marley- kieso ch 18 revenue recog

1. General Course Questions

2. Columbia Sportswear Annual Report Project Questions

3. Chapter 18 Revenue Recognition (using assigned homework)

A. Two Conditions for Revenue Recognition (question 2)

B. Departures from the Point of Sale Basis (question 6)

C. Long term Construction Contracts (?7 & 9, BE 2,3,4,Prob 6)

D. Installment Sales & Cost Recovery (BE 7,8,9, 10)

E. Cost Recovery (BE 10)

4. Discussion Question #4 Revenue Recognition

5. Return and Review Ch 7 quiz – cash & receivables

Intermediate AccountingIntermediate AccountingNovember 16November 16thth, 2010, 2010

Intermediate AccountingIntermediate AccountingNovember 16November 16thth, 2010, 2010

1

2

Revenue should be recognized at the soon as what TWO conditions are met:

1.

2.

Revenue should be recognized when you have ______ the W______ & P_______ is assured.

Revenue RecognitionRevenue Recognition

Question 2

Sale of product from

inventory

Type of Transaction

Rendering a service

Permitting use of an asset

Sale of asset other than inventory

Date of sale (date of delivery)

Services performed and

billable

As time passes or assets are

used

Date of sale or trade-in

Gain or loss on disposition

Revenue from interest, rents, and royalties

Revenue from fees or

services

Revenue from sales

Description of Revenue

Timing of Revenue Recognition

Chapter 18 Chapter 18 Chapter 10

Revenue Recognition Classified by Type of Transaction

Chapter 14 & others

3

I. Revenue is normally recognized at the point of sale, provided:

A. Revenue can be reasonably ___________, collectibility of the sales price is reasonably assured or the amount uncollectible can be ___________ reasonably.

B. The earnings process is _______; the seller is not obligated to perform significant activities after the sale.

II. Earlier recognition is appropriate if there is a high degree of certainty about the amount of revenue earned.

III. Delayed recognition is appropriate if the

degree of uncertainty concerning the amount of revenue or costs is sufficiently high or

sale does not represent substantial completion of the earnings process.


4

I. Revenue is normally recognized at the point of sale, provided:

A. Revenue can be reasonably measured, collectibility of the sales price is reasonably assured or the amount uncollectible can be estimated reasonably.

B. The earnings process is complete; the seller is not obligated to perform significant activities after the sale.

II. Earlier recognition is appropriate if there is a high degree of certainty about the amount of revenue earned.

III. Delayed recognition is appropriate if the

degree of uncertainty concerning the amount of revenue or costs is sufficiently high or

sale does not represent substantial completion of the earnings process.


5

Revenue Recognition Alternatives

6

Departures from the Sale BasisA. Sales with Buyback Agreements - even though title has transferred, if the seller still has the risk of ownership it is not a sale.

B. Sales When Right of Return Exists - do not record

the sale unless all of the following six provisions are met:

(question 6)

1. Sellers _____ is known (fixed or determinable at the date of sale)

2. Buyer's payment is not contingent upon the ______ of product

3. The buyer's obligation is not altered if product is _____/______

4. Buyer is a separate ______ from seller

5. Seller is not obligated to help buyer _______the product

6. Future returns can be _________

C. Trade Loading and Channel Stuffing - practices to book tomorrows revenues today, need to be discouraged.

Departures from the Point of Sale Basis

7

Departures from the Sale BasisA. Sales with Buyback Agreements - even though title has transferred, if the seller still has the risk of ownership it is not a sale.

B. Sales When Right of Return Exists - do not record

the sale unless all of the following six provisions are met:

1. Sellers price is known (fixed or determinable at the date of sale)

2. Buyer's payment is not contingent upon the resale of product

3. The buyer's obligation is not altered if product is stolen/damaged

4. Buyer is a separate entity from seller

5. Seller is not obligated to help buyer resell the product

6. Future returns can be estimated

C. Trade Loading and Channel Stuffing - practices to

book tomorrows revenues today, need to be discouraged.

Departures from the Point of Sale Basis

8

Long-Term ConstructionAccounting Methods

1) Terms of contract must be certain, enforceable.2) Certainty of performance by both parties3) Estimates of completion can be made reliably

1) For short-term contracts 2) Used for long-term contracts only when conditions for percentage completion are not met3) Abnormal contract risks

Percentage-of-CompletionMethod

Completed ContractMethod

Revenue Recognition Revenue Recognition Before DeliveryBefore Delivery

Question 7 & 9 9

10

• Reflect the economic substance of the activities of the company

• I/S: Revenues earned and expenses incurred to reflect the efforts and accomplishments each period. They are not all deferred until the final year of project completion.

