1. Intermediate Accounting
Intermediate Accounting
November 16th, 2010
November 16th, 2010
1.
General Course Questions
2.
Columbia Sportswear Annual Report Project Questions
3.
Chapter 18 Revenue Recognition (using assigned homework)
A. Two Conditions for Revenue Recognition (question 2)
B. Departures from the Point of Sale Basis (question 6)
C. Long term Construction Contracts (?7 & 9, BE 2,3,4,Prob 6)
D. Installment Sales & Cost Recovery (BE 7,8,9, 10)
E. Cost Recovery (BE 10)
4.
Discussion Question #4 Revenue Recognition
5.
Return and Review Ch 7 quiz – cash & receivables
1

2. Revenue Recognition
Revenue should be recognized at the soon as what TWO
conditions are met:
1.
2.
Revenue should be recognized when you have ______ the
W______ & P_______ is assured.
Question 2
2

3. Revenue Recognition Classified by
Type of Transaction
Chapter 18
Type of
Transaction
Description of
Revenue
Timing of
Revenue
Recognition
Sale of product
from inventory
Revenue from
sales
Date of sale
(date of
delivery)
Chapter 18
Chapter 14 & others
Chapter 10
Rendering a
service
Permitting use
of an asset
Sale of asset
other than
inventory
Revenue from
fees or services
Revenue from
interest, rents,
and royalties
Gain or loss on
disposition
Services
performed and
billable
As time passes
or assets are
used
Date of sale or
trade-in
3

4. Timing of Revenue Recognition
I. Revenue is normally recognized at the point of sale,
provided:
A. Revenue can be reasonably ___________, collectibility
of the sales price is reasonably assured or the amount
uncollectible can be ___________ reasonably.
B. The earnings process is _______; the seller is not
obligated to perform significant activities after the sale.
II. Earlier recognition is appropriate if there is a high
degree of certainty about the amount of revenue earned.
III. Delayed recognition is appropriate if the

degree of uncertainty concerning the amount of
revenue or costs is sufficiently high or

sale does not represent substantial completion of
the earnings process.
4

5. Timing of Revenue Recognition
I. Revenue is normally recognized at the point of sale,
provided:
A. Revenue can be reasonably measured, collectibility of
the sales price is reasonably assured or the amount
uncollectible can be estimated reasonably.
B. The earnings process is complete; the seller is not
obligated to perform significant activities after the sale.
II. Earlier recognition is appropriate if there is a high
degree of certainty about the amount of revenue earned.
III. Delayed recognition is appropriate if the

degree of uncertainty concerning the amount of
revenue or costs is sufficiently high or

sale does not represent substantial completion of
the earnings process.
5

6. Revenue Recognition Alternatives
6

7. Departures from the Sale BasisSale Basis
Departures from the Point of
A. Sales with Buyback Agreements - even though title has
transferred, if the seller still has the risk of ownership it is not a
sale.
B. Sales When Right of Return Exists - do not record the
sale unless all of the following six provisions are met: (question 6)
1. Sellers _____ is known (fixed or determinable at the date of sale)
2. Buyer's payment is not contingent upon the ______ of product
3. The buyer's obligation is not altered if product is _____/______
4. Buyer is a separate ______ from seller
5. Seller is not obligated to help buyer _______the product
6. Future returns can be _________
C. Trade Loading and Channel Stuffing - practices to book
tomorrows revenues today, need to be discouraged.
7

8. Departures from the Sale BasisSale Basis
Departures from the Point of
A. Sales with Buyback Agreements - even though title has
transferred, if the seller still has the risk of ownership it is not a
sale.
B. Sales When Right of Return Exists - do not record the
sale unless all of the following six provisions are met:
1. Sellers price is known (fixed or determinable at the date of sale)
2. Buyer's payment is not contingent upon the resale of product
3. The buyer's obligation is not altered if product is stolen/damaged
4. Buyer is a separate entity from seller
5. Seller is not obligated to help buyer resell the product
6. Future returns can be estimated
C. Trade Loading and Channel Stuffing - practices to book
tomorrows revenues today, need to be discouraged.
8

