Kế toán, kiểm toán - Revenue recognition

on18LEARNING OBJECTIVESUnderstand revenue recognition issues.Identify the five steps in the revenue recognition process.Identify the contract with customers.Identify the separate performance obligations in the contract.Determine the transaction price.Contract: Agreement between two or more parties that creates enforceable rights or obligations. Can be written, oral, or implied from customary business practice. Company applies the revenue guidance to a contract according to the following criteria in Illustration 18-3.LO 3Identify Contract with Customers—Step 1LO 3Contract with Customers—Step 1ILLUSTRATION 18-3 Contract Criteria for Revenue GuidanceApply Revenue Guidance to Contracts If:Disregard Revenue Guidance to Contracts If:The contract has commercial substance;The parties to the contract have approved the contract and are committed to perform their respective obligations;The company can identify each party’s rights regarding the goods or services to be transferred; andThe company can identify the payment terms for the goods and services to be transferred.It is probable It is probable that the company will collect the consideration to which it will be entitled.The contract is wholly unperformed, andEach party can unilaterally terminate the contract without compensation.Basic Accounting Revenue cannot be recognized until a contract exists.Company obtains rights to receive consideration and assumes obligations to transfer goods or services. Rights and performance obligations gives rise to an (net) asset or (net) liability. Company does not recognize contract assets or liabilities until one or both parties to the contract perform.LO 3Contract with Customers—Step 1Contract asset = Rights received > Performance obligationContract liability = Rights received < Performance obligationFacts: On March 1, 2015, Margo Company enters into a contract to transfer a product to Soon Yoon on July 31, 2015. The contract is structured such that Soon Yoon is required to pay the full contract price of HK$5,000 on August 31, 2015.The cost of the goods transferred is HK$3,000. Margo delivers the product to Soon Yoon on July 31, 2015.LO 3Basic AccountingCONTRACTS AND RECOGNITIONQuestion: What journal entries should Margo Company make in regards to this contract in 2015?The journal entry to record the sale and related cost of goods sold is as follows.July 31, 2015Accounts Receivable 5,000 Sales Revenue 5,000Cost of Goods Sold 3,000 Inventory 3,000ILLUSTRATION 18-4Basic Revenue TransactionLO 3CONTRACTS AND RECOGNITIONCash 5,000 Accounts Receivable 5,000Basic AccountingILLUSTRATION 18-4Basic Revenue TransactionFacts: On March 1, 2015, Margo Company enters into a contract to transfer a product to Soon Yoon on July 31, 2015. The contract is structured such that Soon Yoon is required to pay the full contract price of HK$5,000 on August 31, 2015.The cost of the goods transferred is HK$3,000. Margo delivers the product to Soon Yoon on July 31, 2015.Question: What journal entries should Margo Company make in regards to this contract in 2015?Margo makes the following entry to record the receipt of cash on August 31, 2015.August 31, 2015Contract Modifications Change in contract terms while it is ongoing.Companies determine whether a new contract (and performance obligations) results or whether it is a modification of the existing contract.LO 3Contract with Customers—Step 1Separate Performance ObligationAccount for as a new contract if both of the following conditions are satisfied:Promised goods or services are distinct (i.e., company sells them separately and they are not interdependent with other goods and services), andThe company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services.LO 3Contract ModificationsFor example, Crandall Co. has a contract to sell 100 products to a customer for $10,000 (€100 per product) at various points in time over a six-month period. After 60 products have been delivered, Crandall modifies the contract by promising to deliver 20 more products for an additional €1,900, or €95 per product (which is the standalone selling price of the products at the time of the contract modification). Crandall regularly sells the products separately. Given a new contract, Crandall recognizes an additional:LO 3Separate Performance ObligationOriginal contract [(100 units - 60 units) x €100] = €4,000New product (20 units x €95) = 1,900Total revenue €5,900Prospective ModificationCompany should account for effect of change in period of change as well as future periods if change affects both.not change previously reported results.LO 3Contract ModificationsProducts not delivered under original contract ($100 x €40) = €4,000Products to be delivered under contract modification (€95 x 20) = 1,900Total remaining revenue €5,900Revenue per remaining unit (€5,900 ÷ 60) = €98.33For Crandall, the amount recognized as revenue for each of the remaining products would be a blended price of €98.33, computed as shown in Illustration 18-5.LO 3Prospective ModificationUnder the prospective approach, a blended price (€98.33) is used for sales in the periods after the modification.LO 3Prospective ModificationILLUSTRATION 18-6Comparison of Contract Modification ApproachesAllocate the transaction price to the separate performance obligations.Recognize revenue when the company satisfies its performance obligation. Identify other revenue recognition issues. Describe presentation and disclosure regarding revenue.After studying this chapter, you should be able to:Revenue Recognition18LEARNING OBJECTIVESUnderstand revenue recognition issues.Identify the five steps in the revenue recognition process.Identify the contract with customers.Identify the separate performance obligations in the contract.Determine the transaction price.Sale of productfrom inventoryPerforming a servicePermitting use of an assetSale of asset other than inventory Type of TransactionRevenue from salesDate of sale (date of delivery)Revenue from fees or servicesRevenue from interest, rents, and royaltiesGain or loss on