than estimates.
In a consignment sale, the consignee
records a payable when consigned merchandise is sold
Which method of measuring the fair value of a performance obligation is dependent on the standalone selling prices of other goods or services promised in the contract?
residual value.
When there is limited information with which to develop a reliable estimate of completion
then no revenue related to the incentive should be recognized until the uncertainty is resolved.
Two types of contract losses:
•A periodic loss that occurs for a project that is projected to be profitable overall •An overall loss projected to occur for the entire project
1. Identifying Contract with Customers
•Agreement between two or more parties that creates enforceable rights or obligations. •Can be written, oral, or implied from customary business practice.
Determining the Transaction Price
•Amount of consideration that company expects to receive from a customer.•In a contract is often easily determined because customer agrees to pay a fixed amount.
Allocating Transaction Price to Separate Performance Obligations
•Based on their relative fair values. •Best measure of fair value is what the company could sell the good or service for on a standalone basis. •If not available, companies should use their best estimate of what the good or service might sell for as a standalone unit. •Adjusted market •Cost plus Residual
Sales Returns
•Situation when merchandise is returned for a refund or for credit to be applied to other purchases •Special price reduction, called an allowance, may be given as an incentive for the customer to keep the merchandise rather than returning it •We need to accrue sales returns and allowances at the time of sale. •Otherwise, recognizing sales returns when they occur could result in overstated income in the period of sale and understated income in the return period Ans:
