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ACT_320_Chapter_18
ACT_320_Chapter_18
18 Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
18-1
Overview of Revenue Recognition
18-2 LO 1
Overview of Revenue Recognition
18-4
Performance Obligation is Satisfied LO 1
L E A R N IN G O B J E C T IV E S
18 Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
18-5
The Five-Step Process
18-6 LO 2
The Five-Step Process
ILLUSTRATION 18-2 Five Steps of Revenue Recognition
18-7 LO 2
The Five-Step Process
ILLUSTRATION 18-2 Five Steps of Revenue Recognition
Step 5: Recognize
Boeing recognizes revenue of $100 million for the
revenue when
sale of the airplanes to Delta when it satisfies its
each performance
performance obligation—the delivery of the
obligation
airplanes to Delta.
is satisfied.
18-8 LO 2
L E A R N IN G O B J E C T IV E S
18 Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
18-9
Identify Contract with Customers—Step 1
Contract:
Agreement between two or more parties that creates
enforceable rights or obligations.
Can be
written,
oral, or
implied from customary business practice.
18-10 LO 3
Contract with Customers—Step 1
ILLUSTRATION 18-3 Contract Criteria for Revenue Guidance
18-11 LO 3
Contract with Customers—Step 1
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.
18-12 LO 3
Basic Accounting ILLUSTRATION 18-4
Basic Revenue Transaction
The journal entry to record the sale and related cost of goods sold is as follows.
July 31, 2014
Accounts Receivable 5,000
Sales Revenue 5,000
Cost of Goods Sold 3,000
Inventory 3,000
18-13 LO 3
Basic Accounting ILLUSTRATION 18-4
Basic Revenue Transaction
Margo makes the following entry to record the receipt of cash on August 31, 2014.
August 31, 2014
Cash 5,000
Accounts Receivable 5,000
18-14 LO 3
Contract with Customers—Step 1
Contract 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.
18-15 LO 3
Contract Modifications
18-16 LO 3
Separate Performance Obligation
Prospective Modification
Company should
Account for effect of change in period of change as
well as future periods if change affects both.
Not change previously reported results.
18-18 LO 3
Prospective Modification
18-19 LO 3
Prospective Modification
ILLUSTRATION 18-6
Comparison of Contract Modification Approaches
18-20 LO 3
L E A R N IN G O B J E C T IV E S
18 Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
18-21
Separate Performance Obligations—Step 2
Type of Sale
Saleof
ofasset
asset
Sale
Saleof
ofproduct
product Rendering
Renderingaa Permitting
Permittinguse
useof
of other than
Transaction from inventory
from inventory service
service an asset
an asset
other than
inventory
inventory
Description Revenue
Revenuefromfrom
Revenue
Revenuefrom
from Revenue
Revenuefrom
from Gain
Gainor
orloss
losson
on
interest, rents,
interest, rents,
of Revenue sales
sales fees or services
fees or services
disposition
disposition
and
androyalties
royalties
Timing of Services As
Date Services Astime
timepasses
passes
Revenue Dateof
ofsale
sale(date
(date performed
Date
Dateof
ofsale
saleor
or
of delivery) performedand and or
or assetsare
assets are trade-in
Recognition of delivery) billable used trade-in
billable used
18-22 LO 4
Separate Performance Obligations—Step 2
The license and the consulting services are distinct but interdependent, and
therefore should be accounted for as one performance obligation.
18-24 LO 4
Performance Obligations—Step 2
ILLUSTRATION 18-8 Identifying Performance Obligations
The 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.
18-25 LO 4
L E A R N IN G O B J E C T IV E S
18 Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
18-26
Determining Transaction Price—Step 3
Transaction 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 consideration
Time value of money
Noncash consideration
Consideration paid or payable to the customer
18-27 LO 5
Determining Transaction Price—Step 3
Variable Consideration
Price dependent on future events.
May include discounts, rebates, credits, performance
bonuses, or royalties.
