Financial Accounting Module 08

Module 8Revenue Recognition

Recognition–Overview

Recognition refers to recording a transaction or item in the financial statements. When cash basis accounting is used, recognition is straightforward; when accrual accounting is used, it is a more difficult issue.

Revenues (and gains) are recognized when they are Realized or realizable. Earned.Realized revenue is cash received in exchange for goods or services. Realizable revenue refers to assets that have been received (in exchange for providing goods or services) that are readily convertible to cash. Earned revenue is recognized when an entity has substantially completed the activities involved in the earnings process.

The two criteria, revenue realized and revenue earned, are generally satisfied at the point of sale, which is when the customer receives its goods or services. Revenue recognition at the point of sale is the most common occurrence, but exceptions, which do occur, are the focus of this chapter.

Revenue Recognition Before or After Delivery of Goods

Some construction projects may take many years to complete. Consider a project that takes three years to complete. In such a project, if the company were to use the revenue earned criterion, it will not recognize any revenue in the first two years and will recognize the entire revenue in the third year. However, the company has devoted efforts toward completing the project in all three years, not just the third year. In such instances, the company may adopt the percentage-of-completion method. This method enables the company to recognize revenue throughout the duration of the project –that is, before the final product has been delivered to the customer.

In other instances, the company may have delivered the product but may recognize revenue only later. For example, the customer may pay over a period of time after the product or service has been delivered (such as in real estate projects). In these cases, if the likelihood of collecting all the amounts due from the customer is uncertain, the company may recognize revenue periodically as it collects cash from the customer.

Percentage-of-Completion Method

Under the percentage-of-completion method, a company recognizes revenues and costs on a contract each period as the project moves toward completion. The revenue recognized each period depends on (1) the extent of work done and (2) the estimated

amount still required to complete the project. The actual costs incurred (for materials, labor, overhead, etc.) are charged to an inventory account. In addition, during each period the gross profit recognized also is charged to an inventory account (usually called the Construction-in-Progress account). Thus, the inventory account is valued at net realizable value as opposed to cost.

The steps in the percentage-of-completion method are as follows:

Step 1: Calculate the percentage to which the project has been completed.

Percent complete = (Total costs spent /Total estimated cost of project)

Note that the numerator includes amounts spent on the project to date, and, hence includes amounts spent in this period and in previous periods. The denominator is the total estimated cost of the project to date, which equals the total costs spent so far (the numerator) plus the cost estimated to complete the project.

Step 2: Calculate the cumulative amount of revenues to be recognized to date.

Revenues to be recognized to date = (Percent complete x The contract price)

Step 3: Calculate the revenues to be recognized this period.

Revenues for this period = Cumulative revenues prior to this period (step 2) – Revenues recognized prior to the previous period.

Step 4: Calculate whether the project is expected to yield a gross profit based on the costs so far and the expectations about future costs.

To do this, we must add the project cost to date plus the costs expected to complete. If this total is less than the contract price for the project, the project result in a gross profit. For a gross profit, go to step 5. If a negative gross profit (loss) from the project is expected, go to step 7.

Step 5: Calculate the cumulative gross profit to be recognized prior to this period.

Gross profit to date = Percentage complete x Total gross profit expected from the project to date.

Note that if the cost estimates change, the expected total gross profit from the project may change from period to period.

Step 6: Calculate the gross profit to be recognized this period.

Gross profit for this period = Cumulative gross profit up to this period (step 5) – Gross profit recognized up to the previous period

Note that this procedure may yield a loss for some of the intermediate years even though the overall project may still be profitable. Such a situation may arise if too much profit has been recognized in earlier years and the costs have escalated since the initial estimation.

Accounting for Loss on a Project

Two points need to be remembered if the overall project results in a loss: 1. Under the conservatism principle, the loss on the project must be immediately

recognized.2. Profits recognized in previous years must also be immediately reversed. Note that the firm may have already recognized some gross profit in earlier years. (When a company begins a project, it selects a profitable project. So, at least in the first year, the firm may have recognized some gross profit.) The second point addresses this fact and requires the reversal of such profits recognized in earlier years.

Step 7: Calculate the loss for the period if it is determined that the gross profit on the project will be negative (that is, a loss).

