Revenue Recognition
Chapter 18 Keiso Weygandt 12th edition
Does priceline.com
sell rooms or broker rooms ?
sell airline tickets or broket tickers ?
Guidelines
Revenue is recognized
fn # 6 page 907
1) when it is realized or realizable and
2) when it is earned
recognition versus realization
page 908
sale of product
Services
permitting others to use assets
disposal of assets
fn 11 page 909
1.
2.
3.
4.
date of sale / date of delivery
services are performed and billable
the passage of time
date of sale
SEC revenue is realized or realizable and earnd
remember this is only 1/2 of the requirement
Persauasive evidence of an arrangement exits
delivery has occured or services have been rendered
price to the buyer is fixed or determinable
collectibility is reasonably assured
earned
realizable
What are we uncertain about?
collection of cash
will we collect the cash ?
measuring revenue is the earnings process complete ?
did we really sell it ?
have we earned it ?
measuring costs
how much does the sold item costs ?
1
example to use with Chapter 18
Revenue recognition is a timing issue
$19,600.00
10.8%
5
$5,275.95
Loan
Interest rate
Years
Payment
BEGIN
BAL
INT
REV
PRINC
NEW
BAL
$19,600.00
$16,440.03
$12,938.91
$9,059.82
$4,761.95
$2,115.98
$1,774.83
$1,396.86
$978.08
$514.09
$3,159.97
$3,501.12
$3,879.09
$4,297.87
$4,761.86
$16,440.03
$12,938.91
$9,059.82
$4,761.95
$0.09
TOTALS
$6,779.84
$19,599.91
$20,000.00
2.0%
$400.00
$19,600.00
10.0%
$5,275.95
$20,000.00
$16,724.05
$13,120.51
$9,156.61
$4,796.32
p. 910
Loan
Points
Loan Orig Revenue
Net loan
Interest rate
Payment
$2,000.00
$1,672.41
$1,312.05
$915.66
$479.63
$3,275.95
$3,603.54
$3,963.90
$4,360.29
$4,796.32
$6,379.75
$20,000.00
$16,724.05
$13,120.51
$9,156.61
$4,796.32
$0.00
Note Rec
Cash
19,600.00
19,600.00
Note Rec
26,379.75
Cash
Revenue
19,600.00
6,779.75
Note Rec
20,000.00
Orig fee Rev
Cash
400.00
19,600.00
Cash
5,275.95
Interest Inc
Note Rec
2,000.00
3,275.95
Buybacks - similar to a collateralized loan
Right of Return
page 910
1. price to the buyer is fixed or determinable
2. buyer's obligation to pay is not contingent on resale of the product
3. buyer's obligation would not change if the event of theft or damage
4. buyer has economic substance
5. seller does not have obligations for future performance
6. the amount of returns can be estimated
2
E 18-1 this is what we learned in 221/222 and in 321
Accounts Rec
Sales
Cost of Goods Sold
Inventory
Cash
Accounts Rec
16,000,000
16,000,000
960,000
I made this up
60%
960,000
How do we deal with low levels (acceptable levels) of uncertainty with regard to collection of cash ?
This is similar to allowances we set up for bad debt exp in 321.
talk about the nature of the various accounts
are they income statement accounts or balance sheet accounts
what effect does the entry have on net income
are they Contra accounts -- what account are they contra to
RETURN PRIVILEGES page 910
Bad debt exp
Acc Rec - allow
Acc Rec - allow
Acc Rec
is the earnings process complete?
