Revenue Recognition

Question 1

Contract liability journal entry

Answer 1

Date cash is received
Dr. Cash
Cr. Unearned sales revenue

Date obligation is performed
Dr. Unearned sales revenue
Cr. Sales revenue

Dr. COGS
Cr. Inventory

Question 2

Contract asset journal entry

Answer 2

Date you deliver first portion
Dr. Contact asset
Cr. Sales revenue

Date you deliver or finish last portion
Dr. Accounts receivable
Cr. Contact asset
Cr. Sales revenue

Question 3

Revenue Recognition Steps

Answer 3

• Identify contract with customer
• Identify performance obligation in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations in the contract
• Recognize revenue when performance obligations have been satisfied

Question 4

Note on allocating performance obligations

Answer 4

If the buyer has the ability to perform part of contract like installation and doesn’t then a separate obligation is recorded but if he doesn’t have the experience and its part of the cost then it is bulked together into 1.

Question 5

Percentage of completion steps

Answer 5

1. Degree of Completion: Costs to date divided by estimated total cost
2. Profit to date: Degree of completion times expected total profit
3. Profit recognized in current year: Profit to date minus previously recognized profit

Question 6

What is the expected total profit

Answer 6

Contract price minus estimated total costs