Consider a project expected to take three years to complete. At the end of the first year, the gross profit on the project is expected to be $10 million. If the project is 30% complete at the end of the first year, then gross profit of $3 million (0.30 x $10 million) should be recognized in the first year. Assume that cost increases occur during the second year, and, as a result, the overall project is expected to result in a loss of $2 million. Hence, during the second year, the profit of $3 million recognized in the first year must be recognized, and the expected loss of $2 million, must be recognized immediately. Thus, in the second year, the gross profit recognized will be negative $5 million, or a loss of $5 million.

Installment Sales Method

The installment sales method is used when cash collection from customers is uncertain. In such instances, accrual accounting is inappropriate because it may result in “front-end loading” of revenues. The installment sales method may be used for real estate transactions, which involve long collection periods.

The installment sales method of accounting is different from installment sales. Installment sales may or may not be accounted for using the installment sales method of accounting.

Under the installment sales method of accounting, the gross profit rate for sales is calculated each year. Two accounts, Installment Accounts Receivable and Deferred Gross Profit, are established for each separate year of sales. As collections are made

from a given year’s receivables, a proportional amount of gross profit is recognized. The proportional amount is obtained by multiplying the cash collected from a particular year’s sales by the gross profit rate for that year’s sales.

ExampleSmith Company, which uses the installment sales method of accounting, had sales of $100,000 and $120,000 in 2002 and 2003, respectively. Gross profit rates were 30% and 35% in 2002 and 2003, respectively. Collections from receivables were $20,000 in 2002 and $54,000 (with $30,000 of this amount coming from 2002 sales) in 2003. What gross profit should be the recognized in 2002 and 2003?

Cash collections in 2002 are $20,000, all from 2002 sales.Gross profit recognized in 2002 = (0.30 x $20,000) = $6,000

Cash collections in 2003 are $30,000 from 2002 sales and $24,000 from 2003 sales.Gross profit recognized in 2003 = (o.30 x $30,000) + (0.35 x $24,000) = $17,400

The cost recovery method is a variation of the installment sales method. It first applies all cash receipts to the cost of the items sold. Once the cost of the items sold has been “recovered,” subsequent cash collections are recognized as gross profit. This method is used when very high uncertainty surrounds the sale.

Glossary

Cost recovery method first applies all cash receipts to the cost of the items sold. Once the cost of the items sold are “recovered,” subsequent cash collections has been recognized as gross profit.

Earned revenue is recognized when an entity has substantially completed the activities in the earnings process.

Installment sales method is used when cash collection from customers is uncertain.

Percentage-of-completion method recognizes revenues each period as the project moves toward completion.

Realized revenue is cash received in exchange for goods or services.

Realizable revenue refers to means assets have been received (in exchange for providing goods or services) that are readily convertible to cash.

Recognition is the recording of a transaction or item in the financial statements.

Demonstration Problem 1Helms Company

Helms Company is constructing a bridge for the contract price of $2,000,000. The estimated project cost was $1,500,000. The project began in 2002 and will be completed in 2004. The amounts spent by the company, the cost estimates to complete at the end of each year, and the progress billings and cash collections each year were as follows:

2002 2003 2004Construction costs – material

$ 150,000 $ 350,000 $ 300,000

Construction costs – labor

125,000 200,000 140,000

Construction costs – overhead

100,000 160,000 75,000

Estimated costs to complete

1,125,000 465,000 -

Partial billings during the year

250,000 950,000 800,000

Cash collections during the year

200,000 850,000 950,000

Calculate the revenue and gross profit to be recognized each year. Prepare the necessary journal entries using the percentage-of-completion method.

Solution to Demonstration Problem 1, Helms Company

2002 2003 2004Construction costs during the year (A)

$ 375,000 $ 710,000 $ 515,000

Cumulative construction costs (B)

375,000 1,085,000(375,000 + 710,000)

1,600,000

Estimated costs to complete (C)

1,125,000 465,000 -

Total estimated cost of project (D = B + C)

1,500,000(375,000 + 1,125,000)

1,550,000(1,085,000 + 465,000)

1,600,000

Percent complete(E = B/D)

25% (375,000/1,500,000)

70%(1,085,000/1,550,000)

100%

Revenue recognized to date (%complete times contract price)

500,000(0.25 x $2,000,000)

1,400,000(0.70 x $2,000,000)

2,000,000

Revenue recognized for current year

500,000 900,000 600,000

Gross profit recognized to date

125,000 315,000(0.70 x $450,000)

400,000

Gross profit this year 125,000 190,000 85,000

Note:1. Gross profit recognized in 2002 = Total expected gross profit x Percent complete =

$500,000 x 0.25 = $125,000.2. Revenue recognized in 2003 = Revenue to be recognized through 2003 – Revenue

recognized in previous years = $1,400,000 – $500,000 = $900,000. 3. Gross profit recognized in 2003 = Total gross profit to be recognized prior to 2003 –

Gross profit recognized in prior years. Note that as of the end of 2003, the total expected project costs have been revised up to $1,550,000 so the revised total expected gross profit would be only $450,000, not $500,000. Hence, gross profit for 2003 = ($450,000 x 0.70) – $125,000 = $190,000.

