How do companies recognize revenue from a performance obligation over time?
As they progress toward fulfillment is measured, revenue from a performance obligation is realized over time.
Revenue recognition is a concept in accounting. According to the revenue recognition principle, revenue is recognized when things are exchanged for a monetary value (amount) or when services are rendered, and a monetary value (cash) is received in return.
Revenue from a performance obligation is recognized over time as the progress toward fulfillment is measured. The technique of progress measurement used should reflect the handover of control from the corporation to the customer. The cost-to-cost and units-of-delivery techniques are the most frequent. These approaches determine the amount of progress made in terms of costs, units, or value-added. Companies categorize many measurements as input or output measures, such as expenditures incurred, labor hours worked, tonnage produced, floors built, and so on. Input metrics (costs incurred, labor hours done) represent the time and effort put into a contract. Results are tracked using output measurements (tone’s produced, floors of a building built, miles of roadway completed, etc.). Neither can be applied generally to all long-term enterprises. Their application necessitates the application of judgment and careful adaptation to the situation. The cost-to-cost basis is the most common input metric used to gauge progress toward completion. A corporation calculates the percentage of completion using this method by comparing current expenses to the most recent estimate of total costs to execute the contract.
(Existence of a Contract) On May 1, 2017, Richardson Inc. entered into a contract to deliver one of its specialty mowers to Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of $900 in advance on May 15, 2017. Kickapoo pays Richardson on May 15, 2017, and Richardson delivers the mower (with cost of $575) on May 31, 2017.
(a) Prepare the journal entry on May 1, 2017, for Richardson.
(b) Prepare the journal entry on May 15, 2017, for Richardson.
(c) Prepare the journal entry on May 31, 2017, for Richardson.
Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth estimates returns of 20%. Organic Growth sells these seeds on account for $1,500,000 (cost $750,000) on January 2, 2017. Customers are required to pay the full amount due by March 15, 2017.
(a) Prepare the journal entry for Organic Growth at January 2, 2017.
(b) Assume that one customer returns the seeds on March 1, 2017, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased $100,000 of seeds from Organic Growth.
(c) Assume Organic Growth prepares financial statements quarterly. Prepare the necessary entries (if any) to adjust Organic Growth’s financial results for the above transactions on March 31, 2017, assuming remaining expected returns of $200,000.
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