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331 Exam 3
3rd Exam
| Term | Definition |
|---|---|
| What are 2 critical aspects of financial reporting | Measuring and reporting revenue |
| Step 1 in Recognizing Revenue | Identify the Contract (legal rights of seller and customer established) |
| Step 2 in Recognizing Revenue | Identify the Performance obligation(s) (single or multiple) |
| Step 3 in Recognizing Revenue | Determine the Transaction price (amount seller is entitled to receive from customer) |
| Step 4 in Recognizing Revenue | Allocate the transaction price (Single - requires no allocation, multiple - allocate a portion to each performance obligation) |
| Step 5 in Recognizing Revenue | Recognize revenue when each performance obligation is satisfied (single - at a point in time or over a period of time, Multiple - at whatever time is appropriate for each performance obligation) |
| What are the indicators that control has transferred to the customer? | Customer has obligation to pay, legal title, physical possession, assumed the risks and rewards of ownership and accepted the asset. |
| Revenue is recognized over a period of time if any of what 3 criteria is met? | 1. The customer CONSUMES THE BENEFIT of the seller's work as it is performed 2. The customer CONTROLS THE ASSET AS IT IS CREATED 3. The seller is creating an asset that has NO ALTERNATIVE USE to the seller |
| Output - based estimate | Measured as the proportion of the goods or services transferred to date |
| Input - based estimate | Measured as the proportion of effort expended thus far relative to the total effort expected to satisfy the performance obligation. (resources you have put in compared to the total you expect to use) |
| A good or service is distinct if it is both... | 1. Capable of being distinct 2. SEPARATELY IDENTIFIABLE from other goods or services in the contract |
| A contract only exists if it... | Has commercial substance, has been approved by seller and customer, specifies the rights, specifics payment terms, and is probable that the seller will collect the amount. |
| What are not considered performance obligations | Prepayments, Quality assurance warranties, and right of return |
| What are considered performance obligations | Extended warranties, and options that provide a material right |
| Extended warranties | A warranty is an extended warranty if the customer is paying an additional fee for an above and beyond warranty. |
| Quality-assurance warrantities | Part of the performance obligation to deliver products of acceptable quality (considered fulfilling original obligation) |
| Right of return | Represents a potential failure to satisfy the original performance obligation to provide goods that the customer wants to keep |
| Variable Considerations | Portion of a transaction price depends on the outcome of future events EX: Construction - incentive payments |
| Methods of estimation | Expected value and most likely amount |
| Expected value calculation | Take bonus multiplied by chance you have of getting it and add it to the fixed amount. |
| Most likely amount | You go with the most probable outcome |
| Most likely amount (higher option) JE #1 | Debit deferred revenue and Bonus receivable Credit Service Revenue (Divide total by months in contract) |
| Most likely amount JE (If you actually receive the bonus) | Debit Cash Credit Bonus Receivable (Full Amount of bonus) |
| Most likely amount JE (If you don't receive bonus) | Debit Service Revenue Credit Bonus Receivable (Full amount) |
| Principal seller | Performance obligation is to provide goods and services (record total sales price paid by customers and COGS) |
| Agent Seller | (middleman) Performance obligation is to facilitate a transaction between a principal and a customer (only record commission it receives on transaction. |
| If Time value of money is a significant part of the contract, the seller should view the transaction price as consisting of 2 components... | 1. Delivery component (the cash price of goods) 2. Financing component (the interest considered paid to the customer (in the case of a prepayment) or the seller (in the case of a receivable) |
| If the seller purchases something from the customer for more than fair value it is considered... | a refund |
| Adjusted market assessment approach | Price if the product/services were sold in the market |
| Expected cost plus margin approach | Estimate the costs of satisfying a performance obligation and then add an appropriate profit margin |
| Residual approach | Subtract the sum of the known or estimated stand alone selling prices of other goods and services in the contract from the total transaction price of the contract |
