Intermediate Accounting 8th Edition David Spiceland James Sepe Mark Nelson - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Chapter 05 Revenue Recognition and Profitability Analysis True / False Questions 1. Companies recognize revenue when goods or services are transferred to customers for …
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Intermediate Accounting 8th Edition David Spiceland James Sepe Mark Nelson – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Chapter 05
Revenue Recognition and Profitability Analysis
True / False Questions
| 1. | Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.
True False |
| 2. | Companies always recognize revenue when goods or services are transferred to customers for the amount the company expects to receive in exchange for those goods or services.
True False |
| 3. | “Determine whether it is probable the seller will collect the consideration it is entitled to receive” is one of the five steps to applying the core revenue recognition principle.
True False |
| 4. | Staff Accounting Bulletin No. 101 was issued by the FASB to clarify its guidelines on revenue recognition.
True False |
| 5. | A transfer of goods or services is complete when the customer has control over the goods or services.
True False |
| 6. | Revenue always is recognized once the buyer has physical possession of goods.
True False |
| 7. | Sellers should recognize revenue over time for a long term contract in which the seller is receiving periodic payments for progress to date but may need to refund those payments in the event the contract is cancelled.
True False |
| 8. | A common output method used to measure progress towards completion is to compare cost incurred to date to total costs estimated to complete the job.
True False |
| 9. | Revenue should be recognized over time for the construction of an annex to a building that the customer owns, even if the seller will not receive payment until the annex is completed.
True False |
| 10. | A common output method used to measure progress towards completion is to determine the proportion of promised goods and services that have been transferred to date.
True False |
| 11. | No allocation of contract price is required if the transaction involves a performance obligation to be satisfied over time.
True False |
| 12. | The transaction price should be allocated to the contract’s performance obligations in proportion to the stand-alone selling prices of the performance obligations.
True False |
| 13. | No allocation of contract price is required if the transaction involves multiple performance obligations that are satisfied at different points in time.
True False |
| 14. | If the contract contains multiple performance obligations, revenue must be recognized in an amount equal to the fair value of each of the separate performance obligations.
True False |
| 15. | The transaction price is only allocated to goods and services that are both capable of being distinct and that are separately identifiable.
True False |
| 16. | Goods and services are distinct if they are either capable of being distinct or are separately identifiable.
True False |
| 17. | A contract between a seller and a buyer need not be in writing to be enforceable.
True False |
| 18. | If the contract is not in writing, revenue cannot be recognized, even though goods have been transferred and payment is expected to be received in exchange.
True False |
| 19. | The probability that the customer will pay the seller does not affect whether a contract exists for purposes of revenue recognition.
True False |
| 20. | A contract exists for purposes of revenue recognition if either the seller or customer has performed an obligation specified by the contract.
True False |
| 21. | An option for a customer to purchase additional goods at a discount from list price is only a performance obligation if the discount is a material right that the customer would not receive otherwise.
True False |
| 22. | A warranty that the customer can purchase separately and that covers a long period of time after the purchase date is likely to be a quality-assurance warranty.
True False |
| 23. | If an option to purchase an extended warranty at a special discount is included with a product when the product is purchased, a portion of the contract price needs to be allocated to the option.
True False |
| 24. | A fee for recording a new customer in the seller’s information system should be treated as a separate performance obligation and should be recognized upon payment.
True False |
| 25. | An option for a customer to purchase additional goods at a discount from list price is always a performance obligation, because it confers a material right.
True False |
| 26. | Accounting for quality-assurance warranties includes a credit to warranty expense and a debit to contingent liability.
True False |
| 27. | When a contract includes variable consideration, the probability-weighted amount must be used when there are different probabilities of occurrence.
True False |
| 28. | To account for variable consideration using the most likely amount, the probability of each possible amount is multiplied by the possible amount to get an expected contract price.
True False |
| 29. | If the estimate of a transaction price is revised, the price change is allocated entirely to the remaining performance obligations that are yet to be satisfied.
True False |
| 30. | The amount of variable consideration that can be recognized is limited to the amount for which it is probable that there won’t be a significant reversal of revenue recognized to date when uncertainty resolves in the future.
True False |
| 31. | The right of return is a separate performance obligation, and a portion of the transaction price needs to be allocated to it for revenue recognition.
