Concept explainers
Revenue recognized point of long term contract
A long-term contract qualifies for revenue recognition over time. The seller can recognize the revenue as per percentage of the completion of the project, which is recognized as revenue minus cost of completion until date.
If a contract does not meet the performance obligation norm, then the seller cannot recognize the revenue till the project is complete.
The revenue recognition principle
The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.
To explain: The manner in which IFRS and GAAP methods affect revenue recognition, cost of construction, and gross profit over the life of a profitable contract.
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INTERMEDIATE ACCT VOL.2>CUSTOM<
- Which of the following statements is not applicable to contract acquisition costs under ASC Topic 606 guidance for revenue recognition? Incremental costs of acquiring a contract must be capitalized and amortized over the life of the contract. Costs that would be incurred regardless of whether a contract is obtained are not capitalized. The capitalization requirement is subject to a practical expedient. Costs must be capitalized even if the amortization period is one year or less.arrow_forwardWhich statement is true when the outcome of construction contract cannot be estimated reliably? a. Contract costs shall be recognized as an expense in the period when incurred. b. Revenue shall be recognized only to the extent of contract costs incurred that is probable will be recoverable c. All of these statements are true. d. An expected loss on the construction contract shall be recognized as an expense immediately.arrow_forwardWhen the outcome of a construction contract cannot be estimated reliably, how shall contract revenue and contract costs associated with the construction contract be recognized? Group of answer choices They shall be recognized as revenue and expenses respectively by reference to the state of completion of the contract activity at the end of the reporting period also known as by percentage of completion method. They shall be recognized as revenue and expenses respectively by the date of earning of revenue or incurring of expenses also known as accrual method. They shall be recognized as revenue and expenses respectively by reference to the percentage of collection of receivables from customers also known as by installment method. Revenue shall be recognized only to the extent of contract cost incurred that is probable will be recoverable and the contract cost shall be recognized as an expense in the period in which there are incurred also known as cost recovery or zero-profit…arrow_forward
- 1. When outcome of a construction contract is estimated reliably, contract revenue and contract costs associated with the construction contract should be recognized using * A. cost recovery method B. percentage of completion method C.gross profit method D.zero profit method.arrow_forwardWhich of the following shall be excluded in the contract costs of a construction contract? * A. Costs that are directly attributable to contract activity in general and can be allocated to the contract B. Costs that directly relate to the specific contract C. Such other costs as are specifically chargeable to the customer under the terms of the contract D. Selling costs such as advertisement expense or commissions of real estate agents or brokers Percentage of Completion is favored to be used under the following circumstances, except A. Progress Billings is assured of collection B. Contract Price is assured C. Performance obligation can be reliably measured D. Contract Costs can be reliably estimated S1: Cost plus contract is a contract used on long term construction contracts in which the contractor agrees to a contract price that is fixed, either at the inception or at a fixed rate per unit of output, which in some cases may be subject to cost escalation clauses.S2: Variable…arrow_forwardWhich of the following statements is true regarding contracts in ASC Topic 606 guidance for revenue recognition? Contracts need to be legally enforceable to be considered under ASC Topic 606. Contracts need to be in written form to be considered under ASC Topic 606. No consideration can be received before a contract exists. No price concessions can be made to an existing contract.arrow_forward
- Under PFRS 15, when shall a consignor recognize revenue from its consignment sales? When it is probable that future economic benefits will flow to the consignor and the fair value of the revenue can be measured reliably. When the consignor receives cash remittance from the consignee. When the consignor satisfies its performance obligation under consignment contract. When the consignor enters into a consignment contract with a consignee.arrow_forwardUnder the new revenue recognition guidance in ASC Topic 606, which of the following statements is true regarding contracts with customer options? In some cases where customers have an option to acquire additional goods or services, an evaluation is required to determine if the option creates an additional performance obligation. An additional performance obligation is created if the customer could obtain the same rights to additional goods or services without entering the contract. An additional performance obligation is created if the option provides the customer a right to purchase the goods or services at the stand-alone selling price for those goods or services. It is generally not considered a performance obligation when a retailer grants a "customer appreciation dividend" to a customer.arrow_forwardThe cost-plus approach: a. refers to contracts that are modified from their original terms during the course of the contract. b. refers to contracts where the contractor is not expected to recover all costs incurred in completing the project. c. is not allowed under ASC Topic 606 guidance for revenue recognition. d. uses an assumed reasonable profit margin to determine the stand-alone price.arrow_forward
- Which of the following costs shall from part of contract costs of long-term construction contract? a. General administration costs for which reimbursement is not specified in the contract b. Research and development costs for which reimbursement is not specified in the contract c. Construction overheads including costs such as the preparation and processing of construction personnel payroll. d. Selling costs such as broker’s commissionarrow_forwardExplain how to account for revenue on a long-term contract over time as opposed to at a point in time. Under what circumstances should revenue be recognized at the point in time a contract is completed?arrow_forwardDavid Mendez Under the percentage-of-completion method, how should the balances of progress billings and construction in process be disclosed in the financial statements prior to the completion of the contract? net, as income from construction if a credit balance, and loss from construction if a debit balance progress billings as deferred income, construction in progress as a deferred expense net, as a current asset if a debit balance, and a current liability if a credit balance progress billings as income, construction in process as inventoryarrow_forward
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