• B/S: Value of asset being constructed is adjusted at the end of each period to reflect the amount of revenue recognized on the contract

• Requires the use of estimates• What information do we need?

• Contract revenue• Expenses incurred (or other input or output measures)• Estimated remaining expenses (or other input or output

measures)• Billing and cash from customer

Basic Idea of Percentage of Basic Idea of Percentage of CompletionCompletion

11

“Construction in Process” (CIP)•An Inventory account used to accumulate the amount recognized as Revenue throughout the contract (Similar to a Work-In-Process inventory account, but includes not only cost, but also the gross profit to date)•First the construction costs are recorded in this account as they are incurred•Then the gross profit is added to this account at the end of each period when Revenue is recognized. Thus, the balance in this account then equals the total revenue recognized on the contract to date.•This inventory account is not removed until the construction is complete and title is transferred to the new owner. Then it is offset against Billings on Construction in Process.

“Billings on Construction in Process”•A Contra-Inventory account to CIP, used to accumulate the amount that a customer has been billed and thus recorded in Cash or Accts Rec.•Interim billings are not usually based upon percentage of costs or completion. Thus, the amount billed and recorded in Billings on CIP is not likely to be equal to the revenue recognized, which is the balance in the CIP account.

Percentage-of-Completion:Percentage-of-Completion: Balance Sheet Accounts Balance Sheet Accounts

12

• “Construction in Process” (CIP) An Inventory account which equals the total revenue recognized on the contract to date.

• “Billings on Construction in Process” A Contra-Inventory account to CIP, used to accumulate the amount that a customer has been billed and thus recorded in Cash or Accts Rec.

• Interim billings are not usually based upon percentage of costs or completion. Thus, the amount billed and recorded in Billings on CIP is not likely to be equal to the revenue recognized, which is the balance in the CIP account.

• At the end of any accounting period, the difference between the balance in “CIP” and “Billings on CIP” will appear on the balance sheet.

1) If “CIP” > “Billings on CIP”, the difference will be reported as an asset2) If “Billing on CIP” > “CIP”, the difference will appear as a liability.

• The two accounts (CIP and Billings on CIP) will equal at the end of the contract. They are closed out against each other when construction is complete and title is transferred to the new owner.

Percentage-of-Completion:Percentage-of-Completion: Balance Sheet Accounts Balance Sheet Accounts

13

Balance SheetCashAccounts ReceivableInventory: Construction in Process (Cost + Gross Profit = Revenue

recognized to-date on the contract)

Less Billings on Construction in Process (amount billed; amount of cash received and/or still in A/R)

Total amount in Current assets related to the contract will equal the amount of Revenue Recognized to date on the contract (the amount in cash and/or A/R will be offset against Billings on CIP)

Income StatementConstruction RevenueConstruction Costs s Gross profit on Construction efforts

Percentage-of-Completion:Percentage-of-Completion: Financial Statements Financial Statements

14

During the period to record costs of construction: DR: Construction in process (CIP)

CR Cash, Raw Materials, A/P, Acc. Depr, Wages Payable

When contract says you can make progress billings to customer:DR: Accounts receivable CR Billings on CIP

To record cash collections:DR: Cash CR Accounts receivable

End of the Accounting Period to recognize Revenue, cost & Gross Profit

DR: CIP (gross profit adjustment for current year)DR. Construction Costs (Expense account)

CR Construction Revenue

Percentage-of-Completion: Percentage-of-Completion: Journal EntriesJournal Entries

15

End of Construction when construction is complete and title is transferred to the new owner:

DR: Billings on Construction in process

CR Construction in Process

The total amount invoiced in Billings on CIP will equal the total revenue recognized to-date on the contract at the end which has been captured in the CIP account. Thus the two accounts are closed out against each other as the construction company no longer has title to the asset and the amount invoiced has been recorded in cash and/or Accounts Receivable.


