Chapter 6

Question 1

E6-6

relative fair value

residual value residual value

• if equip in unknown; if service is unknown

Answer 1

• relative fair value => calculated at a percentage (logical)
• residual value => you subtract the undelivered item (which is the service)

If the service value is not known - you can not separate the units so you will record the whole amount over the term of the contract

Question 2

A6-24

(completed contract method) - the five journal entries

Answer 2

• same 3 steps/journal entries to record:
  1. the costs of construction: Dr. CIP Cr. Cash/Payables
  2. progress billing: Dr. A/R Cr. Billings on construction in progress
  3. collections: Dr. Cash Cr. A/R
• NO recognition of revenue and gross profit - two entries at the end of the contract to recognize revenue and to close out the inventory and billing accounts

Question 3

A6-24 (% of completion method) - the four journal entries

Answer 3

• same 3 steps/journal entries to record:
  1. the costs of construction:

Dr. CIP

Cr. Cash/Payables

2. progress billing:

Dr. A/R

Cr. Billings on construction in progress

3. collections:

Dr. Cash

Cr. A/R

• gross profit recognized to date goes in CIP - one final entry at the end:

Dr. Billings on construction in progress

Cr. CIP - inv

Question 4

CIP

Answer 4

• inventory (current asset)
• actual costs to date
• gross profit recognized to date

Question 5

Billings on construction

Answer 5

Contra account to CIP

Question 6

How to calculate revenue to be recognized - % of completion

Answer 6

actual costs to date/estimated total cost = % 1st year = % x contract price = 1 st year 2nd year = % x contract price - REVENUE RECOGNIZED IN PRIOR YR(S)

Question 7

Gross profit - % of completion

Answer 7

1st year = revenue recognized - actual cost

2nd year = revenue recognized - actual costs

Question 8

Completed contract method => entries at the end of the contract

Answer 8

dr. Billings on construction in progress (revenue amount)
cr. Revenue from long-terms contracts
dr. Construction expenses (the actual expenses)
cr. CIP

Question 9

onerous contract

Answer 9

not profitable for the company who has an ‘onerous contract’

Question 10

consideration

Answer 10

what the entity receives in return for their goods and services

Question 11

arm’s length

Answer 11

unrelated parties

Question 12

commercial substance (a transaction has commercial substance)

Answer 12

= the transaction is a bona fide (=legitimate) purchase and sale - for business purposes (after the transaction, the entity will be in a different position and its future cash flow is expected to change)

Question 13

when supplies exceeds demands

Answer 13

you are able to negotiate a better deal than normal = concessionary terms => they create additional recognition and measurement uncertainty

Question 14

1. FOB shipping point
2. FOB destination

Answer 14

1. title passes at the point of shipment
2. title passes when the asset reaches the customer

Question 15

constructive obligation

Answer 15

= an obligation that is created through past practice (implicit or explicit obligations need to be recognized in the SFP)

Question 16

define revenue

Answer 16

an inflow of economic benefits (cash, receivable, or other consideration) arising from ORDINARY ACTIVITIES

Question 17

2 ways to account for revenue

Answer 17

1. earnings approach 2. contract-based approach (IASB still working on it)

Question 18

contract based approach focuses on… ( 5 steps to memorize)

Answer 18

…the contractual rights and obligations created by sales contracts

Question 19

earnings approach

Answer 19

• currently in place unders ASPE and IFRS - it is an IS approach => so the focus is on measuring revenues and costs AND recognizing revenue when is earned

Question 20

discrete earnings process

Answer 20

is when the earnings process has a critical event