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Appendix 8.2: Summary of Joint FASB-IASB Revenue Recognition Project

Appendix 8.2: Summary of Joint FASB-IASB Revenue Recognition Project

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The application of this core principle involves five steps, beginning with the requirement

that an implicit or explicit contract exists between the seller and buyer:

1.

2.

3.

4.

5.



Identify the contract with the customer.

Identify the separate performance obligations in the contract (this step could involve identifying separate components of a multiple deliverable arrangement).

Determine the transaction price.

Allocate the transaction price to the separate performance obligations.

Recognize revenue when a performance obligation is satisfied (that is, at the point when

the customer obtains control of the good or service by, for example, taking legal title and

physical possession). The proposals also clarify that a firm can satisfy a performance obligation over time, under certain conditions.



In many cases, the proposals would not affect current accounting practice. For example, the

proposal does not affect revenue recognition for cash transactions at the point of sale. As

another example, the proposed guidance does not rule out the percentage-of-completion

method. Also, many of the current accounting practices that would be affected by the proposals apply to arrangements that are beyond the scope of this introductory textbook. There are,

however, four proposed differences that would affect the accounting approaches covered in

Chapter 8:

1.



2.



3.



4.



The proposals focus on the existence of a contract with a customer, not the receipt of an

asset. The proposals would not require a collectibility threshold for revenue recognition, so

the installment method and the cost recovery method could be affected. If, however, collectibility is sufficiently in doubt, a contract may not exist, precluding revenue recognition.

The proposals focus on a transaction price and not a fixed or determinable amount, as is

currently required under SAB 104. The transaction price could include variable elements

whose effect on the transaction amount would have to be estimated.

The proposed treatment of multiple-deliverable or multiple-element contracts requires the

seller to evaluate the contract to determine which components are distinct. Distinct is a

newly proposed term that refers to whether the seller regularly sells the good or service

separately or whether the customer can benefit from the good or service on its own or with

other items it can easily obtain. The proposals for allocating total sales revenues to separate

elements, however, are similar to the procedures described for Apple in the chapter that are

based on stand-alone selling prices for separate contract components, including estimates

of those prices.

The proposals would require that the reduction in income associated with expected uncollectible receivables appear as a reduction in revenue, not as an expense, for example, Bad

Debt Expense. This change would not affect income but would affect the line items on the

income statement.



SOLUTIONS TO SELF-STUDY PROBLEMS

SUGGESTED SOLUTION TO PROBLEM 8.1 FOR SELF-STUDY

(Sony Corporation; revenue recognition at time of sale, or after sale, or before sale.)

a. At the time of shipment to Great Deal, Sony has incurred most of its costs. Experience

should provide Sony with sufficient evidence to estimate the cost of damaged and defective

televisions. Thus, the arrangement appears to meet the first criterion for revenue recognition, substantial performance. The second criterion is also met because there is an agreedon price (of $2,000 per television), and Great Deal agrees to pay within 30 days. Sony

may recognize the revenue from this transaction when Great Deal takes possession of the

televisions, normally either when Great Deal receives the televisions or when Sony ships the

televisions.



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b. This arrangement is similar to a. At the time of shipment, Sony has met the first criterion for revenue recognition. There may be substantial uncertainty, however, about whether

Great Deal will return the televisions for a refund. Sony can recognize revenues on this

transaction at the earlier of two dates: (1) when Great Deal notifies Sony that it has sold all

televisions, or (2) six months after Great Deal’s receipt of the televisions. At both of these

times, there is no uncertainty about the return of televisions to Sony. Great Deal has committed to pay Sony within 30 days. If Sony can reliably estimate the number of televisions

it expects Great Deal to return, then U.S. GAAP might allow Sony to recognize revenue

the same way as in part a, depending on other factors not discussed here.

c. In this setting, Great Deal acts as a consignee for Sony’s televisions; Sony is the consignor.

In a consignment arrangement, the consignor (Sony) sends goods (televisions) to a consignee (Great Deal) for sale, with Sony holding title until Great Deal makes a sale. Sony

should not recognize revenue when it ships the televisions because the amount that Sony

ultimately receives depends on whether and at what price Great Deal sells the televisions.

