NOTE: In example 1 you are recording journal entries for Yoga-Mats-R-Us.

In examples 2 and 3, you will record journal e

Example 1: Yoga-Mats-R-Us sells the Cersei Mat, a yoga mat that is the grippiest mat you’ll ever use! Assume that the mat
services. Analyze the fact pattern below and perform the following requirements:

a. Identify when Yoga-Mats-R-Us should recognize revenue.

b. Identify how much revenue Yoga-Mats-R-Us should recognize.
c. Record the required journal entries. Be sure to include the dates!

Facts:
On December 29, 2021, Serenity Yoga ordered 100 Cersei Mats for $110 each, promising to pay Yoga-Mats-R-Us on Januar
R-Us delivers the mats to Serenity Yoga. Serenity Yoga pays Yoga-Mats-R-Us in full on January 15, 2022. Yoga-Mats-R-Us p
distributor for $50/mat.

Date of order 12/29/2021

Delivery date 1/10/2022
Payment date 1/15/2022
# of mats ordered by Serenity Yoga 100
Price per mat (amount charged to Serenity Yoga) $110
Cost per mat (amount paid by Yoga-Mats-R-Us) $50

Requirements:
a. Identify when Yoga-Mats-R-Us should recognize revenue
It should be recognized the 10/01/2022

b. Identify how much revenue Yoga-Mats-R-Us should recognize.

The should reognize 110 * 100 = 11,000 11000

c. Record the required journal entries. Be sure to include the dates!

Date Account
12/29/2021

1/10/2022 Accounts receivable

Sales revenue

1/10/2022 Costs of goods sold

Inventory

1/15/2022 Cash
Accounts receivable
3, you will record journal entries for Serenity Yoga.

r use! Assume that the mat is only a mat and includes no other goods or

y Yoga-Mats-R-Us on January 15, 2022. On January 10, 2022, Yoga-Mats-

15, 2022. Yoga-Mats-R-Us purchased the Cersei Mats from its wholesale

Debit Credit

11,000
11,000

5,000
5,000

11,000
11,000
 NOTE: In example 1 you are recording journal entries for Yoga-Mats-R-Us. In examples 2 and 3, you will record journal e

Example 2: Serenity Yoga sells three-month yoga memberships for $300 each. Analyze the fact pattern below and perform

a. Identify when Serenity Yoga should recognize revenue.

b. Identify how much revenue Serenity Yoga should recognize.
c. Record the required journal entries. Be sure to include the dates!

Facts:
On February 1, 2022, Serenity Yoga sold ten three-month memberships for $300 each. All ten customers pay cash on Febr
day. Assume Serenity Yoga records journal entries at the end of each month to recognize revenue earned.

Date of sale 2/1/2022

Payment date 2/1/2022
Membership start date 2/1/2022
# of memberships sold 10
Price per membership $300
Length of membership 3

Requirements:
a. Identify when Serenity Yoga should recognize revenue
At the end of each month

b. Identify how much revenue Serenity Yoga should recognize.

They will recognize 300 * 10 = 3000 3000

c. Record the required journal entries. Be sure to include the dates!

Date Account
2/1/2022 Cash
Deferred revenue (LIABILITY)

2/28/2022 Deferred revenue

Service revenue

3/31/2022 Deferred revenuw

Service revenue

4/30/2022 Deferred revenue

Sales revenue
3, you will record journal entries for Serenity Yoga.

t pattern below and perform the following requirements:

customers pay cash on February 1, 2022, and the memberships begin that
nue earned.

months

Debit Credit
3,000
3,000

1,000
1,000

1,000
1,000

1,000
1,000
NOTE: In example 1 you are recording journal entries for Yoga-Mats-R-Us. In examples 2 and 3, you will record journal e

Example 3: Serenity Yoga loves the new Cersei Mats, but it still has several at the end of April. Serenity Yoga decided to bu
membership for $400 beginning in May. Serenity Yoga typically sells the Cersei Mat for $150. Analyze the fact pattern belo

a. Identify when Serenity Yoga should recognize revenue.

b. Identify how much revenue Serenity Yoga should recognize.
c. Record the required journal entries. Be sure to include the dates!

