Flashcards in 2013 Wiley CPAExcel: Module 9: Concepts: Real Estate Transactions, Multiple Deliverable Revenue Arrangements; Research & Development Milestone Method Deck (10):
Accounting treatment for real estate transactions is provided by ASC Topics ___ and __ (SFAS 66)
ASC Topics 360 and 976
How is real estate sales profits recognized?
They're recognized in full when:
(1) Profit is determinable and
(2) Earnings process virtually complete (deliver the ownership to the real estate and get the cash or A/R at around the same time)
(3) Also meet 4 Criteria at POINT OF SALE:
(a) Sale is consummated (completed)
(b) Buyer's initial and continuing investments are adequate to demonstrate a commitment to pay for the property
(c) The Seller's receivable is NOT subject to future subordination (like Seller no longer gets future cash on receivable)
(d) Seller has transferred to Buyer the usual RISKS and REWARDS of ownership in a transaction that is, in substance, a sale and Seller does not have a substantial continuing involvement in the property.
Summary: Complete the sale. Buyer puts in enough money to show that Buyer can pay off the Purchase price on home over time. Seller's receivable NOT gets disrupted by Buyer no longer pays. Seller transfer all ownership (risks and rewards) to buyer; buyer has now owned the property and Seller has no more or just have little continue involvement in the property
What are the 6 methods to record real estate sales?
(2) Cost recovery
(4) reduced profit
(6) Full accrual
What is Deposit method?
What is Reduced profit method?
Deposit method: Payments received are recorded as a LIABILITY until the contract is canceled or a sale is achieved.
Summary: Seller gets the payments (cash deposits) before complete sale. This is a Deferred revenue / unearned revenue. When sale is completed (earnings process completed), Unearned revenue becomes earned revenue.
Reduced profit method: Seller recognizes a portion of profit at time of sale with the calculating the Present value (PV) of buyer's receivable and applying a formula.
At time of sale: Reduced profit = Gross profit - PV receivable.
Remaining profit is recognized in future periods.
Multiple deliverable revenue arrangemets:
what is this?
This is: Entity generates revenue from providing different products and servies (separately) at different times
What are the conditions for time to be considered separate unit of accounting in Multiple-deliverable revenue arrangement?
(1) The delivered item has value on a stand-alone basis (i.e. it can be sold separately by the vendor or customer)
(2) If arrangement includes a RIGHT OF RETURN for the delivered item, the undelivered item must be substantially in control of vendor.
(3) If it meets both requirement, the revenue arrangement is divided into Separate Units based on the Relative selling prices. Then apply the Revenue recognition criteria to each of separate units.
What is the Milestone method for Resarch and Ddveloment Accounting?
Milestone method: it's an optional method that is used in accounting for Research and development arrangement in which Revenue payments) to the Vendor (Seller company) is contingent on Achieving one or more substance milestones related to deliverables or units of accounting.
Other words: Record a revenue when achieve a milestone in creating a Deliverable or a unit of accounting (like software and technological device)
What is a substantiate milestone?
Uncertain event that's achieved based on vendor's performance
(a) It's commensurate (in proportion) with the vendor's performance or enhancement of value resulting from Vendor's performance
(B) It's relative to past performance
(c) It's reasonable relative to all of the deliverable and payment terms.
Summary: based on Vendor's past and probably current performance in reaching its goals on time or earlier on what objectives to achieve and $$ amounts to be paid to the Vendor upon completing the milestone objectives.
If meet the entire circumstances in milestone accounting, then?
The vendor can recognize CONTINGENT revenue (entire amount) in the period of achieving the milestone.