9. Revenue Recognition Before
Delivery
Long-Term Construction
Accounting Methods
Percentage-of-Completion
Method
1) Terms of contract must
be certain, enforceable.
2) Certainty of performance
by both parties
3) Estimates of completion
can be made reliably
Question 7 & 9
Completed Contract
Method
1) For short-term contracts
2) Used for long-term
contracts only when
conditions for percentage
completion are not met
3) Abnormal contract risks
9

10. Basic Idea of Percentage of Completion
•
•
•
Reflect the economic substance of the activities of the company
• I/S: Revenues earned and expenses incurred to reflect
the efforts and accomplishments each period. They are
not all deferred until the final year of project
completion.
• B/S: Value of asset being constructed is adjusted at the
end of each period to reflect the amount of revenue
recognized on the contract
Requires the use of estimates
What information do we need?
• Contract revenue
• Expenses incurred (or other input or output measures)
• Estimated remaining expenses (or other input or output
measures)
10
• Billing and cash from customer

11. Percentage-of-Completion:
Balance Sheet Accounts
“Construction in Process” (CIP)
•An Inventory account used to accumulate the amount recognized as Revenue
throughout the contract (Similar to a Work-In-Process inventory account, but
includes not only cost, but also the gross profit to date)
•First the construction costs are recorded in this account as they are incurred
•Then the gross profit is added to this account at the end of each period when
Revenue is recognized. Thus, the balance in this account then equals the total
revenue recognized on the contract to date.
•This inventory account is not removed until the construction is complete and
title is transferred to the new owner. Then it is offset against Billings on
Construction in Process.
“Billings on Construction in Process”
•A Contra-Inventory account to CIP, used to accumulate the amount that a
customer has been billed and thus recorded in Cash or Accts Rec.
•Interim billings are not usually based upon percentage of costs or completion.
Thus, the amount billed and recorded in Billings on CIP is not likely to be
equal to the revenue recognized, which is the balance in the CIP account.
11

12. Percentage-of-Completion:
Balance Sheet Accounts
• “Construction in Process” (CIP) An Inventory account which equals
the total revenue recognized on the contract to date.
• “Billings on Construction in Process” A Contra-Inventory account to
CIP, used to accumulate the amount that a customer has been billed and
thus recorded in Cash or Accts Rec.
• Interim billings are not usually based upon percentage of costs or
completion. Thus, the amount billed and recorded in Billings on CIP is not
likely to be equal to the revenue recognized, which is the balance in the
CIP account.
• At the end of any accounting period, the difference between the balance
in “CIP” and “Billings on CIP” will appear on the balance sheet.
1) If “CIP” > “Billings on CIP”, the difference will be reported as an asset
2) If “Billing on CIP” > “CIP”, the difference will appear as a liability.
• The two accounts (CIP and Billings on CIP) will equal at the end of the
contract. They are closed out against each other when construction is
complete and title is transferred to the new owner.
12

13. Percentage-of-Completion:
Financial Statements
Balance Sheet
Cash
Accounts Receivable
Inventory:
Construction in Process (Cost + Gross Profit = Revenue
recognized to-date on the contract)
Less Billings on Construction in Process (amount billed;
amount of cash received and/or still in A/R)
Total amount in Current assets related to the contract will equal the amount
of Revenue Recognized to date on the contract (the amount in cash and/or
A/R will be offset against Billings on CIP)
Income Statement
Construction Revenue
Construction Costs
Gross profit on Construction efforts
s
13

14. Percentage-of-Completion: Journal Entries
During the period to record costs of construction:
DR:
Construction in process (CIP)
CR
Cash, Raw Materials, A/P, Acc. Depr, Wages Payable
When contract says you can make progress billings to customer:
DR:
Accounts receivable
CR
Billings on CIP
To record cash collections:
DR:
Cash
CR
Accounts receivable
End of the Accounting Period to recognize Revenue, cost & Gross Profit
DR:
CIP (gross profit adjustment for current year)
DR.
Construction Costs (Expense account)
CR
Construction Revenue
14