16

Costs incurred to date = Percent completeMost recent estimated total costs

11

Estimated total revenue x Percent complete = Revenue to be recognized to date

22

Total revenue to be recognized to date less Revenue recognized in PRIOR periods = Current period revenue

33

Current Period Revenue less current costs = Gross profit44

Computing the Revenue & Computing the Revenue & Gross Profit to recognize at Gross Profit to recognize at the end of each period using the end of each period using Percentage-of-CompletionPercentage-of-Completion

17

Data: Contract price: $8,400,000 Estimated cost: $4,000,000Start date: July, 2003 Finish: October, 2005Balance sheet date: Dec. 31

Given: 2010 2011 2012

Costs incurred during the year $2,880,000 $2,230,000 $2,190,000Estimated costs to complete $3,530,000 $2,190,000 $ -0- total estimated costs

Progress Billings during year $3,200,000 $3,500,000 $1,700,000Cash collected during year

What is the percent complete, revenue, and gross profit recognized each year?

Percentage-of-Percentage-of-Completion: Homework Completion: Homework

Problem 6 Problem 6

17

18


Given: 2010 2011 2012

Costs incurred during the year $2,880,000 $2,230,000 $2,190,000Estimated costs to complete $3,530,000 $2,190,000 $ -0- total estimated costs $6,400,000 $7,300,000 $7,300,000

Progress Billings during year $3,200,000 $3,500,000 $1,700,000Cash collected during year



Problem 6 Problem 6

18

19

2010 2011 2012

% complete to-date

2,880,000 ___% 2,880k + 2230K = $7,300,000$6,400,000 $5,110,000=___% $7,300,000

$7,300,000 100 %

Revenue recognized

8,400,000 * ___% 8,400,000 *__% 8,400,000= 3,780,000 less 3,780,000 less 5,880,000

= 2,100,000 = 2,520,000

$3,780,000 less 2,100,000 less 2,520,000$2,880,000 2,230,000 less 2,190,000 $________ = $_________ = $_______

Gross Profit (loss) recognized


Problem 6Problem 6

Contract to dateRevenue

CostsGross Profit

$3,780,000 $5,880,000 8,400,000$2,880,000 5,110,000 7,300,000 $900,000 $ 770,000 $1,100,000

20

2010 2011 2012

% complete to-date

2,880,000 45% 2,880k + 2230K = $7,300,000$6,400,000 $5,110,000=70% $7,300,000

$7,300,000 100 %

Revenue recognized

8,400,000 * 45% 8,400,000 * 70% 8,400,000= 3,780,000 less 3,780,000 less 5,880,000

= 2,100,000 = 2,520,000

$3,780,000 less 2,100,000 less 2,520,000$2,880,000 2,230,000 less 2,190,000 $900,000 = (130,000) = 330,000

Gross Profit (loss) recognized


Problem 6Problem 6

Contract to dateRevenue

CostsGross Profit

$3,780,000 $5,880,000 8,400,000$2,880,000 5,110,000 7,300,000 $900,000 $ 770,000 $1,100,000

21

Note that Gross Profit is stored in the CIP Account – this is very different from “ordinary” sales transactions, where gross profit is not in any specific account

• A T-account analysis of the CIP account is very useful in answering questions

• For example, you could be told that Daniels Construction incurred $1 million in construction costs on a new contract this year. They expect to incur another $7 million to complete the project. The balance in the CIP account at year end is $1.2 million. What is the total revenue they expect to earn on the contract?

• Answer: 1.2 – 1 = 200,000 in GP recognized• Project is 1/(1+7) or 12.5% complete, so 200,000 / 0.125 =

$1,600,000 in total profit• Since profit is revenues minus expenses, total revenues must

be 1.6 + 8 = $9.6 million

Percentage-of-Completion: the Percentage-of-Completion: the Construction in Progress AccountConstruction in Progress Account

22

Use For Short Term Construction Contracts Or when does not meet criteria for % Completion:1. Terms of contract not certain, or enforceable2. Certainty of Performance by either party is in question3. Realiable estimates to measure % complete are not

available (cost, input or output measures) No revenue, no expense, no gross profit recognized until the project is

actually completed.

Journal entries prepared during the life of contract are the same as those prepared under the percentage-of-completion method with the exception of the last journal entry that recognizes periodic revenue, expense and gross profit.

Instead, the entire revenue, expense and gross profit are recorded at the end of the project.

Completed Contract Completed Contract MethodMethod

23

Completed Contract

• Assuming the same numbers as example before, what are the journal entries under the completed contract method?• All journal entries for 2010, 2011, and 2012

would appear exactly as before, except that there would be no revenue recognition journal entry in each year

• Therefore, the balance in CIP at the end of each year would represent only the inventoried construction costs

24

Losses on Contracts

Need to determine if the loss is for the current period or if for the contract overall.

