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The first premise of the revenue recognition principle provides that companies should recognize revenue
when it is realized or realizable
The Second premise of the revenue recognition principle provides that companies should recognize revenue
when it is earned.
Earlier recognition is appropriate if
there is a high degree of certainty about the revenue earned
The first situation were delayed recognition is appropriate
degree of uncertainty concerning the amount of revenue or costs is sufficiently high
The 2nd situation were delayed recognition is appropriate
sale does not represent substantial completion of the earnings process.
manufactures try to show sales, profits, and market share they don't actually have—induce their wholesale customers, known as trade, to buy more product than they can promptly resell.
software maker offers deep discounts to distributors to overbuy, and recorded revenue when the software left the loading to make fnr results look good.
Most notable example of revenue recognition before delivery
long tern construction contract accounting
Rationale to the percentage of completion method
that buyer and seller have enforceable rights.
What is first condition of the percentage of completion method
contract clearly specifies the enforceable rights regarding goods or services by the parties, the consideration to be exchanged, and the manner and terms of settlement.
What is the 2nd condition of the percentage of completion method
buyer can be expected to satisfy all obligations.
What is the 3rd condition of the percentage of completion method
contractor can be expect to perform under the contract.
When estimates of progress toward completion, revenue, and costs are reasonable is one requirement of the completed contract method
false percentage of completion method.
Short term contracts use what kind of revenue recognition method
If the company cant meet the conditions of the percentage of completion what method is used
the completed contract method.
What happens is there are inherent hazards in the contract beyond the normal, recurring business risk
then the completed contract method is used.
What journal entry do you make once the project is completed under the percentage of completion method
debit to billing on cip for contract price and credit to cip for same amount
What is the completed contract method
companies recognize revenue and gross profit only at point of sale- that is, when the contract is completed.
Under the completed contract method do companies make interim charges or credits to the income statement accounts for revenues, costs, or gross profit
What is required on a loss in the current period on a profitable contract
the estimated cost increase requires a current period adjustment of gross profit recognized in prior periods.
What method recognized a loss in the current period on a profitable contract
the percent of completion method.
What method recognizes a loss on an unprofitable contract
the percentage of completion method and completed contract method.
What is required on the loss of an unprofitable contract
the company must recognize in the current period the entire expected contract loss.
How would you recognize a loss on unprofitable contract
debit loss on construction contract and credit CIP account.
Should construction contractors disclose the method of recognizing revenue
Should construction contractors disclose the basis used to classify assets and liabilities as current (nature and length of the operating cycle)
Should construction contractors disclose the basis for recording inventory
Should construction contractors disclose the effects of any revision of estimated
Should construction contractors disclose the amount of backlog and uncompleted contracts
Should construction contractors disclose the details about receivables
What is the completion of production basis
in certain cases companies recognize revenue at the completion of production even though no sale has been made.
Examples of completion of production basis products
precious metals or agricultural products.
When is the revenue recognized after delivery (deferred)
when the collection of the sales price is not reasonably assured
What are the first two methods of deferring revenue
the installment sales method, and cost recovery method.
What is the last method to defer revenue
the deposit method
How does the installment-sale method recognize income
in the periods of collection rather than in the period of the sale.
How does the installment sale method recognize cost and revenues
in the period of the sale
How does the installment handle gross profit
defer gross profit to periods in which cash is collected
Dose the installment sales method defer selling and administrative expenses
Why is the installment sales method not acceptable by the profession
because it does not recognized any income until cash and not inline with the accrual concept.
When is the installment method acceptable
in special circumstances
How does the cost recovery method recognized profit
when cash pymts by the buyer exceed the cost of the merchandise sold.
When it is permitted to use the cost recovery method
there is reasonable basis for estimating collectability.
What is the cost recovery required
where there is a high degree of uncertainty exists related to the collection of receivables.
How does the seller in the deposit method report cash received from the buyer
as a deposit on the contract and classifies it on the balance sheet as a liability.
According to the deposit method, when doses the seller recognize revenue
when the sale is complete...
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