15. Percentage-of-Completion: Journal Entries
End of Construction when construction is complete and title is
transferred to the new owner:
DR:
Billings on Construction in process
CR
Construction in Process
The total amount invoiced in Billings on CIP will equal the total
revenue recognized to-date on the contract at the end which has
been captured in the CIP account. Thus the two accounts are
closed out against each other as the construction company no
longer has title to the asset and the amount invoiced has been
recorded in cash and/or Accounts Receivable.
15

16. Computing the Revenue & Gross Profit
to recognize at the end of each period
using Percentage-of-Completion
1
Costs incurred to date
= Percent complete
Most recent estimated total costs
2 Estimated total revenue x Percent complete
= Revenue to be recognized to date
3 Total revenue to be recognized to date less Revenue
recognized in PRIOR periods = Current period revenue
4 Current Period Revenue less current costs = Gross profit
16

17. Percentage-of-Completion:
Homework Problem 6
Data: Contract price: $8,400,000
Start date:
July, 2003
Balance sheet date:
Given:
2010
Estimated cost: $4,000,000
Finish: October, 2005
Dec. 31
2011
2012
Costs incurred during the year $2,880,000 $2,230,000
Estimated costs to complete $3,530,000 $2,190,000
total estimated costs
$2,190,000
$
-0-
Progress Billings during year
Cash collected during year
$1,700,000
$3,200,000 $3,500,000
What is the percent complete, revenue, and gross
17
profit recognized each year?
17

18. Percentage-of-Completion:
Homework Problem 6
Data: Contract price: $8,400,000
Start date:
July, 2003
Balance sheet date:
Given:
2010
Estimated cost: $4,000,000
Finish: October, 2005
Dec. 31
2011
2012
Costs incurred during the year $2,880,000 $2,230,000
Estimated costs to complete $3,530,000 $2,190,000
total estimated costs
$6,400,000 $7,300,000
$2,190,000
$
-0$7,300,000
Progress Billings during year
Cash collected during year
$1,700,000
$3,200,000 $3,500,000
What is the percent complete, revenue, and gross
18
profit recognized each year?
18

19. Percentage-of-Completion:
Homework Problem 6
2010
2011
2012
% complete
to-date
2,880,000 ___% 2,880k + 2230K =
$6,400,000
$5,110,000=___%
$7,300,000
Revenue
recognized
8,400,000 * ___% 8,400,000 *__%
8,400,000
= 3,780,000
less 3,780,000 less 5,880,000
= 2,100,000
= 2,520,000
Gross Profit (loss) $3,780,000 less
$2,880,000
recognized
$________
$7,300,000
$7,300,000
100 %
2,100,000 less
2,520,000
2,230,000
less 2,190,000
= $_________
= $_______
Contract to date
Revenue
Costs
Gross Profit
$3,780,000
$2,880,000
$900,000
$5,880,000
5,110,000
$ 770,000
8,400,000
7,300,000
$1,100,000
19

20. Percentage-of-Completion:
Homework Problem 6
2010
2011
% complete
to-date
2,880,000 45% 2,880k + 2230K =
$6,400,000
$5,110,000=70%
$7,300,000
Revenue
recognized
8,400,000 * 45%
= 3,780,000
Gross Profit (loss) $3,780,000 less
$2,880,000
recognized
$900,000
2012
$7,300,000
$7,300,000
100 %
8,400,000 * 70%
8,400,000
less 3,780,000 less 5,880,000
= 2,100,000
= 2,520,000
2,100,000 less
2,230,000
= (130,000)
2,520,000
less 2,190,000
= 330,000
Contract to date
Revenue
Costs
Gross Profit
$3,780,000
$2,880,000
$900,000
$5,880,000
5,110,000
$ 770,000
8,400,000
7,300,000
$1,100,000
20

