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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

ETHICS (Expense Recognition Principle) Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be recognized as assets are used up or liabilities are incurred. Accountants Ana Alicia and Ed Bradley argue whether it is better to allocate the expense of mothballing over the next 20 years or ignore it until mothballing occurs.

Instructions

Answer the following questions.

(a) What stakeholders should be considered?

(b) What ethical issue, if any, underlies the dispute?

(c) What alternatives should be considered?

(d) Assess the consequences of the alternatives.

(e) What decision would you recommend?

The treasurer of Landowska Co. has that conservatism is a doctrine that is followed in accounting and, therefore, proposes that several policies be followed that are conservative in nature. State your opinion with respect to each of the policies listed.

  1. The company gives a 2-year warranty to its customers on all products sold. The estimated warranty costs incurred from this year’s sales should be entered as an expense this year instead of an expense in the period in the future when the warranty is made good.
  2. When sales are made on account, there is always uncertainty about whether the accounts are collectible. Therefore, the treasurer recommends recording the sale when the cash is received from the customers.
  3. A personal liability lawsuit is pending against the company. The treasurer believes there is an even chance that the company will lose the suit and have to pay damages of \(200,000 to \)300,000. The treasurer recommends that a loss be recorded and a liability created in the amount of $300,000.

Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.

a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.

Retained Earnings 60,000

Accumulated Depreciation—Buildings 60,000

b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.

Inventory 21,000

Gain on Inventories 21,000

c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.

Equipment 135,000

Common Stock 135,000

d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.

e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.

Accounts Receivable 61,500

Sales Revenue 61,500

What is the basic accounting problem created by the monetary unit assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?

Selane Eatery operates a catering service specializing in business luncheons for large corporations. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Selane recognize revenue related to its catering service
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