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Chapter 2: Question 21Q (page 61)

What are the five steps used to determine the proper time to recognize revenue?

Short Answer

Expert verified

The steps used to determine the appropriate time for recognition of revenue are:

  • Recognition of the contract,
  • Identification of performance obligations,
  • Determination of transaction value,
  • Allocation of transaction value
  • Recognition of revenue when the performance obligation is satisfied.

Step by step solution

01

Definition of Revenue Recognition

Revenue recognition is defined as the method of recognizing revenue at the point of sale or services rendered.

02

Steps used for determining the proper time for recognizing revenue

  • Identification of the contract with the customer: The contract can be written, verbal, or implied and should specify payment terms as well as rights of business and customers with regard to the goods or services that will be transferred.
  • Identifying performance obligations of the contract: Here, the performance obligation is identified. A performance obligation is an obligation made to the customer to transfer goods or services as per the norms stated in the contract.
  • Determining the price of the transaction: The third step specifies that the contract may involve fixed consideration as well as variable consideration. In the case of variable consideration, the amount one is entitled to be calculated with the help of the expected value method.
  • Allocation of the transaction price in accordance with the performance obligations: The prices must be set in relation to sale prices, prices stated in the contract, or at the marked price. It can also be estimated by using methods like adjusted market assessment, expected cost plus margin, or residual.
  • Recognition of revenue when the performance obligation is satisfied: In this step, revenue is to be recognized either overtime or at a point in time. In the case of recognizing revenue over time, a single method of measuring progress is used. If the performance fails to meet the norms set earlier, revenue is to be recognized at a point in time.

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Most popular questions from this chapter

How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?

Revenues, gains, and investments by owners are all increasing in net assets. What are the distinctions among them?

BE2-10 (L06) Identify which basic principle of accounting is best described in each item below.

  1. Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
  2. Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
  3. Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
  4. Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

What are some of the challenges to the IASB in developing a conceptual framework?

The life of a business is divided into specific time periods, usually, a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period.

  1. This practice is based on the accounting assumption that the life of the business consists of a series of time periods and that it is possible to measure accurately the results of operations for each period. Comment on the validity and necessity of this assumption.
  2. What has been the effect of the practice on accounting? What is its relation to the accrual system? What influence has it had on accounting entries and methodology?
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