Therefore, the amount of cash that Sony will collect is uncertain with regard to both

amount and timing. Thus, Sony should recognize revenue only when it receives the cash

from Great Deal or when Great Deal notifies Sony of the amounts it will remit for sales

made this period.



SUGGESTED SOLUTION TO PROBLEM 8.2 FOR SELF-STUDY

(Scania; revenue recognition at time of sale.)

a. To record sale of four truck engines at SEK20,000 per engine, with payment from the customer to be received in 60 days.

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



80,000

80,000



b. Scania makes no journal entry at the time it signs the SEK250,000 contract for the 50

transport containers because there has been no performance and the customer has not

made any payments.

c. Customer makes payment in full for four engines from part a.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



80,000

80,000



d. To record sale of a truck for SEK725,000.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



145,000

580,000

725,000



e. To record revenue, delivery of containers, and receipt of customer payment.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



250,000

250,000



f. To write off an uncollectible account, for SEK580,000.

Allowance for Uncollectibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



580,000

580,000



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g. To record bad debt expense for the year.



Bad Debt Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Allowance for Uncollectibles . . . . . . . . . . . . . . . . . . . . . . . . . . . .



1.4 billion

1.4 billion



SUGGESTED SOLUTION TO PROBLEM 8.3 FOR SELF-STUDY

(Scania; revenue recognition after sale when substantial performance remains.)

a. To record the receipt of SEK250,000 as a customer advance on the contract to deliver 50

containers. Scania has not performed its obligation to deliver containers.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Advances from Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



250,000

250,000



b. To record the sale of the truck, training session, and customer support.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Advances from Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The sum of the separate selling prices of the three contract elements is

SEK780,000 (= SEK690,000 + SEK40,000 + SEK50,000). The portion of

the contract price allocated to the truck is SEK641,347 (= SEK725,000 ×

[SEK690,000/SEK780,000]). The portion attributable to the training session

is SEK37,179 (= SEK725,000 × [SEK40,000/SEK780,000]), and the portion

attributable to the customer support is SEK46,474 (= SEK725,000 ×

[SEK50,000/SEK780,000]).



145,000

580,000

641,347

83,653



c. To record delivery of the containers (part a) and delivery of the training session (part b).

Advances from Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



250,000



Advances from Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



37,179



250,000



37,179



d. No journal entry because there has been only an exchange of promises.

e. To record the payment made by the customer pursuant to the contract in part d.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Advances from Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



200,000

200,000



f. The adjusting entry for eight months of customer support, May–December (part b).



Advances from Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

From part b, the portion of total contract revenue allocated to customer

support is SEK46,474 (= SEK725,000 × [SEK50,000/SEK780,000]). Scania

will recognize this amount as revenue ratably (equally) over the three-year

(36-months) term of the customer support. 2013 revenue is SEK10,328 (=

SEK46,474 × [8 months/36 months]) for support during May–December.



10,328

10,328



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SUGGESTED SOLUTION TO PROBLEM 8.4 FOR SELF-STUDY

(Scania; income recognition when collectibility is uncertain.)

a. Analysis and journal entries under the installment method. At the time of sale, Scania derecognizes the two trucks, recognizes a receivable, and recognizes a deferred gross margin of

SEK100,000 (= SEK1,080,000 – SEK980,000). The gross margin percentage is approximately 9.26% (= SEK100,000/SEK1,080,000). The journal entry at time of sale is

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred Gross Margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



1,080,000

980,000

100,000



By convention, Scania might display the deferred gross margin among its liabilities; we

classify it as a reduction of assets following Concepts Statement 6.

June–August: Project Hope makes three monthly payments. The journal entry to

record each of the three payments is

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost of Goods Sold (plug) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Scania collects 1/12th of the total contract price, or SEK90,000 (=

SEK1,080,000/12 months) and recognizes this amount as revenue. Under

the installment method, Scania also recognizes gross margin = gross margin

percentage (0.0926) × cash received (SEK90,000) or SEK8,334. After Project

Hope has made three payments of SEK90,000 each, the balance in Accounts

Receivable is SEK810,000 (= SEK1,080,000 – [3 × SEK90,000]). The balance

in Deferred Gross Margin is SEK74,998 (= SEK100,000 – [3 × SEK8,334]).



