FAST I exam 2 reviewChapter 5 Revenue Recognition - Realization principle: record revenue when the earnings process is complete, reasonable certainty as to the collectability of the asset (cash) o SAB:  Persuasive evidence of arrangement, delivery/service performed, price is determinable, collectability is assured - Timeline:o Production: percentage of completion method o Delivery: point of delivery and completed contract o Cash collection: installment and cost recovery methods- Point of Sale: o Sales with buyback: can’t recognize rev b/c risk is not transferredo With right of return: can recognize rev. if company can estimate the rate of returno Sales on consignment: can’t recognize rev. b/c risk has not been transferred- With Deferred Gross Profit (After Delivery)o Installment method: used for high uncertainty of collectability (w/o S&A expense)o Journal Entries:  Record sales: Installment receivable (a)  Inventory (-a) Deferred GP (xa)  Cash and profit: Cash (a) Installment r (-a)o Deferred GP (-xa) Realized GP (+profit, +SE)o Balance Sheet:  Current Assets:  Installment Receivables xx Less: deferred GP (xx) Install. R. net xxo Complications  Interest revenue must be separate from sales  Uncollectible accounts: potential for repossession Must record losses if likely and repossession won’t cover costs o Journal entry (not reposed, with loss)  Deferred GP (-xa)  Loss (+loss)• Installment r (-a) o Journal entry (repossessed with est. value)  Deferred GP (-xa) Inventory (+a) at fair value  Loss (+loss)• Installment receivable (-a)o Cost recovery method: (no reasonable basis for estimating collectability)  Recognizes no profit until cash payments by the buyer exceed cost of inv. Sold  JE: cash• Installment rec.  installment rec. (+a)• inv. (-a)• deferred GP (+xa) Until cash > cost, then cash – cost = deferred GP debit and realized GP credit- Revenue recognition BEFORE delivery o Percentage of completion method: (more frequent, buyer/seller have rights, estimates of progress are reliable, buyer can satisfy obligations, seller expected to perform) 7 steps: • % of completion (cost in yr/total projected costs)• Estimated TP (total contract – total projected)• Cum. Est. revenue to date (total contract x %)• Cum. Est. profit to date (TP x %)• Inc. rev. for the yr (CER 1-CER0)• Inc. profit for the yr (CEP1-CEP0)• Expensed for the yr (IR – IP)  JE’s • Construction in progress (+a) cost incurred in yro CASH, A/P (-a)• Accounts receivable (a) o Billings (+xa)• Cash (+a)o A/R (-a)• CIP (+a) – gross profit • Construction expense (+e)o Construction rev (+r)• Billings on contract (-xa)o CIP (-a) – only at the last year, for the complete contract price  CIP account: last year’s balance + Cost incurred + GP  Effect in IS: • Revenue on contracts - Construction expenses= Gross profit  Effect on BS: • Assets: A/R and Cost & profit in excess of billings  With Loss: periodic – record as a credit to the CIP account; Entire project – fully recognized in the first period loss is anticipated, credit to CIP accounto Completed Contract method: short-term contracts, inherent hazards, can’t meet POC  Only recognized at point-of-sale  Revenue, expenses, profit JE only made at the end with the full amounts o Franchise Sales:  Initial franchise fees: recognized when earnings process is complete  Continuing franchise fees: recognized over time as services are performedo IFRS – only two primary standards to rev. rec.; lack of guidance on important areas, requires cost recovery method Chapter 7 Cash and Receivables - Cash: currency, balances in checking accts (minus restrictions), items for deposit like checks - Cash equivalents: short-term, highly liquid invst. Of less than 3 months maturity o Money market fundso Treasury bills and commercial paper - Restricted cash – ON BS: cash restricted for short-term loans = CA; cash restricted for long term loans: NCA (LT investments, sinking fund, other LT assets)- T-accounts for A/R and ADA: o A/R  Beg Credit sales collections Reinstate collections reinstate Writeoffs  End o ADA Beg  Reinstate Write-offs  BDE End - Trade discounts o Customers billed net of discounts, not recognized in accounting records (NO JE)- cash or sales discounts o 2/10, n/30 o Gross method: do not include the sales discount at first JE  A/R and Sales rev Cash, sales discount and A/R Cash and A/R remainingo Net method: includes the sales discount at first JE A/R and Sales rev minus the expected discount Cash, A/R if discount is take Cash, and A/R and interest Revenue if discount NOT taken - Sales returns o Action return JE: Sales returns (+xr)• A/R  Inventory • COGSo Adjusting entries  Sales returns (xr) estimated = total sold price x expected return rate – already SR• Allowance for sales returns (xa) Inventory: estimated returns (a)• COGS (percentage of sales returns estimated)- Uncollectible Accounts Receivableo Bad debt expense (goes on IS as selling expense), ADA goes on BS o % of credit sales method Add onto the previous ADA balance to get post-adjusting balance of ADAo % of accounts receivable method  Estimation becomes ENDING balance of ADA o % of receivable AGING method  Estimation becomes ENDING balance of ADA - Payment of uncollectible written off o A/R and ADAo Cash and A/R- Receivables: Accounts R, Notes R, and other non-trade Receivables - Interest bearing Notes o N/R and Casho Interest receiv. And Interest Rev. – at YEAR ENDo Cash  Note receivable Interest rec. Interest rev. - “non interest bearing notes” in exchange for goods o Discount = interest taken off from the face value at the beginning of the period o Notes rece.  Discount of N/R Sales rev. o Cash o Discount of N/R Interest rev.  Note rec. - Transfers of N/R o First record: interest receivable (amount x rate x months kept) and Interest Rev.o Then calculate:  Face amount  + interest total if held to maturity  = value at maturity  Less discount rate (total x rate x months left until maturity) = cash proceeds to company from bank o Casho Loss on sale of N/R Notes rec.  Interest receivable - Secured borrowing (restricts A/R in BS for borrowing)o Casho Financial charge  N/Po Cash o Sales discount  A/R o Interest expo Notes