Sales - est returns
Acc Rec - allow for
Inv - est returns
CoGS
2,400,000
Acc Rec - allow for
Acc Rec
Inventory
Inv - est returns
2,000.000
2,400,000
1,440,000
1,440,000
2,000,000
1,200,000
1,200,000
to account for the return of $2,000,000 of books
if you want
Sales Returns
Sales - est returns
2,000,000
2,000,000
Revenue Recognition before Delivery
page 913 PERCENTAGE COMPLETION/COMPLETED CONTRACT
1. contract clearly specifies enforceable rights
2. buyer can be expected to satisfy obligations
3. contractor can be expected to perform obligations
3
Problem 6 If everything went as planned - Completed Contract
2007
2008
2009
8,400,000
3,200,000
2,000,000
5,200,000
1,200,000
6,400,000
1,200,000
6,400,000
0
6,400,000
2,000,000
Total Revenues
costs
costs to date
estimated costs to complete
Est Total Costs
Est Total Gross Profit
Yr 1
Yr 2
Yr 3
3,200,000
6,400,000
Constr in progress
cash etc. ??
Accounts receivable
CiP - contra - BILLINGS
Cash
Accounts receivable
3,200,000
Constr in progress
cash etc. ??
Accounts receivable
CiP - contra - BILLINGS
2,000,000
Constr in progress
cash etc. ??
Accounts receivable
CiP - contra - BILLINGS
1,200,000
3,200,000
3,200,000
3,200,000
2,000,000
3,500,000
3,500,000
1,200,000
1,700,000
1,700,000
Cost of Construction - Exp
6,400,000
Constr in progress
6,400,000
CiP - contra - BILLINGS
8,400,000
Revenue
8,400,000
close the Constr in Progress account are recognize the revenue
const in process
3,200
2,000
1,200
acc receivable
CiP contra Billings
3,200
3,500
1,700
3,200
3,500
1,700
4
Problem 6 Costs exceed estimates - Completed Contract
2007
2008
Total Revenues
8,400,000
costs
costs to date
estimated costs to complete
Est Total Costs
Est Total Gross Profit
Yr 1
Yr 2
Yr 3
2009
3,200,000
3,200,000
6,400,000
2,600,000
5,800,000
1,450,000
7,250,000
Constr in progress
cash etc. ??
3,200,000
Accounts receivable
CiP - contra - BILLINGS
3,200,000
Constr in progress
cash etc. ??
2,600,000
Accounts receivable
CiP - contra - BILLINGS
3,500,000
Constr in progress
cash etc. ??
1,450,000
Accounts receivable
CiP - contra - BILLINGS
1,700,000
1,450,000
7,250,000
0
7,250,000
1,150,000
3,200,000
3,200,000
2,600,000
3,500,000
1,450,000
1,700,000
Cost of Construction - Exp
7,250,000
Constr in progress
7,250,000
CiP - contra - BILLINGS
8,400,000
Revenue
8,400,000
close the Constr in Progress account are recognize the revenue
const in process
3,200
2,600
1,450
acc receivable
CiP contra Billings
3,200
3,500
1,700
3,200
3,500
1,700
5
Problem 6 If everything went as planned - Percent Completion
2007
2008
2009
Total Revenues
costs
costs to date
estimated costs to complete
Est Total Costs
Percent complete
Est Gross Profit to date
Yr 1
Yr 2
Yr 3
8,400,000
3,200,000
3,200,000
6,400,000
50.0%
1,000,000
2,000,000
5,200,000
1,200,000
6,400,000
81.25%
1,625,000
Constr in progress
cash etc. ??
CiP - gross profit
Cost of Construction - Exp
Revenues
Accounts receivable
CiP - contra - BILLINGS
Cash
Accounts receivable
3,200,000
Constr in progress
cash etc. ??
CiP - gross profit
Cost of Construction - Exp
Revenues
Accounts receivable
CiP - contra - BILLINGS
2,000,000
Constr in progress
cash etc. ??
