sti81980_06_c06_p273-322.

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Summary Illustration of Income Recognition Methods

EXHIBIT 6.6

Comprehensive Illustration of Revenue

and Expense Recognition
(all dollar amounts in thousands)
Cash Basis of Accountinga

Period

Revenue

Expense

Income

1
2
3
4
5

$ 1,000
1,000
2,000
4,000
4,000
$12,000

$1,600
4,000
4,000

$9,600

$ (600)
(3,000)
(2,000)
4,000
4,000
$2,400

.......................................
.......................................
.......................................
.......................................
.......................................
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Percentage-ofCompletion Method
Period

Completed Contract Method

Revenue

Expense

Income

Revenue

Expense

Income

1 ..........

$ 2,000d

2
3
4
5

5,000e
5,000e

$12,000

$1,600
4,000
4,000

$9,600

$ 400
1,000
1,000

$2,400

12,000

$12,000

9,600

$9,600

2,400

$2,400

..........
..........
..........
..........
Total . . . . . .

Installment Methodb

Cost-Recovery-First Methodc

Period

Revenue

Expense

Income

Revenue

Expense

1
2
3
4
5

$ 1,000
1,000
2,000
4,000
4,000
$12,000

$ 800f
800f
1,600g
3,200h
3,200h
$9,600

$ 200
200
400
800
800
$2,400

$ 1,000
1,000
2,000
4,000
4,000
$12,000

$1,000
1,000
2,000
4,000
1,600
$9,600

..........
..........
..........
..........
..........
Total . . . . . .

Income
$

0
0
0
0
2,400
$2,400

aThe

cash basis is not allowed for tax or financial reporting if inventories are a material factor in generating income.
installment method is allowed for financial reporting only if extreme uncertainty exists as to the amount of cash to
be collected from customers. Its use for tax purposes is independent of the collectibility of cash.
cThe cost-recovery-first method is allowed for financial reporting only if extreme uncertainty exists as to the amount of
cash to be collected from customers. It is sometimes used for tax purposes.
d$1,600/$9,600  $12,000.
e$4,000/$9,600  $12,000.
f$1,000/$12,000  $9,600.
g$2,000/$12,000  $9,600.
h$4,000/$12,000  $9,600.
bThe

a. Calculate Blounts net income (revenue less expenses) on the contract during Year 2, Year 3,
and Year 4, assuming that it uses the percentage-of-completion method.
b. Repeat part a, assuming that it uses the completed contract method.
c. Repeat part a, assuming that it uses the installment method.
d. Repeat part a, assuming that it uses the cost-recovery-first method.

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