90,000

8,334

81,666

90,000

90,000



After Project Hope fails to make the promised payments, in December 2013 Scania repossesses the two trucks when their net realizable value is SEK690,000:

Inventory—Repossessed Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss on Repossession (plug) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Scania writes off the remaining balances in Accounts Receivable and

Deferred Gross Margin, recognizes the repossessed inventory at its net

realizable value, and recognizes a loss.



690,000

74,998

45,002

810,000



b. Analysis and journal entries using the cost recovery method. At the time of sale, Scania

makes the same journal entries under both the installment method and the cost recovery

method.

June–August: Project Hope makes three monthly payments. The journal to record

each of the three payments is



Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Scania collects 1/12th of the total contract price, or SEK90,000 (=

SEK1,080,000/12 months). Under the cost recovery method, Scania

recognizes cost of goods sold equal to revenue until it recovers the entire

cost of SEK980,000. Gross margin each month during June–August is zero.

After Project Hope has made three payments, the balance in Accounts

Receivable is SEK810,000 (= SEK1,080,000 – [3 × SEK90,000]). The

balance in Deferred Gross Margin is SEK100,000.



90,000

90,000

90,000

90,000



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After Project Hope fails to make the promised payments, in December 2013 Scania repossesses the two trucks when their net realizable value is SEK690,000:



Inventory—Repossessed Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss on Repossession (plug) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Scania writes off the remaining balances in Accounts Receivable and

Deferred Gross Margin, recognizes the repossessed inventory at its net

realizable value and recognizes a loss.



690,000

100,000

20,000

810,000



SUGGESTED SOLUTION TO PROBLEM 8.5 FOR SELF-STUDY

(General Construction Company; income recognition for a long-term construction contract.)

a. Percentage-of-completion method:

Incremental

Percentage

Complete



Revenue

Recognized



Expenses

Recognized



Net Income



30/100 (= 0.30)

60/100 (= 0.60)

10/100 (= 0.10)

100/100 (= 1.00)



¥ 43.5 million

87.0 million

14.5 million

¥145.0 million



¥ 30.0 million

60.0 million

10.0 million

¥100.0 million



¥13.5 million

27.0 million

4.5 million

¥45.0 million



Expenses

Recognized



Net Income



0

0

100.0 million

¥100.0 million



¥ 0

0

45.0 million

¥45.0 million



Year

2014. . . . . . . . . . . . . . . . . . . .

2015. . . . . . . . . . . . . . . . . . . .

2016. . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . .



b. Completed contract method:

Revenue

Recognized



Year

2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



¥



0

0

145.0 million

¥145.0 million



¥



c. IFRS, when GC cannot reliably estimate the contract’s outcome:



Year

2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



Revenue

Recognized

¥ 30.0 million

60.0 million

55.0 million

¥145.0 million



Expenses

Recognized



Net Income



¥ 30.0 million

60.0 million

10.0 million

¥100.0 million



¥ 0

0

45.0 million

¥45.0 million



KEY TERMS AND CONCEPTS

Revenue recognition

Revenue measurement

Expense recognition

Sales returns

Multiple deliverable contract

Percentage-of-completion method



Accounts receivable, trade receivables

Uncollectible account

Allowance method

Allowance for Uncollectibles account

Accounts Receivable, Gross account

Accounts Receivable, Net account



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Questions, Exercises, and Problems



Bad Debt Expense, Provision for Bad

Debts, Provision for Uncollectible

Accounts

Control (or controlling) account

Writing off

Percentage-of-sales procedure

Aging-of-accounts-receivable procedure

Accounts receivable turnover ratio

Days receivables outstanding

Securitization



Deferred performance obligations,

Advances from Customers, Deferred

Revenue, Unearned Revenues

Installment method

Gross margin percentage, gross margin

Cost recovery method

Progress payments

Percentage-of-completion method

Construction in Progress, Construction in

Process account

Completed contract method



QUESTIONS, EXERCISES, AND PROBLEMS

QUESTIONS

1. Review the meaning of the terms and concepts listed above in Key Terms and Concepts.

2. The cost recovery method and the completed contract method of recognizing revenues are

similar in that both methods delay the recognition of income even if a firm collects cash.

In what ways do the two methods differ?