dispositionServices performed and billableAs time passes or assets are usedDate of sale or trade-inDescription of RevenueTiming of Revenue RecognitionSeparate Performance Obligations—Step 2ILLUSTRATION 18-7Revenue Recognition SituationsLO 4LO 4Separate Performance Obligations—Step 2To determine whether a company has to account for multiple performance obligations, it evaluates a second condition. Whether the product is distinct within the contract. If performance obligation is not highly dependent on, or interrelated with, other promises in the contract, then each performance obligation should be accounted for separately. If each of these services is interdependent and interrelated, these services are combined and reported as one performance obligation.SoftTech Inc. licenses customer-relationship software to Lopez Company. In addition to providing the software itself, SoftTech promises to provide consulting services by extensively customizing the software to Lopez’s information technology environment, for a total consideration of $600,000. In this case, SoftTech is providing a significant service by integrating the goods and services (the license and the consulting service) into one combined item for which Lopez has contracted. In addition, the software is significantly customized by SoftTech in accordance with specifications negotiated by Lopez. Do these facts describe a single or separate performance obligation? ILLUSTRATION 18-8 Identifying Performance ObligationsThe license and the consulting services are distinct but interdependent, and therefore should be accounted for as one performance obligation.Performance Obligations—Step 2LO 4Chen Computer Inc. manufactures and sells computers that include a warranty to make good on any defect in its computers for 120 days (often referred to as an assurance warranty). In addition, it sells separately an extended warranty, which provides protection from defects for three years beyond the 120 days (often referred to as a service warranty). In this case, two performance obligations exist, one related to the sale of the computer and the assurance warranty, and the other to the extended warranty (servicewarranty).ILLUSTRATION 18-8 Identifying Performance ObligationsThe sale of the computer and related assurance warranty are one performance obligation as they are interdependent and interrelated with each other. However, the extended warranty is separately sold and is not interdependent.Performance Obligations—Step 2LO 4Allocate the transaction price to the separate performance obligations.Recognize revenue when the company satisfies its performance obligation. Identify other revenue recognition issues. Describe presentation and disclosure regarding revenue.After studying this chapter, you should be able to:Revenue Recognition18LEARNING OBJECTIVESUnderstand revenue recognition issues.Identify the five steps in the revenue recognition process.Identify the contract with customers.Identify the separate performance obligations in the contract.Determine the transaction price.LO 5Determining Transaction Price—Step 3Transaction price Amount of consideration that company expects to receive from a customer. In a contract is often easily determined because customer agrees to pay a fixed amount. Other contracts, companies must consider:Variable considerationTime value of moneyNon-cash considerationConsideration paid or payable to customersLO 5Determining Transaction Price—Step 3Variable ConsiderationPrice dependent on future events.May include discounts, rebates, credits, performance bonuses, or royalties.Companies estimate amount of revenue to recognize.Expected valueMost likely amountILLUSTRATION 18-9 Estimating Variable ConsiderationExpected Value: Probability-weighted amount in a range of possible consideration amounts.Most Likely Amount: The single most likely amount in a range of possible consideration outcomes.May be appropriate if a company has a large number of contracts with similar characteristics.Can be based on a limited number of discrete outcomes and probabilities.May be appropriate if the contract has only two possible outcomes.Determining Transaction Price—Step 3LO 5Facts: Peabody Construction Company enters into a contract with a customer to build a warehouse for $100,000, with a performance bonus of $50,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 10% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that Peabody has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 60% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed 1 week late, and only a 10% probability that it will be completed 2 weeks late.LO 5Variable ConsiderationESTIMATING VARIABLE CONSIDERATIONQuestion: How should Peabody account for this revenue arrangement?ILLUSTRATION 18-10Transaction PriceManagement has concluded that the probability-weighted method is the most predictive approach:LO 5Variable ConsiderationQuestion: How should Peabody account for this revenue arrangement?ILLUSTRATION 18-10Transaction Price60% chance of $150,000 = $ 90,00030% chance of $145,000 = 43,50010% chance of $140,000 = 14,000 $147,500Most likely outcome, if management believes they will meet the deadline and receive the $50,000 bonus, the total transaction price would be?