FR 1: Chapter 5 (Revenue Recognition)
When is a G/S a separate obligation?
A G/S is a separate obligation if it is distinct from other G/S in the contract
What is the journal entry to record revenue for construction using the Completed Contract Method?
Construction in Progress XX -----Materials, Cash, etc. XX Accounts Receivable XX -----Billing on Construction Process XX Cash XX -----Accounts Receivable XX
What is the journal entry to record revenue for construction using the Percentage of Completion Method?
Construction in Progress XX -----Materials, Cash, etc. XX Accounts Receivable XX -----Billing on Construction Process XX Cash XX -----Accounts Receivable XX Construction in Progress XX Construction Costs XX -----Revenue from Construction XX
What are contract modifications that DO qualify a new separate contract?
If a new and distinct G/S is added that requires payment equal to the stand-alone price of that asset
How is progress towards completion calculated?
Seller must estimate the progress to reflect when control of the asset is transferred to the customer
When is revenue recognized at a single point in time?
When the contract contains only 1 obligation and the customer has control of the G or S
What is the Revenue Recognition Process?
(1) Identify the contract (2) Identify the performance obligation(s) (3) Determine the transaction price (4) Allocate the transaction price to the performance obligation(s) (5) Recognize revenue when/as performance obligations are satisfied
What is an Extended Warranty?
-Additional service that covers new problems arising after a customer takes control of a product -Represents a separate performance obligation
The customer has control of a G or S if the customer has...
-An obligation to pay the seller -Legal title to the asset -Physical possession of the asset -Assumed the risk/reward of ownership -Accepted the asset
A G/S is considered distinct if it's...
-Capable of being distinct (customer could use G/S on its own) -Separately identifiable (promise to transfer G/S are distinct in the context of the contract)
What are the methods for recording revenue from long-term construction projects?
-Completed contract method -Percentage of completion method
What are prepayments?
-Don't qualify as performance obligations because they aren't a promise to transfer anything -Included in the transaction price and allocated to the various obligations -Initially recognized as deferred revenue, and then revenue when obligation is satisfied
What is a like-kind exchange?
-Exchange of one asset for another -Recorded at fair value of asset received, FV of asset provided, or Book value of asset provided
What are the Construction in Progress (CIP) rules?
-If CIP>Billings on Construction, we have a contract asset -If CIP<Billings on Construction, we have a contract liability
What are the criteria for recognizing revenue over time?
-If customer consumes benefit of seller's work as it's performed (i.e. cleaning service) -If customer controls asset as it's created (i.e. contractor builds an extension) -If seller is creating an asset that has no alternative use to the seller and the seller has the right to receive payment for progress to date (i.e. Lockheed selling jets to military)
What are the types of contract modifications?
-Modifications that DO qualify a new separate contract -Modifications that DONT qualify a new separate contract -Modifications for non-distinct obligations
What are the 2 methods of estimating progress towards completion?
-Output-based estimate (proportion of G/S transferred to date -Input-based estimate (proportion of effort expended relative to total effort expected)
What are contract modifications that DONT qualify a new separate contract?
-Seller acts as if the old contract has been terminated -New contract includes obligations that remain, and the price is equal to the amount that hasn't been recognized from the old contract, +/- any changes in price required by the modification
What is a stand-alone selling price?
-The amount at which the G/S is sold separately under similar circumstances -Seller allocates the transaction price according to this price
What is a Quality-assurance Warranty?
-Warranty that obligates a seller to repair/replace defective parts -Sold with a G/S -Not a performance obligation -Represents a cost to be recognized in the period of sale
What is the journal entry for recording revenue with multiple obligations?
Accounts Receivable XX -----Sales Revenue XX -----Deferred Revenue XX Deferred Revenue XX -----Sales Revenue XX
What is the journal entry to record an Extended Warranty?
Accounts Receivable XX -----Sales Revenue XX -----Unearned Warranty Revenue XX Unearned Warranty Revenue XX -----Warranty Revenue XX Warranty Expense XX -----Cash, Inventory, etc. XX
What is the journal entry to record a Quality-assurance Warranty?
Accounts Receivable XX -----Sales Revenue XX COGS XX -----Inventory XX Warranty Expense XX -----Warranty Liability XX Warranty Liability XX -----Cash, inventory, etc. XX
What is the journal entry to recognize revenue at a single point in time?
Accounts Receivable XX -----Sales Revenue XX Cash XX -----Accounts Receivable XX COGS XX -----Inventory XX
What is the journal entry for Sales Returns and Allowances?
Accounts Receivable XX -----Sales Revenue XX Sales R+A XX -----Accounts Receivable XX Inventory XX -----COGS XX COGS XX -----Inventory XX
What is the journal entry to recognize revenue over time?
Cash Account XX -----Deferred Revenue XX Deferred Revenue XX -----Service Revenue XX
What is the basic journal entry to recognize revenue?
Cash Account XX -----Sales Revenue XX Cost of Goods Sold XX -----Inventory XX
T or F: Any service that meets a criterion for recognizing a revenue over time is recognized in this way
False. Many services are so short-term that even if a criterion is met, firms don't bother recognizing them over time (i.e UPS delivering a package)
What is a contract modification?
Includes changes in price, assets, duration, etc.
What are contract modifications for non-distinct obligations?
Modifications from a single obligation that is being satisfied over time