True False |
| 32. | When the right of return exists, revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns.
True False |
| 33. | If the seller is a principal, the seller has primary responsibility for delivering a product or service.
True False |
| 34. | If the seller is a principal, the seller typically is not vulnerable to risks associated with delivering the product or service.
True False |
| 35. | If the seller is a principal, the seller typically is vulnerable to risks associated with collecting payment from the customer.
True False |
| 36. | If the seller is a principal, the seller should recognize gross revenue and cost of sales associated with the transaction.
True False |
| 37. | If the seller is an agent, the seller typically is vulnerable to risk associated with delivering the product or service.
True False |
| 38. | If the seller is an agent, the seller typically recognizes cost associated with the sale on its own line in the income statement.
True False |
| 39. | The transaction price should be adjusted to reflect the time value of money for interest payable, but not for interest receivable.
True False |
| 40. | Sellers are only required to adjust the transaction price to reflect the time value of money when the contract has a significant financing component.
True False |
| 41. | If a seller makes payments to a customer to purchase goods and services, and those payments are equal to the stand-alone selling prices of those goods and services, part of those payments are a refund to the customer.
True False |
| 42. | The adjusted market assessment approach can be used to estimate the stand-alone selling price of a good or service.
True False |
| 43. | The residual approach to estimate stand-alone selling prices is often used for goods or services that are sold separately and that have stable prices.
True False |
| 44. | Revenue typically should not be recognized when payment is received but the goods are warehoused at the seller’s facility.
True False |
| 45. | In a bill-and-hold arrangement, revenue only can be recognized after the sale of the goods to the end user.
True False |
| 46. | In franchise arrangements, the franchisor’s performance obligations are not separately identifiable, so revenue must be recognized over time.
True False |
| 47. | The same revenue recognition requirements always apply to franchise arrangements that apply to other selling arrangements.
True False |
| 48. | In a consignment arrangement, revenue typically should not be recognized until sale to a third party occurs, even though there has been a physical transfer of goods to the consignee, because the consignor still retains legal title to the goods.
True False |
| 49. | Sellers recognize revenue for gift cards at the point in time control of the gift card is transferred to the customer.
True False |
| 50. | If a license is acquired to use intellectual property for a 5-year period, revenue always is recognized at the point in time the customer begins to benefit from the license.
True False |
| 51. | If a licensee benefits from the seller’s activity over the license period with respect to the licensed intellectual property, revenue should be recognized over time.
True False |
| 52. | Contract liability, deferred revenue and unearned revenue are all ways to describe a liability that the seller recognizes with respect to unsatisfied performance obligations for which the seller has already been paid.
True False |
| 53. | An account receivable is recognized if the seller has a conditional right to receive payment.
True False |
| 54. | Disclosure notes to the financial statements regarding significant revenue recognition policies are only required when they will not reveal important information to competitors, suppliers or customers.
True False |
| 55. | When recognizing revenue over time on a long-term contract, amounts billed and the cash actually received affect income recognition.
True False |
| 56. | When recognizing revenue over time on a long-term contract, the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete.
True False |
| 57. | Firms have free choice as to whether to recognize revenue over time or at a point in time to account for a long-term contract.
True False |
| 58. | When revenue is recognized over time versus upon completion of the contract, different amounts of total profit or loss are recognized for a particular contract.
True False |
| 59. | Estimated losses on long-term contracts are recognized as ratable over the contract term regardless of whether revenue is recognized over time or upon contract completion.
True False |
| 60. | When a long-term contract does not qualify for revenue recognition over time, all gross profit and loss recognition occurs when the contract is completed.
True False |
| 61. | A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection.
True False |
| 62. | The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high.
True False |
| 63. | A company could improve its return on assets by increasing its income or by increasing its total assets.
True False |
| 64. | Return on shareholders’ equity is increased if a firm can maintain its return on assets but increase its leverage.
True False |
| 65. | Revenue is not recognized under the realization principle unless the earnings process is complete or virtually complete and there is reasonable certainty about the expected collection of the asset received.
True False |
| 66. | Under IFRS, one of the conditions for revenue from product sales to be recognized is when the risks and rewards of ownership have been transferred to the customer.
True False |
| 67. | Use of the installment sales method requires that firms track the gross profit percentage associated with a particular sale.