CiP - gross profit
Cost of Construction - Exp
Revenues
Accounts receivable
CiP - contra - BILLINGS
1,200,000
1,200,000
6,400,000
0
6,400,000
100.00%
2,000,000
2,000,000
3,200,000
1,000,000
3,200,000
4,200,000
3,200,000
3,200,000
2,000,000
625,000
2,000,000
2,625,000
3,500,000
3,500,000
1,200,000
375,000
1,200,000
1,575,000
1,700,000
1,700,000
6
const in process
3,200
2,000
1,200
acc receivable
gross profit
1,000
625
375
CiP contra Billings
3,200
3,500
1,700
Percentage completion
3,200
3,500
1,700
the production period is long
the contract price is known
construction costs are reasonable estimated
percentage completion is a method of allocating the Gross Profit over the remaining production period
this is similar to how we allocate Gross Profit with Installment Sales, except the allocation is based on
Costs instead of Cash Receipts
the problem is ... the reason that we don't recognize Revenue when earned, just like ACTG 321, is that
the project takes a long time to complete
talk about the idea of including Profit in an Asset
we allocate Expected Profit across accounting periods ... But an Expected Loss is recognized
immediately
7
Problem 6 Costs exceed estimates - Percentage Completion
2007
2008
Total Revenues
2009
costs
costs to date
estimated costs to complete
Est Total Costs
Est Total Gross Profit
Percent complete
Est Gross Profit to date
Yr 1
Yr 2
Yr 3
8,400,000
3,200,000
3,200,000
6,400,000
2,000,000
50.0%
1,000,000
2,600,000
5,800,000
1,450,000
7,250,000
1,150,000
80.00%
920,000
Constr in progress
cash etc. ??
CiP - gross profit
Cost of Construction - Exp
Revenues
Accounts receivable
CiP - contra - BILLINGS
Cash
Accounts receivable
3,200,000
Constr in progress
cash etc. ??
CiP - gross profit
Cost of Construction - Exp
Revenues
Accounts receivable
CiP - contra - BILLINGS
2,600,000
Constr in progress
cash etc. ??
CiP - gross profit
Cost of Construction - Exp
Revenues
Accounts receivable
CiP - contra - BILLINGS
1,450,000
1,450,000
7,250,000
0
7,250,000
1,150,000
100.00%
1,150,000
3,200,000
1,000,000
3,200,000
4,200,000
3,200,000
3,200,000
2,600,000
80,000
2,600,000
2,520,000
3,500,000
3,500,000
1,450,000
230,000
1,450,000
1,680,000
1,700,000
1,700,000
8
const in process
3,200
2,600
1,450
acc receivable
gross profit
1,000
80
230
CiP contra Billings
3,200
3,500
1,700
3,200
3,500
1,700
9
Problem 7 Costs exceed estimates - Completed Contract
2007
2008
2009
1,950,000
planned costs
plannded
expected gross profit
150,000
750,000
900,000
600,000
1,500,000
450,000
actaul costs
actaul costs to date
estimated costs to complete
Est Total Costs
Est Total Gross Profit
150,000
1,050,000
1,200,000
800,000
2,000,000
< 50,000 >
900,000
2,100,000
0
2,100,000
< 150,000 >
Total Revenues
Yr 1
Yr 2
Yr 3
1,350,000
1,500,000
Constr in progress
cash etc. ??
Accounts receivable
CiP - contra - BILLINGS
150,000
Constr in progress
cash etc. ??
Loss
CiP Loss
Accounts receivable
CiP - contra - BILLINGS
1,050,000
Constr in progress
cash etc. ??
Loss
CiP Loss
Accounts receivable
CiP - contra - BILLINGS
900,000
150,000
300,000
300,000
1,050,000
50,000
50,000
800,000
800,000
900,000
100,000
100,000
850,000
850,000
Cost of Construction - Exp
1,950,000
CiP Loss
150,000
Constr in progress
2,100,000
CiP - contra - BILLINGS
1,950,000
Revenue
1,950,000
close the Constr in Progress account are recognize the revenue
10
const in process
150
1,050
900
acc receivable
Loss
50
50
CiP contra Billings
300
800
850
300
800
850
.Problem 7 Costs exceed estimates - Percentage Completion
2007
2008
2009
1,950,000
planned costs
plannded
expected gross profit
150,000
750,000
900,000
600,000
1,500,000
450,000
actaul costs
actaul costs to date
estimated costs to complete
Est Total Costs
Est Total Gross Profit
percent complete
150,000
1,050,000
1,200,000
800,000
2,000,000
< 50,000 >
LOSS
900,000
2,100,000
0
2,100,000
< 150,000 >
Total Revenues
1,350,000
1,500,000
450,000
10%
11
Yr 1
Yr 2
Yr 3
Constr in progress
cash etc. ??
