CHAPTER LEARNING OBJECTIVES
Describe and apply the revenue recognition principle.
Describe accounting issues for revenue recognition at point of sale.
Apply the percentage-of-completion method for long-term contracts.
Apply the completed-contract method for long-term contracts.
Identify the proper accounting for losses on long-term contracts.
Describe the installment method of accounting.
Explain the cost recovery method of accounting.
Explain revenue recognition for franchises.
Compare the accounting procedures related to revenue recognition under GAAP and IFRS.
1. One of the most difficult issues facing accountants concerns the recognition of revenue by a business organization. Although general rules and guidelines exist, the significant variety of marketing methods for products and services make it difficult to apply the rules consistently in all situations. Chapter 18 is devoted to a discussion and illustration of revenue transactions that result from the sale of products and the rendering of services. Throughout the discussion, attention is focused on the theory behind the accounting methods used to recognize revenue. Revenue transactions that result from leasing and the sale of assets other than inventory are discussed in other sections of the text. Revenue Recognition
2. (L.O. 1) The revenue recognition principle provides that revenue is recognized when (1) it is realized or realizable and (2) it is earned. Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables). Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, that is, when the earnings process is complete or virtually complete.
*Note: All asterisked (*) items relate to material contained in the Appendix to the chapter.
Student Study Guide for Intermediate Accounting, 15th Edition ____________________________________________________________________________________ 3. The conceptual nature of revenue as well as the basis of accounting for revenue transactions are described in the following four statements.
Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers.
Revenue from services rendered is recognized when services have been performed and are billable.
Revenue from permitting others to use enterprise assets, such as interest, rent, and royalties, is recognized as time passes or as the assets are used. Revenue from disposing of assets other than products is recognized at the date of sale.
Point of Sale
4. (L.O. 2) According to the FASB, revenue is recognized when the product is delivered or the service is rendered. This time of recognition is normally at the time of sale when the product or service is delivered to the customer. Some problems in implementing these basic principles arise when (a) sales are made with discounts, (b) sales are made with right of return, (c) sales have buyback agreements, (d) sales are made as bill and hold sales, (e) a principal-agent relationship exists, (f) trade loading or channel stuffing is present, and (g) sales are made with multiple-deliverable arrangements. 5. Any trade discounts or volume rebates should reduce consideration received and reduce revenue earned. In addition, if the payment is delayed, the seller should impute an interest rate for the difference between the cash or cash equivalent price and the deferred amount. 6. In most business enterprises, a far greater proportion of total sales volume is handled on a credit basis than on an ordinary cash sale basis. In situations where the seller gives the buyer the right to...
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