Wood-Mode Company is involved in the design, manufacture, and installation of va

Question

Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay $2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the arena due to the delay, Stadium has provided a deposit of $300,000.

Instructions

Explain this type of revenue recognition transaction.

What factors should be considered in determining when to recognize revenue in this transaction?

Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time of sale the $300,000 payment.

Explain this type of revenue recognition transaction.

Explanation / Answer

(c) Cash Dr 300000

Accounts Recievable Dr 1700000

to sales revenue 2000000

(a)

The revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine theaccounting period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold.

Cash can be received in an earlier or later period than obligations are met (when goods or services are delivered) and related revenues are recognized that results in the following two types of accounts:

Revenue realized during an accounting period is included in the income

(b)

IFRS provides five criteria for identifying the critical event for recognizing revenue on the sale of goods

The first two criteria mentioned above are referred to as Performance. Performance occurs when the seller has done most or all of what it is supposed to do to be entitled for the payment. E.g.: A company has sold the good and the customer walks out of the store with no warranty on the product. The seller has completed its performance since the buyer now owns good and also all the risks and rewards associated with it. The third criterion is referred to as Collectability. The seller must have a reasonable expectation of being paid. An allowance account must be created if the seller is not fully assured to receive the payment. The fourth and fifth criteria are referred to as Measurability. Due to Matching Principle, the seller must be able to match expenses to the revenues they helped in earning. Therefore, the amount of Revenues and Expenses should both be reasonably measurable

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