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Chapter 18: Question 6Q (page 1031)

When is revenue recognized in the following situations? (a) Revenue from selling products, (b) revenue from services performed, (c) revenue from permitting others to use company assets, and (d) revenue from disposing of assets other than products.

Short Answer

Expert verified
  1. When the seller has transferred the ownership of the product to the buyer
  2. When services have been performed by the company
  3. When interest, rent, etc., are received in return for assets used by others.
  4. At the date of sale, revenue is recognized.

Step by step solution

01

Definition of Revenue Recognition

According to the revenue recognition principle, revenue is recognized when goods are exchanged for some consideration (amount) or when services are performed and receive some amount/cash in return.

02

Revenue recognized in the following situations

According to the revenue recognition concept, revenue is recognized in the following situations as follows:

  1. Revenue from selling products: Under this situation, revenue is recognized when the seller transfers the ownership rights of the product to the buyer. When the seller sells the product to the buyer and receives a considerable amount in return.
  2. Revenue from services performed: Under this situation, revenue is recognized when services are rendered to the customer or services performed and receive some considerable amount in return.
  3. Revenue from permitting others to use company assets: Under this situation, revenue is recognized when the company receives some amount as rent, royalty fee, interest, etc.,from others to use the company’s assets.
  4. Revenue from disposing of assets other than products: Under this situation, revenue is recognized at the time or the date of sale of the assets.

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Most popular questions from this chapter

(Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for \(200,000. In addition, as part of the contract, a performance bonus of \)40,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.

Instructions

(a) Determine the transaction price that Concrete Always should compute for this agreement.

(b) Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 90% and otherwise it will be finished 1 week late, determine the transaction price.

What methods are used in practice to determine the extent of progress toward completion? Identify some “input measures” and some “output measures” that might be used to determine the extent of progress.

Shaw Company sells goods that cost \(300,000 to Ricard Company for \)410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of \(40,000. The standalone selling price of the goods is \)370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete.

Instructions

(a) Prepare the journal entries (if any) to record the sale on January 2, 2017.

Shaw Company sells goods that cost \(300,000 to Ricard Company for \)410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of \(40,000. The standalone selling price of the goods is \)370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete.

Instructions

(b) Shaw prepares an income statement for the first quarter of 2017, ending on March 31, 2017 (installation was completed on June 18, 2017). How much revenue should Shaw recognize related to its sale to Ricard?

Identify the five steps in the revenue recognition process.
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