21. Percentage-of-Completion: the Construction
in Progress Account
Note that Gross Profit is stored in the CIP Account – this is very
different from “ordinary” sales transactions, where gross profit is
not in any specific account
• A T-account analysis of the CIP account is very useful in answering
questions
• For example, you could be told that Daniels Construction incurred
$1 million in construction costs on a new contract this year. They
expect to incur another $7 million to complete the project. The
balance in the CIP account at year end is $1.2 million. What is
the total revenue they expect to earn on the contract?
• Answer: 1.2 – 1 = 200,000 in GP recognized
• Project is 1/(1+7) or 12.5% complete, so 200,000 / 0.125 = $1,600,000
in total profit
• Since profit is revenues minus expenses, total revenues must be 1.6 +
8 = $9.6 million
21

22. Completed Contract Method
 Use For Short Term Construction Contracts
 Or when does not meet criteria for % Completion:
1. Terms of contract not certain, or enforceable
2. Certainty of Performance by either party is in question
3. Realiable estimates to measure % complete are not
available (cost, input or output measures)
 No revenue, no expense, no gross profit recognized until the
project is actually completed.
 Journal entries prepared during the life of contract are the same as
those prepared under the percentage-of-completion method with
the exception of the last journal entry that recognizes periodic
revenue, expense and gross profit.
 Instead, the entire revenue, expense and gross profit are recorded
at the end of the project.
22

23. Completed Contract
• Assuming the same numbers as example
before, what are the journal entries under
the completed contract method?
• All journal entries for 2010, 2011, and 2012
would appear exactly as before, except that
there would be no revenue recognition journal
entry in each year
• Therefore, the balance in CIP at the end of each
year would represent only the inventoried
construction costs
23

24. Losses on Contracts
Need to determine if the loss is for the current
period or if for the contract overall.
• If on overall profitable contract, recognize the
loss in the period incurred via “negative gross
profit” (see example Problem 6 year 2011)
• Overall unprofitable contract
• Percentage of completion: Recognize entire contract
loss now by “backing out” previous gross profit
• Completed contract: Recognize the entire loss now.
What is the theoretical justification for this?
24

25. Disclosures in Construction
Company Financial Statements
Construction contractors should disclosure:
the method of recognizing revenue,
the basis used to classify assets and liabilities as
current (nature and length of the operating cycle),
the basis for recording inventory,
the effects of any revision of estimates,
the amount of backlog on uncompleted contracts, and
the details about receivables.
25

26. Revenue Recognition Before
Revenue Recognition Before
Delivery
Delivery
Completion-of-Production Basis
In certain cases companies recognize revenue at the
completion of production even though no sale has been
made.
Examples are:
precious metals or
agricultural products.
What is the theoretical justification for this?
26

27. Revenue Recognition After Delivery
Revenue recognition is deferred when collection
of sales price is not reasonably assured and no
reliable estimates can be made.
Methods of deferring revenue:
Installment-sales method
Cost-recovery method
Generally
Employed
Deposit method – cash received prior to
delivery or transfer of property. Thus sale
is not complete, and cash is recorded as a
customer deposit (current liability).
27

28. The Installment Sales Method
• Recognize income in periods of cash
collection rather than at the point of sale.
• Title typically does not pass to the buyer
until all cash payments have been made to
the seller.
• Recognize both Revenue and Cost of Sales in
period of sale, but Gross profit is deferred to
the periods of collection.
• Selling and administrative expenses are not
deferred.
28

29. The Installment Sales Method
• Installment sales must be kept separate from
regular sales
• Gross profit on installment sales must be
determinable
• The amount of cash collected from
installment accounts by year sold must be
known
• Provision must be made to carry forward each
year’s deferred gross profit separately
29

30. Steps to Record Installment Sales
1.
2.
3.
4.
5.
Record initial Installment sale, keeping track of A/R
by year sold and noting revenue as “Installment
Sales”.
Cost of sales and inventory reduction recorded
normally, using information to compute Gross Profit
rate each year.
When closing “Installment Sales and COGS, defer the
Gross Profit by year of sale.
Record cash collections reducing A/R by year of
original sale.
Realize Gross profit on cash collected, taking Cash
times gross profit rate in year of original sale, and
reducing deferred gross profit for the corresponding
30
year.