True False |
| 68. | When the expected collection of accounts receivable is difficult to estimate, companies must use the cost recovery method.
True False |
| 69. | Use of the installment sales method indicates little uncertainty about collection of the receivable.
True False |
| 70. | Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment sales method and the cost recovery method.
True False |
| 71. | When the right of return exists and a seller cannot make reliable estimates of future returns, the installment sales method can be used.
True False |
| 72. | Under IFRS, firms have free choice as to whether they use the percentage-of-completion method or the cost recovery method to account for a long-term construction contract.
True False |
| 73. | For long-term construction contracts, the cost recovery method under IFRS requires recognizing equal amounts of revenue and cost until all costs are recovered.
True False |
| 74. | When the cost recovery method is used to account for a long-term construction contract under IFRS, an equal amount of cost and revenue is typically recognized during the early life of the contract, such that high initial gross profit is recognized in net income.
True False |
| 75. | Under IFRS, firms typically use the cost recovery method if they conclude that the percentage-of-completion method is not appropriate to account for a long-term construction contract.
True False |
| 76. | Revenue from the sale of computer software is always recognized at the point of sale.
True False |
| 77. | Revenue on a multiple-element contract typically is allocated to independent parts of the contract based on their relative selling prices.
True False |
| 78. | Vendor-specific objective evidence of separate sales prices is required for multiple-element software contracts, but estimated selling prices can be used for other multiple-element contracts under U.S. GAAP.
True False |
| 79. | Recognition of franchise fee revenue is dependent on judgments of both substantial performance and expected collection of fees.
True False |
| 80. | Initial franchise fees are always recognized on the date they are received.
True False |
| 81. | When accounting for multiple-element software arrangements, the revenue for each element is based on the separate prices stated for each element in the software contract.
True False |
| 82. | When accounting for multiple-element arrangements, GAAP indicates that sellers can separately record revenue for part of an arrangement even if the part does not have value to the customer on a stand-alone basis.
True False |
| 83. | IFRS provides detailed guidance concerning accounting for revenue with respect to multiple-element contracts.
True False |
Multiple Choice Questions
| 84. | Companies recognize revenue only when
|
| 85. | Which of the following is one of the steps for recognizing revenue?
|
| 86. | Which of the following is not one of the five steps for recognizing revenue?
|
| 87. | Which of the following is not one of the five steps for recognizing revenue?
|
| 88. | For a typical manufacturing company, the most common critical point for recognizing revenue is the date:
|
| 89. | Stayman Associates has sold a good to a buyer and wants to recognize revenue. Which of the following is an indicator that control of a good has passed from Stayman to the buyer?
|
| 90. | Which of the following is not an indicator that the customer is likely to have control over a good?
|
| 91. | On June 1st, Lucy & Bros received an order for 500 cupcakes. Lucy delivered the cupcakes to the client on June 25th. A $50 deposit was received on June 5th and the remaining $450 was paid on June 30th. Lucy likely would recognize revenue on
|
| 92. | The core revenue principle states that
|
| 93. | Consider the following three scenarios:
I. ABC Lawncare performed lawn maintenance services for Drake Inc. on June 1st, and received payment of $500 for those services. Given these scenarios, revenue can not be recognized on June 1st for
|
| 94. | Which of the following is not an indicator that revenue can be recognized over time?
|
| 95. | Revenue likely is recognized over time for all of the following arrangements except for
|
| 96. | On November 1, 2016, Taylor signed a one-year contract to provide handyman services on an as-needed basis to King Associates, with the contract to start immediately. King agreed to pay Taylor $4,800 for the one-year period. Taylor is confident that King will pay that amount, but payment is not scheduled to occur until 2017. Taylor should recognize revenue in 2016 in the amount of
|
| 97. | Mary signed up and paid $1200 for a 6 month ceramics course on June 1st with Choplet Ceramics. As of August 1st, Choplet’s accounting records would indicate:
|
| 98. | On February 1st, H&B Bank originated a loan for $50,000 at an interest rate of 7.2%. On March 15th, an interest payment of $300 was received. Which of the following best describes when interest revenue should be recognized?