WOW! That was a fantastic idea. On May 1, 2022, Serenity Yoga sold 15 bundles, and all customers paid in cash. Serenity
May 1, 2022, and the three-month membership began that day.

Date of sale 5/1/2022

Payment date 5/1/2022
Date of delivery of mats 5/1/2022
Membership start date 5/1/2022
# of bundles sold 15
Price per bundle $400
Stand-alone price of mat $150
Stand-alone price of membership $300
Length of membership 3

Before diving in, let’s consider a few things:

Are there multiple performance obligations? Hint: Think about the criteria for multiple performance obligations presented
this meet the criteria for distinct goods and services?

Yes, because the mat could be used seperately from the membership

You’re probably feeling a little stumped at this point regarding the best method to use if Serenity Yoga typically s
Cersei Mat for $150. It typically offers a three-month membership for $300; the math doesn’t add up because $4
PLUS $300) does not equal $400 (contract amount). What should we do?

Allocate the revenue (step 4!) across the performance obligations by using stand-alone prices!

Revenue allocation workspace:

Stand-alone price of Cersei Mat $150

Stand-alone price of three month membership $300
Total $450

Allocation percentages:
Cersei Mat 33.33%
Three-month membership 66.67%
 Revenue allocation:
Revenue allocated to Cersei Mat (per bundle) $133.33
Revenue allocated to three-month membership (per bundle) $266.67

Requirements:
a. Identify when Serenity Yoga should recognize revenue
Serenity Yoga will recognize the revenue allocated to the Cersei Mat on May 1, 2022. Serenity Yoga can recognize some re
membership; technically, the members receive the benefits each day of the three months, so it is appropriate for Serenity
proportion of the time.

b. Identify how much revenue Serenity Yoga should recognize.

$6,000

c. Record the required journal entries. Be sure to include the dates!

Date Account
5/1/2022 Cash
Sales revenue
Deferred revenue

5/1/2022 Cost of sold goods

Inventory

5/31/2022 Deferred revenue

Service revenue

6/30/2022 Deferred revenue

Service revenue

7/31/2022 Deferred revenue

Service revenue
 3, you will record journal entries for Serenity Yoga.

Serenity Yoga decided to bundle the Cersei Mat with a three-month

Analyze the fact pattern below and perform the following requirements:

mers paid in cash. Serenity Yoga provided the mats to all 15 customers on

months

mance obligations presented above. Does

f Serenity Yoga typically sells the

oesn’t add up because $450 ($150
 Yoga can recognize some revenue at the end of each month for the
t is appropriate for Serenity Yoga to recognize revenue using the

Debit Credit
6,000
2,000
4,000

1,650 The cost of the mat is in example 1

1,650

1,333
1,333

1,333
1,333

1,333
1,333
in example 1
Example 4: Sky, Inc. sold $300 of laser equipment during the year. Based on industry experience, Sky estimates that 4% of
sales will be returned. Record the appropriate adjusting journal entry to recognize estimated sales returns.

Sold $300
Estimated returns 4%

Account Debit Credit

Sales returns (contra revenue) 12
Refund liability 12
y experience, Sky estimates that 4% of
stimated sales returns.
Example 5a: Amazon sold a book to a customer for $20 (cash). The book cost Amazon $5. Record the transaction below:

Sales price $20

Cost to Amazon $5

Acting as principal or agent? principal

Account Debit Credit

Cash 20
Sales revenue 20

COGS 5
Inventory 5

Example 5b: Using the Amazon marketplace, a customer purchased a $20 book from a
bookseller. Amazon charges the bookseller a 15% commission. Assume this was a cash
transaction.