31. The Installment Sales Method:
Example
Given:
2003
Installment sales $200,000
Cost of sales
$150,000
Gross Profit
$ 50,000
Cash received in:
from 2003 sales $ 60,000
from 2004 sales $ -0from 2005 sales $ -0-$
2004
2005
$250,000
$190,000
$ 60,000
$240,000
$168,000
$ 72,000
$ 100,000 $ 40,000
$ 100,000 $125,000
-0$ 80,000
Determine the realized and deferred gross profit.
31

32. The Installment Sales Method:
Example
2003
2004
2005
Gross profit rate
25%
24%
30%
Realized Gross Profit:
From 2003 sales (e.g., 60,000 x 25%) ($100,000 x 25%) ($40,000 x 25%)
Realized in
$ 15,000 $ 25,000 $ 10,000
From 2004 sales:
($100,000 x 24%) ($125,000 x 24%)
Realized in:
$ -0- $ 24,000 $ 30,000
From 2005 sales:
($80,000 x 30%)
Realized in:
$ -0- $
-0- $ 24,000
32
32

33. The Installment Sales Method: 2003
Journal Entries for Gross Profit
1. When the 2003 installment sale is made:
Installment A/R (2003)
Installment Sales
200,000
200,000
2. Cost of Sales
Inventory
150,000
3. Installment Sales
Cost of Sales
Deferred Gross Profit, 2003
200,000
150,000
150,000
50,000
When cash is received, some deferred GP is recognized as revenue:
4. Cash
60,000
Installment A/R (2003)
60,000
5. Deferred Gross Profit, 2003
Realized Gross Profit (I/S)
(Realized: $60,000 x 25%)
15,000
15,000
33
33

34. The Installment Sales Method: 2004 Journal
Entries for Gross Profit
1. Installment A/R
Installment Sales
2. Cost of Sales
Inventory
(2004)
3. Installment Sales
Cost of Sales
Deferred Gross Profit, 2004
250,000
250,000
190,000
190,000
250,000
190,000
60,000
4. When cash is received, some deferred GP is recog’d as revenue:
Cash
200,000
Installment A/R (2003)
100,000
Installment A/R (2004)
100,000
5. Deferred Gross Profit, 2003
Deferred Gross Profit, 2004
Realized Gross Profit (I/S)
(Realized: ’03: $100K x 25% + ’04 $100K X 24%)
25,000
24,000
49,000
34

35. Installment Sales Method: 2005 Journal
Entries
1.
2.
3.
4. When cash is received, some deferred GP is recognized as revenue:
Cash
245,000
5.
35
35

36. Installment Sales Method: 2005 Journal
Entries
1. Installment A/R
Installment Sales
2. Cost of Sales
Inventory
(2005)
3. Installment Sales
Cost of Sales
Deferred Gross Profit, 2005
240,000
240,000
168,000
168,000
240,000
168,000
72,000
4. When cash is received, some deferred GP is recognized as revenue:
Cash
Installment A/R (2003)
Installment A/R (2004)
Installment A/R (2005)
5. Deferred Gross Profit, 2003
Deferred Gross Profit, 2004
Deferred Gross Profit, 2005
Realized Gross Profit (I/S)
245,000
40,000
125,000
80,000
10,000
30,000
24,000
64,000
(Realized: ’03: $40K x 25% + ’04 $125K X 24% + ’05 80K X 30%)
36

37. The Cost Recovery Method
• Used when no reasonable basis for estimating
collectibility as in franchises and real estate.
• Seller recognizes no profit until cash
payments by buyer exceed seller’s cost of
merchandise.
• After recovering all costs, seller includes
additional cash collections in income.
• The income statement reports the amount of
gross profit recognized and the amount
deferred.
37

