PROBLEM 18.11 (Continued)
2022
Costs to date (12/31/22)……………………..…………..
$2,100,000
Estimated costs to complete ………………………….
0
(b)
No profit or loss in 2020
2021
$1,900,000
(2,000,000)
$ 100,000
2022
$1,900,000
100,000
$ 100,000
(a) A company recognizes revenue in the accounting period when a
performance obligation is satisfied—the revenue recognition principle.
A key element of the revenue recognition principle is that a company
1. The customer receives and consumes the benefits as the seller
performs.
2. The customer controls the asset as it is created or enhanced (e.g.,
a builder constructs a building on a customer’s property).
3. The company does not have an alternative use for the asset
created or enhanced (e.g., an aircraft manufacturer builds
specialty jets to a customer’s specifications) and either (a) the
*PROBLEM 18.12
PROBLEM 18.12 (Continued)
(b)
1.
January 5, 2020
Cash…………………………….…………….
20,000
Notes Receivable ………………………..
100,000
2.
Unearned Franchise Revenue ……..
20,000
Franchise Revenue …………………
20,000
To record revenue from delivery of
franchise rights.
PROBLEM 18.12 (Continued)
(c) In this situation Amigos would recognize the entire franchise fee of
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 18.1 (Time 20–30 minutes)
Purpose—to provide the student an opportunity to describe the 5-step revenue recognition model and
CA 18.2 (Time 20–30 minutes)
CA 18.3 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the conceptual merits of recognizing revenue
CA 18.4 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the conceptual factors underlying the
CA 18.5 (Time 20–25 minutes)
Purpose— to provide the student with an understanding of the conceptual factors underlying the
CA 18.6 (Time 35–45 minutes)
Purpose—to provide the student an opportunity to explain how a magazine publisher should recognize
CA 18.7 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the criteria and applications utilized in the
CA 18.8 (Time 20–25 minutes)
Purpose—to provide the student an ethical situation related to the recognition of revenue from
membership fees.
*CA 18.9 (Time 20–25 minutes)
Purpose—to provide the student an opportunity to discuss the theoretical justification for use of the
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 18.1
(a) The 5-step model is as follows.
1. Identify the contract with customers.
A contract is an agreement that creates enforceable rights or obligations and (1) has
2. Identify the separate performance obligations in the contract.
A performance obligation is a promise in a contract to provide a product or service to a
customer. A performance obligation exists if the customer can benefit from the good or
3. Determine the transaction price.
The transaction price is the amount of consideration that a company expects to receive from
4. Allocate the transaction price to separate performance obligations.
If there is more than one performance obligation, allocate the transaction price based on
5. Recognize revenue when each performance obligation is satisfied.
A company satisfies its performance obligation when the customer obtains control of the
(1) The customer receives and consumes the benefits as the seller performs.
CA 18.1 (Continued)
(2) The customer controls the asset as it is created or enhanced (e.g., a builder constructs
a building on a customer’s property).
(b) A contract is an agreement between two or more parties that creates enforceable rights or
obligations. Contracts can be written, oral, or implied from customary business practice. By
(c) Companies often have to allocate the transaction price to more than one performance obligation in
a contract. If an allocation is needed, the transaction price allocated to the various performance
obligations is based on standalone selling prices. If this information is not available, companies
should use their best estimate of what the good or service might sell for as a standalone unit.
Depending on the circumstances, companies use the following approaches to determine
(d) Companies use an asset-liability model to recognize revenue. For example, when a company
delivers a product (satisfying its performance obligation), it has a right to consideration and
therefore has a contract asset. If, on the other hand, the customer performs first, by prepaying,
the seller has a contract liability. Companies must present these contract assets and contract
liabilities on their balance sheets. Contract assets are of two types: (1) unconditional rights to
CA 18.2
(a) A company recognizes revenue in the accounting period when a performance obligation is
satisfied—the revenue recognition principle. A key element of the revenue recognition principle is
Companies satisfy performance obligations either at a point in time or over a period of time.
Companies recognize revenue over a period of time if one of the following three criteria is met.
1. The customer receives and consumes the benefits as the seller performs.
The concept of change in control is the deciding factor in determining when a performance
obligation is satisfied. The customer controls the product or service when it has the ability to
direct the use of and obtain substantially all the remaining benefits from the asset or service.