• If on overall profitable contract, recognize the loss in the period incurred via “negative gross profit” (see example Problem 6 year 2011)

• Overall unprofitable contract• Percentage of completion: Recognize entire contract

loss now by “backing out” previous gross profit• Completed contract: Recognize the entire loss now.

What is the theoretical justification for this?

Construction contractors should disclosure:

the method of recognizing revenue,

the basis used to classify assets and liabilities as

current (nature and length of the operating cycle),

the basis for recording inventory,

the effects of any revision of estimates,

the amount of backlog on uncompleted contracts,

and

the details about receivables.

Disclosures in Construction Company Financial

Statements

25

In certain cases companies recognize revenue at

the completion of production even though no sale

has been made.

Completion-of-Production Basis



Examples are:

precious metals or

agricultural products.

What is the theoretical justification for this?

26

27

Revenue recognition is deferred when collection of sales price is not reasonably assured and no reliable estimates can be made.

Methods of deferring revenue:

Installment-sales method

Cost-recovery method

Deposit method – cash received prior to delivery or transfer of property. Thus sale is not complete, and cash is recorded as a customer deposit (current liability).

Revenue Recognition After Revenue Recognition After DeliveryDelivery

Generally Generally EmployedEmployed

28

• Recognize income in periods of cash collection rather than at the point of sale.

• Title typically does not pass to the buyer until all cash payments have been made to the seller.

• Recognize both Revenue and Cost of Sales in period of sale, but Gross profit is deferred to the periods of collection.

• Selling and administrative expenses are not deferred.

The Installment Sales The Installment Sales MethodMethod

29

• Installment sales must be kept separate from regular sales

• Gross profit on installment sales must be determinable

• The amount of cash collected from installment accounts by year sold must be known

• Provision must be made to carry forward each year’s deferred gross profit separately

The Installment Sales The Installment Sales MethodMethod

30

Steps to Record Steps to Record Installment SalesInstallment Sales

1. Record initial Installment sale, keeping track of A/R by year sold and noting revenue as “Installment Sales”.

2. Cost of sales and inventory reduction recorded normally, using information to compute Gross Profit rate each year.

3. When closing “Installment Sales and COGS, defer the Gross Profit by year of sale.

4. Record cash collections reducing A/R by year of original sale.

5. Realize Gross profit on cash collected, taking Cash times gross profit rate in year of original sale, and reducing deferred gross profit for the corresponding year.

31

Given: 2003 2004 2005

Installment sales $200,000 $250,000 $240,000 Cost of sales $150,000 $190,000 $168,000 Gross Profit $ 50,000 $ 60,000 $

72,000

Cash received in: from 2003 sales $ 60,000 $ 100,000 $ 40,000 from 2004 sales $ -0- $ 100,000 $125,000 from 2005 sales $ -0- $ -0- $ 80,000

Determine the realized and deferred gross profit.

The Installment Sales The Installment Sales Method: ExampleMethod: Example

32

2003 2004 2005Gross profit rate 25% 24% 30%Realized Gross Profit: From 2003 sales (e.g., 60,000 x 25%) ($100,000 x 25%) ($40,000 x

25%)

Realized in $ 15,000 $ 25,000 $ 10,000

From 2004 sales: ($100,000 x 24%) ($125,000 x 24%)

Realized in: $ -0- $ 24,000 $ 30,000

From 2005 sales: ($80,000 x 30%)

Realized in: $ -0- $ -0-$ 24,000

The Installment Sales The Installment Sales Method: ExampleMethod: Example

32

33

1. When the 2003 installment sale is made:Installment A/R (2003) 200,000

Installment Sales 200,000

2. Cost of Sales 150,000 Inventory 150,000

3. Installment Sales 200,000 Cost of Sales 150,000 Deferred Gross Profit, 2003 50,000

When cash is received, some deferred GP is recognized as revenue:

4. Cash 60,000 Installment A/R (2003) 60,000

5. Deferred Gross Profit, 2003 15,000 Realized Gross Profit (I/S) 15,000

(Realized: $60,000 x 25%)

The Installment Sales The Installment Sales Method: 2003 Journal Method: 2003 Journal Entries for Gross ProfitEntries for Gross Profit

33

34

1. Installment A/R (2004) 250,000 Installment Sales 250,000



4. When cash is received, some deferred GP is recog’d as revenue:Cash 200,000 Installment A/R (2003) 100,000 Installment A/R (2004) 100,000

5. Deferred Gross Profit, 2003 25,000 Deferred Gross Profit, 2004 24,000

Realized Gross Profit (I/S) 49,000 (Realized: ’03: $100K x 25% + ’04 $100K X 24%)

The Installment Sales Method: The Installment Sales Method: 2004 Journal Entries for Gross 2004 Journal Entries for Gross

ProfitProfit

35

1.

