Acct 387 - Chapter 19 1

Revenue Recognition

Revenue is recognized when (1) it is realized or realizable and (2) it is earned.

Transaction Type of Revenue Timing of Recognition

Product Sale Sales Date of Sale (delivery)

Service Service Revenue Service performed andis billable

Use of Asset Interest, Rent, Passage of time or Royalty usage of asset

Disposal of Gain or loss Time of sale or trade-inother asset

Acct 387 - Chapter 19 2

Example

Fred, a farmer harvests all his corn in October when the price per bushel is $1.60 and immediately sells it for $1.60.

Jim, also a farmer, harvests all his corn in October when the price is $1.60, but Jim thinks prices will improve so he stores his corn for $.02 per bushel per month and sells it in February for $1.75 per bushel.

What is the selling price for each farmer and how should the $0.02 per month be accounted for in order to reflect the economic substance of what is happening?

Acct 387 - Chapter 19 3

Revenue with Right of Return

Sales with buy back agreements at a set price that covers all costs of the inventory plus related holding costs, no sale is recognized.

When returns are very high, revenue recognition may have to be deferred until return privilege lapses. Sales with right of return must meet 6 conditions to be recognized.

Price is fixed or determinableBuyer has paid or is obligated to payBuyer bears risk of loss for goodsBuyer has economic substance apart from sellerSeller does not have significant obligations to bring about

resale of goodsThe amount of future returns can be reasonably estimatedEx 1, 2

Acct 387 - Chapter 19 4

Long Term Contracts

Completed contract records profit only at the end of the contract with Work in Process inventory being offset by Billings on Construction in Process

Percentage of Completion recognizes gross profit based on costs incurred to date versus revenue earned to date.

Must use percentage of completion if estimates of completion, revenues and cost are reasonably dependable and all of these:

Contract specifies termsBuyer can be expected to satisfy obligationsContractor can be expected to perform obligations

Ex 5 Pb 5

Acct 387 - Chapter 19 5

Other Revenue Recognition Bases

Completion of Production: for cases when product is readily saleable at a determinable price, mostly use for commodities

The installment method delays recognition of revenue until cash is received, and each payment is apportioned among cost recovery, interest and gross profit. Use where collectibility is suspect.Ex 10, P12

The cost recovery method defers profit recognition until all of the cost of goods sold has been collectedEx 17

Acct 387 - Chapter 19 6

Franchises

Franchise fees should not be recognized until earned and the collectibility is reasonably assured.

There is a presumption that the earliest a fee should be recognized is when the franchisee begins operations.

Continuing franchise fees should be recognized as revenue when earned.

If franchisee is given the right to buy supplies or equipment at bargain prices, the discount should be deferred from profit.

If the franchisor has a realistic right to purchase the franchisee, the franchisor should treat cash received as a liability.Ex 18

Acct 387 - Chapter 19 7

Consignments

Merchandise is placed physically on the premises of another business, but titles stays with consignor.

Transfer merchandise to inventory on consignment, and recognize revenue when consignee reports that merchandise is sold.

Consignee uses receivable and payable accounts to account for its side of transactions

Ex 20