CHAPTER 18
Revenue Recognition
*1. Realization and recognition;
1, 2, 3, 4,
1, 2, 3,
1, 2, 3, 4,
1
1, 2, 3, 4,
11, 29
5
9
*3. Long-term contracts.
17, 18,
19, 29
10, 11
15,16,
17, 18
6, 7, 15, 16,
17
14, 15, 16,
7, 8, 9,
12, 13, 14,
1, 2, 3, 4, 5,
1, 2, 3, 6
*4. Installment sales.
24, 25, 26,
27, 28, 29
22, 23, 24
11, 12, 14
20, 21, 23,
12, 13, 14
19, 20, 21,
1, 8, 9, 10,
1, 2, 3
*5. Repossessions on
installment sales.
13
21, 25, 26
10, 11, 12,
13, 14
*6. Cost-recovery method;
deposit method.
20, 21, 22,
30, 31
15
23, 24
7
*7. Franchising.
32, 33,
34, 35
16
27, 28
8
CA18-3
1. Describe and apply
6, 7, 8, 9
CA18-1,
CA18-3,
2. Describe
accounting issues
1, 2, 3, 4, 5, 6
1, 2, 3, 4, 5, 6,
7, 8, 9, 10, 11
1
CA18-1,
CA18-2,
6, 7, 16, 17
3. Apply the
percentage-of–
7, 8
12, 13, 14,
15, 16, 17
1, 2, 3, 4,
5,
CA18-6
16, 17
4. Apply the
completed-contract
9, 10
12, 16,
17, 18
1, 2, 3, 5,
6, 7, 15,
CA18-7
5. Identify the proper
accounting for
11
18
5, 6, 7, 15
23, 24, 25, 26
11, 12, 13,
6. Describe the
12, 13, 14
19, 20, 21, 22,
1, 8, 9, 10,
7. Explain the cost-
15
23, 24
*8. Explain revenue
16
27, 28
CA18-8
ASSIGNMENT CHARACTERISTICS TABLE
E18-1
Revenue recognition—point of sale.
Simple
5–10
E18-2
Revenue recognition—point of sale.
Simple
5–10
E18-3
Revenue recognition—point of sale.
Simple
5–10
E18-4
Revenue recognition—point of sale.
Simple
10–15
E18-5
Right of return.
Simple
5–10
E18-6
Revenue recognition on book sales with high returns.
Moderate
15–20
E18-7
Sales recorded both gross and net.
Simple
15–20
E18-8
Revenue recognition on marina sales with discounts.
Moderate
10–15
E18-9
Consignment computations.
Simple
15–20
E18-10
Multiple-deliverable agreement.
Simple
10–15
E18-11
Multiple-deliverable agreement.
Simple
5–10
E18-12
Recognition of profit on long-term contracts.
Moderate
20–25
E18-13
Analysis of percentage-of-completion financial statements.
Moderate
10–15
E18-14
Gross profit on uncompleted contract.
Simple
10–12
E18-15
Recognition of profit, percentage-of-completion.
Moderate
25–30
E18-16
Moderate
15–20
E18-17
Recognition of profit and balance sheet amounts for long-term
contracts.
Simple
15–25
E18-18
Long-term contract reporting.
Simple
15–25
E18-19
Installment-sales method calculations, entries.
Simple
15–20
E18-20
Analysis of installment-sales accounts.
Moderate
15–20
E18-21
Gross profit calculations and repossessed merchandise.
Moderate
15–20
E18-22
Interest revenue from installment sale.
Simple
10–15
E18-23
Installment-sales method and cost-recovery method.
Simple
10–15
E18-24
Installment-sales method and cost-recovery method.
Simple
15–20
*E18-25
Installment-sales—default and repossession.
Simple
10–15
*E18-26
Installment-sales—default and repossession.
Simple
15–20
*E18-27
Franchise entries.
Simple
14–18
*E18-28
Franchise fee, initial down payment.
Simple
12–16
P18-1
Comprehensive three-part revenue recognition.
Moderate
30–45
P18-2
Recognition of profit on long-term contract.
Simple
20–25
P18-4
Recognition of profit and balance sheet presentation,
percentage-of-completion.
Moderate
20–30
P18-5
Completed contract and percentage-of-completion
with interim loss.
Moderate
25–30
P18-6
Long-term contract with interim loss.
Moderate
20–25
P18-7
Long-term contract with an overall loss.
Moderate
20–25
P18-8
Installment-sales computations and entries.
Moderate
25–30
P18-9
Installment-sales income statements.
Moderate
30–35
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
P18-10
Installment-sales computations and entries.
Complex
30–40
P18-11
Installment-sales entries.
