5-9 Installment Sales Method The installment sales method recognizes the gross profit by applying the gross profit percentage on the sale to the amount of cash actually collected...
Trang 1Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved
Income Measurement and Profitability Analysis
5
5-2
Learning Objectives
Discuss the general objective of the timing of
revenue recognition, list the two general
criteria that must be satisfied before revenue
can be recognized, and explain why these
criteria usually are satisfied at a specific point
in time.
5-3
Revenue Recognition
Revenue should be recognized in the
period or periods that the
revenue-generating activities of the company are
performed.
Trang 2Realization Principle
Record revenue when:
AND
There is reasonable certainty as to the collectibility of the asset to be received (usually cash).
SEC Staff Accounting Bulletin No 101
Staff Accounting Bulletin
The SEC issued Staff Accounting Bulletin
No 101 to crackdown on earnings
additional guidance to determine if the
1 Persuasive evidence of an arrangement exists.
2 Delivery has occurred or services have been
a Single Reporting Period
delivered to the customer
When the product or
service has been
delivered to the customer
and cash has been
Trang 3Learning Objectives
Describe the installment sales and cost
recovery methods of recognizing revenues for
certain installment sales and explain the
unusual conditions under which these methods
might be used.
5-8
Significant Uncertainty of Collectibility
1 Installment Sales Method
2 Cost Recovery Method
When uncertainties about
collectibility exist, revenue
recognition is delayed.
5-9
Installment Sales Method
The installment sales method
recognizes the gross profit by
applying the gross profit
percentage on the sale to the
amount of cash actually collected.
Trang 42005 2006 2007
Installment Sales Method
Clarke, Inc had the following installment
sales in addition to its regular sales.
$45,000 ÷ $200,000 = 22.50%
5-11
Installment Sales Method
Clarke, Inc had the following installment
sales in addition to its regular sales.
Cash Collections At Dec 31, 2007,
Clarke, Inc is still owed $30,000 from the 2006 sales and
Installment Sales Method
Description Debit Credit
Installment sale s receivable 2005 200,000
Inventory 155,000
Deferred gross profit 2005 45,000
General Journal
Deferred gross profit is the difference
between the selling price and the cost of the
inventory.
Trang 5Installment Sales Method
Description Debit Credit
Installment sale s receivable 2005 200,000
Inventory 155,000
Deferre d gross profit 2005 45,000
Cash 100,000
Installment sale s receivable 2005 100,000
Deferred gross profit 2005 22,500
Realized gross profit 22,500
($100,000 collected x 22.50%)
General Journal
During 2005, Clarke collected $100,000
on its installment sales.
This entry records the Realized Gross Profit by
adjusting the Deferred Gross Profit account.
5-14
Installment Sales Method
Description Debit Credit
Installment sales receivable 2006 250,000
Inventory 190,000
Deferred gross profit 2006 60,000
Cash 245,000
Installment sales receivable 2005 50,000
Installment sales receivable 2006 195,000
Deferred gross profit 2005 11,250
Deferred gross profit 2006 46,800
Realized gross profit 58,050
General Journal
During 2006, Clarke sold $250,000 on installments and
collected $50,000 on its 2005 installment sales and $195,000
on its 2006 installment sales.
Installment sales receiva ble 2007 275,000
Inventory 220,000
Deferred gross profit 2007 55,000
Cash 275,000
Installment sa les receivable 2005 50,000
Installment sa les receivable 2006 25,000
Installment sa les receivable 2007 200,000
Deferred gross profit 2005 11,250
Deferred gross profit 2006 6,000
Deferred gross profit 2007 40,000
Realized gross profit 57,250
Cash Colle ction on Installme nt Sa les in 2007
Installment Sales Method
Trang 6Installment Sales Method
2005 22,500 45,000 2005
2006 11,250
2007 11,250
-De ferred Gross Profit 2005
Installment Sales Method
Installment sales re ceivable 2006 $ 30,000
Installment sales re ceivable 2007 75,000
Installment accounts receivable $ 105,000
Deferred gross profit 2006 $ 7,200
Deferred gross profit 2007 15,000
Deferred gross profit $ 22,200
Balance Sheet
5-18
Cost Recovery Method
Clarke, Inc had the following installment
sales in addition to its regular sales The
account for installment sales.
Trang 7Cost Recovery Method
The following schedule shows the pattern of
cash collections for the three year period.
Under the cost recovery method
seller has recovered all of the cost of
the goods sold.
5-20
Cost Recovery Method
Description Debit Credit
The entries are exactly the same as under the Installment
Method—EXCEPT that there is not an entry to realize gross
profit Since we have not collected cash in excess of COGS,
no gross profit is recognized in 2005.
5-21
Cost Recovery Method
In 2006, let’s concentrate on the
entries relating to 2005 sales only.
