Chapter 6: Revenue and Expense Recognition
Assignment 6-2
a)
Interest revenue is recognized as time passes according to amount earned.
b) Interest revenue is recognized as time passes according to amount earned.
c)
Revenue would be recognized on a cost recovery basis, where payments received would be considered repayment of
principal until all the principal is recovered, with any additional payments received being recognized as interest revenue.
d) Revenue recognition would be deferred until the service of transporting the passenger is completed.
e)
Revenue would be recognized as soon as the transporting of the freight is completed (delivery).
f)
The change in the fair value of the maturing trees can be recognized as a gain or loss each year until harvest and sale, at
which point the final gain/loss will be recognized (biological assets).
g)
Revenue will be recognized as the completed houses are sold and delivered to a customer. Completed houses are included
in inventory at cost.
h) Revenue could and likely would be recognized on a percentage-of-completion basis, without regard to when payment is
received or when the completed houses are delivered to the purchaser.
i)
Either the instalment sales method or the cost recovery method would be used to recognize revenue. In this case the more
usual treatment is the instalment sales method unless collectibility is in doubt.
j)
Revenue would be recognized as it is earned, which in this case will be with the passage of time, i.e., straight-line over 24
months. The large initial payment will be accounted for as a deferred revenue.
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k)
Because it is not possible to reliably determine the costs for completion and the potential gain or loss on this project,
revenue should be recognized only to the extent of costs incurred and expensed.
l)
It would be permissible to recognize revenue at fair market value as the silver is produced. Subsequent increases and
decreases in market value would be recognized as gains and losses. However, this is permitted under IFRS only if this
practice is widely accepted in the industry. If this method is not generally accepted in the industry, revenue would be
recognized only when the silver is sold.
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6-2
Assignment 6-7 (WEB)
Requirement 1
Date
18 July
24 August
10
September
Inventory
Cash
Inventory
Cash
Accts Rec
(a) Delivery
456,000
60,000
60,000
712,000
Sales
COS
Inventory
(b) Revenue Recognition on
Cash Receipt
(c) Preparation
Inventory
456,000
Inventory
456,000
456,000 Cash
456,000 Cash
456,000
Inventory
Cash
Accts Rec
712,000
60,000
60,000
712,000
Inventory
Deferred
gross
margin
Inventory
Cash
Inventory
COS
Sales
Accts Rec
516,000
Inventory
60,000
60,000
196,000
516,000
712,000
712,000
712,000
196,000
516,000
516,000
22 November Cash
712,000
Cash
Accts Rec
712,000 Accts Rec
COS
Deferred
gross
margin
Sales
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712,000
712,000
Cash
712,000
Accts Rec
712,000
516,000
196,000
712,000
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6-3
Requirement 2
Delivery is the normal revenue recognition point, based on the presumption that the
risks and rewards of ownership pass on this date and that the sales amount is
realizable. Revenue recognition on cash receipt is appropriate when the account
receivable is considered so doubtful that it fails the realizability test; in these
circumstances, revenue cannot be recognized prior to collection.
Revenue
recognition on production is appropriate only for commodities with stable sales prices
and markets where the sales effort and costs are trivial but is not permitted under
IFRS except for biological assets and agricultural produce.
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5
Assignment 6-8
Requirement 1
Date
30 August
30 September
15 October
30 September
Inventory
Cash, etc.
Inventory
Cash
Inventory
COGS
Sales
Bad debt exp.
Sales returns
Allowance*
Accts rec
Inventory
15 October
4,300
4,300
640
640
Inventory
Cash, etc.
Inventory
Cash
Allowance
Accts rec
4,300
4,300
640
640
Inventory
Cash, etc.
Inventory
Cash
4,300
4,300
640
640
8,560
4,940
13,500
155
675
830
13,500
13,500
Accts rec
Sales
COGS
Inventory
25 October
25 October
675
675
Bad debt exp.