4. Revenue and gross profit for 2004 are calculated in a similar manner.

Solution to Demonstration Problem,Helms Company – Journal entries

1. To record use of materials:2002 2003 2004

Debit Credit Debit Credit Debit CreditConstruction in Progress 150,000 350,000 300,000 Materials Inventory 150,000 350,000 300,000

2. To record labor costs:2002 2003 2004

Debit Credit Debit Credit Debit CreditConstruction in Progress 125,000 200,000 140,000 Wages Payable 125,000 200,000 140,000

3. To record overhead: 2002 2003 2004

Debit Credit Debit Credit Debit CreditConstruction in Progress 100,000 160,000 75,000 Accounts Payable 100,000 160,000 75,000

4. To record billings to customer during the year:2002 2003 2004

Debit Credit Debit Credit Debit CreditAccounts Receivable 250,000 950,000 800,000 Partial Billings 250,000 950,000 800,000

5. To record receipt of cash from customer:2002 2003 2004

Debit Credit Debit Credit Debit CreditCash 200,000 850,000 950,000 Accounts Receivable 200,000 850,000 950,000

6. To record recognition of revenue:2002 2003 2004

Debit Credit Debit Credit Debit CreditConstruction Expense 375,000 710,000 515,000Construction in Progress 125,000 190,000 85,000 Construction Revenue 500,000 900,000 600,000

7. To close out accounts at end of project:2004

Debit CreditPartial Billings 2,000,000 Construction in Progress 2,000,000

Demonstration Problem 2Dewey Company

Dewey Company is constructing a bridge. The contract price is $10 million, and the initial estimated project cost was $9 million. The amounts spent by the company and, the costs estimated to complete at the end of each year, and the progress billings and cash collections each year were as follows (all amounts are in thousands of dollars):

2002 2003 2004Construction costs during the year

$ 2,700 $ 5,700 $ 2,100


6,300 2,100 -


1,500 3,000 5,500


1,000 2,500 6,500

Calculate the revenue and gross profit to be recognized each year using the percentage-of-completion method.

Solution to Demonstration Problem 2, Dewey Company


$ 2,700 $ 5,700 $ 2,100


2,700 8,400(2,700 + 4,300)

10,500


6,300 2,100 -


9,000(2,700 + 6,300)

10,500(7,000 + 3,500)

10,500


30% (2,700/9,000)

80%(8,400/10,500)

100%


3,000(0.30 x $10,000)

8,000(0.8 x $10,000)

10,000


3,000 5,000 2,000


300 (500) (500)

Gross profit this year 300 (800) 0Note:1. Gross profit for 2002 = Total expected gross profit on project x Percent complete as

of 2002 = $1,000 x 0.30 = $300.2. Revenue recognized in 2003 = Revenue to be recognized through 2003 – Revenue

recognized in previous years = $8,000 – $3,000 = $5,000. 3. Gross profit recognized in 2003 = Total gross profit to be recognized prior to 2003 –

Gross profit recognized in prior years. Note that as of the end of 2003, the total expected project costs have been revised up to $10,500, so the overall project is expected to result in a loss of $500. Since a gross profit of $300 has already been recognized in previous years, the overall gross profit to be recognized in 2003 = ($500) – $300 = ($800).

4. Since the entire loss on the project has been recognized in 2003 and has not increased further, the gross profit recognized in 2004 is zero. If the loss had increased during 2004, that increased amount would have been recognized as a loss in 2004.

Demonstration Problem 3Gramm Company

Gramm Company sells merchandise and uses the installment method to account for sales because of uncertainties in cash collection. The following data relate to the company’s operations during the years 2002, 2003, and 2004. Prepare the necessary journal entries to record the sales, gross profit recognized, and cash collections.