3. The accounting for a multiple-element contract separates the contract with a customer

into pieces (components or deliverables) and assigns each component a portion of the

total contract revenue. The percentage-of-completion method of accounting for a longterm construction contract also separates the contract for accounting purposes. How do

the approaches used by the multiple-element contract method and the percentage-ofcompletion method to separate the contract differ from, and resemble, each other?

4. The allowance method of accounting for uncollectible accounts receivable involves the creation of a contra account that shows the estimated amount of uncollectible receivables.

Why would financial statement users want to know both this number and the gross amount

of accounts receivable?

5. a. An old wisdom in tennis holds that if your first serves are always good, you are not hitting them hard enough. An analogous statement in business might be that if you have

no uncollectible accounts, you probably are not selling enough on credit. Comment on

the validity and parallelism of these statements.

b. When are more uncollectible accounts better than fewer uncollectible accounts?

c. When is a higher percentage of uncollectible accounts better than a lower percentage?

6. Under what circumstances will the Allowance for Uncollectible Accounts have a debit balance during the accounting period? The balance sheet figure for the Allowance for Uncollectible Accounts at the end of the period should never show a debit balance. Why?

7. Construction companies often use the percentage-of-completion method. Why doesn’t a

typical manufacturing firm use this method of income recognition?

8. Both the installment method and the cost recovery method recognize revenue when a firm

collects cash. Why, then, does the pattern of income (that is, revenues minus expenses) over

time differ under these two methods?

9. “When the total amount of cash that a firm expects to collect from a customer is highly

uncertain, the cost recovery method seems more appropriate than the installment method.”

Explain.

10. A magazine publisher offers a reduced annual subscription fee if customers pay for three

years in advance. Under this subscription program, the magazine publisher receives from

customers $45,000, which it credits to Advances from Customers. The estimated cost of

publishing and distributing magazines for these customers is $32,000. Why does accounting

report a liability of $45,000 instead of $32,000?

11. Both bad debt expense and expected returns reduce income in the period of sale. How does

the accounting for these two items differ and how is it similar?



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12. Conceptually, what kind of account is the Deferred Gross Margin account that arises

under the installment method of accounting? How is this account typically classified on

balance sheets?



EXERCISES

13. Revenue recognition for various businesses. Discuss when each of the following types of

businesses is likely to recognize revenue and related costs of sales:

a. A shoe store.

b. A shipbuilding firm constructing an aircraft carrier under a government contract.

c. A real estate developer selling lots on long-term contracts with small down payments

required.

d. A barbershop.

e. A citrus-growing firm.

f. A producer of television movies working under the condition that it will sell the rights

to the movies to a television network for the first three years, and all rights thereafter

revert to the producer.

g. A residential real estate developer who constructs houses only on speculation and later

sells the houses to buyers.

h. A producer of fine whiskey that ages the whiskey from 6 to 12 years before sale.

i. A savings and loan association lending money for home mortgages.

j. A travel agency that sells tickets in one period to customers who take trips or return

tickets in the next period.

k. A printer who prints only custom-order stationery.

l. A seller to food stores of coupons redeemable by food store customers for various

household products.

m. A wholesale food distributor.

n. A livestock rancher.

o. A shipping company that loads cargo in one accounting period, carries cargo across

the ocean in a second accounting period, and unloads the cargo in a third period; the

shipping is all done under contract, and cash collection of shipping charges is relatively

certain.

14. Income recognition for various business arrangements. Refer to the conceptual revenue recognition guidance given in Appendix 8.1. Applying this conceptual guidance, discuss the

timing of revenue recognition and any related measurement issues.

a. Company A develops software and sells it to customers for an up-front fee. Company

A provides these customers with password-protected access to its Web site for two years

after delivery of the software. With this access, customers can download certain data

and other software. Company A has an obligation to provide updates on its Web site.

b. Company B develops software and sells it to newly formed storage application service

providers (SAPs), who promise to pay for the software over the next two years. These

SAPs in turn place the software on their Web sites and sell rights to access the software

to their customers.

c. Company C develops software that it places on its Web site. It sells rights to its customers to access this software online for a period of two years. Customers pay an up-front

fee for the right to access the software.

d. Company D maintains an auction site on the Web. It charges customers an up-front fee

to list products for sale and a transaction fee when a sale takes place. The transaction

fee is refundable if the auction winner fails to honor its commitment to purchase the

product.

e. Company E sells products of various supplier companies on its Web site. Company E

transmits customers’ purchase requests to the supplier companies, who fill the orders.

