【正文】 tion is not met at the time of sale. The measurability criterion means that the amount of revenue can be reliably measured. If the seller is not able to estimate the amount of work that will have to be done under the warranty agreement, then it is not able to reasonably measure the profit that it will eventually earn on the sales. The performance criteria might also be invoked here. The performance criterion means that the seller has transferred the significant risks and rewards of ownership to the buyer. As long as there is warranty work to be performed after the sale that is the responsibility of the seller, you might argue that performance is not substantially plete. However, if the seller was able to reliably estimate the amount of warranty work, then performance would be satisfied on the assumption that we could measure the risk that remains with the seller, and make a provision for it.2. Percentageofpletion method:The first step in applying revenue recognition using the percentageofpletion method (using costs incurred to date pared to estimated total costs to determine the percentage of pletion) is to estimate the percentage of pletion of the project at the end of each year. This is done in the following table (in $000s): End of 2005 End of 2006 End of 2007Total costs incurred $ 5,400 $ 12,950 $ 18,800Total estimated costs 18,000 18,500 18,800% pleted 30% 70% 100%Once the percentage of pletion at the end of each year has been calculated as above, the next step is to allocate the appropriate amount of revenue to each year, based on the percentage pleted to date, less what has previously been recorded in revenue. This is done in the following table (in $000s): 2005 2006 20072005 $20,000 30% $ 6,0002006 $20,000 70% $ 14,0002007 $20,000 100% $ 20,000Less: Revenue recognized in prior years (0) (6,000) (14,000)Revenue for year $ 6,000 $ 8,000 $ 6,000Therefore, the profit to be recognized each year on the construction project would be: 2005 2006 2007 TotalRevenue recognized $ 6,000 $ 8,000 $ 6,000 $ 20,000Construction costs incurred (expenses) (5,400) (7,550) (5,850) (18,800)Gross profit for the year $ 600 $ 450 $ 150 $ 1,200The following journal entries are used to record the transactions under the percentageofpletion method of revenue recognition: 2005 2006 20071. Costs of construction:Construction in progress 5,400 7,550 5,850 Cash, payables, etc. 5,400 7,550 5,8502. Progress billings: Accounts receivable 3,100 4,900 12,000 Progress billings 3,100 4,900 12,0003. Collections on billings: Cash 2,400 4,000 12,400 Accounts receivable 2,400 4,000 12,4004. Recognition of profit: Construction in progress 600 450 150 Construction expense 5,400 7,550 5,850 Revenue from longterm contract 6,000 8,000 6,0005. To close construction in progress: Progress billings 20,000 Construction in progress 20,000 2005 2006 2007Balance sheetCurrent assets:Accounts receivable $ 700 $ 1,600 $ 1,200Inventory:Construction in process 6,000 14,000 Less: Progress billings (3,100) (8,000) Costs in excess of billings 2,900 6,000Ine statementRevenue from longterm contracts $ 6,000 $ 8,000 $ 6,000Construction expense (5,400) (7,550) (5,850)Gross profit $ 600 $ 450 $ 1503. a. The three criteria of revenue recognition are performance, measurability, and collectibility. Performance means that the seller or service provider has performed the work. Depending on the nature of the product or service, performance may mean quite different points of revenue recognition. For example, for the sale of products, IAS18 defines performance as the point when the seller of the goods has transferred the risks and rewards of ownership to the buyer. Normally, this means that performance is done at the time of sale. Although the seller may have performed much of the work prior to the sale (production, selling efforts, etc.), there is still significant risk to the seller that a buyer may not be found. Therefore, from a reliability point of view, revenue recognition is delayed until the point of sale. Also, there may be significant risks remaining with the seller of the product even after the sale. Warranties given by the seller are a risk that remains with the seller. However, if this risk can be reliably estimated at the time of sale, revenue can be recognized at the point of sale. Performance is quite different under a longterm construction contract. Here, performance really is considered to be a measure of the work done. Revenue is recognized over the production period as the work is performed. It is intended to reflect the amount of effort expended by the seller (contractor). Although legal title won’t transfer to the buyer until the project is pleted, revenue can be recognized because there is a known and mitted buyer. If the contractor is not able to estimate how much of the work has been done (perhaps because he or she can’t reliably estimate how much work must still be done), then profit would not be recognized until the extent of performance is known.Measurability means that the seller or service provider must be able to reliably estimate the amount of the revenue from the sale or service. For the sale of products this is generally known at the time of sale (the sales price is set). However, if the seller provides a return period, it may