2002 2003 2004Installment sales $ 350,000 $ 400,000 $ 440,000Cost of installment sales 210,000 260,000 242,000Cash collections From 2002 sales From 2003 sales From 2004 sales

150,000 100,000180,000

75,000120,000140,000

Solution to Demonstration Problem 3, Gramm Company

Cash collected in 2003 = $280,000 ($100,000 + $180,000)Cash collected in 2004 = $335,000 ($75,000 + $120,000 + $140,000)Gross profit percent for 2002 = 40% ([$350,000 – $210,000]/$350,000)Gross profit percent for 2003 = 35% ([$400,000 – $260,000]/$400,000)Gross profit percent for 2004 = 45% ([$440,000 – $242,000]/$440,000)

Journal entry during the year to record sales:2002 2003 2004

Debit Credit Debit Credit Debit CreditInstallment Receivable 350,000 400,000 440,000 Installment Sales 350,000 400,000 440,000

Journal entry during the year to record cost of sales:2002 2003 2004

Debit Credit Debit Credit Debit CreditCost of Installment Sales 210,000 260,000 242,000 Inventory 210,000 260,000 242,000

Journal entry during the year to record cash collections:2002 2003 2004

Debit Credit Debit Credit Debit CreditCash 150,000 280,000 335,000 Installment Receivable 150,000 280,000 335,000

End-of-year journal entry for installment method adjustment: 2002 2003 2004

Debit Credit Debit Credit Debit CreditInstallment Sales 350,000 400,000 440,000 Cost of Installment Sales 210,000 260,000 242,000 Deferred Gross Profit 140,000 140,000 198,000 Note: Deferred gross profit is the plug number here to make debits equal credits.

Realized gross profit calculations:For 2002, Realized gross profit = $60,000 (0.40 x $150,000)For 2003, Realized gross profit = $103,000 (0.40 x $100,000) + (0.35 x $180,000)For 2004, Realized gross profit = $135,000 (0.40 x $75,000) + (0.35 x $120,000) + (0.45 x $140,000)

End-of-year journal entry for gross profit recognition: 2002 2003 2004

Debit Credit Debit Credit Debit CreditDeferred Gross Profit 60,000 103,000 135,000 Realized Gross Profit 60,000 103,000 135,000

Practice Problem 1Kennedy Company

Kennedy Company is constructing an airport. The contract price is $50,000,000, and the initial estimated project cost was $40,000,000. The amounts spent by the company, and the costs estimated to complete at the end of each year, and the progress billings and cash collections each year were as follows (all amounts are given in thousands of dollars, for convenience):


$ 5,000 $ 10,000 $ 6,000


4,000 5,000 4,000


3,000 4,500 2,500


28,000 10,500 -


12,000 18,000 20,000


7,000 15,000 28,000


Solution to Practice Problem 1, Kennedy Company


$ 12,000 $ 19,500 $ 12,500


12,000 31,500(12,000 + 19,500)

44,000(31,500 + 12,500)


28,000 10,500 -


40,000(12,000 + 28,000)

42,000(31,500 + 10,500)

44,000


30% (12,000/40,000)

75%(31,500/42,000)

100%


15,000(0.30 x $50,000)

37,500(0.75 x $50,000)

50,000


15,000 22,500 12,500


3,000 6,000(0.75 x $8,000)

6,000

Gross profit this year 3,000 3,000 0

Note:1. Gross profit recognized in 2002 = Total expected gross profit x Percent complete =

$10,000 x 0.20 = $3,000.2. Revenue recognized in 2003 = Revenue to be recognized through 2003 – Revenue


Gross profit recognized in prior years. Note that as of the end of 2003, the total expected project costs have been revised up to $42,000, so the revised total expected gross profit will be only $8,000, not $10,000. Hence, gross profit for 2003 = ($8,000 x 0.75) – $3,000 = $3,000.