38. The Original Example – Cost
Recovery Method
Given:
2003
2004
2005
Installment sales $200,000
Cost of sales
$150,000
Gross Profit
$ 50,000
$250,000
$190,000
$ 60,000
$240,000
$168,000
$ 72,000
Cash received in:
from 2003 sales $ 60,000
from 2004 sales $ -0from 2005 sales $ -0-$
$ 100,000 $ 40,000
$ 100,000 $125,000
-0- $ 80,000
Determine the realized and deferred gross profit.
38

39. The Cost Recovery Method:
2003 Journal Entries
2003: (J/E’s for sales and deferral of GP are same as in installment method)
1. When the 2003 installment sale is made:
Installment A/R (2003)
Installment Sales
200,000
200,000
2. Cost of Sales
Inventory
150,000
3. Installment Sales
Cost of Sales
Deferred Gross Profit, 2003
200,000
Cash collection J/E’s:
4. Cash
Installment A/R (2003)
150,000
150,000
50,000
60,000
60,000
5. No Gross Profit realized until cost of Sales recovered by cash collections
Note: costs remaining to recover = 150,000 – 60,000 = 90,000 before any
recognition of profit
39
5.
39

40. The Cost Recovery Method
2004:
J/E’s for sales and deferral of GP are same as in installment method
Cash
Installment A/R (2003)
Installment A/R (2004)
200,000
100,000
100,000
• 2003 GP can be recognized: 150,000 – 60,000 – 100,000 = 10,000 to
be recognized
• No 2004 GP to be recognized: 190,000 – 100,000 = 90,000
Deferred GP, 2003 sales
Recognized GP
10,000
10,000
40

41. The Cost Recovery Method
2005:
J/E’s for sales and deferral of GP are same as in installment method
Entry to record Cash Collections:
Cash
245,000
Entry to record Realized Gross Profit:
41

42. The Cost Recovery Method
2005:
J/E’s for sales and deferral of GP are same as in installment method
Cash
Installment A/R (2003)
Installment A/R (2004)
Installment A/R (2005)
245,000
40,000
125,000
80,000
• All cash collected in 2003 can be recognized as GP because costs
covered in 2004
• 2004 GP to be recognized: 190,000 – 100,000 – 125,000 = 35,000
• No GP for 2005: 168,000 – 80,000 = 88,000
Deferred GP, 2003 sales
Deferred GP, 2004 sales
Recognized GP
40,000
35,000
75,000
42

43. Installment Sales Issues - Interest
and Repossessions
• Interest: recognize at time of receipt (do
not defer)
• Repossessions:
• Be sure to account for all payments and
recognition of gross profit until the repossession
date
• Set up repossessed goods at their fair value at
repossession (not what they were worth when
originally sold)
• Write off any remaining A/R and deferred Gross
Profit; recognizing the gain/loss to make the
journal entry balance
43

44. Franchise Revenue
(Appendix 18A)
Basic Idea:
• Various types of franchise arrangements, we will
focus on service sponsor-retailer
• Franchisor sells
(1) right to operate business and
(2) provides on-going support activities.
• Revenue streams
(1) initial sale of franchise and related assets/services
(2) fees based on the operation of the franchise
So how does franchisor record this revenue?
44

45. Franchise Revenue
• Initial Franchise fee
• Revenue recorded when there is:
• Substantial performance
• No remaining obligation to refund any cash or excuse any
non-payment of note. Generally assumed to be when
franchisee commences operations
• Collection of fee is reasonably assured
• If terms not met, then Unearned Franchise Fees
• Often payment is in cash and a LT note receivable
• Continuing Fees
• When earned and receivable.
• Often amount must be verified
45

