Acct Chapter 191 Revenue Recognition Revenue is recognized when (1) it is realized or realizable and (2) it is earned. TransactionType of RevenueTiming of Recognition Product SaleSalesDate of Sale (delivery) ServiceService RevenueService performed and is billable Use of AssetInterest, Rent, Passage of time or Royaltyusage of asset Disposal of Gain or lossTime of sale or trade-in other asset

Acct Chapter 192 Example Fred, a farmer harvests all his corn in October when the price per bushel is $1.60 and immediately sells it for $1.60. Jim, also a farmer, harvests all his corn in October when the price is $1.60, but Jim thinks prices will improve so he stores his corn for $.02 per bushel per month and sells it in February for $1.75 per bushel. What is the selling price for each farmer and how should the $0.02 per month be accounted for in order to reflect the economic substance of what is happening?

Acct Chapter 193 Revenue with Right of Return Sales with buy back agreements at a set price that covers all costs of the inventory plus related holding costs, no sale is recognized. When returns are very high, revenue recognition may have to be deferred until return privilege lapses. Sales with right of return must meet 6 conditions to be recognized. Price is fixed or determinable Buyer has paid or is obligated to pay Buyer bears risk of loss for goods Buyer has economic substance apart from seller Seller does not have significant obligations to bring about resale of goods The amount of future returns can be reasonably estimated Ex 1, 2

Acct Chapter 194 Long Term Contracts Completed contract records profit only at the end of the contract with Work in Process inventory being offset by Billings on Construction in Process Percentage of Completion recognizes gross profit based on costs incurred to date versus revenue earned to date. Must use percentage of completion if estimates of completion, revenues and cost are reasonably dependable and all of these: Contract specifies terms Buyer can be expected to satisfy obligations Contractor can be expected to perform obligations Ex 5 Pb 5

Acct Chapter 195 Other Revenue Recognition Bases Completion of Production: for cases when product is readily saleable at a determinable price, mostly use for commodities The installment method delays recognition of revenue until cash is received, and each payment is apportioned among cost recovery, interest and gross profit. Use where collectibility is suspect. Ex 10, P12 The cost recovery method defers profit recognition until all of the cost of goods sold has been collected Ex 17

Acct Chapter 196 Franchises Franchise fees should not be recognized until earned and the collectibility is reasonably assured. There is a presumption that the earliest a fee should be recognized is when the franchisee begins operations. Continuing franchise fees should be recognized as revenue when earned. If franchisee is given the right to buy supplies or equipment at bargain prices, the discount should be deferred from profit. If the franchisor has a realistic right to purchase the franchisee, the franchisor should treat cash received as a liability. Ex 18

Acct Chapter 197 Consignments Merchandise is placed physically on the premises of another business, but titles stays with consignor. Transfer merchandise to inventory on consignment, and recognize revenue when consignee reports that merchandise is sold. Consignee uses receivable and payable accounts to account for its side of transactions Ex 20