Kế toán tài chính - Chương 18: Revenue recognition

C H A P T E R 18REVENUE RECOGNITIONIntermediate Accounting13th EditionKieso, Weygandt, and Warfield 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-sales method of accounting.Explain the cost-recovery method of accounting.Learning ObjectivesCurrent EnvironmentGuidelines for revenue recognitionDepartures from sale basisRevenue Recognition at the Point of SaleRevenue Recognition before DeliveryRevenue Recognition after DeliverySales with buyback agreementsSales when right of return existsTrade loading and channel stuffingInstallment-sales methodCost-recovery methodDeposit methodSummary of basesConcluding remarksPercentage-of-completion methodCompleted-contract methodLong-term contract lossesDisclosuresCompletion-of-production basisRevenue RecognitionOne study noted restatements of revenue:Result in larger drops in market capitalization than other types of restatement.Caused eight of the top ten market value losses in a recent year.Revenue recognition has been the largest source of public company restatements over the past decade.The Current EnvironmentThe revenue recognition principle provides that companies should recognize revenueGuidelines for Revenue RecognitionThe Current EnvironmentLO 1 Apply the revenue recognition principle.when it is realized or realizable and when it is earned.Sale of product from inventoryType of TransactionRendering a servicePermitting use of an assetSale of asset other than inventoryDate of sale (date of delivery)Services performed and billableAs time passes or assets are usedDate of sale or trade-inGain or loss on dispositionRevenue from interest, rents, and royaltiesRevenue from fees or servicesRevenue from salesDescription of RevenueTiming of Revenue RecognitionChapter 18Chapter 18The Current EnvironmentLO 1 Apply the revenue recognition principle.Illustration 18-1Revenue Recognition Classified by Type of TransactionEarlier recognition is appropriate if there is a high degree of certainty about the amount of revenue earned.Delayed recognition is appropriate if thedegree of uncertainty concerning the amount of revenue or costs is sufficiently high or sale does not represent substantial completion of the earnings process.Departures from the Sale BasisThe Current EnvironmentLO 1 Apply the revenue recognition principle.Revenue Recognition AlternativesThe Current EnvironmentLO 1 Apply the revenue recognition principle.Illustration 18-2FASB’s Concepts Statement No. 5, companies usually meet the two conditions for recognizing revenue by the time they deliver products or render services to customers.Departures from the Sale BasisRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.Implementation problems,Sales with Buyback AgreementsSales When Right of Return ExistsTrade Loading and Channel StuffingWhen a repurchase agreement exists at a set price and this price covers all cost of the inventory plus related holding costs, the inventory and related liability remain on the seller’s books. In other words, no sale.Sales with Buyback AgreementsRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.Recognize revenue only if six conditions have been met.Sales When Right of Return ExistsRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.The seller’s price to the buyer is substantially fixed or determinable at the date of sale.The buyer has paid the seller, or the buyer is obligated to pay the seller, and the obligation is not contingent on resale of the product. The buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.Recognize revenue only if six conditions have been met.Sales When Right of Return ExistsRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.The buyer acquiring the product for resale has economic substance apart from that provided by the seller.The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.The seller can reasonably estimate the amount of future returns.“Trade loading is a crazy, uneconomic, insidious practice through which manufacturers—trying to show sales, profits, and market share they don’t actually have—induce their wholesale customers, known as the trade, to buy more product than they can promptly resell.”*Trade Loading and Channel StuffingRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.* “The $600 Million Cigarette Scam,” Fortune (December 4, 1989), p. 89.A similar practice is referred to as channel stuffing. When a software maker needed to make its financial results look good, it offered deep discounts to its distributors to overbuy, and then recorded revenue when the software left the loadingTrade Loading and Channel StuffingRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.Two Methods:Percentage-of-Completion Method.Rationale is that the buyer and seller have enforceable rights.Completed-Contract Method.Most notable example is long-term construction contract accounting.Revenue Recognition Before DeliveryLO 2 Describe accounting issues for revenue recognition at point of sale.Must use Percentage-of-Completion method when estimates of progress toward completion, revenues, and costs are reasonably dependable and all of the following conditions exist:Revenue Recognition Before DeliveryContract clearly specifies the enforceable rights regarding goods or services by the parties, the consideration to be exchanged, and the manner and terms of settlement.Buyer can be expected to satisfy all obligations.Contractor can be expected to perform under the contract.LO 2 Describe accounting issues for revenue recognition at point of sale.Companies should use the Completed-Contract method when one of the following conditions applies when:Revenue Recognition Before DeliveryCompany has primarily short-term