Simple
20–25
inventory.
P18-13
Installment repossession entries.
Moderate
20–25
P18-14
Installment-sales computations and schedules.
Complex
50–60
P18-15
Completed-contract method.
Moderate
20–30
P18-17
Comprehensive problem—long-term contracts.
Complex
50–60
CA18-1
Revenue recognition—alternative methods.
Moderate
20–30
CA18-2
Recognition of revenue—theory.
Moderate
35–45
CA18-3
Recognition of revenue—theory.
Moderate
25–30
CA18-4
Recognition of revenue—bonus dollars.
Moderate
30–35
CA18-5
Recognition of revenue from subscriptions.
Complex
35–45
CA18-6
Long-term contract—percentage-of-completion.
Moderate
20–25
CA18-7
Revenue recognition—membership fees, ethics.
Moderate
20–25
* CA18-8
Franchise revenue.
Moderate
35–45
SOLUTIONS TO CODIFICATION EXERCISES
CE18-1
Master Glossary
(a) Under the cost-recovery method, no profit is recognized until cash payments by the buyer,
including principal and interest on debt due to the seller and on existing debt assumed by the
CE18-2
According to FASB ASC 605-10–25-3 (Revenue Recognition—Recognition):
CE18-3
According to FASB ASC 910-605–50-2 (Contractors—Revenue Recognition—Disclosure):
CE18-4
According to FASB ASC 605-10–25-4 (Revenue Recognition—Recognition):
55-7 through 55-9, the installment-sales method apportions collections received between cost recov-
1. A series of highly publicized cases of companies recognizing revenue prematurely has caused
the SEC to increase its enforcement actions in this area. In some of these cases, significant
3. The revenue recognition principle indicates that revenue is recognized when it is 1) realized or
realizable and 2) when it is earned.
4. Revenues are recognized generally as follows:
(a) Revenue from selling products—date of delivery to customers.
6. The three alternatives available to a seller that is exposed to risks of ownership due to a return of
the product are:
(2) Recording the sale, but reducing sales by an estimate of future returns.
7. GAAP requires that such sales transactions not be recognized as current revenue unless all of
the following six conditions are met:
(2) The buyer has paid the seller, or the buyer is obligated to pay the seller, and the obligation
is not contingent on resale of the product.
(4) The buyer acquiring the product for resale has economic substance apart from that provided
by the seller.
(6) The seller can reasonably estimate the amount of future returns.
8. Bill and hold sales result when the buyer is not yet ready to take delivery but the buyer takes title
and accepts billing. Revenue is recognized at the time title passes, provided (1) the risk of
9. If a company sells a product in one period and agrees to buy it back in the next period, legal title
has transferred, but the economic substance of the transaction is that the seller retains the risks
11. A sale on consignment is the shipment of merchandise from a manufacturer (or wholesaler) to
a dealer (or retailer) with title to the goods and the risk of sale being retained by the manufacturer
who becomes the consignor. The consignee (dealer) is expected to exercise due diligence in
12. A multiple deliverable arrangement provides multiple products or services to customers as part of
13. Once the separate units of a multiple deliverable arrangement are determined, the amount paid
14. The two basic methods of accounting for long-term construction contracts are: (1) the percentage-
of-completion method and (2) the completed-contract method.
(1) The contract clearly specifies the enforceable rights regarding goods or services to be
(2) The buyer can be expected to satisfy all obligations under the contract.
(3) The contractor can be expected to perform the contractual obligations.
15.
Costs Incurred
X Total Revenue = Revenue Recognized
16. Under the percentage-of-completion method, income is reported to reflect more accurately the
production effort. Income is recognized periodically on the basis of the percentage of the job
17. The methods used to determine the extent of progress toward completion are the cost-to-cost
18. The two types of losses that can become evident in accounting for long-term contracts are:
(2) A loss related to an unprofitable contract.
The first type of loss is actually an adjustment in the current period of gross profit recognized on
the contract in prior periods. It arises when, during construction, there is a significant increase in the
19. The dollar amount of difference between the Construction in Process and the Billings on Con–
struction in Process accounts is reported in the balance sheet as a current asset if a debit and as
20. Under the installment-sales method, income recognition is deferred until the period of cash
collection. At the end of each year, the appropriate gross profit rate is applied to the cash
21. The two methods generally employed to account for cash received when cash collection of the sales
price is not reasonably assured are: (1) the cost–recovery method and (2) the installment-sales method.