| Licenses of functional intellectual property | transfer a right of use, recognize revenue at a point in time (a music download, requires no seller effort) |
| Licenses of symbolic IP | Transfer seller's IP with the understanding that the seller will undertake ongoing activities (need seller to maintain product) EX: Logos, brand names, franchise rights |
| Licenses of Exception | functional IP is viewed as transferring a right of access (and requiring revenue recognition over time) if both. Ex: occasional Updates/maintenance is required. |
| Bill and Hold arrangements | exist when a customer purchases goods but requests that the seller retain physical possession of the goods until a later date. |
| Which steps are critical for long term contracts | 2 and 5 |
| Journal entry to record construction costs incurred | Debit CIP Credit Cash, materials, etc |
| Journal entry to record progress on billings | Debit: A/R Credit: Billings on construction contract |
| Journal entry to record cash collections | Debit: Cash Credit: A/R |
| Equation to find revenue recognized this period | = (total estimated revenue x Percentage completed) - revenue recognized in prior periods |
| Closing Out contract journal entry | Debit: Billings on construction contract Credit: CIP |
| Periodic loss | Occurs for a project that is projected to be profitable overall but not in a certain period |
| Overall loss | projected to occur for entire project |
| Do you debit or credit CIP if you have a periodic loss | Credit |
| Sarbanes-Oxley Act requires: | A company to document its internal controls and assess their adequacy |
| COSO | Defines internal control as a process designed to provide reasonable assurance regarding the achievement of objectives |
| Trade discounts | A percentage reduction from the list price. Includes quantity discounts to large customers |
| Sales discounts | Reduction in the amount to be paid by a credit customer if paid within a specified period of time. EX: 2/10, n/30 |
| Gross Method for sales discounts | Assumes customers will NOT take the discount and then revenue is reduced for any discounts taken |
| Net Method for sales discounts | Assumes customers WILL take the discount then increases revenue for discounts forfeited |
| JE for Gross Method if discount is actually used | Debit Cash and Sales Discounts, Credit A/R |
| JE for Net Method if discount is not actually used | Debit cash, credit A/R and sales discounts forfeited |
| Allowance | Special price reduction may be given as an incentive for the customer to keep the merchandise rather than returning it |
| If a return occurs, then at the end of the reporting period... | Debit sales returns and credit refund liability |
| methods to account for credit losses | Direct write off method and allowance method |
| Direct Write-Off Method (Not GAAP) | Wait until a particular account is deemed uncollectible and write it off at that time. (overstates the balance in A/R in the periods prior to the write off) |
| Allowance Method | Uses allowance for uncollectible accounts, to reduce A/R to what the company expects to collect |
| Estimating the allowance for uncollectable accounts (2 approaches) | 1. Balance sheet approach 2. Income statement approach |
| Balance sheet approach | Company estimates what the ending balance of the allowance for uncollectible accounts should be, and then records the amount of bad debt expense necessary to adjust the allowance to that desired balance |
| Income statement approach | Estimate bad debt expense directly as a percentage of each period's net credit sales |
| Combined Approaches | Could estimate bad debts on a quarterly basis using the income statement approach and refine the estimate using the balance sheet approach at year end. |
| JE for write offs | Debit Allowance for uncollectable accounts Credit A/R |
| Recognition (measuring and reporting accounts receivable) | For most credit sales, revenue and the related receivables are recognized at the point of delivery |
| Initial Valuation (measuring and reporting accounts receivable) | Initially recorded at the amount of consideration the seller is entitled to receive. Affected by cash discounts and variable consideration such as sales discounts and sales returns. |
| Subsequent Valuation (measuring and reporting accounts receivable) | Initial valuation reduced by allowance for uncollectable accounts, so accounts receivable are shown at the amount of cash the seller expects to receive |
| Classification (measuring and reporting accounts receivable) | Almost always classified as a current asset |
| Interest of Notes formula | Face amount x annual rate x months/12 |
Created by:
sekavecr
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