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Chapter 18: 2Q (page 1031)

What was viewed as a major criticism of GAAP as it relates to revenue recognition?

Short Answer

Expert verified

GAAP had numerous standards related to revenue recognition, but they were often inconsistent with one another.

Step by step solution

01

Introduction to Prior Standards  

According to asurvey,in prior standards,financial executives noted that the revenue recognition process is increasingly complex to manage, more prone to error, and more material to financial statements than any other financial reporting area.

The report noted that revenue recognition is a top fraud risk and that regardless of the accounting rules followed (GAAP or IFRS), the risk of errors and inaccuracies in revenue reporting is significant.

02

The explanation for lack of guidance

The FASB and the IASB have indicated that the state of reporting for revenue was unsatisfactory. IFRS was criticized because it lacked guidance in a number of areas.

IFRS had one general standard on revenue recognition plus some limited guidance related to certain minor topics. In contrast, GAAP had numerous standards related to revenue recognition, but many believed the standards were often inconsistent with one another.

Thus, the accounting for revenue provided a most fitting contrast of the principles-based (IFRS) and rules-based (GAAP) approaches.

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Most popular questions from this chapter

Why in franchise arrangements may it be improper to recognize the entire franchise fee as revenue at the date of sale?

When must multiple performance obligations in a revenue arrangement be accounted for separately?

Ismail Construction enters into a contract to design and build a hospital. Ismail is responsible for the overall management of the project and identifies various goods and services to be provided, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment, and finishing. Does Ismail have a single performance obligation to the customer in this revenue arrangement? Explain.

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 鈥�0鈥�

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.

Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer鈥檚 expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%. The costs of recovery are expected to be immaterial, and the textbooks are expected to be resold at a profit.

Instructions

(a) Identify the revenue recognition criteria that Uddin could employ concerning textbook sales.

(b) Briefly discuss the reasoning for your answers in (a) above.

(c) On July 1, 2017, Uddin shipped books invoiced at \(15,000,000 (cost \)12,000,000). Prepare the journal entry to record this transaction.

(d) On October 3, 2017, \(1.5 million of the invoiced July sales were returned according to the return policy, and the remaining \)13.5 million was paid. Prepare the journal entries for the return and payment.

(e) Assume Uddin prepares financial statements on October 31, 2017, the close of the fiscal year. No other returns are anticipated. Indicate the amounts reported on the income statement and balance related to the above transactions.
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