Customers pay for their purchases using third-party credit cards. Company E receives a

fee from the supplier companies for each item sold.



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f. Company F sells products of various supplier companies on its Web site. It promises

to the supplier companies to sell a minimum number of items each month and pays

storage and insurance costs for that minimum number of units. Actual storage of these

units takes place at the supplier companies’ warehouses. The supplier companies also

handle shipments to customers. Customers pay for their purchases using third-party

credit cards.

g. Company G manufactures and sells personal computers (PCs). Customers receive a

$400 rebate on the purchase of the computer if they will purchase Internet access services for three years after the purchase of the computer. Customers mail their rebate

coupons to the Internet service provider, called an ISP. The ISP bears 90% of the initial

cost of the rebate, and the PC manufacturer bears the other 10%. If customers do not

subscribe for the full three-year period, the parties reallocate the cost of the rebate, $360

(= 0.90 × $400) initially borne by the ISP and $40 (= 0.10 × $400) by the manufacturer, resulting in the PC manufacturer’s paying the ISP to reduce the ISP’s share of the

rebate’s cost from $360 to a smaller amount.

h. Company H sells advertising space on its Web site to other companies. For an up-front

fee, Company H guarantees to the other companies a certain minimum number of hits,

viewings, or click-throughs each month of the one-year contract period. It must return

a pro rata portion of the fee if the hits and click-throughs fall short of the guarantee.

i. Company I sells advertising space on its Web site to other companies. It recently received

10,000 shares of common stock of Upstart Company in payment for certain advertising

space. Upstart Company intends to make an initial public offering of its common stock

in six months. At the most recent financing round, venture capitalists paid $10 per share

for the common stock.

j. Company J and Company K both maintain Web sites. Each company sells advertising

space to the other company for an agreed-on period, with no funds changing hands.

15. Meaning of allowance for uncollectible accounts. Indicate whether each of the following

accurately describes the meaning of the Allowance for Uncollectible Accounts account

when properly used. If the description does not apply to this account, discuss why it does

not.

a. Assets available in case customers don’t later pay what they owe.

b. Cash available in case customers don’t later pay what they owe.

c. Estimates of the amount that customers who purchased goods this period, but who have

not yet paid, and won’t later pay.

d. Estimates of the amount of goods purchased by customers, whether paid or not, that

the firm estimates those customers will return.

e. Estimates of the amount that customers who purchased goods at any time, but who

have not yet paid, and won’t later pay.

f. Estimates of amount the firm will owe to others if its customers who purchased goods

this period don’t later pay what they owe.

g. Estimates of amount the firm will owe to others if its customers who ever purchased

goods don’t later pay what they owe.

h. Estimates of the amount of sales for the current period that will become bad debt

expense for the current period.

i. An amount of deferred revenue.

j. A part of retained earnings.

16. Revenue recognition at time of sale and advances from customers. Pret a Manger is a food

retailer with stores in the United Kingdom and the United States and is known for its fast

but fresh food menu. A customer shopping at a London Heathrow store purchased a ham

and cheese baguette (£4.50), a small fruit salad (£2.40), and a banana-bran muffin (£1.50).

The customer paid with cash.

a. What journal entry will Pret a Manger record for this transaction?

b. Suppose that, in addition to the above items, the customer purchased a Pret a Manger

card (to use for future purchases at Pret a Manger stores) for £40.00. What journal entry

will Pret a Manger record for this transaction?



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c. Suppose that, for the original transaction described in this problem, the customer did

not pay with cash but used a Pret a Manger card purchased a month earlier. Assume

there is a sufficient balance on the card to cover the cost of his purchases. What journal

entry did Pret a Manger record?

17. Revenue recognition at time of sale and advances from customers. A customer shopping

at Bed, Bath & Beyond, a home products retailer in the United States, made the following purchases: $100 for bath towels, $135 for an iron, $45 for an ironing board, and $250

for a gift certificate. Sales taxes on the purchase amounted to 5% of the total order. The

customer paid with cash. What journal entry will Bed, Bath & Beyond make to recognize

revenue on this transaction? Ignore the journal entries to recognize the expenses.