Description Debit Credit
We have not fully recovered the
cost, so no profit is recognized in 2006.
2005 Installment Sale
Now can we recognize some profit?
Trang 8Cost Recovery Method
Here are the entries we would make in
2007 relating to 2005 sales.
Description Debit Credit
Cash 50,000
Installment receivable 2005 50,000
General Journal
We have fully recovered the $155,000 cost
during 2007, so the entire deferred gross
profit will be recognized.
5-23
Learning Objectives
Discuss the implications for revenue
recognition of allowing customers the right of
return.
5-24
Right of Return
In most situations, even though the right
to return merchandise exists, revenues
and expenses can be appropriately
recognized at point of delivery.
Estimate the returns.
Reduce both Sales and Cost of Goods Sold.
Trang 9Learning Objectives
Identify situations that call for the recognition of
revenue over time and distinguish between the
percentage-of-completion and completed
contract methods of recognizing revenue for
long-term contracts.
5-26Completion of the Earnings Process Over
Multiple Reporting Periods
Completed Contract Method
Completion Method
Trang 10Completed Contract Method
Geller Construction entered into a three-year
contract to build a containment vessel for
Southeast Power Company for a contract price of
$1,400,000 Presented below is information
about the contract.
Let’s see how Geller will account for
the revenues and cost of this project
2006 2007 2008
Construction costs incurred during they year $ 250,000 $ 550,000 $ 400,000
Construction costs incurred in prior years - 250,000 800,000
Cumula tive construction costs 250,000 800,000 1,200,000
Estimated costs to complete a t e nd of ye ar 1,000,000 425,000
-Total estimated and actual construction costs $ 1,250,000 $ 1,225,000 $ 1,200,000
Billings made during the year $ 250,000 $ 525,000 $ 625,000
Cash collections during year 225,000 470,000 405,000
2006 Construction costs incurred during they year $ 250,000
Construction costs incurred in prior yea rs
-Cumulative construction costs 250,000
Estimated costs to complete at e nd of yea r 1,000,000
Tota l estimated and a ctua l construction costs $ 1,250,000
Billings made during the year $ 250,000
Cash collections during ye ar 225,000
-Billings on Construction Contract
Debit Balance (Unbilled Receivable)
Trang 11Description Debit Credit
Construction in progress 550,000
Cash, materials, etc 550,000
Accounts receiva ble 525,000
Billings on construction contract 525,000
Construction costs incurred during they yea r $ 250,000 $ 550,000
Construction costs incurred in prior years - 250,000
Cumulative construction costs 250,000 800,000
Estimated costs to complete at end of year 1,000,000 425,000
Tota l estima te d a nd actual construction costs $ 1,250,000 $ 1,225,000
Billings made during the year $ 250,000 $ 525,000
Cash collections during ye ar 225,000 470,000
Gross profit is not recognized until project is complete.
5-32
Completed Contract Method
Construction in progress 400,000
Cash, materials, etc 400,000
Accounts receiva ble 625,000
Billings on construction contract 625,000
Cash 405,000
Accounts receiva ble 405,000
General Journal
2006 2007 2008
Construction costs incurre d during they year $ 250,000 $ 550,000 $ 400,000
Construction costs incurre d in prior years - 250,000 800,000
Cumula tive construction costs 250,000 800,000 1,200,000
Estimated costs to complete a t e nd of year 1,000,000 425,000
-Total estimated and actual construction costs $ 1,250,000 $ 1,225,000 $ 1,200,000
Billings made during the year $ 250,000 $ 525,000 $ 625,000
Cash collections during year 225,000 470,000 405,000
5-33
Completed Contract Method
Revenue from long-term contract 1,400,000
Revenue from long-term contract 1,400,000
Cost of construction 1,200,000
Retained earnings 200,000
profit is recognized
in year 3 since project is complete.
2006 2007 2008
Construction costs incurre d during they yea r $ 250,000 $ 550,000 $ 400,000
Construction costs incurre d in prior yea rs - 250,000 800,000
Cumula tive construction costs 250,000 800,000 1,200,000
Estimated costs to complete a t e nd of yea r 1,000,000 425,000
-Tota l estimated and actual construction costs $ 1,250,000 $ 1,225,000 $ 1,200,000
Billings ma de during the yea r $ 250,000 $ 525,000 $ 625,000
Ca sh collections during year 225,000 470,000 405,000
Remember that the contract price was $1,400,000.
Trang 12Completed Contract Method
Billings on construction contract 1,400,000
General Journal Entry to transfer title to the customer.
1,400,000 Billings on Construction Contract
5-35
Percentage-of-Completion Method
Cost incurred to date
Gross profit estimate
Measuring Progress Toward Completion
Estimate of project’s total
Trang 13Percentage-of-Completion Method
Geller Construction entered into a three-year
contract to build a containment vessel for
Southeast Power Company for a contract price of
$1,400,000 Presented below is information
about the contract.
