🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
HomeClass Notes1,200,000CA670,000

ACCTG311 Lecture Notes - International Financial Reporting Standards, Income Statement, Gross Profit

24 views6 pages
School
University of Alberta
Department
Accounting
Course
ACCTG311
Professor
Kristie Dewald

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

We previously learned that in order to recognize revenue in the income statement, 3 criteria need to be met: Revenues and relates expenses are known or estimable. In certain situations, the performance criterion is satisfied over more than one accounting period. These would be common in the construction industry, for example. The problem with long-term contracts is that waiting until the goods are delivered at the end of the contract may not best reflect the efforts or activities of the business, as will be demonstrated with examples below. There are 2 methods permitted for recognizing the revenue when a long-term contract is involved: the completed contract method, and, the percentage of completion method, completed contract method (this is not permitted under international financial reporting. Standards, but is permitted under private entity standards) Under this method, revenue (and the related expenses) are not recognized until the contract is completed.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Class+
$8 USD/m
Billed $96 USD annually
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
30 Verified Answers

Related Documents

SMG AC 222 Lecture Notes - Lecture 6: Cash Cash, Accounts Receivable, Income Statement
ivorycrab864
ACC 110 Chapter Notes - Chapter 4: Financial Statement, Income Statement
greyrhinoceros682
ACC 110 Lecture Notes - Income Statement, Financial Statement
viridianzebra871

Related Questions

There are several differences between IFRS and GAAP in regardsto revenue recognition. First, there are differences in theconditions that must exist to recognize revenue from the sale ofgoods. For example, under IFRS, one of the conditions is that “Theentity has transferred to the buyer the significant risks andrewards of the goods.” Where as one of the GAAP conditions issimply that “Delivery has occurred.” Second, there are differencesin recognizing revenue from construction contracts. For example, inGAAP, “If certain criteria are met, the percentage-of-completionmethod is used. If those criteria are not met, the completedcontract method is used.” In IFRS, “The completed contract methodis prohibited. If the percentage-of-completion method is not usedbecause the final outcome cannot be reliably estimated, revenue islimited to the amount of recoverable costs incurred.” Third, thereare differences in recognizing revenue involving contingentconsideration. For example, under IFRS, if there is “theprobability that economic benefits associated with the transactionwill flow to the entity…revenue might be recognized prior toresolution of the contingency.” However, with GAAP, “Revenuerelated to contingent consideration should not be recognized untilthe contingency is resolved.” Lastly, in regards to customerloyalty programs, “there is not specific guidance related toaccounting for customer loyalty programs. However, IFRS states that“Credits awarded to program participants must be treated as aseparately identifiable component of a sales transaction.” PLEASECOMMENT ON THIS POST

Citation Builders, Inc., builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging from 10–20 homes and are typically sold during construction or soon after. To secure the home upon completion, buyers must pay a deposit of 10% of the price of the home with the remaining balance due upon completion of the house and transfer of title. Failure to pay the full amount results in forfeiture of the down payment. Occasionally, homes remain unsold for as long as three months after construction. In these situations, sales price reductions are used to promote the sale. During 2018, Citation began construction of an office building for Altamont Corporation. The total contract price is $23 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows: 2018 2019 2020 Costs incurred during the year $ 4,600,000 $ 10,925,000 $ 5,175,000 Estimated costs to complete as of year-end 13,800,000 5,175,000 — Billings during the year 2,300,000 11,500,000 9,200,000 Cash collections during the year 2,070,000 10,130,000 10,800,000 Also during 2018, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $860,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2018 and paid for in full for $860,000 each by the buyers. The completed homes cost $645,000 each to construct. The construction costs incurred during 2018 for the nine uncompleted homes totaled $3,870,000. Required: 1. Which method is most equivalent to recognizing revenue at the point of delivery? 2. Answer the following questions assuming that Citation uses the completed contract method for its office building contracts: 2-a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements? 2-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019? 2-c. What will Citation report in its December 31, 2018, balance sheet related to this contract? (Ignore cash.) 3. Answer the following questions assuming that Citation uses the percentage-of-completion method for its office building contracts. 3-a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements? 3-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019? 3-c. What will Citation report in its December 31, 2018, balance sheet related to this contract? (Ignore cash.) 4. Assume the same information for 2018 and 2019, but that as of year-end 2019 the estimated cost to complete the office building is $10,350,000. Citation uses the percentage-of-completion method for its office building contracts. 4-a. How much revenue related to this contract will Citation report in the 2019 income statement? 4-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2019? 4-c. What will Citation report in its 2019 balance sheet related to this contract? (Ignore cash.) 5. Which method of accounting should Citation Builders, Inc adopt for its single-family houses? 6. What will Citation report in its 2018 income statement and 2018 balance sheet related to the single-family home business (ignore cash in the balance sheet)?