Sales returns
Allowance
Allowance
Accts rec
13,500
13,500
Accts rec
Def’d gross
margin
Inventory
13,500
8,560
4,940
4,940
4,940
155
675
830
675
675
Sales returns**
Accts rec
COGS
Def’d gross margin
Sales
Bad debt expense
Allowance
Cash
Allowance
Accts Rec
675
675
4,940
8,560
13,500
155
155
Cash
12,670
Cash
12,670
12,670
Allowance
155
Allowance
155
155
Accts Rec
12,825
Accts Rec
12,825
12,825
* Allowance would be shown as a contra account to inventory until accounts receivable are recognized.
** Or sales—this entry may be netted with the next. However, it seems more appropriate to capture the sales returns since they were problematic.
30 November
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Requirement 2
At each critical event, net assets (equity) is affected by the sales and expense
accounts. Prior to that point, and after that point, entries affect the distribution within
net assets but not the total net amount.
Requirement 3
a. Recognition at production is appropriate for a commodity with an organized
market, where sale is trivial, the producer cannot affect price, and also if all costs
are known and can be accrued. This point is acceptable under IFRS, but only for
biological assets and agricultural produce, and for minerals and mineral products,
but then only if this valuation basis is widely used within the industry. Canadian
ASPE accepts this revenue recognition point only for biological assets and
agricultural produce.
b. Delivery is an appropriate critical event most of the time, as risks and rewards
pass to the customer. However, sales amounts have to be realizable and all
costs estimable and accrued on this date.
c. Revenue recognition after the right of return has passed is appropriate if returns
cannot be predicted.
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6-7
Assignment 6-10
Requirement 1
Cash ......................................................................................................532,000
Deferred gross margin ...................................................................
244,000
Inventory (48,000 × $6) ................................................................
288,000
Requirement 2
Inventory (4,500 × $6) ........................................................................ 27,000
Deferred gross margin*....................................................................... 20,000
Cash ................................................................................................
47,000
*(3,500 × $4) + (1,000 × $6)
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6-8
Requirement 3
Month
of Sale
Units
Sold
Sales
Price
Monthly
Sales
September
October
November
December
10,000
12,000
15,000
11,000
$10
10
12
12
$100,000
120,000
180,000
132,000
Totals
48,000
$532,000
Gross Units
ROR Expired
*
4,000
3,600
3,000
Total Units
Returned
Net Units
ROR Expired †
2,500
1,000
1,000
0
1,500
2,600
2,000
1,100
$15,000
26,000
24,000
13,200
4,500
7,200
$78,200
1,100
11,70
0
ROR Expired
Sales Amount §
* Gross number of units sold this month, times 10% times number of months since sale. For example, at 31 December, 20x5,
four months have passed since the September sales, thus 4 × 10%, or 40% of the right of return (ROR) has expired; (40% ×
10,000 units = 4,000 units).
† Equal to gross units for which ROR expired, less units returned.
§ Equal to Net units for which ROR has expired times sale price per unit for this month sales.
Realized gross margin in 20x5 = $78,200 – (7,200 units × $6) = $78,200 – $43,200 = $35,000
To record realized gross margin on expired and unused right of return units
shipped:
Cost of Goods Sold (7,200 × $6) .................................................... 43,200
Deferred gross margin...................................................................... 35,000
Sales .............................................................................................
78,200
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Requirement 4
September
Units Available
for Return or
Sale**
6,000
October
November
December
8,400
12,000
9,900
Month
of Sale
Cost of returns
Units
Returned
Units Sold
in 20x6 ††
Unit Sale
Price
1,000
5,000
$10
2,000
2,500
4,000
6,400
9,500
5,900
10
12
12
9,500
26,800
× $6
$57,00
0
× $6
Costs of units sold
Sales
Amount
$
50,000
64,000
114,000
70,800
$298,80
0
$160,80
0
** Equal to total sold for this month, less those returned or recorded as sold in 20x5
(see Requirement 3).
†† Equal to Units available (column 2) less units returned.