CiP gross profit
Cost of Construction - Exp
revenues
Accounts receivable
CiP - contra - BILLINGS
150,000
Constr in progress
cash etc. ??
CiP gross profit
Cost of Construction - Exp
revenues
Accounts receivable
CiP - contra - BILLINGS
1,050,000
Constr in progress
cash etc. ??
CiP gross profit
Cost of Construction - Exp
revenues
Accounts receivable
CiP - contra - BILLINGS
900,000
const in process
150
1,050
900
CiP gross profit / Loss
150,000
45,000
150,000
195,000
300,000
300,000
1,050,000
95,000
1,050,000
955,000
800,000
800,000
900,000
100,000
900,000
800,000
850,000
850,000
acc receivable
45
95
100
CiP contra Billings
300
800
850
300
800
850
12
INSTALLMENT METHOD / COST RECOVERY METHOD p. 923
Installment method
the collection period is fairly long
unable to estimate uncollectible accounts - but we expect to collect it
the installment sales method is a method of allocating the Gross Profit over the
collection period (the percentage collected method)
we use the GP as percent of sales to allocate the GP to the different years
Problem 18-8
there is $100,000 of GP associated with the 2004 sales (40% GP)
we will recognize $ 75,000 / 250,000 30% of the total GP in 2007
we will recognize 100,000 / 250,000 40% of the total GP in 2008
we will recognize 50,000 / 250,000 20% of the total GP in 2009
30,000
40,000
20,000
there is $96,200 of GP associated with the 2005 sales (37% GP)
we will recognize 100,000 / 260,000 38.46 % of the total GP in 2008
we will recognize 50,000 / 260,000 46.15% of the total GP in 2009
36,999
44,396
there is $98,000 of GP associated with the 2006 sales (35% GM)
we will recognize 110,000 / 280,000 39.29% of the total GP in 2009
38,504
P18-8
Accounts rec - 2007
Sales - 2007
CoGS
Inventory
250,000
250,000
150,000
150,000
Sales - 2007
250,000
CoGS
150,000
2007 deferred GP- 40%
100,000
Cash
contra to Acc Rec
similar to allow for
doubtful accounts
75,000
Accounts rec - 2007
2007 deferred GP- 40%
30,000
Recognized Gross Profit
75,000
30,000
Look closely at Financial Statement presentation on Page 930
an important concept Accounts Rec usually includes Gross Profit
13
Accounts rec - 2008
260,000
Sales - 2008
260,000
CoGS
163,800
Inventory
163,800
Sales - 2008
260,000
CoGS
163,800
2008 deferred GP- 37%
96,200
Cash
200,000
Accounts rec- 2007
100,000
Accounts rec- 2008
100,000
2007 deferred GP- 40%
40,000
2008 deferred GP- 37%
37,000
Recognized Gross Profit
77,000
Accounts rec - 2009
280,000
Sales - 2009
280,000
CoGS
182,000
Inventory
182,000
Sales - 2009
280,000
CoGS
182,000
2009 deferred GP- 35%
98,000
Cash
380,000
Accounts rec- 2007
50,000
Accounts rec- 2008
120,000
Accounts rec- 2009
110,000
2007 deferred GP- 40%
20,000
2008 deferred GP- 37%
44,400
2009 deferred GP- 35%
38,500
Recognized Gross Profit
102,900
14
Income Statement
Miller Motor Co
for the years ending Dec, 31st, 2009, 2008 and 2007
2009
Sales
Cost of Goods Sold
Gross Profit
less: Deferred GP
Realized Gross Profit
current year
prior years
Gross Profit realized
2008
2007
250,000 260,000 280,000
150,000 163,800 182,000
100,000 96,200 98,000
70,000 59,200 59,500
30,000
0
30,000
37,000 38,500
40,000 64,400
77,000 102,900
Balance Sheet
Miller Motor Co
December 31st 2009 and 2008
2009
2008
Cash
Investments
Installment Receivables
less Deferred Gross Profit
Net Receivables
2009
2008
Accounts Payable
Wages Payable
235,000
-89,200
235,000
-84,300
145,800 150,700
Cost Recovery Method
cash collection is highly uncertain
the collection period is fairly long