$150,000 (the outcome with 60% probability)LO 5Companies only allocate variable consideration if it is reasonably assured that it will be entitled to the amount. Companies only recognize variable consideration if they have experience with similar contracts and are able to estimate the cumulative amount of revenue, and based on experience, they do not expect a significant reversal of revenue previously recognized. If these criteria are not met, revenue recognition is constrained.Variable ConsiderationLO 5Determining Transaction Price—Step 3Time Value of MoneyWhen contract (sales transaction) involves a significant financing component.Interest accrued on consideration to be paid over time.Fair value determined either by measuring the consideration received or by discounting the payment using an imputed interest rate.Company reports as interest expense or interest revenue.Facts: On July 1, 2015, SEK Company sold goods to Silva Company for R$900,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of R$1,416,163. The goods have a cost on SEK’s books of R$590,000.LO 5Time Value of MoneyEXTENDED PAYMENT TERMSQuestions: (a) How much revenue should SEK Company record on July 1, 2015? (b) How much revenue should it report related to this transaction on December 31, 2015?Entry to record SEK’s sale to Silva Company on July 1, 2015, is as follows.Notes Receivable 1,416,163 Sales Revenue 900,000 Discount on Notes Receivable 516,163Cost of Goods Sold 590,000 Inventory 590,000ILLUSTRATION 18-12Transaction Price -Extended Payment TermsLO 5Time Value of MoneyEXTENDED PAYMENT TERMSQuestions: (a) How much revenue should SEK Company record on July 1, 2015? (b) How much revenue should it report related to this transaction on December 31, 2015?Entry to record interest revenue at the end of the year, December 31, 2015.Discount on Notes Receivable 54,000 Interest Revenue (12% x ½ x $900,000) 54,000Companies are not required to reflect the time value of money if the time period for payment is less than a year.ILLUSTRATION 18-12Transaction Price -Extended Payment TermsFacts: On July 1, 2015, SEK Company sold goods to Silva Company for R$900,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of R$1,416,163. The goods have a cost on SEK’s books of R$590,000.LO 5Determining Transaction Price—Step 3Non-Cash ConsiderationGoods, services, or other non-cash consideration.Companies sometimes receive contributions (e.g., donations and gifts).Customers sometimes contribute goods or services, such as equipment or labor, as consideration for goods provided or services performed.Companies generally recognize revenue on the basis of the fair value of what is received.LO 5Determining Transaction Price—Step 3Consideration Paid or Payable to CustomersMay include discounts, volume rebates, coupons, free products, or services. In general, these elements reduce the consideration received and the revenue to be recognized.Facts: Sansung Company offers its customers a 3% volume discount if they purchase at least ¥2 million of its product during the calendar year. On March 31, 2015, Sansung has made sales of ¥700,000 to Artic Co. In the previous 2 years, Sansung sold over ¥3,000,000 to Artic in the period April 1 to December 31.LO 5Consideration Paid or PayableVOLUME DISCOUNTQuestions: How much revenue should Sansung recognize for the first 3 months of 2015?Sansung makes the following entry on March 31, 2015.Accounts Receivable 679,000 Sales Revenue 679,000Sansung should reduce its revenue by ¥21,000 (¥700,000 x 3%) because it isprobable that it will provide this rebate.ILLUSTRATION 18-13Transaction Price – Volume DiscountLO 5Questions: How much revenue should Sansung recognize for the first 3 months of 2015?Assuming Sansung’s customer meets the discount threshold, Sansung makes the following entry.Cash 679,000 Accounts Receivable 679,000If Sansung’s customer fails to meet the discount threshold, Sansung makes the following entry upon payment.Cash 700,000 Accounts Receivable 679,000 Sales Discounts Forfeited 21,000Consideration Paid or PayableILLUSTRATION 18-13Transaction Price – Volume DiscountAllocate the transaction price to the separate performance obligations.Recognize revenue when the company satisfies its performance obligation. Identify other revenue recognition issues. Describe presentation and disclosure regarding revenue.After studying this chapter, you should be able to:Revenue Recognition18LEARNING OBJECTIVESUnderstand revenue recognition issues.Identify the five steps in the revenue recognition process.Identify the contract with customers.Identify the separate performance obligations in the contract.Determine the transaction price.LO 6Allocating Transaction Price to Separate Performance Obligations—Step 4Based on their relative fair values. Best measure of fair value is what the company could sell the good or service for on a standalone basis. If not available, companies should use their best estimate of what the good or service might sell for as a standalone unit.LO 6Allocating Transaction Price to Separate Performance Obligations—Step 4ILLUSTRATION 18-14Transaction PriceAllocationAllocate the transaction price to the separate performance obligations.Recognize revenue when the company satisfies its performance obligation. Identify other revenue recognition issues. Describe presentation and disclosure regarding revenue.After studying this chapter, you should be able to:Revenue Recognition18LEARNING OBJECTIVESUnderstand revenue recognition issues.Identify the five steps in the revenue recognition process.Identify the contract with customers.Identify the separate performance obligations in the contract.Determine the transaction price.LO 7Recognizing Revenue When (or as) EachPerformance Obligation Is Satisfied-Step 5Company satisfies its performance obligation when the customer obtains control of the good or service.Change in Control IndicatorsCompany has a right to payment for asset.Company has transferred legal title to asset.Company has transferred physical possession of asset.Customer has significant risks and rewards of ownership.Customer has accepted the asset.LO 7Recognizing Revenue When (or as) EachPerformance Obligation Is Satisfied-Step 5Recognizing revenue from a performance obligation over timeMeasure progress toward completionMethod for measuring progress should depict transfer of control from company to customer.Most common are cost-to-cost and units-of-delivery methods. Objective of methods is to measure extent of progress in terms of costs, units, or value added. LO 7Recognizing Revenue When (or as) EachPerformance Obligation Is Satisfied-Step 5Step in ProcessIdentify the contract with customers.DescriptionA contract is an agreement that creates enforceable rights or obligations.ImplementationA company applies the revenue guidance to contracts with customers and must determine if new performance obligations are created by