FAST I exam 2 review Chapter 5 Revenue Recognition o SAB Timeline Point of Sale Realization principle record revenue when the earnings process is complete reasonable certainty as to the collectability of the asset cash Persuasive evidence of arrangement delivery service performed price is determinable collectability is assured o Production percentage of completion method o Delivery point of delivery and completed contract o Cash collection installment and cost recovery methods o Sales with buyback can t recognize rev b c risk is not transferred o With right of return can recognize rev if company can estimate the rate of return o 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 xx Install R net o Complications 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 Interest revenue must be separate from sales Uncollectible accounts potential for repossession Must record losses if likely and repossession won t cover costs 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 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 of completion cost in yr total projected costs JE s Construction in progress a cost incurred in yr o 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 account o 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 performed o 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 funds o 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 o ADA Beg Credit sales Reinstate End Write offs collections collections reinstate Writeoffs Beg Reinstate BDE End Trade discounts cash or sales discounts o Customers billed net of discounts not recognized in accounting records NO JE 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 remaining o 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 Inventory A R COGS o 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 Receivable o 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 ADA o 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 ADA o Cash and A R Receivables Accounts R Notes R and other non trade Receivables Interest bearing Notes o N R and Cash o Interest receiv And Interest Rev at YEAR END o 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 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 Secured borrowing restricts A R in BS for borrowing Interest receivable Discount of N R o Cash o Discount of N R Sales rev Interest rev Note rec Transfers of N R o Cash o Loss on sale of N R Notes rec o Cash o Financial charge N P o Cash o Sales discount A R o Interest exp o Notes pay Cash Factoring without recourse factor assumes all risk control passed on fair value of cash recorded financing loss or expense is recognized Factoring with recourse transferor retains risk of uncollectibility meets 3 conditions JE without recourse o Cash o Loss of sale of receivable o Receivable from factor A R JE with recourse o Cash o Loss on sale of receivable o receivable from factor recourse liability A R Receivable Sale or Secured borrowing o Transfer w three conditions transferor doesn t have control or risks o Pledging disclose in debt note GAAP focuses on transfer of control of assets IFRS has to have transferred the rights to receive cash flows from the receivable and