2.

3.

4. When cash is received, some deferred GP is recognized as revenue:Cash 245,000

5.

Installment Sales Method: 2005 Installment Sales Method: 2005 Journal EntriesJournal Entries

35

36

1. Installment A/R (2005) 240,000Installment Sales

240,0002. Cost of Sales 168,000

Inventory 168,000


4. When cash is received, some deferred GP is recognized as revenue:Cash 245,000 Installment A/R (2003) 40,000 Installment A/R (2004) 125,000 Installment A/R (2005) 80,000

5. Deferred Gross Profit, 2003 10,000 Deferred Gross Profit, 2004 30,000 Deferred Gross Profit, 2005 24,000

Realized Gross Profit (I/S) 64,000

(Realized: ’03: $40K x 25% + ’04 $125K X 24% + ’05 80K X 30%)

Installment Sales Method: 2005 Installment Sales Method: 2005 Journal EntriesJournal Entries

37

• Used when no reasonable basis for estimating collectibility as in franchises and real estate.

• Seller recognizes no profit until cash payments by buyer exceed seller’s cost of merchandise.

• After recovering all costs, seller includes additional cash collections in income.

• The income statement reports the amount of gross profit recognized and the amount deferred.

The Cost Recovery The Cost Recovery MethodMethod

38

Given: 2003 2004 2005

Installment sales $200,000 $250,000 $240,000 Cost of sales $150,000 $190,000 $168,000 Gross Profit $ 50,000 $ 60,000 $

72,000 Cash received in: from 2003 sales $ 60,000 $ 100,000 $ 40,000 from 2004 sales $ -0- $ 100,000 $125,000 from 2005 sales $ -0- $ -0- $ 80,000

Determine the realized and deferred gross profit.

The Original Example – The Original Example – Cost Recovery MethodCost Recovery Method

39

2003: (J/E’s for sales and deferral of GP are same as in installment method)

1. When the 2003 installment sale is made:Installment A/R (2003) 200,000

Installment Sales 200,000



Cash collection J/E’s:4. Cash 60,000

Installment A/R (2003) 60,000

5. No Gross Profit realized until cost of Sales recovered by cash collectionsNote: costs remaining to recover = 150,000 – 60,000 = 90,000 before any

recognition of profit5.

The Cost Recovery Method:The Cost Recovery Method: 2003 Journal Entries 2003 Journal Entries

39

40

2004:J/E’s for sales and deferral of GP are same as in installment

method

Cash 200,000Installment A/R (2003)100,000Installment A/R (2004)100,000

• 2003 GP can be recognized: 150,000 – 60,000 – 100,000 = 10,000 to be recognized

• No 2004 GP to be recognized: 190,000 – 100,000 = 90,000

Deferred GP, 2003 sales 10,000Recognized GP 10,000


41


methodEntry to record Cash Collections:Cash 245,000

Entry to record Realized Gross Profit:


42


method

Cash 245,000Installment A/R (2003) 40,000Installment A/R (2004) 125,000Installment A/R (2005) 80,000

• All cash collected in 2003 can be recognized as GP because costs covered in 2004

• 2004 GP to be recognized: 190,000 – 100,000 – 125,000 = 35,000

• No GP for 2005: 168,000 – 80,000 = 88,000

Deferred GP, 2003 sales 40,000Deferred GP, 2004 sales 35,000

Recognized GP 75,000


43

Installment Sales Issues - Interest and Repossessions

• Interest: recognize at time of receipt (do not defer)

• Repossessions:• Be sure to account for all payments and

recognition of gross profit until the repossession date

• Set up repossessed goods at their fair value at repossession (not what they were worth when originally sold)

• Write off any remaining A/R and deferred Gross Profit; recognizing the gain/loss to make the journal entry balance

44

Basic Idea:• Various types of franchise arrangements, we

will focus on service sponsor-retailer• Franchisor sells

(1) right to operate business and (2) provides on-going support activities.