|
| 99. | Rothbart Manufacturing agrees to manufacture bumper cars for 12 Banners Amusement Parks. Under the terms of the contract, 12 Banners will pay Rothbart a total of $60,000, and 12 Banners can cancel the contract if it so chooses but must pay Rothbart for work completed. Rothbart believes that, if 12 Banners cancelled the contract, Rothbart could sell the bumper cars to another amusement park and still make a profit. The manufacturing contract is expected to last six months, and as of December 31, 2016, the job is 80% complete. How much revenue should Rothbart recognize in 2016 for this contract?
|
| 100. | Which of the following is not a characteristic of a distinct good or service?
|
| 101. | For contracts that include more than one separate performance obligation:
|
| 102. | Binz Company provides cleaning services and sells garbage bins to office clients. On June 1st, Binz delivered 100 garbage bins to a client, and also entered into a 5-year contract for Binz to provide cleaning services to that client. Which of the following is most likely to be true?
|
| 103. | Goods and services are capable of being distinct if:
|
| 104. | Minarski Electronics sells computers and provides hardware maintenance services. On April 1st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $840 and the one-year unlimited maintenance/repair service costs $360. How much revenue does Minarski Electronics recognize for the month ended April 30th, assuming that revenue is accrued monthly?
|
| 105. | On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods and services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2016, and the calibration service commenced on that date.
How many performance obligations exist in this contract?
|
| 106. | On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods and services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2016, and the calibration service commenced on that date.
Assume that the scales, software and calibration service are all separate performance obligations. How much revenue will Ortiz recognize in 2016 for this contract?
|
| 107. | On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods and services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2016, and the calibration service commenced on that date.
Assume that the scales, software and calibration service are viewed as one performance obligation. How much revenue will Ortiz recognize in 2016 for this contract?
|
| 108. | A contract does not exist for purposes of applying the revenue recognition principle in all of the following cases except for when:
|
| 109. | Which of the following is a characteristic of a contract for purposes of revenue recognition?
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| 110. | Waldman Associates received a written, approved contract to deliver economic consulting services, with service and payment commencing in one month. The contract specifies the services that Waldman is to perform, and the payment terms. Waldman and the customer both can cancel the contract without penalty prior to commencing service. Does Waldman have a contract for purposes of revenue recognition on the day the contract is received?
|
| 111. | What is the effect of bad debts on revenue recognition?
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| 112. | Which of the following is considered a performance obligation?
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| 113. | Which of the following is not a performance obligation?
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| 114. | Which of the following is an example of an extended warranty?
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| 115. | Orange Inc. offers a discount on an extended warranty on its oPhone when the warranty is purchased at the time the oPhone is purchased. The warranty normally has a price of $150, but Orange offers it for $120 when purchased along with an oPhone. Orange anticipates a 75% chance that a customer will purchase the extended warranty along with the oPhone. Assume Orange sells to 1,000 oPhones with the extended warranty discount offer. What is the total stand-alone selling price that Orange would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 oPhone contracts?
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| 116. | In which of the following is the option described not a performance obligation?
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| 117. | Which of the following statement is most true?
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| 118. | Which of the following is an example of a variable consideration?
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| 119. | Which of the following is correct about changes in estimated variable consideration?
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| 120. | On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%.
What is the expected transaction price with variable consideration estimated as the expected value?
|
| 121. | On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%.
What is the expected transaction price with variable consideration estimated as the most likely amount?
|
| 122. | Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume Sanjeev estimates variable consideration as the most likely amount. What is the amount of revenue Sanjeev would recognize for the first month of the contract?
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| 123. | Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume Sanjeev estimates variable consideration as the expected value. What is the amount of revenue Sanjeev would recognize for the first month of the contract?
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| 124. | Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume that Sanjeev estimates variable consideration as the most likely amount. After Sanjeev has recognized revenue for two months of the contract, he changes his assessment of the chance the contract will pay him $3,000 to 70%. What adjustment to revenue should Sanjeev recognize to account for that change in estimate?
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| 125. | On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
Assume Emmet estimates variable consideration as the expected value. How much revenue should Emmet recognize on this contract in 2016?
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| 126. | On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
Assume Emmet estimates variable consideration as the most likely amount. How much revenue should Emmet recognize on this contract in 2016?