Companies estimate amount of revenue to recognize.
Expected value
Most likely amount
18-28 LO 5
Determining Transaction Price—Step 3
ILLUSTRATION 18-9 Estimating Variable Consideration
Most Likely Amount: The single most likely amount in a range of possible
consideration outcomes.
May be appropriate if the contract has only two possible outcomes.
18-29 LO 5
Variable Consideration ILLUSTRATION 18-10
Transaction Price
18-30 LO 5
Variable Consideration ILLUSTRATION 18-10
Transaction Price
18-31 LO 5
Variable Consideration
18-32 LO 5
Determining Transaction Price—Step 3
18-33 LO 5
ILLUSTRATION 18-12
Questions: (a) How much revenue should SEK Company record on July 1,
2014? (b) How much revenue should it report related to this transaction on
December 31, 2014?
Questions: (a) How much revenue should SEK Company record on July 1,
2014? (b) How much revenue should it report related to this transaction on
December 31, 2014?
Entry to record interest revenue at the end of the year, December 31, 2014.
Discount on Notes Receivable 54,000
Interest Revenue (12% x ½ x $900,000) 54,000
Companies are not required to reflect the time value of money if the time period
for payment is less than a year.
18-35 LO 5
Determining Transaction Price—Step 3
Noncash Consideration
Goods, services, or other noncash 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.
18-36 LO 5
Determining Transaction Price—Step 3
18-37 LO 5
ILLUSTRATION 18-13
VOLUME DISCOUNT
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,
2014, 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.
Questions: How much revenue should Sansung recognize for the first 3
months of 2014?
18-38 LO 5
ILLUSTRATION 18-13
Questions: How much revenue should Sansung recognize for the first 3
months of 2014?
Cash 679,000
Accounts Receivable 679,000
If 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 21,000
18-39 LO 5
L E A R N IN G O B J E C T IV E S
18 Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
18-40
Allocating Transaction Price to Separate
Performance Obligations—Step 4
Based 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.
18-41 LO 6
Allocating Transaction Price to Separate
Performance Obligations—Step 4 ILLUSTRATION 18-14
Transaction Price
Allocation
18-42 LO 6
L E A R N IN G O B J E C T IV E S
18 Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
18-43
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied-Step 5
Company satisfies its performance obligation when the
customer obtains control of the good or service.
18-44 LO 7
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied-Step 5
Recognizing revenue from a performance obligation over
time
► Measure progress toward completion
Method 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.
18-45 LO 7
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied-Step 5
Step in Process Description Implementation
ILLUSTRATION 18-20
Summary of the
Five-Step Revenue
Recognition Process
18-46 LO 7
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied-Step 5
Step in Process Description Implementation
18-47 LO 7
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied-Step 5
Step in Process Description Implementation
ILLUSTRATION 18-20
Summary of the
Five-Step Revenue
Recognition Process
18-48 LO 7
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied-Step 5
Step in Process Description Implementation
4. Allocate the If more than one The best measure of fair value
transaction performance obligation is what the good service could
price to the exists, allocate the be sold for on a standalone
separate transaction price based basis (standalone selling price).
performance on relative fair values. Estimates of standalone selling
obligation. price can be based on
1. adjusted market
assessment,
2. expected cost plus a margin
approach, or
ILLUSTRATION 18-20 3. a residual approach.
Summary of the
Five-Step Revenue
Recognition Process
18-49 LO 7
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied-Step 5
Step in Process Description Implementation
18-50 LO 7
L E A R N IN G O B J E C T IV E S
18 Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
18-51
Other Revenue Recognition Issues
Right of return
Consignments
Repurchase agreements
Warranties
Bill and hold
Nonrefundable upfront fees
Principal-agent relationships
18-52 LO 8
Right of Return
18-53 LO 8
Right of Return ILLUSTRATION 18-21
Recognition—Right of Return
RIGHT OF RETURN
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:
1. Three (3) products will be returned.
2. The costs of recovering the products will be immaterial.
3. The returned products are expected to be resold at a profit.
18-54 LO 8
Right of Return ILLUSTRATION 18-21
Recognition—Right of Return
Venden records the sale as follows with the expectation that three
products will be returned:
Cash 10,000
Sales Revenue [$9,700 x ($100 x 97)] 9,700
Refund Liability ($100 x 3) 300
Venden records the cost of goods sold with the following entry.
