FAR - F2 Flashcards
(20 cards)
When the total consideration for a contract with multiple embedded obligations reflects a discount, what is the most appropriate way to assign that discount?
Allocate it proportionally to all obligations within the contract.
Performance obligation
A promise to transfer a good or service to a customer.
Explain the transfer of goods/services (2 items)
Can be a contractual agreement by the company to provide an individual good/service (or bundle) that is distinct for the customer. (treated as separate performance obligations)
Can be a series of goods/services that are substantially the same and transferred in the same manner. (treated as one performance obligation)
Define distinct (2 items)
The promise to transfer the good/service is separately identifiable from other goods or services in the contract.
The customer can benefit from the good or service independently or when combined with the customer’s available resources.
Define separately identifiable (3 items)
The entity does not combine the good or service with other goods or services in the contract.
The good or service does not modify another good or service in the transaction.
The good or service does not depend on other goods or services in the contract.
Define not separately identifiable (2 items)
The goods or services are highly interdependent.
The entity provides a significant service of integrating the good or service with other goods or services in the contract. The combined bundle represents the output contracted for the customer.
What are the journal entries for a LT construction contract using the percentage of completion method?
Record costs incurred:
Dr. CIP
Cr. Cash
Record billings:
Dr. Contracts Receivable
Cr. Progress Billings
Record Payments Received:
Dr. Cash
Cr. Contracts Receivable
Record Revenue/Costs incurred in the period:
Dr. Construction Expense
Dr. CIP (Gross Profit)
Cr. Revenue
When is CIP recorded as a current asset?
When the balance in the CIP account is greater than the balance in the progress billings account.
When is CIP recorded as a current liability?
When the balance in the progress billings account is greater than the balance in the CIP account.
What is the correct treatment for losses on a LT construction contract?
Losses are recognized in the year they are realized regardless if revenues are recognized over a period of time or at a point in time.
What are the journal entries for a LT construction project using the completed projects method?
Record costs incurred:
Dr. CIP
Cr. Cash
Record billings:
Dr. Contracts Receivable
Cr. Progress Billings
Record Payments Received:
Dr. Cash
Cr. Contracts Receivable
*There is no entry to record revenue or expenses until the completion of the contract, matching principle.
What is the final journal entry or journal entries for a LT construction contract using the completed contracts method?
1.
Dr. Construction expense
Dr. CIP (Gross Profit)
Cr. Revenue
2.
Dr. Progress billings
Cr. CIP
*These entries can be combined into a single entry or 2 separate entries.
How is gross profit computed using the percentage of completion method?
Contract price - Estimated Total Cost = Gross Profit
Total Cost to Date / Total Estimated Cost = Percentage of completion
Gross profit x percentage of completion = PTD
PTD - PTD at beginning of period = Current Year PTD
How are changes in accounting estimates treated? Explain the method.
Prospectively - implemented in the current period and continue in future periods and there is no effect on prior periods.
When must a change in accounting estimate be disclosed and when does it not have to be disclosed?
When the change in accounting estimate impacts several future periods.
If the change is to an ordinary accounting estimate (inventory adjustment, etc.), unless material they do not need to be disclosed.
How are changes in accounting principles treated? Explain the method.
Retrospectively - the financial statements of prior periods presented must be adjusted to account for the new accounting principle.
How is a change in accounting principle reported?
Should be recognized by adjusting beginning retained earnings in the earliest period presented for the cumulative effect of the change. (Net of tax)
Therefore, if the comparative financial statements are presented, they must be restated (retrospective).
What are the exceptions to the retrospective approach to changes in accounting principle?
Impracticable to estimate - if it is impractical to accurately calculate the effect of the change then it is to be treated prospectively.
Change in depreciation method - considered to be a change in principle, as well as a change in estimate. As such, it is treated prospectively.
How is the cumulative effect of a change in accounting principle reported?
Reported on the statement of retained earnings, net of tax
How is the cumulative effect of a change in accounting principle calculated?
The difference between retained earnings at the beginning of the earliest period presented and retained earnings that would have been reported at the beginning of the earliest period presented if the new accounting principle was applied retroactively for all prior periods. (Net of tax)