18. Revenue recognition at time of sale. Marks and Spencer Group, Plc., a U.K. retailer, applies

IFRS and reports its results in millions of pounds sterling (£). The notes to its financial

statements provide the following information:

■ Revenue comprises sales of goods to customers less an appropriate deduction for

returns and discounts. Marks and Spencer records revenues for sales of furniture and

items purchased online upon delivery to the customer.

■ Marks and Spencer records trade receivables at their nominal amount less an allowance for any doubtful accounts and sales returns. The beginning balance in the allowance for uncollectible accounts and sales returns was £1.1 million, and the ending

balance was £3.3 million. There were no recoveries of uncollectible accounts during

the year.

Assume that for the year ended March 29, 2013, Marks and Spencer reported revenues

(before discounts and returns) of £9,022.0 million. The cost of merchandise sold in 2013

was £5,535.2 million. Assume that Marks and Spencer estimates discounts and returns of

1% of sales. Further assume that it made all sales on credit and that it estimates that 1.5%

of revenues will be uncollectible.

a. What journal entry did Marks and Spencer record during the year ended March 29,

2013, to recognize revenues and expenses?

b. What journal entry did Marks and Spencer make in the year ended March 29, 2013, to

recognize sales returns and bad debts expense?

c. What was the combined amount of sales returns and write-offs of uncollectible accounts

during the year ended March 29, 2013?

19. Revenue recognition at time of sale. Assume that Lentiva Group Limited provided the following description of its revenue recognition policies in the notes to its financial statements.

■ Lentiva recognizes revenue from the sale of goods (such as sales of hardware and

software) when it effectively transfers both ownership and risk of loss to the customer,

generally when there is persuasive evidence a sales arrangement exists, the price is fixed

or determinable, collectibility is reasonably assured, and delivery has occurred.

■ Lentiva defers revenue from contracts to provide training services and amortizes those

amounts as earned over the contract period, generally three years.

Assume that on January 1, 2013, Lentiva sold 50,000 laptop computers to a public education system for $75 million. The price of the computers includes a contract for training

services, which Lentiva will provide evenly over the next two years. The separate selling

price of the training services is $100 per laptop, and the separate selling price of a laptop

is $1,500. Lentiva’s cost of a laptop is $1,200, and the expected cost to provide the training

is $50 per laptop. At the time of sale, the customer paid Lentiva $15 million, and promised

to pay the remaining amount owed in 30 days. Assuming that the arrangement meets the

first criterion to recognize revenue, what journal entries will Lentiva make on these dates:

a. January 1, 2013?

b. December 31, 2013?

c. December 31, 2014?

20. Journal entries for coupons. Morrison’s Cafeteria sells coupons that customers may use

later to purchase meals. Each coupon book sells for $25 and has a face value of $30; that

is, the customer can use the book to purchase meals with menu prices of $30. On January

1, redeemable unused coupons that Morrison’s had sold for $4,000 were outstanding. Cash

inflows during the next three months appear in the following table:



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Cash-Paying Customers . . . . . . . . . . . . . . . . . . . . . . . . . .

Sale of Coupon Books . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Cash Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . .



March



February



January



$50,000

2,400

$52,400



$48,500

2,200

$50,700



$48,000

2,100

$50,100



Customers redeemed coupons with a discounted face value for meals as follows: January,

$1,600; February, $2,300; March, $2,100.

a. Prepare journal entries for January, February, and March to reflect the above

information.

b. What effect, if any, do the coupon sales and redemptions have on the liabilities on the

March 31 balance sheet?

21. Journal entries for service contracts. Abson Corporation began business on January 1,

2013, selling copiers. It also sells service contracts to maintain and repair copiers for $600

per year. When a customer signs a service contract, Abson collects the $600 fee and credits Service Contract Fees Received in Advance. Abson recognizes revenues on a quarterly

basis during the year of coverage. For purposes of computing revenue, Abson assumes that

all sales of service contracts occur midway through each quarter. Sales of contracts and

service expenses for 2013 appear in the following table:



First Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



Sales of Contracts



Service

Expenses



$180,000 (300 contracts)

300,000 (500 contracts)

240,000 (400 contracts)

120,000 (200 contracts)



$ 32,000

71,000

105,000

130,000



a. Prepare journal entries for the first three quarters of 2013 for Abson Corporation.

