Transaction - Revenue Recognition: Percentage Of Completion Flashcards
(47 cards)
Percentage of Completion Method
Recognition of revenue throughout the lifespan of a project.
Percentage of Completion Requirements
Costs, revenue, and completion progress estimable.
Buyer expected to fulfill financial obligations per contractual agreements
Contractor expected to fulfill performance obligations per contractual agreements.
Enforceable rights clarified within the contractual agreement.
Percentage of Completion Method Calculation
Costs Incurred / Estimated Total Costs = Percentage Completion
Contract Price (Revenue) - Estimated Total Costs = CY Gross Profit
CY Gross Profit X Percentage Completion = CY Gross Profit Completion
CY Gross Profit Completion - PY Gross Profit Completion = Construction In Progress
Percentage of Completion Journal Entires (Revenue/Expense)
Debit Construction Expense = Cost Incurred (- Combined Construction Expense from previous years if applicable)
Debit Construction In Progress = Step 3
Credit Construction Revenue = Contract Price (Revenue) X Percentage Completion (- combined recognized revenue from previous year)
Percentage of Completion Journal Entries (Cost Incurred)
Debit Construction In Progress = Costs Incurred (- combined costs incurred from prior years)
Credit Cash/Payable = Costs Incurred (-combined costs incurred from prior years)
Percentage of Completion Journal Entries (Cash Collected)
Debit Cash = Cash Received To Date
Credit Contracts Receivable = Cash Received To Date
Percentage of Completion Journal Entries (Billings)
Debit Contracts Receivable = Billed to date
Credit Progress Billing = Billed to date
Point In time
Contract Completion Method
Over Time
Percentage of Completion Method
Point In Time Revenue Recognition Criteria
Customer must accept assets with full ownership of title, risks, and rewards, and fully paid/entity collection rights.
Bill and Holding Criteria
Must be identified as customer’s belongings which cannot be used by the entity or transfered to another customer, ready for physical transport to customer, and a substantive reasoning for the arrangement.
Revenue Recognition Approach (step wise)
Contract(s), performance obilgations, and transaction price must be identified, along with the allocation to transaction price and performance obligation, and revenue can be recognized as the entity satifies the performance obligation.
Lew Co. sold 200,000 corrugated boxes for $2 each. Lew’s cost was $1 per unit. The sales agreement gave the customer the right to return up to 60% of the boxes within the first six months, provided an appropriate reason was given. It was immediately determined, with appropriate reason, that 5% of the boxes would be returned. Lew absorbed an additional $10,000 to process the returns and expects to resell the boxes. What amount should Lew report as operating profit from this transaction?
200,000 X .05 = 10,000
200,000 - 10,000 = 190,000
190,000 X 2 = 380,000
190,000 X 1 = 190,000
380,000 - 190,000 = 190,000
190,000 - 10,000 = 180,000
KLU Broadcast Co. entered into an agreement to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, travel and lodging services of $10,000 were used by KLU. However, the advertising service had not been provided. How should KLU account for travel and lodging in its June 30 financial statements?
Expense and liability of 10k since the services were used in advance by KLU
Wren Corp.’s trademark was licensed to Mont Co. for royalties of 15% of sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Wren received the following royalties from Mont:
March September
Year 2 $10,000 $15,000
Year 3 $12,000 $17,000
Mont estimated that sales of the trademark items would total $60,000 for July through December Year 3. In Wren’s Year 3 income statement, the royalty revenue should be:
60,000 X 15% = 9,000
9,000 + 17,000
On January 2 of the current year, Boulder Co. assigned its patent to Castle Co. for royalties of 10% of patent-related sales. The assignment is for the remaining four years of the patent’s life. Castle guaranteed Boulder a minimum royalty of $100,000 over the life of the patent and paid Boulder $50,000 against future royalties during the year. Patent-related sales for the year were $300,000. In its current year income statement, what amount should Boulder report as royalty revenue?