4. Revenue and gross profit for 2004 are calculated in a similar manner.

Solution to Practice Problem 1,Kennedy Company, Journal Entries

1. To record use of materials 2002 2003 2004


2. To record labor costs2002 2003 2004


3. To record overhead 2002 2003 2004


4. To record billings to customer during the year2002 2003 2004


5. To record receipt of cash from customer2002 2003 2004


6. To record recognition of revenue2002 2003 2004

Debit Credit Debit Credit Debit CreditConstruction Expense 12,000 19,500 12,500Construction in Progress 3,000 3,000 0 Construction Revenue 15,000 22,500 12,500

7. To close out accounts at end of project2004

Debit CreditPartial Billings 50,000 Construction in Progress 50,000

Practice Problem 2Hoover Company

Hoover Company is constructing a road. The contract price is $30 million, and the initial estimated project cost was $25 million. The amounts spent by the company, and the costs estimated to complete at the end of each year, and the progress billings and cash collections each year were as follows (all amounts are in thousands of dollars):


$ 10,000 $ 11,000 $ 7,000


15,000 7,000 -

Partial billings to customer

8,000 10,000 12,000


7,000 9,000 14,000


Solution to Practice Problem 2, Hoover Company


$ 10,000 $ 11,000 $ 7,000


10,000 21,000(10,000 + 11,000)

28,000


15,000 7,000 -


25,000(10,000 + 15,000)

28,000(21,000 + 7,000)

28,000


40% (10,000/25,000)

75%(21,000/28,000)

100%


12,000(0.40 x $30,000)

22,500(0.75 x $30,000)

30,000


12,000 10,500 7,500


2,000 1,500(0.75 x 2,000)

2,000

Gross profit this year 2,000 (500) 500Note:1. Gross profit for 2002 = Total expected gross profit on project x Percent complete as

of 2002 = $5,000 x 0.40 = $2,000.2. Revenue recognized in 2003 = Revenue to be recognized through 2003 – Revenue


Gross profit recognized in prior years. Note that as of the end of 2003, the total expected project costs have been revised up to $28,000, so the overall project is expected to result in a gross profit of $2,000. Since the project is 75% complete as of the end of 2003, the cumulative gross profit to be recognized as of the end of 2003 is $1,500 (75 percent of $2,000). Since a gross profit of $2,000 has already been recognized in previous years, the overall gross profit to be recognized in 2003 is a loss of $500 ($1,500 – $2,000).

Practice Problem 3 Snowe Company

Snowe Company sells merchandise and uses the installment method to account for sales because of uncertainties in cash collection. The following data relate to the company’s operations during the years 2002, 2003, and 2004. Prepare the necessary journal entries to record the sales, gross profit recognized, and cash collections.


50,000 30,00070,000

15,00030,00080,000

Solution to Practice Problem 3, Snowe Company

Cash collected in 2003 = $100,000 ($30,000 + $70,000)Cash collected in 2004 = $125,000 ($15,000 + $30,000 + $80,000)

Gross profit percent for 2002 = 30% ([$100,000 – $70,000]/$100,000)Gross profit percent for 2003 = 25% ([$120,000 – $90,000]/$120,000)Gross profit percent for 2004 = 35% ([$150,000 – $97,500]/$150,000)







End-of-year journal entries for installment method adjustment: 2002 2003 2004

Debit Credit Debit Credit Debit CreditInstallment Sales 100,000 120,000 150,000 Cost of Installment Sales 70,000 90,000 97,500 Deferred Gross Profit 30,000 30,000 52,500 Note: Deferred gross profit is the plug number here to make debits equal credits.

Realized gross profit calculations:For 2002, Realized gross profit = $15,000 (0.30 x $50,000)For 2003, Realized gross profit = $26,500 (0.30 x $30,000) + (0.25 x $70,000)For 2004, Realized gross profit = $40,000 (0.30 x $15,000 )+ (0.25 x $30,000) + (0.35 x $80,000)End-of-year journal entries for gross profit recognition:

2002 2003 2004Debit Credit Debit Credit Debit Credit

Deferred Gross Profit 15,000 26,500 40,000 Realized Gross Profit 15,000 26,500 40,000

Homework Problem 1Lott Company

Lott Company is constructing a shipyard. The contract price is $100 million, and the initial estimated project cost was $90 million. The amounts spent by the company, and the costs estimated to complete at the end of each year, and the progress billings and cash collections each year were as follows (all amounts are given in thousands of dollars):


$ 7,000 $ 14,000 $ 25,000


6,000 10,000 15,000


5,000 5,500 8,500


72,000 47,500 -


15,000 30,000 55,000


12,000 27,000 61,000


Solution to Homework Problem 1, Lott Company


$ 18,000 $ 29,500 $ 48,500


18,000 47,500(18,000 + 29,500)

96,000(47,500 + 48,500)


72,000 47,500 -


90,000(12,000 + 72,000)

95,000(47,500 + 47,500)

96,000


20% (18,000/90,000)

50%(47,500/95,000)

