Aantekeningen Intermediate Financial Accounting
HC 2 9 September
Chapter 3: revenue recognition
To recognize revenue, two conditions have to be satisfied:
1) The “critical event” of being earned
2) “measurable” of being realized
In some situations, with very high uncertainty, condition 1 and 2 might not be satisfied even after the
sale is completed.
Example 1:
Percentage of completion
2014: step 1: (Cost incurred/estimated total cost) = (240.000/800.000) = 30%
Step 2: estimated profit = 200.000
` Step 3: 30% * 200.000 = 60.000 (=estimated profit earned to date)
2015: Step 1: (544.000/800.000) = 64%
Step 2: 1.000.000 – 850.000 = 150.000
Step 3: 64% * 150.000 = 96.000
Step 4: 96.000 – 60.000 = 36.000
2016: Step 1: 100%
Step 2: 150.000
Step 3: 150.000
Step 4: 150.000 – 96.000 = 54.000
Journal entries:
2014:
1) Inventory: construction in progress 240.000
@ Account payable 240.000
2) Accounts receivable 280.000
@ Billings on construction in progress 280.000
3) Cash 210.000
@ Accounts receivable 210.000
4) Inventory: construction in progress 60.000
construction expenses 240.000
@ Revenue 300.000
We use billings on construction in progress and add inventory (as gross profit) because we keep the
physical asset and get financial asset. If we did not do that, we would count some assets double.
, 2015:
1) Inventory: construction in progress 304.000
@ Accounts payable 304.000
2) Accounts receivable 370.000
@ Billings construction in progress 370.000
3) Cash 390.000
@ Accounts receivable 390.000
4) Inventory: construction in progress 36.000
Construction expenses 304.000
@ Revenue 340.000
2016: (Year of completion)
1) Inventory: Construction in progress $306,000
@ Accounts payable $306,000
2) Accounts receivable $350,000
@ Billings on construction in progress $350,000
3) Cash $400,000
@ Accounts receivable $400,000
4) Inventory: Construction in progress $54,000
Construction expense $306,000
@ Construction revenue $360,000
5) To record completion and acceptance of the project:
Billings on construction in progress $1,000,000
@ Inventory: Construction in progress $1,000,000
Completed-contract method: Long-term construction projects
- Suppose it is not possible to determine expected costs with a high degree of reliability
- Percentage of completion then becomes inappropriate because “matching” fails
- Completed contract method postpones all revenue recognition (and expenses) until the period
of project completion
Installment sales method
Revenue recognition occurs as cash is collected
Journal entries:
(1) to record installement sales
accounts receivable: 2014 installment sales xxx
@ installment sales revenue xxx
(2) to record GOCS
cost of installment goods sold xxx
@ inventory xxx
(3) to record cash collections
cash xxx
@ accounts receivable: 2014 installment sales xxx
HC 2 9 September
Chapter 3: revenue recognition
To recognize revenue, two conditions have to be satisfied:
1) The “critical event” of being earned
2) “measurable” of being realized
In some situations, with very high uncertainty, condition 1 and 2 might not be satisfied even after the
sale is completed.
Example 1:
Percentage of completion
2014: step 1: (Cost incurred/estimated total cost) = (240.000/800.000) = 30%
Step 2: estimated profit = 200.000
` Step 3: 30% * 200.000 = 60.000 (=estimated profit earned to date)
2015: Step 1: (544.000/800.000) = 64%
Step 2: 1.000.000 – 850.000 = 150.000
Step 3: 64% * 150.000 = 96.000
Step 4: 96.000 – 60.000 = 36.000
2016: Step 1: 100%
Step 2: 150.000
Step 3: 150.000
Step 4: 150.000 – 96.000 = 54.000
Journal entries:
2014:
1) Inventory: construction in progress 240.000
@ Account payable 240.000
2) Accounts receivable 280.000
@ Billings on construction in progress 280.000
3) Cash 210.000
@ Accounts receivable 210.000
4) Inventory: construction in progress 60.000
construction expenses 240.000
@ Revenue 300.000
We use billings on construction in progress and add inventory (as gross profit) because we keep the
physical asset and get financial asset. If we did not do that, we would count some assets double.
, 2015:
1) Inventory: construction in progress 304.000
@ Accounts payable 304.000
2) Accounts receivable 370.000
@ Billings construction in progress 370.000
3) Cash 390.000
@ Accounts receivable 390.000
4) Inventory: construction in progress 36.000
Construction expenses 304.000
@ Revenue 340.000
2016: (Year of completion)
1) Inventory: Construction in progress $306,000
@ Accounts payable $306,000
2) Accounts receivable $350,000
@ Billings on construction in progress $350,000
3) Cash $400,000
@ Accounts receivable $400,000
4) Inventory: Construction in progress $54,000
Construction expense $306,000
@ Construction revenue $360,000
5) To record completion and acceptance of the project:
Billings on construction in progress $1,000,000
@ Inventory: Construction in progress $1,000,000
Completed-contract method: Long-term construction projects
- Suppose it is not possible to determine expected costs with a high degree of reliability
- Percentage of completion then becomes inappropriate because “matching” fails
- Completed contract method postpones all revenue recognition (and expenses) until the period
of project completion
Installment sales method
Revenue recognition occurs as cash is collected
Journal entries:
(1) to record installement sales
accounts receivable: 2014 installment sales xxx
@ installment sales revenue xxx
(2) to record GOCS
cost of installment goods sold xxx
@ inventory xxx
(3) to record cash collections
cash xxx
@ accounts receivable: 2014 installment sales xxx
