Revenue Recognition Illustartions

1. Sunshine Engineering is a civil engineering firm that specializes in bridge and tunnel construction as
well as flood control. In July 2010 the company has received a fixed price of Br.4,500,000, three-year
contract for a flood control project on the Awash River at an estimated cost of Br. 4,000,000. The
project is to be completed in October 2012. The following data pertain to the status of this contract
during the construction period. (Note that by the end of 2011, Sunshine has revised the estimated total
cost from Br.4,000,000 to Br.4,050,000.)
Item 2010 2011 2012
Costs to date Br. 1,000,000 Br. 2,916,000 Br. 4,050,000
Estimated costs to complete 3,000,000 1,134,000 -0-
Progress billings during the year 900,000 2,400,000 1,200,000
Cash Collections on Billings during the year 750,000 1,750,000 2,000,000
Operating expenses incurred during the year 40,000 50,000 60,000
Required:
a. Determine the gross profit or loss to be recognized for each year both under the percentage-of-
completion (cost-to-cost) & cost-recovery (zero-profit) method;
b. Prepare the necessary journal entries for each year both under the percentage-of-completion(cost-to-
cost) & cost-recovery (zero-profit) method; and
c. Show the financial statement presentation of the contract for each year both under the percentage-of-
completion (cost-to-cost) method & cost-recovery (zero-profit) method.

2. Assume the following information for a construction firm using the percentage-of-completion method.
2010 2011 2012
Total contract price Br. 4,500,000 Br. 4,500,000 Br. 4,500,000
Costs incurred to date (cumulative) 1,000,000 2,916,000 4,050,000
Anticipated costs to complete 3,000,000 1,468,962 -0-
Progress billings during the year 2,000,000 1,500,000 1,000,000
Cash Collections on Billings during the year 1,500,000 2,000,000 1,000,000
Required:
a. Determine the gross profit or loss to be recognized for each year both under the percentage-of-
completion (cost-to-cost) & cost-recovery (zero-profit) method;
b. Prepare the necessary journal entries for each year both under the percentage-of-completion(cost-
to-cost) & cost-recovery (zero-profit) method; and
c. Show the financial statement presentation of the contract for each year both under the percentage-
of-completion (cost-to-cost) method & cost-recovery (zero-profit) method.
3. Assume the following information for a construction firm.
Assume the following information for a construction firm using the percentage-of-completion method.
2010 2011 2012
Total contract price Br. 4,500,000 Br. 4,500,000 Br. 4,500,000
Costs incurred to date (cumulative) 1,000,000 2,916,000 4,050,000
Anticipated costs to complete 3,000,000 2,500,000 -0-
Progress billings during the year 2,000,000 1,500,000 1,000,000
Cash Collections on Billings during the year 1,500,000 2,000,000 1,000,000
Required:
a. Determine the gross profit or loss to be recognized for each year both under the percentage-of-
completion (cost-to-cost) & cost-recovery (zero-profit) method;
b. Prepare the necessary journal entries for each year both under the percentage-of-completion(cost-to-
cost) & cost-recovery (zero-profit) method; and
c. Show the financial statement presentation of the contract for each year both under the percentage-of-
completion (cost-to-cost) method & cost-recovery (zero-profit) method.
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4. Sales with Volume Discounts
Facts: ABC Company has an arrangement with its customers that it will provide a 4% volume discount to its
customers if they purchase at least Br.2million of its product during the calendar year. On march 31,2011, ABC has
made sales of Br.800,000 to DEF plc. In the previous two years, ABC sold over Br.3million to DEF in the period
April 1 to December 31.
Question: How much revenue should ABC recognize for the first three months of 2011?

5. Sales with Extended Payment Terms

Facts: On July 1, 2011, SEK Company sold goods to Grant Company for Br900,000 in exchange for a 4-year zero-
interest-bearing note in the face amount of Br1,416,163. The goods have an inventory cost on SEK’s books of
Br590,000.
Questions: a) How much revenue should SEK Company record on July 1, 2011? b) How much revenue should it
report related to this transaction on December 31, 2011?

