Apply the revenue model
The five steps of the revenue recognition model; how the criteria determine whether revenue is recognized over time or at a single point; Exam 1 preparation.
Lecture 8 completes Unit 2 and is our last class before Exam 1. We apply the revenue model to one contract, change the facts, and finish with exam preparation.
- Date
- Thu 9/2480 minutes
- Reading
- Chapter 8: Apply the revenue model (read by next class) Optional Kieso equivalent: Chapter 3 and Chapter 17
- Engagement points
- Scored5 points for answering at least 75%
Slides and downloads
View the slides online, or download the PDF for offline reading or printing.
Watch this meeting
These materials change during the semester. Report an error or an unclear passage.
Lecture playlist Subscribe on YouTube
The slides of this meeting's deck, each held for as long as the narration over it runs. Read by a speech synthesizer; every line was transcribed back and checked against its script before it was kept.
Upcoming deadline
Unit 2 review assignment due Sun 9/27, 11:59 PM
What to do before class
- Bring a draft of your 3x5 card. You will have time to compare it with the person next to you if no one has a question ready.
- Bring your questions for the last class before Exam 1.
What we will do in class
Recall earlier material
Review discontinued-operation presentation and one Unit 1 adjustment.
The five-step revenue model
Follow one contract from the first scope check through the ending contract balances.
Establish the contract
Return to Granite Harbor and identify the decision required at each step.
Work 1: map the obligations
Classify every promise, support each conclusion, and test one changed installation fact.
Estimate the transaction price
Separate estimation from the constraint, then establish the allocation rule.
Work 2: allocate and calculate
Allocate the transaction price and calculate Year 1 revenue before reviewing the answer.
Work 3: timing and balances
Apply the timing tests to each obligation, then reconcile revenue, billing, and collection.
Confirm Exam 1 logistics
Confirm the date, format, permitted materials, and required technology.
Ask Exam 1 questions
Use the remaining planned time for questions that will change how you study.
Plan your time
Exam 1 is 33 questions in 80 minutes. Pace at 2 minutes a question and you finish with 14 minutes of buffer for whatever you flagged. There is no penalty for guessing, so nothing should be blank when time expires.
Assigned reading and deadlines
Solutions to the in-class problems post to D2L after the meeting.
- Read Chapter 8: Apply the revenue model after this meeting and before the next class.
- Complete the Unit 2 review assignment by Sunday, September 27 at 11:59 PM.
- Check the D2L exam instructions and required technology before Tuesday.
Practice and review
You do not have to complete or submit these items. They do not affect your grade.
- Use the study plan to begin with the problems that take the most time.
- If you will use a 3x5 card, finish it by hand. A printed card is not permitted.
- Redo any problem you could not complete without notes.
Lessons, examples, and references
Complete the assigned reading first. Open a link below when you need a definition, another explanation, or more practice.
Lessons
- Establish scope and the accounting contract
Separate customer contract scope, enforceability, termination, collectibility, and contract combination before identifying promises or calculating revenue.
- Map promises before counting performance obligations
Inventory explicit and implied promises, apply both distinct tests, evaluate a service series and customer option, and keep setup effort from becoming a fictional obligation.
- Estimate consideration, then constrain it
Build transaction price from fixed and variable amounts while keeping estimation method, price concession, credit risk, and significant reversal analysis separate.
- Establish standalone prices and allocate the contract
Build standalone selling price evidence, allocate transaction price, control discounts and variable amounts, and reconcile the contract total without using invoice lines as the answer.
- Recognize performance over time only after proving the path
Apply the three over time criteria, select a faithful output or input measure, and compute current revenue from cumulative progress without letting cost incurred decide control.
- Locate point-in-time control and route special arrangements
Determine a point in time transfer from the full evidence set, then route returns, warranties, bill and hold, consignment, repurchase, acceptance, and license terms to distinct analyses.
- Reconcile contract balances, receivables, entries, and costs
Separate conditional and unconditional rights, advance performance obligations, and contract cost assets while tying performance, billings, cash, revenue, and ending balances across periods.
Worked examples
- Allocate Granite Harbor's cabinet-and-maintenance contract
Allocate a supported transaction price among a cabinet system, routine installation, and maintenance, then reconcile revenue, billing, and collection.
Concepts used
Mistakes to avoid
- Mistaken idea: A signed agreement is automatically a Topic 606 contract
Mistaken reasoning: This mistake treats signatures as sufficient and skips scope, enforceability, rights, payment terms, commercial substance, termination, and collectibility.
- Mistaken idea: Every contract or invoice line is a performance obligation
Mistaken reasoning: This mistake copies document labels instead of inventorying promises and testing distinctness, setup activities, series guidance, options, and warranties.
- Mistaken idea: Invoice lines control revenue allocation
Mistaken reasoning: This mistake allocates stated line prices without establishing standalone selling prices or testing allocation exceptions.
- Mistaken idea: Cost incurred proves over-time control and progress
Mistaken reasoning: This mistake uses incurred cost first, without establishing an over time criterion or whether the input depicts performance.
- Mistaken idea: Shipment always transfers control
Mistaken reasoning: This mistake treats a logistics event as conclusive and ignores acceptance, title, possession, payment, risks, bill and hold, consignment, return, and repurchase terms.
- Mistaken idea: Every dollar collected from a customer is revenue
Mistaken reasoning: This mistake includes taxes collected for an authority or advances for future performance in current revenue.
- Mistaken idea: A receivable and contract asset are synonyms
Correction: A [receivable](C:accounts-receivable) is an unconditional payment right. A [contract asset](C:contract-asset) is a right for goods or services already transferred that remains conditional on something other than time. Both can exist before cash collection, which makes the mistaken comparison plausible.
- Mistaken idea: An adjusting entry requires cash to move
Correction: An adjusting entry can record revenue earned or an expense incurred before cash moves. Record the related receivable or payable at period end, then record the later cash settlement separately.
Longer problem
- Granite Harbor's cabinet-system customer contract
Apply the five step revenue model to the continuing cabinet operation of the established Unit 2 classroom company.
Background
Questions from this lecture (9)
These prompts are optional, not assigned, submitted, or graded. If you use them, choose an answer before opening the explanation on the linked practice page.
- Separate variable estimation from the constraint
- Reconcile contract rights, obligations, and costs
- Defend the accounting contract boundary
- Prepare Harbor's contract-cost schedule
- Build a promise and obligation map
- Prove over-time recognition before measuring progress
- Reconcile payment due before service
- Route point-in-time and special arrangement evidence
- Estimate SSP and control allocation