Entry to record returns in 20x6:
Inventory (9,500 units × $6)........................................................ 57,000
Deferred gross margin.................................................................. 51,000
Cash ..........................................................................................
108,000*
*Refund amount on returned units:
(1,000 units × $10) + (2,000 units x $10) + ($2,500 units × $12) + (4,000 units
× $12) = $108,000
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Entry to record realized gross margin in 20x6 related to 20x5 sales:
Cost of goods sold ..................................................................... 160,800
Deferred gross margin............................................................... 138,000
Sales ......................................................................................
298,800
Reconciliation:
Total units sold in period September–December ...................
Total dollar sales amount for period September–December .
Cost of units sold in period September–December ................
Total gross margin .....................................................................
48,000
$532,000
288,000
$244,000
Units:
20x5
20x6
Total
Returned ..................................................
Not returned (sold) ..................................
Totals ............................................................
4,500
7,200
11,700
9,500
26,800
36,300
14,000
34,000
48,000
Gross Sales:
Returned .................................................. $ 47,000
Not returned ............................................ 78,200
Totals ............................................................ $125,200
$108,000
298,800
$406,800
$155,000
377,000
$532,000
Cost of sales:
Returned .................................................. $ 27,000
Not returned (sold) .................................. 43,200
Totals ............................................................ $ 70,200
$ 57,000
160,800
$217,800
$ 84,000
204,000
$288,000
Gross margin:
Returned (not realized) ........................... $ 20,000
Not returned (sold) .................................. 35,000
Totals ............................................................ $ 55,000
$ 51,000
138,000
$189,000
$ 71,000
173,000
$244,000
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Assignment 6-27
a. There is no commercial substance to this transaction, and therefore the new truck
is recorded at the net book value of the old truck plus the cash paid:
Truck (new)……………………………………………….
Accumulated amortization (old)…………………………..
Truck (old)…………………………………….
Cash…………………………………………….
60,000
60,000
100,000
20,000
b. This transaction has commercial substance since it enables a new type of
operation for Rochester Shipping Company and thereby can be expected to
significantly affect the future cash flows of the company. It seems likely that the
fair value of the land and building given up is more readily determinable than the
fair value of the boat, since it remained unsold for two years and also requires
substantial work before it can return to service. Therefore, the boat should be
recorded based on the fair value of the land and building.
Ferry ……………………………………………………..
Accumulated amortization – building…………………….
Building………………………………………...
Land…………………………………………….
Gain on capital asset disposal………………
1,150,000
210,000
700,000
300,000
360,000
The additional cost for necessary upgrading and maintenance is added to the cost
of the boat when the work is done:
Ferry……………………………………………………..
Cash, accounts payable, etc…………………..
350,000
350,000
This brings the recorded ferry value to $1,500,000, which may exceed fair value.
Alternatively, the $1,500,000 may be appropriate; it depends on whether the
expenditures improve the ferry, or just get it into serviceable shape.
The value now assigned to the ferry should be reviewed. It should be reduced if it
is more than fair value. If it is reduced, it seems logical that the gain on capital
asset disposal should be reduced rather than a loss recorded.
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Assignment 6-28
Requirement 1
Entry #
1
2
3
4
5
6
7
8
9
10
Effect on net assets
No change
No change
Increase
Decrease
Decrease
No change
No change
Decrease
No change
No change
When sales are recognized, inventory is increased. Therefore, the revenue
recognition point is production, or inventory acquisition.
Requirement 2
Asset
Inventory
Prepaid insurance
Accounts receivable
Cash
Explanation
Future cash from sale; measured at sales amount
Future benefits obtained through coverage
Future cash on collection
Cash !
Requirement 3
Expense
Cost of goods sold
business
Warranty expense
Commission expense
Insurance expense
I or D
D
Explanation
All expenses are related to normal
D
D
I
activities, cause net assets to decline, and
have no future benefit past the revenue
recognition point.
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Intermediate Accounting, Volume 1, 5th edition