a contract modification.ILLUSTRATION 18-20Summary of theFive-Step RevenueRecognition ProcessLO 7Recognizing Revenue When (or as) EachPerformance Obligation Is Satisfied-Step 5Step in ProcessIdentify the separate performance obligations in the contractDescriptionA performance obligation is a promise in a contract to provide a product or service to a customer. A performance obligation exists if the customer can benefit from the good or service on its own or together with other readily available resources.ImplementationA contract may be comprised of multiple performance obligations. Accounting is based on evaluation of whether the product or service is distinct within the contract. If each of the goods or services is distinct, but is interdependent and interrelated, these goods and services are combined and reported as one performance obligation.ILLUSTRATION 18-20Summary of theFive-Step RevenueRecognition ProcessLO 7Recognizing Revenue When (or as) EachPerformance Obligation Is Satisfied-Step 5Step in ProcessDetermine the transaction price.DescriptionTransaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring goods and services.ImplementationIn determining the transaction price, companies must consider the following factors: variable consideration, time value of money, Non-cash consideration, and consideration paid or payable to customer.ILLUSTRATION 18-20Summary of theFive-Step RevenueRecognition ProcessLO 7Recognizing Revenue When (or as) EachPerformance Obligation Is Satisfied-Step 5Step in ProcessAllocate the transaction price to the separate performance obligation.DescriptionIf more than one performance obligation exists, allocate the transaction price based on relative fair values.ImplementationThe best measure of fair value is what the good service could be sold for on a standalone basis (standalone selling price). Estimates of standalone selling price can be based on adjusted market assessment, expected cost-plus a margin approach, or a residual approach.ILLUSTRATION 18-20Summary of theFive-Step RevenueRecognition ProcessLO 7Recognizing Revenue When (or as) EachPerformance Obligation Is Satisfied-Step 5Step in ProcessRecognize revenue when each performance obligation is satisfied.DescriptionA company satisfies its performance obligation when the customer obtains control of the good or service.ImplementationCompanies satisfy performance obligations either at a point in time or over a period of time. Companies recognize revenue over a period of time if the customer controls the asset as it is created or the company does not have an alternative use for the asset.ILLUSTRATION 18-20Summary of theFive-Step RevenueRecognition ProcessAllocate the transaction price to the separate performance obligations.Recognize revenue when the company satisfies its performance obligation. Identify other revenue recognition issues. Describe presentation and disclosure regarding revenue.After studying this chapter, you should be able to:Revenue Recognition18LEARNING OBJECTIVESUnderstand revenue recognition issues.Identify the five steps in the revenue recognition process.Identify the contract with customers.Identify the separate performance obligations in the contract.Determine the transaction price.OTHER REVENUE RECOGNITION ISSUESLO 8Right of return ConsignmentsRepurchase agreementsWarrantiesBill and holdNon-refundable upfront feesPrincipal-agent relationshipsRight of ReturnLO 8Right of return is granted for product for various reasons (e.g., dissatisfaction with product).Company returning the product receives any combination of the following.Full or partial refund of any consideration paid.Credit that can be applied against amounts owed, or that will be owed, to the seller.Another product in exchange.Facts: Venden Company sells 100 products for €100 each to Amaya Inc. for cash. Venden allows Amaya to return any unused product within 30 days and receive a full refund. The cost of each product is €60. To determine the transaction price, Venden decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the most likely amount. Using the most likely amount, Venden estimates that:Three products will be returned.The costs of recovering the products will be immaterial.The returned products are expected to be resold at a profit.LO 8RIGHT OF RETURNQuestion: How should Venden record this sale?ILLUSTRATION 18-21Recognition—Right of ReturnRight of ReturnVenden records the sale as follows with the expectation that three products will be returned:LO 8Question: How should Venden record this sale?ILLUSTRATION 18-21Recognition—Right of ReturnRight of ReturnCash 10,000 Sales Revenue [€9,700 x (€100 x 97)] 9,700 Refund Liability (€100 x 3) 300Venden records the cost of goods sold with the following entry.Cost of Goods Sold 5,820Estimated Inventory Returns (€60 x 3) 180 Inventory 6,000When a return occurs, Venden records the following entries.LO 8Question: How should Venden record this sale?ILLUSTRATION 18-21Recognition—Right of ReturnRight of ReturnRefund Liability (2 x €100) 200 Accounts Payable 200Returned Inventory (2 x €60) 120 Estimated Inventory Returns 120Companies record the returned asset in a separate account from inventory to provide transparency.Repurchase AgreementsLO 8Transfer control of (sell) an asset to a customer but have an obligation or right to repurchase. If obligation or right to repurchase is for an amount greater than or equal to selling price, then transaction is a financing transaction.Facts: Morgan Inc., an equipment dealer, sells equipment on January 1, 2015, to Lane Company for £100,000. It agrees to repurchase this equipment on December 31, 2016, for a price of £121,000.LO 8REPURCHASE AGREEMENTQuestion: How should Morgan Inc. record this transaction?ILLUSTRATION 18-22Recognition—Repurchase AgreementRepurchase AgreementsAssuming an interest rate of 10 percent is imputed from the agreement, Morgan makes the following entry to record the financing on January 1, 2015.Cash 100,000 Liability to Lane Company 100,000LO 8ILLUSTRATION 18-22Recognition—Repurchase AgreementRepurchase AgreementsMorgan