Assume that the firm prepares quarterly reports on March 31, June 30, and September

30, 2013.

b. What is the balance in the Service Contract Fees Received in Advance account on

December 31, 2013?

22. Allowance method for uncollectible accounts. Diversified Technologies opened for business

on January 1, 2013. Sales on account during 2013 were $126,900. Collections from customers from sales on account during 2013 were $94,300. Diversified Technologies estimates

that it will ultimately not collect 4% of 2013 sales on account. During 2013 the firm wrote

off $2,200 of accounts receivable as uncollectible. The firm uses the allowance method for

uncollectible accounts.

a. Compute the amount of bad debt expense for 2013.

b. Compute the December 31, 2013, balance sheet carrying value of accounts receivable.

23. Aging of accounts receivable. York Company’s accounts receivable show the following

balances:



Age of Accounts



Balance

Receivable



0–30 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31–60 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61–120 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

More than 120 Days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



$1,200,000

255,000

75,000

30,000



York Company uses the aging-of-accounts-receivable procedure. The credit balance in the

Allowance for Uncollectible Accounts is now $16,000. Analysis of collection experience

suggests that York should use the following percentages to estimate the amounts that will

eventually prove uncollectible: 0–30 days, 0.5%; 31–60 days, 1.0%; 61–120 days, 10%; and

more than 120 days, 30%. Prepare the journal entry to provide for estimated uncollectible

accounts.



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24. Aging of accounts receivable. Dove Company’s accounts receivable show the following balances by age:



Age of Accounts



Balance

Receivable



Not yet due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0–30 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31–60 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61–120 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

More than 120 Days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



$1,200,000

400,000

90,000

40,000

20,000



The credit balance in the Allowance for Uncollectible Accounts is now $17,200. Dove

Company’s analyses of its collection experience suggest that Dove should use the following

percentages to estimate the amounts that will eventually prove uncollectible: 0–30 days,

half of 1.0%; 31–60 days, 1.0%; 61–120 days, 10%; and more than 120 days, 70%. Prepare

the journal entry to record Dove’s bad debt expense.

25. Aging of accounts receivable. Hamilia S.A.’s financial records show the following balances

in its accounts receivable:

Balance

Receivable



Age of Accounts

0–30 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31–60 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

91–150 Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

More than 150 Days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



€980,000

130,000

102,000

68,000



Hamilia uses the aging-of-accounts-receivable procedure. At the end of the fiscal year, the

credit balance in the Allowance for Uncollectible Accounts is €96,600. Hamilia’s analysis

of recent collection experience suggests it should use the following percentages to estimate

the amounts that will eventually prove uncollectible: 0–30 days, 0.5%; 31–90 days, 3.0%;

91–150 days, 15%; and more than 150 days, 75%. Prepare the journal entry to provide for

estimated uncollectible accounts.

26. Reconstructing events when using the allowance method. Selected data from the accounts of

Seward Corporation appear next; the firm’s fiscal year ends on December 31.



Accounts Receivable, Gross. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Allowance for Uncollectible Accounts . . . . . . . . . . . . . . . . . . . . . . . . .

Bad Debt Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



January 1



December 31



$82,900 Dr.

8,700 Cr.







$ 87,300 Dr.

9,100 Cr.

4,800 Dr.

240,000 Cr.



The firm makes all sales on account. There were no recoveries during the year of accounts

written off in previous years.

Give the journal entries for the following transactions and events during the year:

a. Sales on account.

b. Recognition of bad debt expense.

c. Write-off of uncollectible accounts.

d. Collection of cash from customers from sales on account.

27. Allowance method: reconstructing journal entry from events. (From a problem by S. A. Zeff.)

During 2013, Pandora Company wrote off $2,200 of accounts receivable as uncollectible.

Pandora Company collected no cash during 2013 for amounts it had written off in previous years. The balance in the Allowance for Uncollectible Accounts account on the balance sheet was $3,500 at the beginning of 2013 and $5,000 at the end of 2013. Present the

journal entry that the company made to provide for estimated uncollectibles during 2013.



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Appendix 8.2: Summary of Joint FASB-IASB Revenue Recognition Project

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