Let’s see how Geller will account for the
revenues and cost of this project using the
2006 2007 2008
Construction costs incurred during they year $ 250,000 $ 550,000 $ 400,000
Construction costs incurred in prior years - 250,000 800,000
Cumula tive construction costs 250,000 800,000 1,200,000
Estimated costs to complete a t e nd of ye ar 1,000,000 425,000
-Total estimated and actual construction costs $ 1,250,000 $ 1,225,000 $ 1,200,000
Billings made during the year $ 250,000 $ 525,000 $ 625,000
Cash collections during year 225,000 470,000 405,000
5-38
Percentage-of-Completion Method
2006 Contract price $ 1,400,000
Actual costs to date $250,000
Estimated costs to complete 1,000,000
Total project cost $1,250,000
Total gross profit (Contract price - total costs) $ 150,000
Percentage-of-completion (actual costs to date) $ 250,000
Divided by the estimated total project cost $ 1,250,000
Equals percentage complete to date 20.00%
Total project gross profit $ 150,000
Multiplied by the estimated % of completion 20.00%
Gross profit earned to date $ 30,000
Less gross profit recognized in previous periods
-Gross profit recognized currently $ 30,000
Contra account to CIP
Entries are identical
to the entries for the
completed contract
method.
2006 Construction costs i ncurred during they ye ar $ 250,000 Construction costs i ncurred in prior years - Cumul ative construction costs 250,000 Estimated costs to comple te at end of yea r 1,000,000 Total estimated and actual construction costs $ 1,250,000 Billings m ade during the ye ar $ 250,000
Ca sh colle ctions during yea r 225,000
Trang 14Description Debit Credit
-Billings on Construction Contract
Debit Balance (Unbilled Receivable)
Actual costs to da te $250,000
Estimated costs to compl ete 1,000,000
Total project cost $1,250,000
Total gross profit (Contract price - total costs) $ 150,000
Percentage-of-completion (actual costs to da te) $ 250,000
Divided by the estimated total project cost $ 1,250,000
Equals percentage complete to da te 20.00%
Total project gross profit $ 150,000
Multipl ied by the estimated % of compl etion 20.00%
Gross profit earned to date $ 30,000
Less gross profit recognized in previous periods
-Gross profit recogni zed currently $ 30,000
Revenue from long-term contract 280,000
Revenue from long-term contract 280,000
Cost of construction 250,000
Retained earnings 30,000
General Journal
Closing Entry
Trang 15Percentage-of-Completion Method
2006 2007 Contract price $ 1,400,000 $ 1,400,000
Actual costs to date $250,000 $800,000
Estimated costs to complete 1,000,000 425,000
Total project cost $1,250,000 $1,225,000
Total gross profit (Contract price - total costs) $ 150,000 $ 175,000
Percentage-of-completion (actual costs to date) $ 250,000 $ 800,000
Divided by the estimated total project cost $ 1,250,000 $ 1,225,000
Equals percentage complete to date 20.00% 65.31%
Total project gross profit $ 150,000 $ 175,000
Multiplied by the estimated % of completion 20.00% 65.31%
Gross profit earned to date $ 30,000 $ 114,286
Less gross profit recognized in previous periods - (30,000)
Gross profit recognized currently $ 30,000 $ 84,286
Construction costs incurred during they year $ 250,000 $ 550,000
Construction costs incurred in prior yea rs - 250,000
Cumula tive construction costs 250,000 800,000
Estimated costs to complete a t e nd of year 1,000,000 425,000
Total estimated and actual construction costs $ 1,250,000 $ 1,225,000
Billings made during the year $ 250,000 $ 525,000
Cash colle ctions during year 225,000 470,000
Revenue from long-term contract 634,286
Revenue from long-term contract 634,286
Cost of construction 550,000
Retained earnings 84,286
General Journal2006 2007 Contract price $ 1,400,000 $ 1,400,000
Actua l costs to date $250,000 $800,000
Estimated costs to complete 1,000,000 425,000
Total project cost $1,250,000 $1,225,000
Total gross profit (Contract price - total costs) $ 150,000 $ 175,000
Percenta ge-of-comple tion (actual costs to date ) $ 250,000 $ 800,000
Divided by the estimated total project cost $ 1,250,000 $ 1,225,000
Equals percentage complete to da te 20.00% 65.31%
Total project gross profit $ 150,000 $ 175,000
Multiplied by the estimated % of completion 20.00% 65.31%
Gross profit ea rne d to date $ 30,000 $ 114,286
Less gross profit recognized in previous periods - (30,000)
Gross profit recognized currently $ 30,000 $ 84,286