I just want to make sure that I am approaching these problems correctly so I will only list one of the three probs.
Gina Construction Division
During the fiscal year ended November 30,2007, Gina Constgruction Division had one construction project in process. A $30,000,000 contract for construction of a civic center was granted on June 19,2007, and construction began on August 1,2007. Estimated costs of completion at the contract date were $25,000,000 over a 2-year time period from the date of the contract. On November 30, 2007, construction costs of $7,800,000 had been incurred and process billings of $9,500,000 had been made. The construction costs to complete the remainder of the project were reviewed on November 30,2007, and were estimated to amount to only $16,200,000 because of an expected decline in raw materials costs. Revenue recognition is based upon a percentage-of-completion method.
a) there are a variety of methods of revenue recognition. Define and describe each of the following methods of revenue recognition, and indicate whether each is in accordance with generally accepted accounting principles.
1) point of sale
2) completion of production
3) percentage of completion
4) Installment sazles contract
b) compute the revenue to be recognized in fiscal year 2007 for each of the three operating divisions in accordance with generally accepted accounting principles.
Here are your answers:
Point of Sale:
Revenue is recognized at the time of sale (defined as the moment when the title of the goods or services is transferred to the buyer.) The sale can be for cash or credit (i.e., accounts receivable.) This means that revenue is not recognized even if cash is received before the transaction is complete. A magazine publisher, for example, that receives $120 a year for an annual subscription, will only recognize $10 of revenue every month. The reason is simple: if they went out of business, they would have to return a pro-rated portion of the annual subscription price to the customer since it had not yet delivered the merchandise for which it had been paid.
Completion of production:
This method allows recognizing revenues even if no sale was made. This applies to agricultural products and minerals because (1) there is a ready market for these products with reasonably assured prices, (2) the units are interchangeable, and (3) selling and distributing does not involve significant costs.
The completed-contract method should be used only when:
a. an entity has primarily short-term contracts,
b. the conditions for using the percentage-of-completion method cannot be met, or
c. there are inherent hazards in the contract beyond normal, recurring business risks.
Percentage of Completion:
The AICPA recommends that the percentage-of-completion method should ...