6. Bill and Hold Sales

Facts: ARK Company sells Br450,000 of fireplaces to a local coffee shop, Green, which is planning to expand its
locations around the city. Under the agreement, Green asks ASK to retain these fireplaces in its warehouses until the
new coffee shops that will house the fireplaces are ready. Title passes to Green at the time the agreement is signed.
Question: Should ASK report the revenue from this bill and hold arrangement when the agreement is signed, or
should revenue be deferred and reported when the fireplaces are delivered?

7. Sales Subject to Installation/Inspection

Facts: Walta Company sells complex medical scanning equipment to physicians and hospitals. Installation takes
approximately three weeks and must be performed by Walta’s skilled technicians.
Question: When should Walta recognize the revenue related to the medical equipment?

8. Layaway Sales
Facts: Milano Company sells merchandise on the installment basis. As a result, it holds the goods until the final
payment is made.
Question: Should Milano recognize the sale at the time of sale or when it receives its last payment?

9. Sales with Right of Return

Facts: International Company is in the beta-testing stage for new laser equipment that will help patients who have
acid reflux problems. The product that International is selling has been very successful in trials to date. As a result,
International has received regulatory authority to sell this equipment to various hospitals. Because of the uncertainty
surrounding this product, International has granted to the participating hospitals the right to return the device and
receive full reimbursement for a period of 9 months.
Question: When should International recognize the revenue for the sale of the new laser equipment?

10. Sales with Buyback Agreements

Facts: Morgan plc., an equipment dealer, sells equipment to Lane company for Br135,000. The equipment has a
coist of Br115,000. Morgan agrees to repurchase the equipment at the end of 2 years at its fair value. Lane Company
pays full price at the sales date, and there are no restrictions on the use of the equipment over the 2 years.
Question: How should Morgan record this transaction?

11. Sales on Consignment

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Facts: Norton Manufacturing Co. ships merchandise costing Br36,000 on consignment to Best Value Stores. Norton
pays Br3,750 of freight costs, and Best Value pays Br2,250 for local advertising costs that are reimbursable from
Norton. By the end of the period, Best Value has sold two-thirds of the consigned merchandise for bBr40,000 cash.
Best Value notifies Norton of the sales, retains a 10% commission, and remits the cash due Norton.
Question: What are the journal entries that the consignor (Norton) and the consignee (Best Value) make to record
this transaction?

12. R & D Service Contract

Facts: ABC Bio-Tech has signed a contract to provide research and development services to DEF Company for 5
years. DEF must also use certain technology owned by ABC. The technology may not be sold or licensed by ABC
unless the service agreement is also accepted. Under terms of the arrangement, DEF pays a non-refundable upfront
technology fee of Br1 million on January 1, 2011. In addition, it must pay Br400,000 at the end of each year for 5
years for the related R&D.
Question: How should the upfront fee of Br1million be recognized and how should the Br400,000 annual payment
for the related R&D services be reported?

13. Advertising
Facts: Grand Company produces, publishes, and distributes telephone directories. Its revenue source arises from
advertisements placed by companies and individuals selling goods and services. In many cases, the amounts paid for
the advertising are received before the telephone directories are distributed.
Question: How should the advertising and the related costs associated with the production and distribution of the
directories be reported?

14. Internet Services

Facts: Lifelong Company offers various services for the senior citizen market. The company delivers internet-based
content (photos, albums, memoir writing, games, and much more) to keep senior citizens involved with their family
and friends. In addition, it provides ambassadors to help senior development facilities provide worthwhile activities
for its members. The services provided by Lifelong include a subscription that provides a mix of services. Recently,
the company has contacted with a large senior citizen organization called attic Angles to provide the standard service
package. The fee for this arrangement is Br300,000, to be paid on January 1, 2011. At this point, it is still somewhat
uncertain what will be the entire level of services provided as of January 1, 201. However, Lifelong is able to make a
reliable estimate of the level of costs that it will incur over the next 3 years of the contract. Lifelong estimates that
these costs will be Br120,000. A schedule of the costs incurred and the cumulative percentages complete related to
these costs is provided below:

December 31, December 31, December 31,

2011 2012 2013
Costs incurred 24,000 42,000 54,000
Cumulative costs to date 24,000 66,000 120,000
Cumulative percentage 20% 55% 100%
complete

Questions: a) How much revenue should Lifelong record in 2011 related to the arrangement with Attic Angles?
b)How much revenue should Lifelong record in 2012 related to the arrangement with Attic Angles?

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