Whenever a product is sold, the seller earns and reports the revenue. However, in the real world such sales transactions are not as straight forward, and the principle of revenue recognition is one that creates the most issues for accountants. Now a days the process of selling has become quite complex. There are many issues and procedures involved. Customers have the option to make payments right away when making the sale, or can choose to make the payment in installments as agreed to in the sales contract. There are many credit and financing options available. Customers also have guaranteed return days. All of these incentives help make it easier for customers to buy products increasing sales for the seller; however, the job of an …show more content…
This is known as the matching principle. However the question that many CPAs ask is: when is it really earned? Is it earned when the sale contract is signed, the product is delivered to the customer or the payment of the product is received? Ronald Clark draws the following scenario to help illustrate this revenue recognition issue:
"Capitol Motors is in its first year of operations and as of December 30 has total revenues of $5 million, projected net income of $200,000, and total assets of $40 million (Capitol’s year-end is December 31). On December 31, a customer and Capitol Motors agree to terms on the purchase of a new automobile for $25,000. The customer signs and completes all paperwork for the sale but asks Capitol to hold the full-payment check until he can complete financing with a local bank. Because the bank has already closed for the day, it will be January 2 before the customer can release the check to Capitol. The customer already has a $30,000 line of credit approved by his bank. The Capitol Motors’ credit manager reviews the customer’s file and offers to finance the transaction through the dealership’s financing
Revenues are recognized at the POS, when a fixed sales price is established, and collection is probable. For most product sales, these criteria are met when a product is shipped. Online sales are deferred until the customer receives their product, and the transfer of liability is completed.
The conditions for this alternative are very similar to alternative #2 in the aspect that the only thing that has changed is the condition for the collectability. If we decide to recognize the partial revenue of $15,000 on October 4, 2015, when the customer pays the remaining $15,000, collectability is assured 100 percent because all the payment has been paid. In
Do you agree with this logic? No, I do not. It is not well understood because “accrual accounting can be difficult to understand” (Needles & Powers, 2012, p. 143). I saw this and thought, well it takes time to calculate and enter them, so it’s not so easy to just sell the service contracts and record all sales as revenue. There is a process, called recognizing the revenue.
Revenue is the gross inflow of economic benefits during the period arising in the ordinary course of activities. Revenue should be recognized when the future economic benefits that will flow to the entity can be measured reliably. The new standard will significantly change how companies recognize revenue. It creates a whole new codification in a new era of revenue recognition by replacing hundreds of pages of guidance that are specific for each industry to a single comprehensive standard applicable to virtually all industries. The recognition criteria are usually applied separately to each transaction, but sometimes and under specific circumstances, it is necessary to apply the recognition criteria to the separate recognizable parts or of a single transaction in order to reflect the substance of the transaction. In aviation industry, the revenue transaction or events takes a significant period of time in order to complete because of the nature of product delivering against the sum of money. The five‐step revenue recognition process for this transaction are as follows:
Commercial Capital Corporation is the leasing subsidiary of a major regional bank and offers a lease at 12.75 million per year for 4 years. The first payment is due upon delivery and installation. The rest of the payments are due each subsequent year at the beginning of the year. This cost includes the same service contract as what would have been obtained with purchase.
2. On the basis of the response to Question 1, discuss the revenue recognition accounting literature
For each of the specific contracts described in the case, please describe the best revenue recognition policy considering the criteria in SAB 101. (Onsetcom, Cataumet, Sandham, XLSemi, Technical Devices and Ashaban)
INVESTools should definitely capitalize these expenses. The practice of not capitalizing these expenses has led to routine recording of net losses
The third scenario involves the same $100 million borrowing capacity:, only each draw does not have its own maturity date specified. Instead, whatever outstanding balance remaining is due by the end of the three-year credit line term, or December 31, 2012. The first draw is made on June 30, 2010, in the amount of $70 million. Another draw for $15 million is made on September 30 of the same year, followed by another draw for $15 million on November 30. The only repayment made by Buck is that made on December 15, 2010, in the amount of $50 million.
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts that have been deferred related to embedded unspecified and specified software upgrades rights. The Company sells gift cards and records deferred revenue upon the sale of the card, which is relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized ratably over the service coverage periods.
SAB 104 lays down the following conditions that should all be fulfilled to enable revenue recognition in cases on non-delivery of goods: (1) The risks of ownership need to have been transferred to the purchasers, (2) The customers have made commitments, preferably written, to procure the goods, (3) The purchasers call for the ‘bill and hold’ transactions, (4) The buyers should be
Revenue from the provision of goods and all services is only recognized when the amounts to be recognized are fixed or determinable, and collectability is reasonably assured (Elliot B., Elliot J., 2007)
The revenue recognition principle is a foundation of accrual accounting and one of the main principles of GAAP. The revenue recognition principle is a set of guidelines that helps accountants to identify when a revenue event has taken place and how to appropriately record cash exchanges before, during, and after the revenue event. According to the revenue recognition principal, revenue must (1) be realized or realizable and (2) earned, in order to be recognized. According to the SEC revenue is realized when (1) Persuasive evidence of an arrangement exists, (2) Delivery has occurred or services have been rendered, (3) The seller’s price to the buyer is fixed or determinable, and (4) Collectability is reasonably assured. It is essential
13. Janfer Book Store purchased a new automobile that cost $10,000, made a down payment of $3,000, and signed a note payable for the balance. The entry to record this transaction is:
Revenues for license fees should be recognized when the product is delivered. This practice is in accordance with common industry practice and provides a more accurate accounting of when revenue is earned by the company. The current policy for recognizing revenue when the contract is signed as an accurate time period indicator is clearly contradicted by the associated receivables being outstanding in excess of 160 days. As industry norms indicate an average of a 62 day collection period, this indicates that the contract date is not a reasonable basis for estimating the degree of collectability for the receivable and that more accurate estimate measures exist.