300,000 X 0.1 = 30,000
Lin Co., a distributor of machinery, bought a machine from the manufacturer in November for $10,000. On December 30, Lin sold this machine to Zee Hardware for $15,000 under the following terms: 2% discount if paid within 30 days, 1% discount if paid after 30 days but within 60 days, or payable in full within 90 days if not paid within the discount periods. However, Zee had the right to return this machine to Lin if Zee was unable to resell the machine before expiration of the 90-day payment period, in which case Zee’s obligation to Lin would be canceled. In Lin’s net sales for the year ended December 31, how much should be included for the sale of this machine to Zee?
0 for the right to return the machine
The calculation of the income recognized in the third year of a five-year construction contract accounted for using the uses input method prescribed in ASC 606 that recognizes revenue over time includes the ratio of
A Total costs incurred to date to total estimated costs.
B Cost incurred in year three to total estimated costs.
C Costs incurred in year three to total billings to date.
D Total costs incurred to date to total billings.
Total costs incurred to date to total estimated costs.
Ott Company acquired rights to a patent from Grey under a licensing agreement that required an advanced royalty payment when the agreement was signed.
Ott remits royalties earned and due, under the agreement, on October 31 each year. Additionally, on the same date, Ott pays, in advance, estimated royalties for the next year. Ott adjusts prepaid royalties at year-end. Information for the current year ended December 31 is as follows:
01/01 Prepaid royalties 65K
10/31 Royalty payment (charged to royalty expense) 110K
12/31 Year-end credit adjustment to royalty expense 25K
In its December 31 balance sheet, Ott should report prepaid royalties of
65,000 + 25,000 = 90,000
A company sold a machine to a customer, which contains the warranty required by state statute that the machine will perform at the agreed-upon level of specifications for a period of one year after purchase. In addition, the customer paid separately for the company to install the machine at its facility. The installation does not significantly modify the machine, and the installation services are readily available from third-party providers. The customer also paid for online access to a technical website maintained by the company; this service is offered separately to customers and gives them unlimited online access for two years after the purchase date. How many Performance Obligations should the company identify for the transaction?
three
The Machine (including the state-required warranty as it is not distinct).
The Installation Service.
The Online Access to the Technical Website.
On October 1, year 1, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty-thousand gallons were delivered on December 15, year 1, and the remaining 50,000 gallons were delivered on January 15, year 2. Payment terms were: 50% due on October 1, year 1, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale during year 1?
50,000 X 3 = 150,000
Since the 25% was not really delivered the first year.
On January 2, Year 1, Jann Co. purchased a $150,000 whole-life insurance policy on its president. The annual premium is $4,000. The company is both the owner and the beneficiary. Jann charged officers’ life insurance expense as follows:
Year 1 4K
Year 2 3.6K
Year 3 3K
Year 4 2.2K
Total 12.8K
In its December 31, Year 4, balance sheet, what amount should Jann report as investment in cash surrender value of officers’ life insurance?
4,000 X 4 = 16,000
16,000 - 12,800 = 3,200
During 2002, Fleet Co.’s trademark was licensed to Hitch Corp. for royalties of 10% of net sales of the trademarked items. Returns were estimated to be 1% of gross sales. On signing the licensing agreement, Hitch paid Fleet $75,000 as an advance against future royalty earnings. Gross sales of the trademarked items during the year were $600,000. What amount should Fleet report as royalty income for 2002?
600,000 X 0.01 = 6,000
600,000 - 6,000 = 594,000
594,000 X 0.1 = 59,400
Ina Co. had the following beginning and ending balances in its prepaid expense and accrued liabilities accounts for the current year:
Prepaid expenses:
Beginning balance 5K
Ending balance 10K
Accrued liabilities
Beginning balance 8K
Ending balance 20K
Operating Expenses charged to Income Statement totaled $100,000. What amount did Ina pay for operating expenses during the current year?
5K increase to prepaid expenses which would increase operating expenses.
12K increase to accrued liabilities would decrease operating expenses since they weren’t expensed yet but used.