contracts, or Company cannot meet the conditions for using the percentage-of-completion method, or There are inherent hazards in the contract beyond the normal, recurring business risks.LO 2 Describe accounting issues for revenue recognition at point of sale.Formula for Total Revenue to Be Recognized to DateLO 3 Apply the percentage-of-completion method for long-term contracts.Illustration 18-3Percentage-of-Completion MethodIllustration 18-4Illustration 18-5Percentage-of-Completion MethodLO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: KC 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 2010, and the bridge is to be completed in October 2012. The following data pertain to the construction period. LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: Compute percentage complete.Illustration 18-6Solution on notes pageLO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: KC would make the following entries to record (1) the costs of construction, (2) progress billings, and (3) collections.Illustration 18-7Solution on notes pagePercentage-of-Completion MethodIllustration: Percentage-of-Completion, Revenue and Gross Profit, by YearIllustration 18-8Solution on notes pageLO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: KC’s entries to recognize revenue and gross profit each year and to record completion and final approval of the contract.Illustration 18-9Solution on notes pageLO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: Content of Construction in Process Account—Percentage-of-Completion MethodIllustration 18-10LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodFinancial Statement Presentation—Percentage-of-CompletionIllustration 18-11Computation of Unbilled Contract Price at 12/31/10LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodFinancial Statement—Percentage-of-CompletionIllustration 18-12KC Construction CompanyA) Prepare the journal entries for 2010, 2011, and 2012. Casper Construction Co. LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration:LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration:LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration:LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration:Companies recognize revenue and gross profit only at point of sale—that is, when the contract is completed. Under this method, companies accumulate costs of long-term contracts in process, but they make no interim charges or credits to income statement accounts for revenues, costs, or gross profit.LO 4 Apply the completed-contract method for long-term contracts.Revenue Recognition Before DeliveryCompleted Contract MethodLO 4 Apply the completed-contract method for long-term contracts.Completed Contract MethodIllustration:Illustration:Completed Contract MethodLO 4 Apply the completed-contract method for long-term contracts.LO 5 Identify the proper accounting for losses on long-term contracts.Loss in the 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 completed-contract methods, the company must recognize in the current period the entire expected contract loss.Long-Term Contract LossesRevenue Recognition Before DeliveryIllustration: Loss on Profitable ContractLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.b) Prepare the journal entries for 2010, 2011, and 2012 assuming the estimated cost to complete at the end of 2011 was $215,436 instead of $170,100.Casper Construction Co. Long-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.Illustration: Loss on Profitable ContractLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.Illustration: Loss on Profitable ContractIllustration: Loss on Unprofitable ContractLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.c) Prepare the journal entries for 2010, 2011, and 2012 assuming the estimated cost to complete at the end of 2011 was $246,038 instead of $170,100.Casper Construction Co. Long-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.$675,000 – 683,438 = (8,438) cumulative lossIllustration: Loss on Unprofitable ContractPlugLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.Illustration: Loss on Unprofitable ContractLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.Illustration: Loss on Unprofitable ContractFor the Completed-Contract method, companies would recognize the following loss :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 Financial StatementsRevenue Recognition Before DeliveryLO 5 Identify the proper accounting for losses on long-term contracts.In certain cases companies recognize revenue at the completion of production even though no sale has been made.Completion-of-Production BasisRevenue Recognition Before DeliveryLO 5 Identify the proper accounting for losses on long-term contracts.Examples are: precious metals oragricultural products.When the collection of the sales price is not reasonably assured and revenue recognition is deferred.Revenue Recognition After DeliveryLO 6 Describe the installment-sales method of accounting.Methods of deferring revenue: Installment-sales methodCost-recovery methodDeposit methodGenerally EmployedRecognizes income in the periods of collection rather than in the period of sale.Recognize both revenues and costs of sales in the period of sale, but defer gross profit to periods in which cash is collected.Selling and administrative expenses are not deferred.Installment-Sales MethodRevenue Recognition After DeliveryLO 6 Describe the installment-sales method of accounting.The profession concluded that except in special circumstances, “the installment method of recognizing revenue is not acceptable.”The rationale: because the installment method does not recognize any income until cash is collected, it is not in accordance with