46. Franchise Revenue Example
On 3/31/09 the Red Hot Chicken Wing Corp. entered into a
franchise agreement with Thomas Keller. In exchange for an initial
franchise fee of $50,000, Red Hot will provide initial services to
include the selection of location, construction of building,
employee training and consulting services over several years.
$10,000 is payable on 3/31/09, with the remaining $40,000 payable
in annual installments. 10% interest on the note (at market rate) is
payable annually. In addition, the franchisee will pay continuing
franchise fees of $1000 per month for advertising and promotion
provided by Red Hot, beginning immediately after the franchise
begins operations. Thomas Keller opened his Red Hot franchise for
business on 9/30/09
46

47. Franchise Revenue Example
Initial Franchise fee
3/31/09
Cash
10,000
Note Receivable
40,000
Unearned franchise fee revenue
50,000
9/30/09
Unearned franchise fee revenue
Franchise fee revenue
50,000
50,000
Continuing Fees
10/31/09
(& monthly)
Cash
1000
Service Revenue
1000
Debt Service
3/31/10
Cash
4000
47

48. Consignments (Appendix 18A)
Basic idea:
• Consignor “gives” merchandise to a a reseller to sell on your behalf
to an end user.
• Can’t recognize revenue until sold to end user
Entries:
Ships to consignee
Inventory on consignment
Finished good inventory
Notified of sale to end user
Cash
Commission expense
Revenue from consigned sales
COGS
Inventory on consignment
xxx
xxx
xxx
xxx
xxx
xxx
xxx
48

49. Revenue Recognition:
US GAAP vs. IFRS
1. Long-term construction contracts when outcomes
cannot be reasonably estimated:
•
US GAAP: must use Completed Contract Method (No
revenue or expense is recognized until the end of the
contract)
•
IFRS: must use the zero-profit method (revenues are
recognized only to the extent of costs)
1. Service Revenue
•
US GAAP: follow specific industry guidance for revenue
recognition
•
IFRS: typically use the % Completion method (or straightline if services are specified over a period of time)
49

50. 50

51. Percentage-of-Completion:
Example
Data: Contract price: $4,500,000
Start date:
July, 2003
Balance sheet date:
Given:
Estimated cost: $4,000,000
Finish: October, 2005
Dec. 31
2003
Costs to date
$1,000,000
Estimated costs to complete $3,000,000
Progress Billings during year
$900,000
Cash collected during year
$750,000
2004
$2,916,000
$1,134,000
$2,400,000
$1,750,000
2005
$4,050,000
$
-0$1,200,000
$2,000,000
What is the percent complete, revenue, and gross
51
profit recognized each year?

52. Percentage-of-Completion:
Example
2003
2004
2005
% complete
to-date
1,000,000 = 25% 2,916,000= 72%
4,000,000
4,050,000
100 %
Revenue
recognized
4,500,000 * 25%
= 1,125,000
4,500,000 * 72% 4,500,000
less 1,125,000 less 3,240,000
= 2,115,000
= 1,260,000
Gross Profit
recognized
1,125,000 less
1,000,000
= 125,000
2,115,000 less
1,916,000
= 199,000
1,260,000
less 1,134,000
= 126,000
52

53. Percentage-of-Completion: Journal Entries
2003
To record cost of construction:
DR
Construction in process (CIP)
CR
Accounts Payable
1,000,000
1,000,000
To record progress billings to customer:
DR
Accounts receivable
CR
Billings on CIP
900,000
900,000
To record cash collections:
DR
Cash
CR
Accounts receivable
750,000
750,000
53

54. Percentage-of-Completion: Entries
Involving Third Parties
2003
To record revenue and expense
DR
DR
CIP (plug gross profit here)
125,000
Construction Expenses
1,000,000
CR
Revenue (1m/(1m+3m)x4.5m)
1,125,000
Note: Construction expenses = actual expenditures for the
period
54

55. Balance Sheet 2003
Construction In Progress
1,000,000
Billings
900,000
125,000
900,000
1,125,000
Balance Sheet
… in current assets:
CIP
Billings
1,125,000
(900,000)
Costs and Recognized Gross Profit
in excess of Billings
225,000
55