18-55 LO 8
Right of Return ILLUSTRATION 18-21
Recognition—Right of Return
18-56 LO 8
Repurchase Agreements
18-57 LO 8
ILLUSTRATION 18-22
Repurchase Agreements Recognition—Repurchase
Agreement
REPURCHASE AGREEMENT
Facts: Morgan Inc., an equipment dealer, sells equipment on January 1,
2014, to Lane Company for $100,000. It agrees to repurchase this
equipment on December 31, 2015, for a price of $121,000.
Cash 100,000
Liability to Lane Company 100,000
18-58 LO 8
ILLUSTRATION 18-22
Repurchase Agreements Recognition—Repurchase
Agreement
Morgan Inc. records interest and retirement of its liability to Lane Company
on December 31, 2014, as follows.
18-59 LO 8
18-60 LO 8
Bill-and-Hold Arrangements
18-61 LO 8
Bill-and-Hold Arrangements ILLUSTRATION 18-23
Recognition—Bill and Hold
18-62 LO 8
Bill-and-Hold Arrangements ILLUSTRATION 18-23
Recognition—Bill and Hold
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.
18-63 LO 8
Bill-and-Hold Arrangements ILLUSTRATION 18-23
Recognition—Bill and Hold
18-64 LO 8
Principle-Agent Relationships
18-65 LO 8
18-66 LO 8
Consignments
18-67 LO 8
ILLUSTRATION 18-25
Consignments Recognition—Sales on
Consignment
18-68 LO 8
ILLUSTRATION 18-25
Consignments Recognition—Sales on
Consignment
18-69 LO 8
Warranties
18-70 LO 8
ILLUSTRATION 18-26
Warranties Performance Obligations
and Warranties
WARRANTIES
Facts: Maverick Company sold 1,000 Rollomatics during 2014 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.
18-71 LO 8
ILLUSTRATION 18-26
Warranties Performance Obligations
and Warranties
18-72 LO 8
Nonrefundable Upfront Fees
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
18-74
Presentation and Disclosure
Presentation
Contract Assets and Liabilities
Contract assets are of two types:
1. Unconditional rights to receive consideration
because company has satisfied its performance
obligation.
CONTRACT ASSET
Facts: On January 1, 2014, 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, 2014. On March 1, 2014, Finn
delivers Product B to Obermine.
18-76 LO 9
ILLUSTRATION 18-29
Presentation Contract Asset Recognition
and Presentation
CONTRACT LIABILITY
Facts: On March 1, 2014, Henly Company enters into a contract to transfer
a product to Propel Inc. on July 31, 2014. It is agreed that Propel will pay the
full price of $10,000 in advance on April 1, 2014. The contract is
noncancelable. Propel, however, does not pay until April 15, 2014, and Henly
delivers the product on July 31, 2014. The cost of the product is
$7,500.
18-78 LO 9
ILLUSTRATION 18-30
Presentation Contract Liability Recognition
and Presentation
On receiving the cash on April 15, 2014, Henly records the following entry.
Cash 10,000
Accounts Receivable 10,000
On satisfying the performance obligation on July 31, 2014, Henly records the
following entry to record the sale.
Unearned Sales Revenue 10,000
Sales Revenue 10,000
18-79 LO 9
Presentation
18-80 LO 9
Presentation
Collectibility
Credit 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.
18-81 LO 9
Disclosure
18-82 LO 9
Disclosure
18-83 LO 9