Specific applications of revenue

LT Construction contracts

Recognized over time, but can also be done as point in time

Contract assets (Dr.) vs progress billings (Cr.) contra GL accounts

LT Construction contracts JE

Costs - Dr. Contract assets / Cr. Cash or AP

Billing - Dr. AR / Cr. Progress billings

Payment - Dr. Cash / Cr. AR

Rev/Exp Recognition - Dr. COGS, Dr. contract assets (profit) / Cr. Revenue

Completion - Dr. Progress billings / Cr. Contract assets

Steps for fixed price contracts (4)

1. Estimate expected profit or loss

2. Determine stage of completion by input (costs incurred/total cost) or output method (value certified/contract price)

3. Calculate revenue to be recognized (Contract price × step 2)

4. Ascertain COGS

Consignment

Consignor delivers a product to consignee to sell on their behalf, no control or legal title for consignee. Consignor continues to report inventory.

Performance is not met by transferring goods to consignee

When sold: Consignee pays proceeds net commission and reimbursable expenses, consignor recognizes sales revenue, consignee recognizes commission revenue

Right of return

Limit to amount recognized depending on if seller can estimate amount returned

No estimate - recognized after time period has passed.

Estimate - recognize percent not expected return and record refund liability (and refund asset for inventory)

Bill and hold arrangements

Entity bills a customer, but retains physical control until its transferred in the future - affects performance

All criteria must be met

Bill and hold criteria (4)

1. Substantive reasons

2. Product must be identified separately as belonging to customer

3. Readily available for transfer

4. Entity cannot use or re-sell product

Principal-agent arrangements

Principals are obligated to provide goods while agents arranges the transaction and does not control the goods

Principal records revenue and agent records commissions as revenue

Factors of agents (majority of 5)

Other party responsible for fulfilment

Doesn’t bear risk

Doesn’t set price

Commission consideration

No exposure to credit/non-payment risk

Refundable fees vs non-refundable

Refundable fees are only refundable up until a performance obligation has been met, at this point seller can retain fees and recognize

Non-refundable fees are assessed as separate obligations from delivery, and are recognized when obligation is met