unable to estimate uncollectible accounts - highly doubtful
cost recovery method defers the recognition of gross profit until the amount of cash
collected exceeds the Cost of Goods Sold
Cost Recovery Mehtod is just like the Installment Method
except we don't allocate Gross Profit to the different periods
we recognize Gross Profit last, after we have recovered our costs
if we have $150,000 Cost of Goods Sold then we will recognize the Gorss Profit after
we recover $150,000 of the Account Receivable
15
there is $150,000 Cost of Goods to Recover associated with the 2007 sales
we recovered
$ 75,000 of the 150,000 as of 12/31/2007
0
we recovered
$ 175,000 of the 150,000 as of 12/31/2008
25,000
we recovered
$ 225,000 of the 150,000 as of 12/31/2009
75,000 - 25,000
there is $163,800 Cost of Goods to Recover associated with the 2008 sales
we recovered
$ 100,000 of the 163,800 as of 12/31/2008
we recovered
$ 220,000 of the 163,800 as of 12/31/2009
0
56,200
there is $182,000 Cost of Goods to Recover associated with the 2009 sales
we recovered
$ 110,000 of the 182,000 as of 12/31/2009
0
P18-8
Accounts rec - 2007
Sales - 2007
CoGS
Inventory
250,000
Sales - 2007
CoGS
2007 deferred GP
Cash
Accounts rec - 2007
250,000
Accounts rec - 2008
Sales - 2008
CoGS
Inventory
Sales - 2008
CoGS
2008 deferred GP
260,000
Cash
200,000
250,000
150,000
150,000
150,000
100,000
75,000
75,000
260,000
163,800
163,800
260,000
163,800
96,200
Accounts rec- 2007
100,000
Accounts rec- 2008
100,000
2007 deferred GP
25,000
Recognized Gross Profit
25,000
16
Accounts rec - 2009
Sales - 2009
CoGS
Inventory
Sales - 2009
CoGS
2009 deferred GP
280,000
Cash
380,000
280,000
182,000
182,000
280,000
182,000
98,000
Accounts rec- 2007
50,000
Accounts rec- 2008
120,000
Accounts rec- 2009
110,000
2007 deferred GP
50,000
2008 deferred GP
56,200
Recognized Gross Profit
106,200
17
FRANCHISE FEES Appendix 18A
what is uncertain the earning process or the collection of cash
E 18-19 (a) payment is non refundable and we need provide no additional services
Cash
40,000
Note rec
30,000
discount on Note rec
5,131.48
Revenue
64,868.52
Cash
10,000
Note rec
10,000
discount on Note rec 2,486.85
Interest income
2,486.85
E 18-19 (b) substantial services to perform
down payment is refundable
very uncertain about collection
Cash
40,000
Uneraned Revenue
40,000
Note Receivable
24,868.52
Deferred Revenue
24,868.52
Cash
10,000
Interest income
Note Receivable
Deferred Revenue
Revenue
2,486.52
7,513.48
7,513.48
7,513.48
Unearned revenue 14,109.36
Revenue
14,109.36
If we assume we earn the revenue ratably over the three year period
Deferred Revenue -contra to Accounts Receivable similar to Allowance for Doubtful
Accounts
18
E 18-19 (c) down payment is not refundable
collection is reasonably certain
substantial services to remain but down payment reflects services
completed
Cash
40,000
Revenue
40,000
Note rec
30,000
discount on Note rec
5,131.48
Unearned Revenue
24,868.52
Cash
10,000
Note rec
10,000
discount on Note rec 2,486.85
Interest income
2,486.85
Unearned revenue
8,289.51
Revenue
8,289.51
Stop here
the remainder is old stuff
19
completion
of production
the old
fashioned way
installment
method
year 1
year 2
year 1
year 2
year 1
year 2
year 3
Revenue
CoGS
Gross Profit
selling exp
Net Profit
30,000
11,000
18,900
1,500
17,400
0
0
0
0
0
22,500
8,325
14,175
1,125
13,050
7,500
2,775
4,725
375
4,350
18,000
6,660
11,340
1,125
10,215
8,250
3,053
5,197
375
4,822
3,000
1,110
1,890.
