BUSI 1004 Lecture Notes - Lecture 5: Accounts Receivable, Income Statement, Debits And Credits
4 Nov 2018
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Chapter 5: Revenue Recognition and Accounts Receivable
Revenue from the Sale of Goods
• Revenue from the sale of goods shall be recognized when all the following conditions have been
satisfied:
• The significant risks and rewards of ownership of the goods have been transferred to the consumer
• The amount of revenue can be measure reliably
• It is probably that the accounts receivable will be collected in the normal course of business
• The cost incurred or to be incurred in respect of the transaction can be measured reliably
Revenues from the Rendering of Services
• Service revenue is to be recognized on the percentage of completion basis if the following
conditions are present:
• The amount of revenue can be measured reliability
• It is probable that the accounts receivable will be collected in the normal course of business
• The stage of completion of the transaction at the reporting dat can be measured reliably
• The costs incurred for the transaction can be measured reliably
• If any of the above are not met, then the revenue shall be recognized only to the extent of the
expenses recognized that are recoverable.
Revenue from Contracts with Customers-New Proposal
Five step approach to revenue recognition:
1. Identify the contract(s) with a customer
2. Identify the separate performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the separate performance obligations
5. Recognize revenue when the performance obligations are completed
• This occurs when the customer obtains control of that good or service-this happens when the
customer has the ability to direct the use of, and receive the benefits from the good/service
Application of the percentage of completion
• % completion=costs incurred to date/total estimated costs to complete (Accumulative)
• ESTIMATE
• Revenues reported in a given year=total contract revenues x (% of completion end of year-% of
completion beginning of year)
• Profits recognized in a given year=revenue less costs incurred
Rendering of Services Example
A company sells 3 year extended warranties for $180
Assume that 100 of these extended warranties are sold on Jan 1, 20x1. In 20x1, the costs to service the
extended warranties are $3,000 and the expected costs in 20x2 and 20x3 are $6,000
In 20x2, the costs to service the extended warranties are $3,510 and the expected costs in 20x3 are
$2,790
The actual costs to service the extended warranties in 20x3 are $6,000
How much revenue and profit can be recognized on these contracts in each of the three years?
20x1
% of completion= cost incurred today/total estimate cost to complete
=3,000/3,000+6,000
=1/3=30%
Total Revenue=100x180
=18,000x1/3
=6,000
Costs=3,000
Profit=R-C
=6,000-3,000
=$3,000
20x2
% of completion=(3,000+3,510)/(3,000+3,510+2,790)
=6,510/9,300
=0.7
=70%
Revenue=18,000x(0.7-0.33)
=6,600
Costs Incurred=3,510
Profit=6,600-3,510
=$3,090
20x3
% of completion= 100% completion (we are done)
Document Summary
A company sells 3 year extended warranties for . Assume that 100 of these extended warranties are sold on jan 1, 20x1. In 20x1, the costs to service the extended warranties are ,000 and the expected costs in 20x2 and 20x3 are ,000. In 20x2, the costs to service the extended warranties are ,510 and the expected costs in 20x3 are. The actual costs to service the extended warranties in 20x3 are ,000. % of completion= cost incurred today/total estimate cost to complete. % of completion= 100% completion (we are done) Sales allowances: customer keeps merchandise but is given a credit. Sales discount: discounts given to customers for early payment of their accounts, n/30-payment due 30 days from invoice date, 1/20,n/30-deduct 1% of invoice amount if paid within 20 days, otherwise full amount is due in 30. Example: you just made a sale of ,000, terms 2/10, n/30.