Citation Builders, Inc., builds office buildings andsingle-family homes. The office buildings are constructed undercontract with reputable buyers. The homes are constructed indevelopments ranging from 10–20 homes and are typically sold duringconstruction or soon after. To secure the home upon completion,buyers must pay a deposit of 10% of the price of the home with theremaining balance due upon completion of the house and transfer oftitle. Failure to pay the full amount results in forfeiture of thedown payment. Occasionally, homes remain unsold for as long asthree months after construction. In these situations, sales pricereductions are used to promote the sale.

During 2016, Citation began construction of an office buildingfor Altamont Corporation. The total contract price is $20 million.Costs incurred, estimated costs to complete at year-end, billings,and cash collections for the life of the contract are asfollows:

Percentage of completion Costs incurred to date Estimated coststo complete Billings to Axelrod, to date

Required:

At 12-31-2016

10% $ 350,000 3,150,000 720,000

At 12-31-2017

60% $2,500,000 1,700,000 2,170,000

At 12-31-2018

100% $4,250,000 –0– 3,600,000

Costs incurred during the year
Estimated costs to complete as of year-end Billings during theyear
Cash collections during the year

2016

$ 4,000,000 12,000,000 2,000,000 1,800,000

2017

$ 9,500,000 4,500,000 10,000,000 8,600,000

2018

$4,500,000 — 8,000,000 9,600,000

Also during 2016, Citation began a development consisting of 12identical homes. Citation estimated that each home will sell for$600,000, but individual sales prices are negotiated with buyers.Deposits were received for eight of the homes, three of which werecompleted during 2016 and paid for in full for $600,000 each by thebuyers. The completed homes cost $450,000 each to construct. Theconstruction costs incurred during 2016 for the nine uncompletedhomes totaled $2,700,000.

Required:

1. Briefly explain the difference between recognizing revenueover time and upon project completion when accounting for long-termconstruction contracts.

2. Answer the following questions assuming that Citationconcludes it does not qualify for revenue recognition over time forits office building contracts:

a. How much revenue related to this contract will Citationreport in its 2016 and 2017 income statements?

b. What is the amount of gross profit or loss to be recognizedfor the Altamont contract during 2016 and

2017?

c. What will Citation report in its December 31, 2016, balancesheet related to this contract? (Ignore cash.)

3. Answer requirements 2a through 2c assuming that Citationrecognizes revenue over time according to per- centage ofcompletion for its office building contracts.

4. Assume the same information for 2016 and 2017, but that as ofyear-end 2017 the estimated cost to complete the office building is$9,000,000. Citation recognizes revenue over time according topercentage of comple- tion for its office building contracts.

a. How much revenue related to this contract will Citationreport in the 2017 income statement?

b. What is the amount of gross profit or loss to be recognizedfor the Altamont contract during 2017?
c. What will Citation report in its 2017 balance sheet related tothis contract? (Ignore cash.)
5. When should Citation recognize revenue for the sale of itssingle-family homes?
6. What will Citation report in its 2016 income statement and 2016balance sheet related to the single-family home business (ignorecash in the balance sheet)?