Inc. records interest on December 31, 2016, as follows.Interest Expense 10,000 Liability to Lane Company (£100,000 x 10%) 10,000Question: How should Morgan Inc. record this transaction?Morgan Inc. records interest and retirement of its liability to Lane Company on December 31, 2016, as follows.Interest Expense 11,000 Liability to Lane Company (£110,000 x 10%) 11,000Liability to Lane Company 121,000 Cash (£100,000 + £10,000 + £11,000) 121,000LO 8Bill-and-Hold ArrangementsLO 8Contract under which an entity bills a customer for a product but the entity retains physical possession of the product until a point in time in the future. Result when buyer is not yet ready to take delivery but does take title and accepts billing.Facts: Kaya Company sells ₺450,000 (cost ₺280,000) of fireplaces on March 1, 2015, to a local coffee shop, Baristo, which is planning to expand its locations around the city. Under the agreement, Baristo asks Kaya to retain these fireplaces in its warehouses until the new coffee shops that will house the fireplaces are ready. Title passes to Baristo at the time the agreement is signed.LO 8BILL AND HOLDQuestion: When should Kaya recognize the revenue from this bill-and-hold arrangement?ILLUSTRATION 18-23Recognition—Bill and HoldKaya determines when it has satisfied its performance obligation to transfer a product by evaluating when Baristo obtains control of that product.Bill-and-Hold ArrangementsLO 8Question: When should Kaya recognize the revenue from this bill-and-hold arrangement?ILLUSTRATION 18-23Recognition—Bill and HoldFor Baristo to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria should be met:(a) The reason for the bill-and-hold arrangement must be substantive.(b) The product must be identified separately as belonging to Baristo.(c) The product currently must be ready for physical transfer to Baristo.Kaya cannot have the ability to use the product or to direct it to another customer.In this case, it appears that the above criteria were met, and therefore revenue recognition should be permitted at the time the contract is signed.Bill-and-Hold ArrangementsLO 8Question: When should Kaya recognize the revenue from this bill-and-hold arrangement?ILLUSTRATION 18-23Recognition—Bill and HoldBill-and-Hold ArrangementsKaya makes the following entry to record the sale.Accounts receivable 450,000 Sales Revenue 450,000Kaya makes an entry to record the related cost of goods sold as follows.Cost of Goods Sold 280,000 Inventory 280,000Principal-Agent RelationshipsLO 8Agent’s performance obligation is to arrange for principal to provide goods or services to a customer.Examples:Preferred Travel Company (agent) facilitates the booking of cruise excursions by finding customers for Regency Cruise Company (principal).Priceline (USA) (agent) facilitates the sale of various services such as car rentals at Hertz (USA) (principal).Amounts collected on behalf of the principal are not revenue of the agent. Revenue for agent is amount of commission received.LO 8ConsignmentsLO 8Manufacturers (or wholesalers) deliver goods but retain title to the goods until they are sold. Consignor (manufacturer or wholesaler) ships merchandise to the consignee (dealer), who is to act as an agent for the consignor in selling the merchandise. Consignor makes a profit on the sale.Carries merchandise as inventory.Consignee makes a commission on the sale.LO 8ILLUSTRATION 18-25Recognition—Sales on ConsignmentConsignmentsLO 8ILLUSTRATION 18-25Recognition—Sales on ConsignmentConsignmentsWarrantiesLO 8Two types of warranties to customers:Product meets agreed-upon specifications in contract at time product is sold. Warranty is included in sales price (assurance-type warranty).Not included in sales price of product (service-type warranty). Recorded as a separate performance obligation.Facts: Maverick Company sold 1,000 Rollomatics during 2015 at a total price of $6,000,000, with a warranty guarantee that the product was free of any defects. The cost of Rollomatics sold is $4,000,000. The term of the assurance warranty is two years, with an estimated cost of $30,000. In addition, Maverick sold extended warranties related to 400 Rollomatics for 3 years beyond the 2-year period for $12,000.WARRANTIESQuestion: What are the journal entries that Maverick Company should make in 2015 related to the sale and the related warranties?ILLUSTRATION 18-26Performance Obligations and WarrantiesWarrantiesLO 8Cash ($6,000,000 + $12,000) 6,012,000Warranty Expense 30,000 Warranty Liability 30,000 Unearned Warranty Revenue 12,000 Sales Revenue 6,000,000Cost of Goods Sold 4,000,000 Inventory 4,000,000Question: What are the journal entries that Maverick Company should make in 2015 related to the sale and the related warranties?ILLUSTRATION 18-26Performance Obligations and WarrantiesWarrantiesTo record the revenue and liabilities related to the warranties:To reduce inventory and recognize cost of goods sold:LO 8Non-Refundable Upfront FeesLO 8Payments from customers before Delivery of a product. Performance of a service.Generally relate to initiation, activation, or setup of a good or service to be provided or performed in the future.Most cases, upfront payments are nonrefundable.Examples include: Membership fee in a health club.Activation fees for phone, Internet, or cable.Allocate the transaction price to the separate performance obligations.Recognize revenue when the company satisfies its performance obligation. Identify other revenue recognition issues. Describe presentation and disclosure regarding revenue.After studying this chapter, you should be able to:Revenue Recognition18LEARNING OBJECTIVESUnderstand revenue recognition issues.Identify the five steps in the revenue recognition process.Identify the contract with customers.Identify the separate performance obligations in the contract.Determine the transaction price.PresentationPRESENTATION AND DISCLOSURELO 9Contract Assets and LiabilitiesContract assets are of two types: Unconditional rights to receive consideration because company has satisfied its performance obligation.Conditional