What happens when service contracts are sold?
Deferred revenue increases, but service revenue doe not increase until service are performed
When a sale contracts includes multiple products or services
The FV of the contract must be allocated to the separate contracts elements. Revenue is recognized as each element is completed
How do you solve the amount of Gross Profit
Total sales - total cost = GP
How would you solve when dealing with contract incurred construction cost
Divided by the total cost and multiply by the total GP
To solve the method of percentage of completion recognition
Take the total actual cost incurred for each year and divide by the actual cost to incurred to complete
When revenue is recognized over time
Annual GP = [total cost incurred/total expected cost] * [total expected GP] - total GP previously recognized
When a company recognize revenue overtime for a long term contract
Income previously recognized would be used to calculate the income recognized within the previous years, not progress to date
Progress billing to date are not used to calculate income recognized
Billings are just invoicing milestones and do not directly addictions the profit calculation
Income previously recognized is used because
You want to avoid double counting profit already recorded in prior years
Income recognized for current year
= total GP * percentage of completion to date - income previously recorded
Percentage of completion is =
To the total cost incurred to date / total estimate cost
Incremental cost of obtaining a contract are
Cost that the company would not have incurred if the contract had not been obtained
Meaning if commissions are paid to the sales agent, it directly ties back to the contract
When calculating revenue recognized overtime
Add previous year with the current year given
Deferred revenue is considered a what
Liability until the service have been performed / fulfilled
When unearned rent that has been paid by tenant for less than 12 months
This would be considered current liability until its satisfied within a year from the financial statement date
(From a landlord perspective, if perspective from the tenant, this would be considered a current assets)
Within US GAAP, how would it recognize revenue overtime
The time of contract year as the service are performed
IF the buyer is benefiting as the seller performs per the contract, the revenue would be recognized overtime
Convertible securities are recognized when
computing Dilutive EPS if only the conversion is dilutive
Under the cost method, if charges are acquired and reissued at a lower price
The APIC / TS account will absorb the loss until reaching $0 with the remaining loss recognized as reduction (debit) to RE
If the services are similar in nature and provide in the same way
They don’t consider to be multiple service as a distinct obligation rather they should combine as one obligation contract
To solve for income from continuing operations
Include all revenue and expenses related to the ongoing business
Net sales - COGS - Expenses +/- on extinguished
If a company signs a 2+ year contract and wants to modify the contract within the period of the contract
The scope of the original contract needs to increase through the additional distinct goods and service