22. The deposit method postpones recognizing a sale by treating the cash received from a buyer as
23. An installment sale is a special type of credit arrangement which provides for payment in periodic
installments over a predetermined period of time and results from the sale of real estate,
24. Under the installment-sales method of accounting, emphasis is placed on collection rather than
sale. Because of the unique characteristics of installment sales, particularly the longer collection
period and higher risk of loss through bad debts, gross profit is considered to be realized in
25. In the application of the installment-sales method, most companies record operating expenses
without regard to the fact that some portion of the year’s gross profit is to be deferred revenue.
26.
Year
Cash
Collected
X
*Gross Profit
Percentage
=
Gross Profit
Recognized
27. When interest is involved in installment sales, it should be separately accounted for as interest
28. With respect to the income statement, the degree of detail to be reported frequently will vary,
depending upon the magnitude of installment-sales revenues in relation to total sales. If install-
(1) Total, (2) Regular Sales, and (3) Installment Sales. Obviously, many variations are possible
and should be used to meet the necessities of information and full disclosure.
29. (a) Income (gross profit) on certain installment sales may be recognized on a basis of:
Gross Profit
X Collections.
30. Under the cost-recovery method, revenue is recognized (along with the relevant cost of goods sold)
in the period of the sale. However, the gross profit is deferred and is not recognized in the income
*31. Under the deposit method, revenue is not recognized. The deposit method treats cash advances
and other payments received as refundable deposits. The sales transaction is not considered
*32. It is improper to recognize the entire franchise fee as revenue at the date of sale when many of
*33. In a franchise sale, the franchisor may record initial franchise fees as revenue only when the
franchisor makes “substantial performance” of the services it is obligated to perform. Substantial
*34. Continuing franchise fees should be reported as revenue when they are earned and receivable
from the franchisee, unless a portion of them have been designated for a particular purpose. In
*35. (a) If it is likely that the franchisor will exercise an option to purchase the franchised outlet, the
initial franchise fee should not be recorded as a revenue but as a deferred credit. When
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 18-1
Accounts Receivable ……………………………………….. 103,400
Sales Revenue ($110,000 X 94%) ………………… 103,400
BRIEF EXERCISE 18-2
Accounts Receivable ………………………….. 78,000
(b) Sales Returns and Allowances …………………… 27,000
Allowance for Sales Returns and
Allowances
[(15% X $700,000) – $78,000] …………… 27,000
January income ………………………………………………………. $ 0
February income ($4,000 – $3,000) X 50% …………………. $500
March income ($4,000 – $3,000 X 30%) ……………………… $300
April income ($4,000 – $3,000 X 20%) ……………………….. $200
BRIEF EXERCISE 18-7
BRIEF EXERCISE 18-8
Current Assets
Accounts receivable ………………………………….. $ 240,000
Inventories
Construction in process ……………………… $2,450,000
BRIEF EXERCISE 18-10
Current Assets
Accounts receivable ………………………………….. $240,000
Inventories
Construction in process ……………………… $1,715,000
Installment Accounts Receivable, 2014 ………………… 150,000
Installment Sales Revenue ……………………………. 150,000
Cash ………………………………………………………………….. 54,000
Installment Accounts Receivable, 2014 …………. 54,000
Cost of Installment Sales …………………………………….. 102,000
Installment Accounts Receivable ………………….. 520
*[$275 – ($520 – $208)]
BRIEF EXERCISE 18-14
Current Assets
Installment accounts receivable due in 2015 ….. $ 65,000
BRIEF EXERCISE 18-15
2014 $0
2015 $2,000 ($15,000 – $13,000)
EXERCISE 18-1 (5–10 minutes)
(a) Notes Receivable ……………………………………. 600,000
EXERCISE 18-2 (5–10 minutes)
(a) Accounts Receivable ………………………………. 410,000
Sales Revenue …………………………………. 370,000
EXERCISE 18-3 (5–10 minutes)
(a) Grupo would recognize $1,000,000 of revenue at delivery.
EXERCISE 18-4 (10–15 minutes)
EXERCISE 18-4 (Continued)
(b) Revenue is reported at the time title passes if (1) the risks of ownership
has passed; (2) the buyer makes a fixed commitment of purchase the
EXERCISE 18-5 (5-10 minutes)
(a) Accounts Receivable ……………………………….. 1,500,000
Sales Revenue ………………………………….. 1,500,000
EXERCISE 18-6 (15–20 minutes)
(a) Uddin could recognize revenue at the point of sale based upon the time
EXERCISE 18-6 (continued)
(b) Based on the available information and lack of any information indi–
cating that any of the criteria in GAAP were not met, the correct treatment
is to report revenue at the time of shipment as the gross amount less
EXERCISE 18-7 (15–20 minutes)
(a) 1. 6/3 Accounts Receivable (Ann Mount) …. 8,000
Sales Revenue ………………………. 8,000