• Revenue streams (1) initial sale of franchise and related

assets/services(2) fees based on the operation of the franchise

So how does franchisor record this revenue?

Franchise Revenue Franchise Revenue (Appendix 18A)(Appendix 18A)

45

• Initial Franchise fee• Revenue recorded when there is:

• Substantial performance• No remaining obligation to refund any cash or excuse

any non-payment of note. Generally assumed to be when franchisee commences operations

• Collection of fee is reasonably assured

• If terms not met, then Unearned Franchise Fees• Often payment is in cash and a LT note

receivable• Continuing Fees

• When earned and receivable.• Often amount must be verified

Franchise RevenueFranchise Revenue

46

On 3/31/09 the Red Hot Chicken Wing Corp. entered into a franchise agreement with Thomas Keller. In exchange for an initial franchise fee of $50,000, Red Hot will provide initial services to include the selection of location, construction of building, employee training and consulting services over several years. $10,000 is payable on 3/31/09, with the remaining $40,000 payable in annual installments. 10% interest on the note (at market rate) is payable annually. In addition, the franchisee will pay continuing franchise fees of $1000 per month for advertising and promotion provided by Red Hot, beginning immediately after the franchise begins operations. Thomas Keller opened his Red Hot franchise for business on 9/30/09

Franchise Revenue Franchise Revenue ExampleExample

47

Initial Franchise fee3/31/09 Cash 10,000

Note Receivable 40,000Unearned franchise fee revenue

50,000

9/30/09 Unearned franchise fee revenue 50,000Franchise fee revenue

50,000

Continuing Fees10/31/09 Cash 1000(& monthly) Service Revenue 1000

Debt Service3/31/10 Cash 4000

Interest revenue 4000

Franchise Revenue Franchise Revenue ExampleExample

48

Basic idea:• Consignor “gives” merchandise to a a reseller to sell on your

behalf to an end user.• Can’t recognize revenue until sold to end user

Entries:Ships to consignee

Inventory on consignment xxxFinished good inventory xxx

Notified of sale to end userCash xxxCommission expense xxx

Revenue from consigned sales xxxCOGS xxx

Inventory on consignment xxx

Consignments (Appendix Consignments (Appendix 18A)18A)

1. Long-term construction contracts when outcomes cannot be reasonably estimated:• US GAAP: must use Completed Contract Method (No

revenue or expense is recognized until the end of the contract)

• IFRS: must use the zero-profit method (revenues are recognized only to the extent of costs)

2. Service Revenue• US GAAP: follow specific industry guidance for revenue

recognition

• IFRS: typically use the % Completion method (or straight-line if services are specified over a period of time)

Revenue Recognition: Revenue Recognition: US GAAP vs. IFRSUS GAAP vs. IFRS

49

51


Given: 2003 2004 2005

Costs to date $1,000,000 $2,916,000 $4,050,000Estimated costs to complete $3,000,000 $1,134,000 $ -0-Progress Billings during year $900,000 $2,400,000 $1,200,000Cash collected during year $750,000 $1,750,000 $2,000,000


Percentage-of-Percentage-of-Completion: ExampleCompletion: Example

52

2003 2004 2005

% complete to-date

1,000,000 = 25% 2,916,000= 72% 100 %4,000,000 4,050,000

Revenue recognized

4,500,000 * 25% 4,500,000 * 72% 4,500,000= 1,125,000 less 1,125,000 less 3,240,000

= 2,115,000 = 1,260,000

1,125,000 less 2,115,000 less 1,260,0001,000,000 1,916,000 less 1,134,000= 125,000 = 199,000 = 126,000

Gross Profit recognized

Percentage-of-Percentage-of-Completion: ExampleCompletion: Example

53

2003To record cost of construction:

DR Construction in process (CIP) 1,000,000CR Accounts Payable

1,000,000

To record progress billings to customer:DR Accounts receivable 900,000

CR Billings on CIP 900,000

To record cash collections:DR Cash 750,000

CR Accounts receivable 750,000


54

2003To record revenue and expense

DR CIP (plug gross profit here) 125,000DR Construction Expenses 1,000,000

CR Revenue (1m/(1m+3m)x4.5m) 1,125,000

Note: Construction expenses = actual expenditures for the period

Percentage-of-Percentage-of-Completion: Entries Completion: Entries

Involving Third Parties Involving Third Parties

55

Balance Sheet 2003Construction In Progress1,000,000

125,000

1,125,000

Billings

900,000

900,000

Balance Sheet

… in current assets:

