Chapter 17: Revenue Recognition

Vocabulary flashcards covering Chapter 17 revenue recognition topics, including the 5-step model, variable consideration, contract allocation methods, warranties, consignments, and long-term construction contracts.

Five Steps of Revenue Recognition

1) identify contracts w/ customers, 2) identify separate performance obligations, 3) determine transaction price, 4) allocate price to performance obligation, 5) recognize revenue when each performance obligation is satisfied.

Historical Cost

The original amount paid in the past for an asset.

Book Value

$$\text{historical cost} - \text{accum. deprec.}$$

Fair Value

What an asset is worth today in cash; non-cash consideration revenue is recorded based on this value.

Adjusted Market Assessment Approach

$$\text{tot cost of sale} \times \left(\frac{\text{FV of A}}{\text{Total FV of sale}}\right)$$

Residual Approach

An allocation approach where the company allocates one item's full market value and lumps the remainder to an activity or good whose fair value is unknown.

Expected Cost Plus Margin Approach

A transaction price allocation method where fair value is calculated as: $\text{cost}(1 + \text{mgn \%}) = \text{Fair value}$

installation equation (EC +M)

(cost (1+mgn) / independent $) OG price

equipment equation (EC +M)

(standalone $/ independent $) * OG price

independent $

standalone equiptment $ + (Install *(1+mgn))

Bill and Hold Agreements

A contract under which a company bills a customer for a product but retains possession until a certain point in the future; the sale is recorded when the item belongs to the customer.

Non-Refundable Upfront Fees

Payments collected from customers before the delivery of a product or service; recognized as revenue evenly over the period of service.

Year end SR &A w/ cash vs w/ AR difference

Cash- credit AP, AR- credit refund liability

both- debit est inventory returns, credit cogs

Refund Liability

A liability account connected to Sales Returns & Allowances ($\text{SR \& A}$) established for estimated customer refunds.

Estimated Inventory Returns

An asset account established at year-end reflecting the cost of inventory expected to be returned from sales.

Net Revenue

$$\text{net rev} = \text{gross rev} - \text{sales disc, ret. \& allow}$$

Repurchase Agreements entry for when sold back

debit interest exp, credit liabilities to ____

debit liability to ____ , credit cash

Assurance-Type Warranty

A warranty that is assumed with the item and included in the sale price; accounted for as an accrued expense with an estimated warranty liability recorded at year-end.

Service-Type Warranty

An additional warranty charged extra as a separate performance obligation; recognized as unearned warranty revenue at sale and amortized to revenue after the assurance warranty period has passed.

Consignor

The party that owns the goods and retains title until sold (e.g., a cruise company), recording inventory under inventory on consignment.

Consignee

The party that sells goods on behalf of the consignor (e.g., a travel agent) and earns commission revenue without recording the goods in their inventory.

entry for consignor sending goods to consignee

Debit: inventory(consignments)

Credit : finished goods inventory, cash (if shipping fees)

consignor adjusting entry for inv balance COGS

Debit: COGS

Credit: inventory (consignments)

% complete

cost incurred to date/ est total cost

cost incurred to date

previous costs + CY costs

est total costs

costs incurred to date + est cost to complete

revenue to recognize

% complete (full contract price) - previous year rev

end of first year warranty entry

debit warranty exp

credit warranty liability

End GP

(contract price - est total costs) *% complete

Cost-Recovery (Zero Profit) Method

year 1&2 - Rev + exp = costs during year / profit =0

last year- rev= costs to date , exp = costs in year , profit= total $- costs to date

Construction in Process (CIP)

(CY cost/ total cost) *transaction price

Billings on Long-Term Contracts entry

debit AR

Credit billings on LT contracts

CIP > Billings in Process

A balance sheet presentation where Construction in Process exceeds billings, reported as a current asset.

entry for construction costs during the ear

debit CIP

credit cash

CIP < Billings in Process

A balance sheet presentation where billings exceed Construction in Process, reported as a current liability.

% completion revenue recognition entry & last year for cost recovery

Debit : construction exps , CIP

Credit : rev on LT contracts

cost recovery revenue recognition entry

debit: construction expense

credit: revenue

Overall Loss on Long-Term Contract

A contract scenario where the expected total cost exceeds the contract price; the entire projected gross profit loss is recognized immediately in the current year, crediting Construction in Process ($\text{CIP}$).