Sales price $20

Commission rate 15%

Acting as principal or agent? agent

Account Debit Credit

Cash 3
Service / commision revenue 3

OR

Cash $20
Payable to seller 17
Service / commision revenue $3
on $5. Record the transaction below:
 Example 6a (recognizing revenue at the end of the project): CGG Construction Co. was contracted to build an office buildin
started in 2021 and was completed in 2023. In this case, no revenue, expense, or profit would be recognized in 2021 or 20
expense, and profit in 2023, we must calculate how much profit was earned. To do so, we subtract all costs of construction

2021
Costs incurred during the year $500
Estimated costs to complete the project 2,000
Billings during the year 400
Cash collections during the year 350

Contract amount $3,000

In the space below, record all required journal entries for 2021.

Account Debit

1 Construction in progress 500

Cash, raw materials, etc.

2 Accounts receivable 400

Billings

3 Cash 350
Accounts receivable

4 N/A - recognize revenue at the end of the contract

In the space below, record all required journal entries for 2022.

Account Debit

1 Construction in progress 1,000

Cash, raw materials, etc.

2 accounts receivable 1,500

Billibgs

3 Cash 1,050
Accounts receivable

4 N/A - recognize revenue at the end of the contract

In the space below, record all required journal entries for 2023.
 Account Debit

1 Construction in progress 1,050

Cash, raw materials, etc.

2 Accounts receivable 1,100

Billings

3 Cash 1,600
Accounts receivable

4 Cost of construction 2,550

CIP 450
Revenue

After completing the project, we also need to close the CIP and Billings accounts (Note: these are not
temporary accounts, but the project is complete, so these accounts are zeroed out).

Billings 3,000
CIP

For Example 6a (revenue at the end of the contract), the income statement would not report any revenue or
expense related to the project for 2021 or 2022. In 2023, the income statement would show:

Revenue from long-term contract $ 3,000

Cost of construction 2,550
Gross profit 450

The balance sheet is a little more complicated. First, we would record accounts receivable just like any other
company. Next, we have a CIP account; this is an asset like a WIP inventory account, i.e. a physical asset. Third,
we have a Billings account that keeps track of how much has been billed to the customer; this is a contra CIP
account.

Note: The Billings account is a contra account to the CIP account—

If CIP > Billings, the net amount is reported as a contract asset,
If CIP < Billings, the net amount is reported as a contract liability

*Ignore cash for purposes of this example.

Balance Sheets 2021

Current assets:
Accounts receivable 50
Costs in excess of billings 100

Current liabilities:
Billings in excess of costs
n Co. was contracted to build an office building for $3,000. Construction CIP T-account:
, or profit would be recognized in 2021 or 2022. To recognize revenue,
To do so, we subtract all costs of construction from total revenue.
Debit Credit
500
EOY 2021 500
2022 2023 1,000
$1,000 $1,050 EOY 2022 1,500
1,000 0 1,050
1,500 1,100 2,550
1,050 1,600 gross profit 450
3,000
3,000
EOY 2023 -

Credit

500

400

350

Credit

1,000

1,500

1,050
 Credit

1,050

1,100

1,600

3,000

accounts (Note: these are not

zeroed out).

3,000

ent would not report any revenue or

atement would show:

ccounts receivable just like any other

ory account, i.e. a physical asset. Third,
d to the customer; this is a contra CIP

2022

500 asset, permanent account (temporary accounts are the ones that close at the end of t
(for example incomes, expenses…)
400
Billings T-account: Accounts receivable T-account:

Debit Credit Debit Credit

400 400
400 EOY 2021 350
1,500 EOY 2021 50
1,900 EOY 2022 1,500
1,100 1,050
3,000 EOY 2022 500
3,000 1,100
- EOY 2023 1,600
EOY 2023 -
the ones that close at the end of the year)
 Example 6b (recognizing project revenue over time): CGG Construction Co. was contracted to build an office building for $
started in 2021 and was completed in 2023. This project qualifies to recognize revenue over time.

Note: This is the same data set from 6a.