56. Percentage-of-Completion:
Journal Entries
2004:
Construction in Progress (2.916m – 1.0m)
Cash, A/P, etc.
1,916,000
1,916,000
A/R
Billings
2,400,000
2,400,000
Cash
A/R
1,750,000
1,750,000
CIP
Construction Expenses
Revenue (2.916m/4.050m x 4.5m) – 1,125,000
199,000
1,916,000
2,115,000
56

57. % Completion Balance Sheet 2004
Construction In Progress
1,000,000
Billings
900,000
125,000
1,916,000
2,400,000
199,000
3,300,000
3,240,000
Balance Sheet
… in current liabilities:
Billings
Less: CIP
3,300,000
(3,240,000)
Billings in excess of cost
and recognized gross profit
60,000
57

58. Percentage-of-Completion: Journal Entries
2005:
CIP (4,050 – 2,916)
Cash, A/P, etc.
1,134,000
A/R
Billings
1,200,000
Cash
A/R
2,000,000
CIP
Construction Expenses
Revenue (4,050/4,050 x 4,500) – 1,125 - 2,115
126,000
1,134,000
1,134,000
1,200,000
2,000,000
1,260,000
58

59. % Completion Balance Sheet 2005
CIP
Billings
1,000,000
900,000
125,000
2,400,000
1,916,000
4,500,000
1,200,000
199,000
4,500,000
4,500,000
1,134,000
-
126,000
4,500,000
4,500,000
4,500,000
-
59

60. Percentage-of-Completion: Entries
At the end of the contract:
To record completion of project:
DR
Billings on CIP
4,500,000
CR
Construction in process
4,500,000
Over the life of the contract, the total credits to “Billings on CIP”
will equal the total amount billed to the customer, which is the
total revenue received over the life of the contract.
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61. Completed Contract
• Assuming the same numbers as example
before, what are the journal entries under
the completed contract method?
• All journal entries for 2003, 2004, and 2005
would appear exactly as before, except that
there would be no revenue recognition journal
entry in each year
• Therefore, the balance in CIP at the end of each
year would represent only the inventoried
construction costs
61

62. Completed Contract: Journal Entries
2003:
Construction in Progress (CIP)
Cash, A/P, etc.
1,000,000
1,000,000
A/R
Billings
900,000
Cash
A/R
750,000
900,000
750,000
Entries above same as for % Completion. No entry to record
revenues and expenses.
62

63. Balance Sheet 2003 – Completed Contract
Construction In Progress
1,000,000
Billings
900,000
900,000
1,000,000
Balance Sheet
… in current assets:
CIP
Billings
1,000,000
(900,000)
Costs and Recognized Gross Profit
in excess of Billings
100,000
63

64. Completed Contract: Journal Entries
2004:
Construction in Progress (2,916 – 1,000)
Cash, A/P, etc.
1,916,000
1,916,000
A/R
Billings
2,400,000
2,400,000
Cash
A/R
1,750,000
1,750,000
J/E above are same as for % Completion (no entry made for
revenue and expense)
64

65. Completed Contract Balance Sheet 2004
Construction In Progress
1,000,000
Billings
900,000
1,916,000
2,400,000
3,300,000
2,916,000
Balance Sheet
… in current liabilities:
Billings
Less: CIP
3,300,000
(2,916,000)
Billings in excess of cost
and recognized gross profit
384,000
65

66. Completed Contract: Journal Entries
2005:
CIP (4,050 – 2,916)
Cash, A/P, etc.
1,134,000
A/R
Billings
1,200,000
Cash
A/R
2,000,000
1,134,000
1,200,000
2,000,000
Now that the project is done, we can close out the Billings and CIP accounts and
record Construction Revenue and Construction Expense:
Billings
Revenue
4,500,000
Construction Expenses
CIP
4.050,000
4,500,000
4,050,000
66

67. Completed Contract Balance Sheet 2005
CIP
Billings
1,000,000
900,000
2,400,000
1,916,000
4,500,000
4,500,000
1,134,000
1,200,000
4,500,000
4,050,000
4,050,000
-
4,050,000
67