Respond to the following: a. When is revenue generally recognized, and what are three other alternative points in time for recognizing revenue? b. When is each alternative revenue recognition method appropriate and why have these methods evolved? c. What is the primary criterion for revenue recognition applied in practice, and what attributes must be measurable before revenue is recognized.
What will be an ideal response?
ANSWER:
a. Revenues should be identified with the period during which the major economic activities necessary to the creation and disposition of goods and services have been accomplished. Revenues generally are recognized at the point of sale when legal title is transferred. Three alternative points in time for recognizing revenue are: (1) during production; (2) at the completion of production; and (3) when cash is collected.
b. Revenue may be recognized during production for long-term construction contracts if reliable estimates of the extent of progress and of the cost to complete can be made and if reasonable assurance of collectibility exists. If immediate marketability at a quoted price exists for a product whose units are interchangeable, revenue may be recognized at the completion of production. Recognizing revenue on a cash basis, either installment or cost recovery, is allowed if no reasonable basis exists for estimating collectibility. The vast majority of exceptions to recognizing revenue at the point of sale have evolved because new transactions have emerged that do not fit the mold of traditional transactions.
c. The primary criterion for revenue recognition applied in practice is the completion of the earnings process. Attributes that must be measurable are: (1) sale price; (2) cash collection; and (3) future costs. If all three cannot be measured with reasonable accuracy when the earning process is complete, recognition must be delayed until reasonable measurements can be made.
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