2021
Costs incurred during the year $500
Estimated costs to complete the project 2,000
Billings during the year 400
Cash collections during the year 350

Contract amount $3,000

For long-term projects that qualify to recognize revenue over time, we need a way to estimate how much progre
completing the project. In general, this is best done by comparing the costs incurred to the total estimated costs
project. This is called the “cost-to-cost ratio,” representing an input-based revenue recognition method. Using th
we can calculate how much revenue (or how much gross profit) to recognize in the period using the following thr

2021
Step 1:
Costs incurred to date $500
Estimated costs to complete 2,000

Estimated total costs 2,500

Estimated % complete (to date) 20%

Step 2:
Contract amount 3,000
Revenue recognizable (to date) 600

Step 3:
Revenue recognized in prior years -
Revenue to recognize in current year 600
Costs incurred in current year 500
Gross profit to recognize in the current year 100

In the space below, record all required journal entries for 2021.

Account Debit

1 CIP 500
Cash, raw materials, etc,.
2 Accounts receivable 400
Billings

3 Cash 350
Accounts receivable

4 Cost of construction 500

CIP 100
Revenue from long term contracts

In the space below, record all required journal entries for 2022.

Account Debit

1 CIP 1,000
Cash, raw materials, etc,.

2 Accounts receivable 1,500

Billings

3 Cash 1,050
Accounts receivable

4 Cost of construction 1,000

CIP 200
Revenue from long term contracts

In the space below, record all required journal entries for 2023.

Account Debit

1 CIP 1,050
Cash, raw materials, etc,.

2 Accounts receivable 1,100

Billings

3 Cash 1,600
Accounts receivable

4 Cost of construction 1,050

CIP 150
Revenue from long term contracts

After completing the project, we also need to close the CIP and Billings accounts (Note: these are not
temporary accounts, but the project is complete, so these accounts are zeroed out).
Billings 3,000
CIP

For Example 6b (revenue over time), the income statement would report any revenue and expense
related to the project for 2021, 2022, and 2023. The income statement would show:

2021
Revenue from long-term contract
Cost of construction
Gross profit

The balance sheet is a little more complicated. First, we would record accounts receivable just like any
other company. Next, we have a CIP account; this is an asset like a WIP inventory account, i.e. a physical
asset. Third, we have a Billings account that keeps track of how much has been billed to the customer; this
is a contra CIP account.

Note: The Billings account is a contra account to the CIP account—

If CIP > Billings, the net amount is reported as a contract asset,
If CIP < Billings, the net amount is reported as a contract liability

*Ignore cash for purposes of this example.

Balance Sheets 2021

Current assets:
Accounts receivable
Costs and profits in excess of billings

Current liabilities:
Billings in excess of costs and profits
Co. was contracted to build an office building for $3,000. Construction CIP T-account:
gnize revenue over time.
Debit
500
100
2022 2023 EOY 2021 600
$1,000 $1,050 1,000
1,000 0 200
1,500 1,100 EOY 2022 1,800
1,050 1,600 1,050
150
3,000

EOY 2023 -
we need a way to estimate how much progress has been made in
he costs incurred to the total estimated costs to complete the
t-based revenue recognition method. Using the cost-to-cost ratio,
recognize in the period using the following three steps:

2022 2023

$1,500 $2,550
1,000 -

2,500 2,550

60% 100%

3,000 3,000
1,800 3,000

600 1,800
1,200 1,200
1,000 1,050
200 150

Credit

500
 400

350

600

Credit

1,000

1,500

1,050

1,200

Credit

1,050

1,100

1,600

1,200

ings accounts (Note: these are not

s are zeroed out).
 3,000

report any revenue and expense

ment would show:

2022 2023

ord accounts receivable just like any

WIP inventory account, i.e. a physical
ch has been billed to the customer; this

ty

2022
CIP T-account: Billings T-account: Accounts receivable T-account:

Credit Debit Credit Debit Credit

400 400
400 EOY 2021 350
1,500 EOY 2021 50
1,900 EOY 2022 1,500
1,100 1,050
3,000 EOY 2022 500
3,000 1,100
- EOY 2023 1,600
EOY 2023 -
3,000