intermediate accounting i - spring 2013 sessions 5-6 scf rev. rec. installment sales long-term...
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Intermediate Accounting I - Spring 2013
Sessions 5-6SCF
Rev. Rec. Installment Sales
Long-term ContractsCash & Receivables
Intermediate Accounting I - Spring 2013
Realization Principle
Process must be complete
Collection must be assured
Intermediate Accounting I - Spring 2013
Revenue Recognition ASC 605-10-S99 (SAB 101)
C: collection must be assured
D: delivery must have occurred
E: persuasive evidence of an arrangement
F: fixed price
Intermediate Accounting I - Spring 2013
Points of Recognition
At delivery--usual approach Before delivery--L/T contracts After delivery--installment sales
Intermediate Accounting I - Spring 2013
Abusive Revenue Recognition
Bausch & Lomb Oracle Corporation “ship ahead” orders
Intermediate Accounting I - Spring 2013
Class Discussion
Why all the concern over revenue recognition?
Intermediate Accounting I - Spring 2013
General Considerations
See Graphic 5-3 in Chapter 5 Revenue recognition prior to delivery Revenue recognition at delivery Revenue recognition after delivery
Intermediate Accounting I - Spring 2013
Installment Sales
Cash receipts Pro-rate using gross profit percentage
Cost recovery method: Defer until after costs are covered
Intermediate Accounting I - Spring 2013
Special Revenue Issues
Right of return (distributors)
Consignment (transfer of risk)
Software and similar issues --ASC 985-605-25 (SOP 97-2) and ASC 605-25-25(EITF 08-1)
Intermediate Accounting I - Spring 2013
Software Revenue Recognition
SOP 97-2 Pro-rata based on revenue measurement Give consideration to related costs as well
EITF 08-1 Expands SOP 97-2 to situations other than s/w
Intermediate Accounting I - Spring 2013
Long-term Contracts
Methodology Entries Key Accounts Special Conditions
Intermediate Accounting I - Spring 2013
Key Accounts
Construction in progress-CIP
Billings (contra to CIP)
Cost of construction (similar to COGS)
Intermediate Accounting I - Spring 2013
Methodology
Percentage of completion Completed contract Disclose in Summary of Significant Accounting
Policies
Intermediate Accounting I - Spring 2013
Percentage of Completion
Determine costs to date Estimate total costs Calculate gross profit estimate
Intermediate Accounting I - Spring 2013
Entries-I For both methods:
Record construction costs (actual payments) CIP XXX
Cash, etc. XXX Record progress billings (actual billings)
A/R XXX
Billings (contra) XXX Record cash receipts (actual cash)
Cash XXX
A/R XXX
Intermediate Accounting I - Spring 2013
Entries-II For percentage of completion:
Record est. annual gross profit CIP XXX
Cost of constr. XXX
Revenue XXX Close out accounts
Billings XXX
CIP XXX
Intermediate Accounting I - Spring 2013
Entries-III For completed contract:
Record total gross profit CIP XXX
Cost of construction XXX
Revenue XXX Close out accounts
Billings XXX
CIP XXX
Intermediate Accounting I - Spring 2013
Special Conditions
Losses Single period: change in accounting estimate
Period amount Overall: change in accounting estimate
Total amount
Intermediate Accounting I - Spring 2013
Cash & Receivables
Cash Receivables Discounts & Returns Notes Receivable
Intermediate Accounting I - Spring 2013
Cash Most liquid asset Focal point on internal controls
Segregation of duties Cash equivalents--90 day rule Bank reconciliation Cash restrictions
Restricted cash Compensating balances Overdrafts
Intermediate Accounting I - Spring 2013
Bank Reconciliations
Balance per bank statement Add: deposits in transit Less: outstanding checks Equals corrected balance
Adjust your checkbook to the corrected balance
Intermediate Accounting I - Spring 2013
Accounts Receivable Value at net realizable value
Use the allowance for doubtful accts. Cash discounts--gross or net
Gross is preferred due to simplicityA/R xxx
Sales xxxCash xxxSales discount xxx
A/R xxx
A/R, net xxxSales, net xxx
Cash xxxA/R xxxInterest Revenue xxx
Gross
Net
Intermediate Accounting I - Spring 2013
Sales Returns
Provide an allowance if materialA/R xxx
Sales xxx
COGS xxx
Inventory
Sales Returns xxx
A/R xxx
Inventory xxx
COGS xxx
Sales Returns xxx
Allowance for Returns xxx
Invent.-Est.Rtns xxx
COGS xxx
Intermediate Accounting I - Spring 2013
Doubtful Accounts
Provide an allowance if materialBad Debt Exp. xxx
Allowance xxx
Allowance xxx
A/R xxx
A/R xxx
Allowance xxx
Cash xxx
A/R xxx
Income Statement:
•% of Credit Sales Approach
Balance Sheet:
•Aging Approach
Intermediate Accounting I - Spring 2013
Notes Receivable
Interest bearing…accrue interest Non-interest bearing…discount interest Use allowance to reflect bad debts
Intermediate Accounting I - Spring 2013
Financing Options Assigning and pledging
Assigning requires recording of the transaction Pledging requires disclosure
Factoring and securitization With and without recourse Securitization: purchase of A/R and resale as a security
Sales conditions: surrender of control
See Graphic 7-17
Intermediate Accounting I - Spring 2013
Discounting (transferring) the Note
Accrue interest at transfer date Add interest to maturity Deduct discount to determine cash See Illustration 7-18
Treat as sale or loan Sale treatment is preferred See Graphic 7-19