0.
1,890.
750
277
473.
0.
473.
Cash
Accounts rec
Inventory
Equipment
accum dep
8,775
4,500
7,125
20,000
- 3,000
16,650
3,750
0
20,000
- 3,000
8,775
4,500
2,775
20,000
- 3,000
16,650
3,750
0
20,000
- 3,000
8,775 16,650 19,650
4,500. 3,750.
750
7,125.
0.
0
20,000. 20,000. 20,000
- 3,000. -3,000. - 3,000
20,400.
0
0
20,000
- 3,000
20,000
17,400
2,835
2,363
473
20,000. 20,000. 20,000
10,215 15,037 16,927
0
20,000
17,400.
deferred Gross Profit
Capital Stock
20,000
Retained Earn
17,400
20,000
17,400
20,000
13,050
year 4
20
Completion of Production E7-9
modify E7-9 15,000 bushels of grain at $2.00 per bu. = $30,000
the Old Fashioned way
YR1 Dep exp
Accum dep
Inventory
Dep exp
Inventory
Cash
just like ACTG 214
3,000
3,000
3,000
3,000
8,100
8,100
Accounts rec
22,500
Sales
22,500
CoGS
8,325.00
Inventory
8,325.00
sold 11,250 bu. Cost/ bu. = $11,100 / 15,000 bu. = $0.74
Delivery exp
Cash
Cash
1,125
1,125.
18,000
Accounts rec
YR2 Accounts rec
Sales
CoGS
18,000
7,500
7,500
2,775.
21
Inventory
2,775.
sold 3,750 bu. Cost/ bu. = $11,100 / 15,000 bu. = $0.74
delivery exp
cash
Cash
375
375.
8,250
Accounts rec
Accounts rec
2,250
6,000
10% of prior yr sales
80% of current yr sales
25% * 80% collections
25% * 80% collection
25% * 80% collection
Completion of Production a form of percentage completion 100% complete ----- normally, we match costs to
the year of the Sale , with Completion of Production we match both Revenues and Costs to the year of production
YR1 Inventory
Accum dep
Inventory
Cash
3,000
3,000
8,100
8,100
Inventory
18,900
CoGS
11,100
Revenue
30,000
entry at completion of production
how do I recognize profit
I include it in an asset
account
22
Accounts rec
Inventory
Delivery exp
Cash
Cash
22,500
22,500
1,125
1,125.
18,000
Accounts rec
18,000
12/31 Delivery exp
375
Inventory
375
adjusting entry to adjust Inventory to NRV
YR2 Accounts rec
Inventory
Cash
Cash
7,500
7,125
375.
8,250
Accounts rec
Accounts rec
2,250
6,000
10% of prior year deliveries
80% of current yr deliveries
25% * 805 collections
23