Exam 8: Revenue Recognition, Receivables, and Advances From Customers

Both U.S.GAAP and IFRS require the allowance method for uncollectible accounts, which involves estimating the amount of uncollectible accounts receivable associated with

When the customer pays with a credit card

How do sellers measure revenue?

Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000.Estimated costs for the contract are: Year 4 \ 5,600,000 Year 5 \ 11,200,000 Year 6 \ 5,600,000 $\text { Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows: }$ Year 4 \ 4,200,000 Year 5 \ 7,000,000 Year 6 \ 16,800,000 Refer to the Rock Aerospace Company example.Income from the contract for Year 5 under the installment method is:

The write-off of specific customers' accounts using the allowance method has no effect on the income statement.

U.S.GAAP does not allow sellers of merchandise to recognize revenue from sales when the customers have the right to return goods.

Prepare entries to record the following transactions using the direct write-off method for uncollectibles. a. The firm assumes that approximately 1% of total sales on account will prove uncollectible. Sales for Year 1 are $1,000,000. All sales are on account. b. On July 7, Year 2, it is determined that an account of $2,000 will not be collected. c. On August 14, Year 2, it is determined that an account of $3,000 will not be collected. d. On December 31, Year 2, the company estimates that 2% of total credit sales of $2,000,000 will be uncollectible. e. On February 1, Year 3, it is determined that accounts of $6,000 will not be collected. f. On March 2, Year 3, $1,000 is collected on an account that had previously been written off as uncollectible in (e). It is determined that the account was originally written off in error.

U.S.GAAP and IFRS require that firms disclose sufficient information to allow the reader of financial statements to calculate Accounts Receivable, Gross, Allowance for Uncollectibles, and Accounts Receivable, Net.

An accounting issue for accounts receivable is measurement of the amount on the balance sheet. With regard to measurement, both U.S.GAAP and IFRS require that sellers report accounts receivable _____.

Describe the income recognition principles and how they are applied.

The method of revenue recognition where the seller has substantial uncertainty about the amount of cash it will collect and matches the costs of generating revenues dollar for dollar with cash receipts until the seller recovers all such costs is called the

In year 1, Northern Construction agrees to build a fire station that will be completed in year 2.Construction starts in year 1.The station will have costs of $2,000,000 in year 1 and $2,000,000 in year 2.Northern receives payment for the station of $5,000,000 in advance, in year 1.If Northern uses the completed contract method, what net profit is recognized by Northern in each year? $\text { Year } 1 \quad \text { Year } 2$

The allowance method does not involve

Under the _____ procedure, the firm estimates and recognizes its bad debt expense; the offsetting credit increases the balance in the Allowance for Uncollectibles.Under the _____ procedure, the firm estimates the ending balance in the Allowance for Uncollectibles account and makes a credit entry to bring the balance to this amount; the offsetting debit is to Bad Debt Expense.

The direct write-off method

The percentage-of-completion method measures the proportion of total work carried out during the accounting period either from engineers' estimates of the degree of completion or from the ratio of costs incurred to date to the total costs expected for the entire contract.

When customers return goods for cash refunds or, if the customer has not yet paid, for cancellation of the customer's obligation to pay, the firm records a sales

Allowance for Uncollectibles contra account appears among the _____ on a firm's balance sheet as a(n) _____.

The allowance method is used by a firm

Project Paso Vineyards processes grapes into champagne, which it bottles, corks, and places on shelves in underground caverns to age for several years.During the aging process, the winemakers hand-turn the bottles a quarter rotation every few months; also, at fixed intervals, they release yeast gases to preclude unwanted fermentation.Assume that Project Paso contracts to sell a quantity of champagne to a customer for €30 million.Under the terms of the contract, Project Paso will store the champagne in its caverns and perform all necessary functions associated with the aging process (for example, turning the bottles and releasing yeast gases).The selling price includes the costs of producing the champagne and providing services during the aging process.The customer pays Project Paso €15 million at the beginning of the aging and storage process, and agrees to pay the remainder in five years upon delivery of the champagne.When should Project Paso Vineyards recognize revenue from selling the champagne?