ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Principles
Both methods attempt to report revenues that faithfully represent the
operations of the company so that future earnings and cash flows can be
predicted (relevance). With the percentage-of–completion method, companies
use subjective estimates (based on prior experience) of the percent
PROFESSIONAL RESEARCH
(a) See FASB ASC 605-15-15 (Predecessor Literature—FAS 48: Revenue
Recognition When Right of Return Exists)
(b) According to FASB ASC 605-15–15:
15-2 The guidance in this Subtopic applies to the following transactions:
a. Sales in which a product may be returned, whether as a
matter of contract or as a matter of existing practice, either by
the ultimate customer or by a party who resells the product to
(c) According to FASB ASC 605-15–25:
> Sales of Product when Right of Return Exists
25-1 If an entity sells its product but gives the buyer the right to return
the product, revenue from the sales transaction shall be recog–
nized at time of sale only if all of the following conditions are met:
PROFESSIONAL RESEARCH (Continued)
d. The buyer acquiring the product for resale has economic
substance apart from that provided by the seller. This condition
f. The amount of future returns can be reasonably estimated
(see paragraphs 605-15–25-3 through 25-4). Because detailed
record keeping for returns for each product line might be
(d) According to FASB ASC Codification 605-15-25:
25-3 The ability to make a reasonable estimate of the amount of future
returns depends on many factors and circumstances that will
vary from one case to the next. However, any of the following
factors may impair the ability to make a reasonable estimate:
a. The susceptibility of the product to significant external factors,
PROFESSIONAL RESEARCH (Continued)
c. Absence of historical experience with similar types of sales of
similar products, or inability to apply such experience because
PROFESSIONAL SIMULATION
Note: This assignment is available on the Kieso website.
Measurement
Computation of net income for 2015:
Revenues ………………………………………………………….. $5,500,000
Journal Entries
Construction in Process……………………………. 100,000
Materials, Cash, Payables …………………… 100,000
PROFESSIONAL SIMULATION (Continued)
Financial Statements
NOMAR INDUSTRIES, INC.
Balance Sheet
December 31, 2015
Current Assets
Accounts receivable ($230,000 – $202,500) …………………. $27,500
Explanation
Given these facts, a more appropriate revenue recognition policy would be
IFRS18-1
The general concepts and principles used for revenue recognition are
IFRS18-2
The cost-recovery method is preferable when the lack of dependable
estimates or inherent hazards cause forecasts to be doubtful.
IFRS18-3
Livesey should use the cost-recovery method. Under the cost-recovery
IFRS18-4
The percentage-of-completion method is preferable when estimates of
costs to complete and extent of progress toward completion of long-term
contracts are reasonably dependable. The percentage-of–completion method
should be used in circumstances when reasonably dependable estimates
can be made and:
(1) The contract clearly specifies the enforceable rights regarding
IFRS18-4 (Continued)
(2) The buyer can be expected to satisfy all obligations under the
contract.
IFRS18-5
Under the cost-recovery method, revenue is recognized up to the amount
IFRS18-6
Construction in Process …………………………………… 1,700,000
Materials, Cash, Payables ………………………….. 1,700,000
IFRS18-7
Construction in Process ………………………………………. 1,700,000
Materials, Cash, Payables. …………………………….. 1,700,000
IFRS18-8
(a)
2014—
$640,000
X $2,200,000 = $880,000
$1,600,000
IFRS18-9
(a) IAS 18, paragraphs 15-19 addresses revenue recognition when right of
return exists.
IFRS18-9 (Continued)
(d) An entity does not recognise revenue if it retains significant risks of
ownership. Examples of situations in which the entity may retain the
significant risks and rewards of ownership are:
1. the entity retains an obligation for unsatisfactory performance not
covered by normal warranties.
(e) The seller recognises revenue when the buyer takes title, provided:
1. it is probable that delivery will be made;
2. the item is on hand, identified and ready for delivery to the buyer at
IFRS18-10
(a) 2012 Revenues: £9,934.3 million.
IFRS18-10 (Continued)
(c) Revenue comprises sales of goods to customers outside the Group
less an appropriate deduction for actual and expected returns,
(d) Accruals for sales returns and loyalty scheme redemptions are
estimated on the basis of historical returns and redemptions and these