Selecting Revenue Recognition Methods

the principal advantage of the completed-contract method is that

C 73. Gross profit recognized under percentage-of-completion. A 74. Computation of construction in process amount.

The revenue recognition principle states that revenue is recognized when it is earned and realized or realizable. The installment method is generally used for high-ticket purchases when the reliability of customer payments is not guaranteed. Because the company is unsure about receiving payment, the installment method lets them recognize revenue only when payments are received, which could be over months or years, and often is unexpected. You can use this method whether the customer pays with cash, on credit or even has a high likelihood of paying. This method is not dependent on payment, it is the delivery of the goods or services that triggers the revenue recognition event.


The percentage of completion method must be used if the revenues and costs of a project can be reasonably estimated and the parties involved are expected to be able to complete all duties. The initial franchise fee is considered for establishing the franchise relationship and providing some initial services. Such fees are recorded as revenue only upon substantial performance by the franchiser and when collection of the initial franchise fee is reasonably assured. This statement is false because each time a portion of the revenue from an installment sale is collected, it is recognized as revenue. The statement in this question reads “…until the entire sales price is collected” which makes it false. What portion of the total contract price would be recognized as revenue in 2014 and in 2015?

It also sells an extended warranty which provides an additional two years of protection. On May 10, it sold a paging system for $4,500 and an extended warranty for another $1,400. The journal entry to record this transaction would include a. A credit to Warranty Revenue of $5,900.b. A credit to Warranty Revenue of $1,400c.

Time and Materials Contract

$1,400,000. $5,600,000. S38. One of the more popular input measures used to determine the progress toward completion in the percentage-of-completion method is a. Revenue-percentage basis.

the principal advantage of the completed-contract method is that

When services or investments are involved, the revenue will be recognized at the time the income is accrued. When a continuous service business is dealing with revenue, the revenue should be recognized by using the percentage completion method.

it reflects current performance when the period of a contract

This is one of the major differences between accrual basis accounting and cash basis accounting, since with cash accounting, revenue is recognized when payment is received, not when it’s earned. The timing of when revenue and expenses are recorded can result in big swings in earnings from reporting period to the next. Since accrual accounting doesn’t factor in when money actually changes hands, it reduces the impact of timing on a company’s financial records.

the principal advantage of the completed-contract method is that

T 2. Realization of revenue. T 3. Delayed recognition of revenue. F 4. Recognizing revenue when right of return exists.

A Cost Plus Incentive Fee Vs. a Fixed Priced Contract

Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. She previously worked as an accountant.

The percentage of completion and completed contract methods are often used by construction companies, engineering firms, and other businesses that operate on long-term contracts for large projects. Since income and expenses are often deferred during work on these long-term projects, companies seek to defer tax liabilities as well. Both the percentage of completion and completed contract methods allow for such tax deferral. The completed-contract method recognizes revenue and gross profit only at the point of sale, that is, when the contract is completed. Thus, reported revenue is based on final results rather than estimates of unperformed work as is the case with the percentage-ofcompletion method. The final amount of gross profit is the same under the completedcontract method as it is under the percentage-of-completion method.

Cost Fluctuations

Recognizes and measures revenue based on changes in assets and liabilities.d. Simplify revenue recognition practices across entities and industries. How should the balances of Progress Billings and Construction in Process be shown at reporting dates prior to the completion of a long-term contract? Progress Billings as deferred income, Construction in Progress as a deferred expense.b.

ALPHA & OMEGA SEMICONDUCTOR LTD Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K) –

ALPHA & OMEGA SEMICONDUCTOR LTD Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K).

Posted: Tue, 20 Sep 2022 10:05:12 GMT [source]

Does not need to have commercial substance. Revenue from a contract with a customera. the principal advantage of the completed-contract method is that Is recognized when the customer receives the rights to receive consideration.b.

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