Control also includes the customer’s ability to prevent other companies from directing the use of,
or receiving the benefit, from the asset or service. Indicators that the customer has obtained
control are as follows:
1. The company has a right to payment for the asset.
(b) Companies use an asset-liability model to recognize revenue. For example, when a company
delivers a product (satisfying its performance obligation), it has a right to consideration and
therefore has a contract asset. If, on the other hand, if the customer performs first, by prepaying,
CA 18.2 (Continued)
(c) Collectibility refers to a customer’s credit risk—that is, the risk that a customer will be unable to
pay the amount of consideration in accordance with the contract. Any time a company sells a
product or performs a service on account, a collectibility issue occurs. Will the customer pay the
promised consideration? Whether a company will get paid for satisfying a performance obligation
CA 18.3
(a) The point of sale is the most widely used basis for the timing of revenue recognition because in
most cases it provides the degree of objective evidence that control has transferred to the
customer. In other words, sales transactions with outsiders represent the point in the revenue–
generating process when most of the uncertainty about satisfying a performance obligation is
resolved.
(b) 1. Though it is recognized that revenue is earned throughout the entire production process,
generally it is not feasible to measure revenue on the basis of operating activity. It is not
feasible because of the absence of suitable criteria for consistently and objectively arriving
2. To criticize the sales basis as not being sufficiently conservative because accounts receiv-
able do not represent disposable funds, it is necessary to assume that the collection of
receivables is the decisive step in satisfying a performance obligation and that periodic
CA 18.3 (Continued)
The fact that some revenue adjustments (e.g., sales returns) and some expenses (e.g., bad
(c) Over time. This basis of recognizing revenue is frequently used by firms whose major
source of revenue is long-term construction projects. For these firms the point of sale is far
less significant to satisfying a performance obligation than is production activity because the
sale is assured under the contract (except of course where performance is not substantially
in accordance with the contract terms).
CA 18.4
(a) Recognizing revenue at point of sale is appropriate for many revenue arrangements because this
1. The company has a right to payment for the asset.
2. The company transferred legal title to the asset.
CA 18.4 (Continued)
(b) Companies recognize revenue over a period of time if one of the following three criteria is met.
1. The customer receives and consumes the benefits as the seller performs.
2. The customer controls the asset as it is created or enhanced (e.g., a builder constructs a
A company recognizes revenue from a performance obligation over time by measuring the
progress toward completion. The method selected for measuring progress should depict the
transfer of control from the company to the customer. Companies use various methods to
Both input and output measures have certain disadvantages. The input measure is based on an
established relationship between a unit of input and productivity. If inefficiencies cause the
productivity relationship to change, inaccurate measurements result.
CA 18.5
(a) Fahey will likely report $2,000,000 at the financial reporting date, the date of sale if using the
gross method. Under the net method Fahey will report $1,700,000 ($2,000,000 − $300,000).
(b) In situations where there may be returns or variable consideration, revenue on sales subject to
reversal may not be recognized (constrained). Therefore, companies may only recognize if (1)
they have experience with similar contracts and are able to estimate the returns and/or variable
(c) Collectibility refers to a customer’s credit risk—that is, the risk that a customer will be unable to
pay the amount of consideration in accordance with the contract. Any time a company sells a
product or performs a service on account, a collectibility issue occurs. The amount recognized is
not adjusted for customer credit risk. Rather, companies report the revenue gross and then
CA 18.6
(a) Cash receipts based on subscription sales should initially be credited to Unearned Sales
Revenue. As each monthly issue is distributed, Unearned Sales Revenue is reduced (Dr.) and Sales
CA 18.6 (Continued)
(b) To account for the sale of products with a right of return (and for some services that are provided
subject to a refund), the seller should recognize all of the following.
(c) Since the atlas premium may be accepted whenever requested, it is necessary for Cutting Edge
(d) The current ratio (Current Assets Current Liabilities) will change, but not in the direction Embry
thinks. As subscriptions are obtained, current assets (cash or accounts receivable) will increase
CA 18.7
(a) A company recognizes revenue in the accounting period when a performance obligation is
satisfied—the revenue recognition principle. A key element of the revenue recognition principle is
that a company recognizes revenue to depict the transfer of goods or services to customers in an
amount that reflects the consideration that it receives, or expects to receive, in exchange for
those goods or services.
The concept of change in control is the deciding factor in determining when a performance
CA 18.7 (Continued)
Companies satisfy performance obligations either at a point in time or over a period of time.
Companies recognize revenue over a period of time if one of the following three criteria is met.
1. The customer receives and consumes the benefits as the seller performs.
(b) Griseta & Dubel Inc., in effect, collects cash for merchandise credits far in advance of when
merchants furnish the goods. Thus, this is an example of upfront payments. In addition, since the
data indicate that about 5 percent of the credits sold will never be redeemed, it also has revenue
from this source unless these credits are redeemed. Griseta & Dubel’s revenues are recognized
when the performance obligation is met when credits are redeemed.
CA 18.8
(a) Honesty and integrity of financial reporting versus higher corporate profits are the ethical issues.
Nies’s position represents GAAP. The financial statements should be presented fairly and that