CIP 1,125,000

Billings (900,000)

Costs and Recognized Gross Profit

in excess of Billings 225,000

56

2004:Construction in Progress (2.916m – 1.0m) 1,916,000

Cash, A/P, etc. 1,916,000

A/R 2,400,000Billings 2,400,000

Cash 1,750,000A/R 1,750,000

CIP 199,000Construction Expenses 1,916,000

Revenue (2.916m/4.050m x 4.5m) – 1,125,000 2,115,000

Percentage-of-Percentage-of-Completion: Journal Completion: Journal

EntriesEntries

57

% Completion Balance Sheet 2004

Construction In Progress1,000,000

125,000

1,916,000

199,000

3,240,000

Billings

900,000

2,400,000

3,300,000

Balance Sheet

… in current liabilities:

Billings 3,300,000

Less: CIP (3,240,000)

Billings in excess of cost

and recognized gross profit 60,000

58

2005:CIP (4,050 – 2,916) 1,134,000

Cash, A/P, etc.1,134,000

A/R 1,200,000Billings 1,200,000

Cash 2,000,000A/R2,000,000

CIP 126,000Construction Expenses 1,134,000

Revenue (4,050/4,050 x 4,500) – 1,125 - 2,1151,260,000

Percentage-of-Completion: Journal Percentage-of-Completion: Journal EntriesEntries

59

% Completion Balance Sheet % Completion Balance Sheet 20052005

CIP Billings

1,000,000 900,000

125,000 2,400,000

1,916,000 4,500,000 1,200,000

199,000 4,500,000 4,500,000

1,134,000 -

126,000 4,500,000

4,500,000 4,500,000

-

60

At the end of the contract:

To record completion of project:DR Billings on CIP 4,500,000

CR Construction in process 4,500,000

Over the life of the contract, the total credits to “Billings on CIP” will equal the total amount billed to the customer, which is the total revenue received over the life of the contract.

Percentage-of-Percentage-of-Completion: EntriesCompletion: Entries

61

Completed Contract

• Assuming the same numbers as example before, what are the journal entries under the completed contract method?• All journal entries for 2003, 2004, and 2005

would appear exactly as before, except that there would be no revenue recognition journal entry in each year

• Therefore, the balance in CIP at the end of each year would represent only the inventoried construction costs

62

2003:Construction in Progress (CIP) 1,000,000

Cash, A/P, etc.1,000,000

A/R 900,000Billings 900,000

Cash 750,000A/R750,000

Entries above same as for % Completion. No entry to record revenues and expenses.

Completed Contract: Journal Completed Contract: Journal EntriesEntries

63

Balance Sheet 2003 – Completed Contract


1,000,000

Billings

900,000

900,000

Balance Sheet

… in current assets:

CIP 1,000,000

Billings (900,000)

Costs and Recognized Gross Profit

in excess of Billings 100,000

64

2004:Construction in Progress (2,916 – 1,000)

1,916,000Cash, A/P, etc. 1,916,000

A/R 2,400,000Billings 2,400,000

Cash 1,750,000A/R 1,750,000

J/E above are same as for % Completion (no entry made for revenue and expense)


65

Completed Contract Balance Sheet 2004


1,916,000

2,916,000

Billings

900,000

2,400,000

3,300,000

Balance Sheet

… in current liabilities:

Billings 3,300,000

Less: CIP (2,916,000)

Billings in excess of cost

and recognized gross profit 384,000

66

2005:CIP (4,050 – 2,916) 1,134,000

Cash, A/P, etc. 1,134,000

A/R 1,200,000Billings 1,200,000

Cash 2,000,000A/R 2,000,000

Now that the project is done, we can close out the Billings and CIP accounts and record Construction Revenue and Construction Expense:

Billings 4,500,000Revenue 4,500,000

Construction Expenses 4.050,000CIP 4,050,000


67

Completed Contract Balance Sheet Completed Contract Balance Sheet 20052005

CIP Billings

1,000,000 900,000

2,400,000

1,916,000 4,500,000 1,200,000

4,500,000 4,500,000

1,134,000 -

4,050,000

4,050,000 4,050,000

-

marley- kieso ch 18 revenue recog

Technology