rights to receive consideration because company has satisfied one performance obligation but must satisfy another performance obligation before it can bill the customer.Facts: On January 1, 2015, Finn Company enters into a contract to transfer Product A and Product B to Obermine Co. for €100,000. The contract specifies that payment of Product A will not occur until Product B is also delivered. In other words, payment will not occur until both Product A and Product B are transferred to Obermine. Finn determines that standalone prices are €30,000 for Product A and €70,000 for Product B. Finn delivers Product A to Obermine on February 1, 2015. On March 1, 2015, Finn delivers Product B to Obermine.LO 9CONTRACT ASSETQuestion: What journal entries should Finn Company make in regards to this contract in 2015?ILLUSTRATION 18-29Contract Asset Recognition and PresentationPresentationContract Asset 30,000 Sales Revenue 30,000Question: What journal entries should Finn Company make in regards to this contract in 2015?On February 1, 2015, Finn records the following entry:On February 1, Finn does not record an accounts receivable because it does not have an unconditional right to receive the €100,000 unless it also transfers Product B to Obermine. When Finn transfers Product B on March 1, 2015, it makes the following entry.LO 9ILLUSTRATION 18-29Contract Asset Recognition and PresentationAccounts Receivable 100,000 Contract Asset 30,000 Sales Revenue 70,000PresentationFacts: On March 1, 2015, Henly Company enters into a contract to transfer a product to Propel Inc. on July 31, 2015. It is agreed that Propel will pay the full price of $10,000 in advance on April 1, 2015. The contract is non-cancelable. Propel, however, does not pay until April 15, 2015, and Henly delivers the product on July 31, 2015. The cost of the product is$7,500.LO 9CONTRACT LIABILITYQuestion: What journal entries are required in 2015?ILLUSTRATION 18-30Contract Liability Recognition and PresentationNo entry is required on March 1, 2015:Neither party has performed on the contract.Neither party has an unconditional right as of March 1, 2015.PresentationLO 9Question: What journal entries are required in 2015?Cash 10,000 Unearned Sales Revenue 10,000On receiving the cash on April 15, 2015, Henly records the following entry.Unearned Sales Revenue 10,000 Sales Revenue 10,000On satisfying the performance obligation on July 31, 2015, Henly records the following entry to record the sale.ILLUSTRATION 18-30Contract Liability Recognition and PresentationCost of Good Sold 7,500 Inventory 7,500In addition, Henly records cost of goods sold as follows.PresentationLO 9Costs to Fulfill a ContractCompanies divide fulfillment costs (contract acquisition costs) into two categories:Those that give rise to an asset.Those that are expensed as incurred.PresentationLO 9CollectibilityCredit risk that a customer will be unable to pay in accordance with the contract.Whether a company will get paid is not a consideration in determining revenue recognition. Amount recognized as revenue is not adjusted for customer credit risk.PresentationDisclosureLO 9Companies disclose qualitative and quantitative information about the following:Contracts with customers.Significant judgments.Assets recognized from costs incurred to fulfill a contract.DisclosureLO 9Companies provide a range of disclosures:Disaggregation of revenue.Reconciliation of contract balances.Remaining performance obligations.Cost to obtain or fulfill contracts.Other qualitative disclosures.Significant judgments and changes in them.Minimum revenue not subject to variable consideration constraint.REVENUE RECOGNITION OVER TIMEUnder certain circumstances companies recognize revenue over time. The most notable context in which revenue may be recognized over time is long-term construction contract accounting.LO 10 Apply the percentage-of-completion method for long-term contracts.APPENDIX 18ALONG-TERM CONSTRUCTION CONTRACTSREVENUE RECOGNITION OVER TIMELong-term contracts frequently provide that seller (builder) may bill purchaser at intervals.Examples:Development of military and commercial aircraftWeapons-delivery systemsSpace exploration hardwareLO 10APPENDIX 18ALONG-TERM CONSTRUCTION CONTRACTSREVENUE RECOGNITION OVER TIMEA company recognizes revenue over time if at least one of the following two criteria is met:Company’s performance creates or enhances an asset (e.g., work in process) that the customer controls as the asset is created or enhanced; orCompany’s performance does not create an asset with an alternative use. In additionLO 10APPENDIX 18ALONG-TERM CONSTRUCTION CONTRACTSREVENUE RECOGNITION OVER TIMEIn addition at least one of the following criteria must be met:The customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs.Another company would not need to substantially re-perform the work the company has completed to date if that other company were to fulfill the remaining obligation to the customer.The company has a right to payment for its performance completed to date, and it expects to fulfill the contract as promised.LO 10APPENDIX 18ALONG-TERM CONSTRUCTION CONTRACTSIf criterion 1 or 2 is met, then a company recognizes revenue over time if it can reasonably estimate its progress toward satisfaction of the performance obligations.Company recognizes revenues and gross profits each period based upon the progress of the construction—referred to as the percentage-of-completion method.If criteria are not met, the company recognizes revenues and gross profit when the contract is completed, referred to as the cost-recovery (zero-profit) method.LO 10APPENDIX 18ALONG-TERM CONSTRUCTION CONTRACTSREVENUE RECOGNITION OVER TIMEMeasuring the Progress Toward CompletionMost popular input measure used to determine the progress toward completion is the cost-to-cost basis.LO 10APPENDIX 18ALONG-TERM CONSTRUCTION CONTRACTSPercentage-of-Completion MethodLO 10Percentage-of-Completion MethodRevenue to Recognized Cost-to-Cost BasisILLUSTRATION 18A-1ILLUSTRATION 18A-2ILLUSTRATION 18A-3APPENDIX 18ALONG-TERM CONSTRUCTION