the accrual concept.Acceptability of the Installment-Sales MethodRevenue Recognition After DeliveryLO 6 Describe the installment-sales method of accounting.Recognizes no profit until cash payments by the buyer exceed the cost of the merchandise sold.A seller is permitted to use the cost-recovery method to account for sales in which “there is no reasonable basis for estimating collectibility.” In addition, use of this method is required where a high degree of uncertainty exists related to the collection of receivables.Cost-Recovery MethodRevenue Recognition After DeliveryLO 7 Explain the cost-recovery method of accounting.Illustration: In 2010, Fesmire Manufacturing sells inventory with a cost of $25,000 to Higley Company for $36,000. Higley will make payments of $18,000 in 2010, $12,000 in 2011, and $6,000 in 2012. If the cost-recovery method applies to this transaction and Higley makes payments as scheduled, Fesmire recognizes cash collections, revenue, cost, and gross profit as follows.Cost-Recovery MethodLO 7 Explain the cost-recovery method of accounting.Illustration 18-28Illustration: Fesmire’s journal entry to record the deferred gross profit on the Higley sale transaction (after recording the sale and the cost of sale in the normal manner) at the end of 2010 is as follows.Cost-Recovery MethodLO 7 Explain the cost-recovery method of accounting.Sales 36,000 Cost of Sales 25,000 Deferred Gross Profit 11,000Illustration: In 2011 and 2012, the deferred gross profit becomes realized gross profit as the cumulative cash collections exceed the total costs, by recording the following entries.Cost-Recovery MethodLO 7 Explain the cost-recovery method of accounting.Deferred Gross Profit 5,000 Realized Gross Profit 5,000Deferred Gross Profit 6,000 Realized Gross Profit 6,00020112012Seller reports the cash received from the buyer as a deposit on the contract and classifies it on the balance sheet as a liability.The seller does not recognize revenue or income until the sale is complete.Deposit MethodRevenue Recognition After DeliveryLO 7 Explain the cost-recovery method of accounting.Summary of Product Revenue Recognition BasesRevenue Recognition After DeliveryIllustration 18-29The IASB defines revenue to include both revenues and gains. U.S. GAAP provides separate definitions for revenues and gains. Revenue recognition fraud is a major issue in U.S. financial reporting. The same situation occurs overseas as evidenced by revenue recognition breakdowns at Dutch software company Baan NV, Japanese electronics giant NEC, and Dutch grocer AHold NV. A specific standard exists for revenue recognition under iGAAP (IAS 18). U.S. GAAP uses concepts such as realized, realizable, and earned as a basis for revenue recognition.iGAAP prohibits the use of the completed-contract method of accounting for long-term construction contracts (IAS 13). Companies must use the percentage-of-completion method. If revenues and costs are difficult to estimate, then companies recognize revenue only to the extent of the cost incurred—a zero-profit approach. In long-term construction contracts, iGAAP requires recognition of a loss immediately if the overall contract is going to be unprofitable. In other words, U.S. GAAP and iGAAP are the same regarding this issue.FranchisesFour types of franchising arrangements have evolved: manufacturer-retailer,manufacturer-wholesaler, service sponsor-retailer, and wholesaler-retailer. LO 8 Explain revenue recognition for franchises and consignment sales.FranchisesFastest-growing category of franchising is service sponsor-retailer:Soft ice cream/frozen yogurt stores (Tastee Freeze, TCBY, Dairy Queen)Food drive-ins (McDonald’s, KFC, Burger King)Restaurants (TGI Friday’s, Pizza Hut, Denny’s)Motels (Holiday Inn, Marriott, Best Western)Auto rentals (Avis, Hertz, National)Others (H & R Block, Meineke Mufflers, 7-Eleven Stores)LO 8 Explain revenue recognition for franchises and consignment sales.FranchisesTwo sources of revenue: Sale of initial franchises and related assets or services, and Continuing fees based on the operations of franchises. LO 8 Explain revenue recognition for franchises and consignment sales.FranchisesLO 8 Explain revenue recognition for franchises and consignment sales.The 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 promotionLO 8 Explain revenue recognition for franchises and consignment sales.Franchisors record initial franchise fees as revenue only when and as they make “substantial performance” of the services they are obligated to perform and when collection of the fee is reasonably assured. Substantial performance occurs when the franchisor has no remaining obligation to refund any cash received or excuse any nonpayment of a note and has performed all the initial services required under the contract.Initial Franchise FeesLO 8 Explain revenue recognition for franchises and consignment sales.Illustration: Tum’s Pizza Inc. charges an initial franchise fee of $50,000 for the right to operate as a franchisee of Tum’s Pizza. Of this amount, $10,000 is payable when the franchisee signs the agreement, and the balance is payable in five annual payments of $8,000 each. The credit rating of the franchisee indicates that money can be borrowed at 8 percent. The present value of an ordinary annuity of five annual receipts of $8,000 each discounted at 8 percent is $31,941.68. The discount of $8,058.32 represents the interest revenue to be accrued by the franchisor over the payment period. Example of Entries for Initial Franchise FeeLO 8 Explain revenue recognition for franchises and consignment sales.Illustration: 1. If there is reasonable expectation that Tum’s Pizza Inc. may refund the down payment and if substantial future services remain to be performed by Tum’s Pizza Inc., the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00Notes Receivable 40,000.00 Discount on Notes Receivable 8,058.32 Unearned Franchise Fees 41,941.68LO 8 Explain revenue recognition for franchises and consignment sales.Illustration: 2. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is minimal, collectibility of the note is reasonably assured, and substantial performance has occurred, the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00Notes Receivable 40,000.00 Discount on Notes Receivable 8,058.32 Revenue from Franchise Fees 41,941.68LO 8 Explain revenue recognition for franchises and consignment sales.Illustration: 3. If the initial down payment is not refundable, represents a fair measure of the services already provided, with a significant amount of services still to be performed by Tum’s Pizza in future periods, and collectibility of the note is reasonably assured, the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00Notes Receivable 40,000.00 Discount on Notes Receivable 8,058.32 Revenue from Franchise Fees 10,000.00 Unearned Franchise Fees 31,941.68LO 8 Explain revenue recognition for franchises and consignment sales.Illustration: 4. If the initial down payment is not refundable and no future services are required by the franchisor, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00 Revenue from Franchise Fees 10,000.00LO 8 Explain revenue recognition for franchises and consignment sales.Illustration: 5. Under the same conditions as those listed in case 4 above, except that the down payment is refundable or substantial services are yet to be performed, the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00 Unearned Franchise Fees 10,000.00In cases 4 and 5 — where collection of the note is extremely uncertain—franchisors may recognize cash collections using the installment-sales method or the cost-recovery method.LO 8 Explain revenue recognition for franchises and consignment sales.Continuing franchise fees are received in return for the continuing rights granted by the franchise agreement and for providing such services as management training, advertising and promotion, legal assistance, and other support. Franchisors report continuing fees as revenue when they are earned and receivable from the franchisee.Continuing Franchise FeesLO 8 Explain revenue recognition for franchises and consignment sales.Sometimes the franchise agreement grants the franchisee the right to make bargain purchases of equipment or supplies after the franchisee has paid the initial franchise fee. If the bargain price is lower than the normal selling price of the same product, or if it does not provide the franchisor a reasonable profit, then the franchisor should defer a portion of the initial franchise fee. The franchisor would account for the deferred portion as an adjustment of the selling price when the franchisee subsequently purchases the equipment or supplies.Bargain PurchasesLO 8 Explain revenue recognition for franchises and consignment sales.As a matter of management policy, the franchisor may reserve the right to purchase a profitable franchise outlet, or to purchase one that is in financial difficulty.If it is probable at the time the option is given that the franchisor will ultimately purchase the outlet, then the franchisor should not recognize the initial franchise fee as revenue but should instead record it as a liability. Options to PurchaseLO 8 Explain revenue recognition for franchises and consignment sales.Should ordinarily defer direct costs (usually incremental costs) relating to specific franchise sales for which revenue has not yet been recognized. Should not defer costs without reference to anticipated revenue and its realizability. Indirect costs of a regular and recurring nature, such as selling and administrative expenses that are incurred irrespective of the level of franchise sales, should be expensed as incurred.Franchisor’s CostLO 8 Explain revenue recognition for franchises and consignment sales.All significant commitments and obligations resulting from franchise agreements. Any resolution of uncertainties regarding the collectibility of franchise fees. Where possible, revenues and costs related to franchisor owned outlets should be distinguished from those related to franchised outlets.Disclosure of FranchisorsConsignmentsConsignor recognizes revenue only after receiving notification of sale and cash remittance from the consignee. Consignor carries the merchandise as inventory throughout the consignment, separately classified as Merchandise on Consignment. Consignee does not record the merchandise as an asset. Upon sale of the merchandise, the consignee has a liability for the net amount due the consignor. Revenue is then recognized by the consignor.LO 8 Explain revenue recognition for franchises and consignment sales.ConsignmentsIllustration: Nelba Manufacturing Co. ships merchandise costing $36,000 on consignment to Best Value Stores. Nelba pays $3,750 of freight costs, and Best Value pays $2,250 for local advertising costs that are reimbursable from Nelba. By the end of the period, Best Value has sold two-thirds of the consigned merchandise for $40,000 cash. Best Value notifies Nelba of the sales, retains a 10 percent commission, and remits the cash due Nelba. LO 8 Explain revenue recognition for franchises and consignment sales.ConsignmentsLO 8 Explain revenue recognition for franchises and consignment sales.ConsignmentsLO 8 Explain revenue recognition for franchises and consignment sales.Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. 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