ACCT5001_Accounting Principles_2009 Semester 1_Week 7 Demo Q SUGGESTED ANSWERS 2009 final.doc

WEEK 7 DEMONSTRATION QUESTION SUGGESTED ANSWERS QUESTIONS Chapter 12 REVENUE RECOGNITION Q.7. when should income (Revenue) be recognised? The CF must be used to determine when FS elements should be recognised To recognise an item in the financial statements It must satisfy the definition of income It must satisfy the income recognition criteria Income Definition increases of economic benefits during an accounting period in the form of inflows or enhancement of assets or reductions of liabilities [includes both revenues and gains] that result in increases in equity other than those relating to contributions of owners (IASB Framework, Para 70a) Recognition criteria It must be probable that any future economic benefits will flow to or from the enterprise. AND The item has a cost or value that can be reliably measured Rule of thumb: When income is earned – once service provided or goods received. It does not necessarily provide correct answer and is an insufficient test for professional accountants. For instance, shipping terms are important. So in exams please use the CF definition and recognition criteria to analyse recognition questions. What difference does it make if the sale contract specifies that the goods are Free on Board – “Destination” ‘The seller accepts responsibility for delivery and freight costs, recognised as FREIGHT OUT income is not recognised as being earned until the goods have been delivered to their destination and the seller has a legal claim. Free on Board – Delivery (shipping) point The buyer accepts responsibility for delivery and freight costs, recognised as FREIGHT IN income is recognised at shipping point because the seller has fulfilled the contract, and has a legal claim, at that point. E12.5 E12.5 Lecton Construction Company currently has one long-term construction project. The project has a contract price of $140000 000, with total estimated costs of $100 000 000. Lecton appropriatel