CONTRACTSIllustration: Hardhat Construction Company has a contract to construct a £4,500,000 bridge at an estimated cost of £4,000,000. The contract is to start in July 2015, and the bridge is to be completed in October 2017. The following data pertain to the construction period. LO 10APPENDIX 18APERCENTAGE-OF-COMPLETION METHODILLUSTRATION 18A-4LO 10APPENDIX 18APERCENTAGE-OF-COMPLETION METHODILLUSTRATION 18A-5LO 10APPENDIX 18APERCENTAGE-OF-COMPLETION METHODIllustration: Percentage-of-Completion Revenue, Costs, and Gross Profit by YearILLUSTRATION 18A-6LO 10APPENDIX 18APERCENTAGE-OF-COMPLETION METHODILLUSTRATION 18A-7ILLUSTRATION 18A-6PERCENTAGE-OF-COMPLETION METHODAPPENDIX 18ALO 10Illustration: Content of Construction in Process Account—Percentage-of-Completion MethodILLUSTRATION 18A-8LO 10APPENDIX 18APERCENTAGE-OF-COMPLETION METHODFinancial Statement Presentation—Percentage-of-CompletionILLUSTRATION 18A-9Computation of Unbilled Contract Price at 12/31/15LO 10APPENDIX 18APERCENTAGE-OF-COMPLETION METHODFinancial Statement Presentation—Percentage-of-Completion Method (2015)ILLUSTRATION 18A-10LO 10APPENDIX 18APERCENTAGE-OF-COMPLETION METHODLO 10APPENDIX 18APERCENTAGE-OF-COMPLETION METHODFinancial Statement Presentation—Percentage-of-Completion Method (2016)ILLUSTRATION 18A-11This method recognizes revenue only to the extent of costs incurred that are expected to be recoverable. Only after all costs are incurred is gross profit recognized.LO 11 Apply the cost-recovery method for long-term contracts.Cost-Recovery (Zero-Profit) MethodAPPENDIX 18ALONG-TERM CONSTRUCTION CONTRACTSAPPENDIX 18ACOST-RECOVERY (ZERO-PROFIT) METHODLO 11Illustration: Hardhat Construction would report the following revenues and costs for 2015–2017.ILLUSTRATION 18A-14APPENDIX 18ACOST-RECOVERY (ZERO-PROFIT) METHODLO 11ILLUSTRATION 18A-14Cost-Recovery MethodRevenue, Costs, andGross Profit by YearILLUSTRATION 18A-15Journal Entries—Cost-Recovery MethodAPPENDIX 18ACOST-RECOVERY (ZERO-PROFIT) METHODLO 11ILLUSTRATION 18A-14Cost-Recovery MethodRevenue, Costs, andGross Profit by YearILLUSTRATION 18A-16Comparison of Gross Profit Recognized under Different MethodsAPPENDIX 18ACOST-RECOVERY (ZERO-PROFIT) METHODLO 11ILLUSTRATION 18A-17Financial Statement Presentation—Cost- Recovery MethodLoss in Current Period on a Profitable ContractPercentage-of-completion method only, the estimated cost increase requires a current-period adjustment of gross profit recognized in prior periods.Loss on an Unprofitable ContractUnder both percentage-of-completion and cost-recovery methods, the company must recognize in the current period the entire expected contract loss.Long-Term Contract LossesLO 12 Identify the proper accounting for losses on long-term contracts.APPENDIX 18ALONG-TERM CONSTRUCTION CONTRACTSPrepare the journal entries to record revenue and expense for 2014, 2015, and 2016 assuming the estimated cost to complete at the end of 2015 was $215,436.Casper Construction Co. Illustration: Loss in Current PeriodAdvance slide in presentation mode to reveal answers.LO 12APPENDIX 18ALONG-TERM CONTRACT LOSSESLO 12Illustration: Loss in Current PeriodAPPENDIX 18ALONG-TERM CONTRACT LOSSESLO 12Illustration: Loss in Current PeriodAPPENDIX 18ALONG-TERM CONTRACT LOSSESPrepare the journal entries for 2014, 2015, and 2016 assuming the estimated cost to complete at the end of 2015 was $246,038 instead of $170,100.Casper Construction Co. Illustration: Loss on Unprofitable ContractLO 12APPENDIX 18ALONG-TERM CONTRACT LOSSES$675,000 – 683,438 = (8,438) cumulative lossLO 12APPENDIX 18ALONG-TERM CONTRACT LOSSESIllustration: Loss on Unprofitable ContractLO 12APPENDIX 18ALONG-TERM CONTRACT LOSSESIllustration: Loss on Unprofitable ContractFor the Cost-Recovery method, companies would recognize the following loss :LO 12APPENDIX 18ALONG-TERM CONTRACT LOSSESIllustration: Loss on Unprofitable ContractFranchisesFour types of franchising arrangements have evolved: Manufacturer-retailerManufacturer-wholesalerService sponsor-retailerWholesaler-retailerLO 13 Explain revenue recognition for franchises.APPENDIX 18BREVENUE RECOGNITION FOR FRANCHISESTwo sources of revenue: Sale of initial franchises and related assets or services, and Continuing fees based on the operations of franchises. FranchisesLO 13APPENDIX 18BREVENUE RECOGNITION FOR FRANCHISESThe franchisor normally provides the franchisee with:Assistance in site selectionEvaluation of potential incomeSupervision of construction activityAssistance in the acquisition of signs, fixtures, and equipmentBookkeeping and advisory servicesEmployee and management trainingQuality controlAdvertising and promotionFranchisesLO 13APPENDIX 18BREVENUE RECOGNITION FOR FRANCHISESPerformance obligations relate to: Right to open a business. Use of trade name or other intellectual property of the franchisor.Continuing services, such as marketing help, training, and in some cases supplying inventory and inventory management.FRANCHISE ACCOUNTINGLO 13APPENDIX 18BREVENUE RECOGNITION FOR FRANCHISESFranchisors commonly charge an initial franchise fee and continuing franchise fees:Initial franchise fee (payment for establishing the relationship and providing some initial services).Continuing franchise fees receivedIn return for continuing rights granted by the agreement.For providing management training, advertising and promotion, legal assistance, and other support.LO 13APPENDIX 18BREVENUE RECOGNITION FOR FRANCHISESFRANCHISE ACCOUNTINGFacts: Tum’s Pizza Inc. enters into a franchise agreement on November 1, 2015, giving Food Fight Corp. the right to operate as a franchisee of Tum’s Pizza for 5 years. Tum’s charges Food Fight an initial franchise fee of $50,000 for the right to operate as a franchisee. Of this amount, $20,000 is payable when Food Fight signs the agreement, and the balance is payable in five annual payments of $6,000 each on December 31. Food Fight also promises to pay ongoing royalty payments of 1% of its annual sales (payable each January 31 of the following year) and is obliged to purchase products from Tum’s at its current standalone