ACC 100 Chapter Notes - Chapter 5: Tim Hortons, Common Application, Down Payment

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28 Jun 2018

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ACC - Chapter 5

Revenues: increases in economic resources resulting from ordinary activities such

as the sale of goods, the rendering of services, or the use by others of the entity’s

resources

Expenses are decreases in economic resources

Revenue Recognition Principle: revenues are recognized in the income statement

when they are earned

Most common application of the revenue recognition principle is to recognize

revenue at the time of sale

Various revenue recognition methods:

Manufactured goods and merchandise

Time-of-sale method: used by merchandising and manufacturing industries to

recognize when goods are sold.

Paying on account is revenue

Long Term Contracts

Percentage-of-completion method: used by contractors to recognize revenue

before the completion of a long-term contract

Over the life of a project rather than at its completion

Franchises

Franchise fees and equipment sales are generally recognized as income when

each restaurant commences operations and payments is received from the

franchisee (tim hortons ex)

Commodities

Production Method: revenue is recognized when a commodity is produced rather

than when it is sold

Agriculture and mining products

Readily convertible assets are interchangeable and can be sold at a quoted

price

One of the few instances where it is acceptable to recognize revenue prior to

the sale

Installment Sales

Installment Method: revenue is recognized at the time cash is collected

Real estates

Down payment, series of regular payments (years)

Defer revenue until cash is actually collected

Essentially cash basis accounting

Production and installment are on opposite ends of the spectrum

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Document Summary

Revenues: increases in economic resources resulting from ordinary activities such as the sale of goods, the rendering of services, or the use by others of the entity"s resources. Revenue recognition principle: revenues are recognized in the income statement when they are earned. Most common application of the revenue recognition principle is to recognize revenue at the time of sale. Time-of-sale method: used by merchandising and manufacturing industries to recognize when goods are sold. Percentage-of-completion method: used by contractors to recognize revenue before the completion of a long-term contract. Over the life of a project rather than at its completion. Franchise fees and equipment sales are generally recognized as income when each restaurant commences operations and payments is received from the franchisee (tim hortons ex) Production method: revenue is recognized when a commodity is produced rather than when it is sold. Readily convertible assets are interchangeable and can be sold at a quoted price.

Related Questions

Identify two categories of revenue for Panera Bread from the table in the article Revenue Recognition: Key differences between U.S. GAAP and IFRSs. Compare and contrast the companyâs current U.S. GAAP revenue recognition with the potential adoption of IFRS. Provide the IASB Framework or the IAS statement, the changes in revenue recognition as well as potential challenges the company may face in adoption.

Table:

Subject	U.S. GAAP	IFRSs
Concept/objective	realized or realizable and earned.	According to paragraph 83 of the IASB's Framework for the Preparation and Presentation of Financial Statements, revenue is recognized when (1) "it is probable that any future economic benefit" will flow to the entity and (2) such a benefit can be measured reliably. Further, paragraph 93 of the IASB Framework indicates that revenue normally must be earned before it can be recognized.
Definition of revenue	Paragraph 78 of FASB Concepts Statement No. 6, Elements of Financial Statements, defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations."	Paragraph 74 of the IASB Framework states, "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent." Paragraph 7 of IAS 18 defines revenue as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants."
Sale of goods or products	SAB Topic 13 indicates that revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Delivery has occurred (e.g., an exchange has taken place). The sales price is fixed or determinable. Collectibility is reasonably assured. In addition, ASC 605-15 provides guidance on product transactions that include a right of return. Further, various industry- and transaction-specific guidance is provided in other U.S. GAAP.	Under paragraph 14 of IAS 18, revenue from the sale of goods is recognized if all of the following conditions are met: The "entity has transferred to the buyer the significant risks and rewards of ownership of the goods." The "entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold." The "amount of revenue can be measured reliably." "[I]t is probable that the economic benefits associated with the transaction will flow to the entity." The "costs incurred or to be incurred in respect of the transaction can be measured reliably."
Rendering services	>Like revenue from product sales, revenue from service transactions should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Service has been rendered. The sales price is fixed or determinable. Collectibility is reasonably assured. Other than the limited guidance in >ASC 605-20, no specific guidance on the rendering of services exists under U.S. GAAP. The appropriate method for recognizing revenue in such transactions depends on the individual transaction but is usually based on the proportional performance as of the balance sheet date.	Paragraph 20 of IAS 18 states, "When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage [i.e., percentage] of completion of the transaction at the balance sheet date." Paragraph 20 goes on to list specific conditions for determining whether an outcome of a transaction can be estimated reliably. And subsequent paragraphs provide guidance on determining the stage of completion. Paragraph 26 of IAS 18 states, "When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable."
Software arrangements	ASC 985-605 provides guidance on recognizing revenue in a software arrangement.	There is no specific guidance on software revenue recognition in IFRSs. An entity should apply the provisions of IAS 18 as appropriate.
Construction-type contracts	ASC 605-35 provides guidance on construction-type contracts. ASC 605-35-25-90 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when dependable estimates cause the outcome to be doubtful), the completed-contract method is preferable. ASC 605-35-25-25 through 25-27, the customer must approve the scope and price of change orders before the related revenue can be recognized.	IAS 11, Construction Contracts, provides guidance on construction-type contracts. Paragraph 32 of IAS 11 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when the outcome of the contract cannot be estimated reliably), revenue is recognized to the extent that costs have been incurred, provided that the costs are recoverable. Use of the completed-contract method is prohibited under IFRSs. Paragraph 13 of IAS 11 specifies that when it is probable that the customer will approve the scope and price of a change order, the related revenue can be recognized.
Milestone method	ASC 605-28 provides guidance on the application of the milestone method for recognizing revenue in research or development arrangements.	There is no specific guidance in IFRSs on the application of the milestone method for recognizing revenue in research or development arrangements.
Multiple-element arrangements	ASC 605-25 provides guidance on multiple-element revenue arrangements and establishes detailed criteria for determining whether each element may be separately considered for recognition. This guidance does not apply to arrangements or deliverables that are within the scope of other authoritative literature (e.g., ASC 985-605).	Paragraph 13 of IAS 18 indicates that the recognition criteria under IAS 18 are usually applied separately to each transaction unless either of the following conditions applies: "[I]t is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction." Two or more transactions "are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole."
Bill-and-hold arrangements	The SEC staff lists specific criteria that must be met for revenue to be recognized in bill-and-hold arrangements before delivery of the product. (Non-SEC entities also use these revenue recognition criteria because no other authoritative guidance in U.S. GAAP addresses the accounting for these transactions.) The criteria restrict revenue recognition to limited circumstances.	Illustrative Examples to IAS 18 list criteria for recognizing revenue under bill-and-hold arrangements before delivery of the product. While the objective for recognizing revenue in bill-and-hold arrangements may be similar to that in U.S. GAAP, the criteria are not the same.
Gross versus net	ASC 605-45 provides guidance on whether to report revenue on the basis of the gross amount billed to the customer (as a principal) or the net amount retained by the company (as an agent).	Paragraph 8 of IAS 18 requires that revenue be reported on a net basis in agency relationships but does not provide specific guidance to consider. Improvements to IFRSs issued in April 2009) provides examples that indicate whether an entity is acting as a principal or as an agent.
Customer loyalty programs	Revenue recognition for customer loyalty programs is not specifically addressed in U.S. GAAP. (The EITF attempted to address this issue but did not reach a consensus.) Although entities account for customer loyalty programs in different ways, such programs are typically accounted for under ASC 605-25 as multiple-element arrangements or under an incremental-cost model.	IFRIC 13 indicates that customer loyalty programs are deemed multiple-element revenue transactions and that the fair value of the consideration received should be allocated between the components of the arrangement.
Rebates, discounts, incentives, and other consideration	ASC 605-50 indicates that consideration given by an entity to its customers is presumed to be a reduction of revenue unless an identifiable benefit whose fair value can be reasonably estimated is received.	Paragraph 10 of IAS 18 states that revenue "is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity." There is no specific guidance on other types of consideration given by an entity to its customers.
Specific industry and other guidance	Certain standards in U.S. GAAP provide specialized guidance on revenue recognition, including guidance that applies to specific industries and transactions.	IFRSs provide no (or limited) revenue recognition guidance that applies to specific industries or transactions.

greyhornet170

True/False

Indicate whether the sentence or statement is true or false. 1 point for each question

____ 1. The completed-contract method was developed to relate recognition of revenue on long-term construction-type contracts to the activities of a firm in fulfilling these contracts.

____ 2. Estimates of architects and engineers of percentage-of-completion are not acceptable under generally accepted accounting principles.

____ 3. The use of the direct write-off method is acceptable under generally accepted accounting principles.

____4. The method of estimating uncollectible accounts expense based on the accounts receivable balance emphasizes the determination of the net realizable value of the receivables.

____5. The "list" sales price less any trade discount is the amount at which the receivable and the corresponding revenue should be recorded.

____6. In a bank reconciliation statement, an outstanding check must be subtracted from the bank statement balance in determining the correct cash balance.

____ 7. Accounting for installment sales using the deferred gross profit approach requires determining a gross profit rate for the sales of each year, and establishing an accounts receivable and a deferred revenue account identified by the year of the sale.

____ 8. The deferred gross profit accounts are reported as liabilities under the installment sale method.

____ 9. The cost recovery method is often used when the circumstances surrounding a sale are too uncertain to use the installment sale method.

____ 10. In a bank reconciliation statement, the amount of a not-sufficient-funds check must be added to the depositor's cash balance in determining the correct cash balance.

pucelocust656

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 10â20 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 â0â 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 â 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)?

ACC 100 Chapter Notes - Chapter 5: Tim Hortons, Common Application, Down Payment

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