100%


20,000(0.20 x $100,000)

50,000(0.50 x $100,000)

100,000


20,000 30,000 50,000


2,000 2,500(0.50 x $5,000)

4,000

Gross profit this year 2,000 500 1,500

Solution to Homework Problem 1,Lott Company, Journal Entries

1. To record use of materials: 2002 2003 2004


2. To record labor costs:2002 2003 2004


3. To record overhead:2002 2003 2004


4. To record billings to customer during the year:2002 2003 2004


5. To record receipt of cash from customer:2002 2003 2004


6. To record recognition of revenue:2002 2003 2004

Debit Credit Debit Credit Debit CreditConstruction Expense 18,000 29,500 48,500Construction in Progress 2,000 500 1,500 Construction Revenue 20,000 30,000 50,000

7. To close out accounts at end of project:2004

Debit CreditPartial Billings 100,000 Construction in Progress 100,000

Homework Problem 2Landon Company

Landon Company is constructing a dam. The contract price is $60 million, and the initial estimated project cost was $50 million. The amounts spent by the company, and the costs estimated to complete at the end of each year, and the progress billings and cash collections each year were as follows (all amounts are in thousands of dollars):


$ 10,000 $ 29,000 $ 28,000


40,000 36,000 -

Partial billings to customer

8,000 25,000 27,000


4,000 20,000 36,000


Solution to Homework Problem 2, Landon Company


$ 10,000 $ 29,000 $ 27,000


10,000 39,000(2,700 + 4,300)

66,000


40,000 26,000 -


50,000(10,000 + 40,000)

65,000(39,000 + 26,000)

66,000


20% (10,000/50,000)

60%(39,000/65,000)

100%


12,000(0.20 x $60,000)

36,000(0.6 x $60,000)

60,000


12,000 24,000 24,000


2,000 (5,000) (6,000)

Gross profit this year 2,000 (7,000) (1,000)Note:1. Gross profit for 2002 = Total expected gross profit on project x Percent complete as

of 2002 = $10,000 x 0.20 = $2,000.2. Revenue recognized in 2003 = Revenue to be recognized through 2003 – Revenue


Gross profit recognized in prior years. Note that as of the end of 2003, the total expected project costs have been revised up to $65,000 so that the overall project is expected to result in a loss of $5,000. Since a gross profit of $2,000 has already been recognized in previous years, the overall gross profit to be recognized in 2003 = ($5,000) – $2,000 = ($7,000).

4. Since the cost of the project has increased from an expected $65,000 at the end of 2003 to an actual cost of $66,000 at the end of 2004, an additional loss of $1,000 must be recognized during 2004.

Practice Problem 3 Jeffords Company

Jeffords Company sells merchandise and uses the installment method to account for sales because of uncertainties in cash collection. The following data relate to the company’s operations during the years 2002, 2003, and 2004. Prepare the necessary journal entries to record the sales, gross profit recognized, and cash collections.


80,000 60,000110,000

40,00080,000

100,000

Solution to Homework Problem 3, Jeffords Company

Cash collected in 2003 = $170,000 ($60,000 + $110,000)Cash collected in 2004 = $220,000 ($40,000 + $80,000 + $100,000)

Gross profit percent for 2002 = 20% ([$200,000 – $160,000]/$200,000)Gross profit percent for 2003 = 20% ([$250,000 – $200,000]/$250,000)Gross profit percent for 2004 = 25% ([$300,000 – $225,000]/$300,000)







End-of-year journal entries for installment method adjustment: 2002 2003 2004

Debit Credit Debit Credit Debit CreditInstallment Sales 200,000 250,000 300,000 Cost of Installment Sales 160,000 200,000 225,000 Deferred Gross Profit 40,000 50,000 75,000 Note: Deferred gross profit is the plug number here, to make debits equal credits.

Realized Gross Profit calculations:For 2002, Realized gross profit = $16,000 (0.20 x $80,000)For 2003, Realized gross profit = $34,000 (0.20 x $60,000) + (0.20 x $110,000)For 2004, Realized gross profit = $49,000 (0.20 x $40,000) + (0.20% x $80,000) + (0.25 x $100,000)End-of-year journal entries for gross profit recognition:

2002 2003 2004Debit Credit Debit Credit Debit Credit

Deferred Gross Profit 16,000 34,000 49,000 Realized Gross Profit 16,000 34,000 49,000

Financial Accounting Module 08

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