selling prices at the time of purchase. The credit rating of Food Fight indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of $6,000 each discounted at 8% is $23,957. The discount of $6,043 represents the interest revenue to be accrued by Tum’s over the payment period.LO 13APPENDIX 18BREVENUE RECOGNITION FOR FRANCHISESRights to the trade name, market area, and proprietary know-how for 5 years are not individually distinct.Each one is not sold separately and cannot be used with other goods or services that are readily available to the franchisee. Combined rights give rise to a single performance obligation. Tum’s satisfies performance obligation at point in time when Food Fight obtains control of the rights. LO 13Identify the performance obligations and the point in time when the performance obligations are satisfied and revenue is recognized.APPENDIX 18BREVENUE RECOGNITION FOR FRANCHISESTraining services and equipment are distinct because similar services and equipment are sold separately. Tum’s satisfies those performance obligations when it transfers the services and equipment to Food Fight. Tum’s cannot recognize revenue for the royalty payments because it is not reasonably assured to be entitled to those royalty amounts. Tum’s recognizes revenue for the royalties when (or as) the uncertainty is resolved.LO 13Identify the performance obligations and the point in time when the performance obligations are satisfied and revenue is recognized.APPENDIX 18BREVENUE RECOGNITION FOR FRANCHISESREVENUE RECOGNITION FOR FRANCHISESConsider the following for allocation of the transaction price at December 31, 2015.LO 13Training is completed in January 2016, the equipment is installed in January 2016, and Food Fight holds a grand opening on February 2, 2016.APPENDIX 18BOn December 31, 2015, Tum’s signs the agreement and receives upfront payment and note.Cash 20,000Notes Receivable 30,000 Discount on Notes Receivable 6,043 Unearned Franchise Revenue 20,000 Unearned Service Revenue (training) 9,957 Unearned Sales Revenue (equipment) 14,000REVENUE RECOGNITION FOR FRANCHISESLO 13APPENDIX 18BOn February 2, 2016, franchise opens. Tum’s satisfies the performance obligations related to the franchise rights, training, and equipment.Unearned Franchise Revenue 20,000 Franchise Revenue 20,000Unearned Service Revenue (training) 9,957 Service Revenue (training) 9,957Unearned Sales Revenue (equipment) 14,000 Sales Revenue 14,000Cost of Goods Sold 10,000 Inventory 10,000REVENUE RECOGNITION FOR FRANCHISESLO 13APPENDIX 18BRECOGNITION OF FRANCHISE RIGHTS REVENUE OVER TIMEDepending on the economic substance of the rights, the franchisor may be providing access to the right rather than transferring control of the franchise rights. In this case, the franchise revenue is recognized over time, rather than at a point in time.REVENUE RECOGNITION FOR FRANCHISESLO 13APPENDIX 18BFacts: Tech Solvers Corp. is a franchisor and provides a range of computing services (hardware/software installation, repairs, data backup, device syncing, and network solutions) on popular Apple and PC devices. Each franchise agreement gives a franchisee the right to open a Tech Solvers store and sell Tech Solvers’ products and services in the area for 5 years. Under the contract, Tech Solvers also provides the franchisee with a number of services to support and enhance the franchise brand, including advising and consulting on the operations of the store; communicating new hardware and software developments, and service techniques; providing business and training manuals; and advertising programs and training. FRANCHISE REVENUE OVER TIMELO 13APPENDIX 18BFacts: As an almost entirely service operation (all parts and other supplies are purchased as needed by customers), Tech Solvers provides few upfront services to franchisees. Instead, the franchisee recruits service technicians, who are given Tech Solvers’ training materials (online manuals and tutorials), which are updated for technology changes, on a monthly basis at a minimum. Tech Solvers enters into a franchise agreement on December 15, 2015, giving a franchisee the rights to operate a Tech Solvers franchise in eastern Bavaria for 5 years. Tech Solvers charges an initial franchise fee of €5,000 for the right to operate as a franchisee, payable upon signing the contract. Tech Solvers also receives ongoing royalty payments of 7% of the franchisee’s annual sales (payable each January 15 of the following year).LO 13FRANCHISE REVENUE OVER TIMEAPPENDIX 18BRights to the trade name, market area, and proprietary know-how for 5 years are not individually distinct.Each one is not sold separately and cannot be used with other goods or services that are readily available to the franchisee. Licensed rights and the ongoing training materials are a single performance obligation. Tech Solvers is providing access to the rights and must continue (over time) to perform updates and services.LO 13Identify the performance obligations and the point in time when the performance obligations are satisfied and revenue is recognized.FRANCHISE REVENUE OVER TIMEAPPENDIX 18BTech Solvers cannot recognize revenue for the royalty payments Not reasonably assured to be entitled to those revenue-based royalty amounts. Payments represent variable consideration. Recognize revenue for royalties when (or as) uncertainty is resolved.LO 13Identify the performance obligations and the point in time when the performance obligations are satisfied and revenue is recognized.FRANCHISE REVENUE OVER TIMEAPPENDIX 18BFranchise agreement signed and receipt of upfront payment and note, December 15, 2015:Cash 5,000 Unearned Franchise Revenue 5,000LO 13Unearned Franchise Revenue 1,000 Franchise Revenue (€5,000 ÷ 5) 1,000Accounts Receivable 5,950 Franchise Revenue (€85,000 x 7%) 5,950Franchise begins operations in January 2016 and records €85,000 of revenue for the year ended December 31, 2016.FRANCHISE REVENUE OVER TIMEAPPENDIX 18BCopyright © 2015 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. 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