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| 127. | On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
Assume that Emmet accrues revenue each month, and estimates variable consideration as the most likely amount. On November 1, Emmet revises its estimate of the chance the building will exceed the 90% occupancy threshold to a 70% chance. What is the total amount of revenue Emmet should recognize on this contract in November of 2016?
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| 128. | Which of the following is not an indicator that the constraint on recognizing variable consideration should be applied?
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| 129. | On January 1, 2016, Elite Advertising was contracted to run a marketing campaign for Pharm King’s new dieting pills. In addition to getting a base fee of $150,000 for the 3-year campaign, Elite also may get an additional 5% of the base fee as a bonus if a targeted sales level is reached at the end of three years. Elite currently lacks sufficient information to make an estimate of the likelihood of the expected bonus, with the marketing director indicating that “If you forced me to make an estimate, I’d say we have a 50/50 chance. But don’t quote me on that – it’s really too early to tell.” Elite concludes this contract qualifies for revenue recognition over time, and estimates variable consideration using the most likely amount. How much revenue should Elite recognize as of December 31, 2016?
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| 130. | Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:
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| 131. | Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing revenue associated with one of these sales?
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| 132. | Under which of the following circumstances is it most appropriate to use the residual method to estimate stand-alone selling prices?
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| 133. | Which of the following is not an approach for estimating stand-alone selling prices?
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| 134. | Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson’s prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.
Estimate the stand-alone selling price of the software using the adjusted market assessment approach.
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| 135. | Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson’s prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.
Estimate the stand-alone selling price of the software using the expected cost plus margin approach.
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| 136. | Estimate the stand-alone selling price of the software using the residual approach.
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| 137. | Which of the following does not apply to a seller who is a principal?
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| 138. | Which of the following applies to a seller who is an agent?
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| 139. | Explodia.com sells fireworks over the Internet. Customers access Explodia’s website and select particular products, and Explodia refers the customer order to a fireworks manufacturer who fulfills the order, ships to the customer, and pays Explodia a 20% commission. Which of the following is true about Explodia?
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| 140. | Jing Statistical Services operates a website that links experienced statisticians with businesses that need data analyzed. Statisticians post their rates, qualifications, and references on the website, and Jing receives 25% of the fee paid to the statisticians in exchange for identifying potential customers. VetMed Associates contacts Jing and arranges to pay a consultant $1,500 in exchange for analyzing some data. Jing’s income statement would include the following with respect to this transaction:
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| 141. | Assume a contract for the sale of goods specifies that payment is to be made four months after delivery of a product. The seller is likely to do which of the following, with respect to the time value of money over the life of the contract?
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| 142. | Assume a contract for the sale of goods specifies that payment is to be made 15 months prior to delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?
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| 143. | Johnson sells $100,000 of product to Robbins, and also purchases $10,000 of advertising services from Robbins. The advertising services have a fair value of $8,000. Johnson should record revenue on its sale of product to Robbins of:
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| 144. | Which of the following is not true?
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| 145. | Maas LLP developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectiveness of irrigation. Sunny Dale paid a licensing fee of $20,000 for a copy of the software. Although Sunny Dale can use the software as long as it wants, Maas expects that Sunny Dale will use the software for approximately 5 years. Maas does not anticipate any further interaction with Sunny Dale following transfer of the license. How much revenue should Maas recognize in the first year of the contract?
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| 146. | The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years.
How much of the $1 million initial license fee should the UFL recognize as revenue in the first year of the contract?
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| 147. | The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years.
Assume that the UFL anticipates that, in addition to receiving the $1 million license fee, it will receive a bonus of $2 million in year 1 of the contract and a bonus of $3 million in years 2-4 of the contract based on Tank-Skin’s sales. Also assume that the UFL is convinced that it is probable there will not be a significant reversal of any revenue recognized with respect to the bonus in subsequent periods. At the inception of the contract, what is the amount of transaction price that the UFL would estimate with respect to this license arrangement?
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| 148. | Which of the following is not true about accounting for revenue from franchise arrangements?
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| 149. | Pita Pal sells fast-food franchises. Pita Pal receives $75,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of $75,000. Pita Pal also receives $36,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 2016, and on May 1, 2016 Rachel had completed training and was open for business. How much revenue in 2016 will Pita Pal recognize for its arrangement with Rachel?
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| 150. | Which of the following is typically true for a bill-and-hold arrangement?
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| 151. | On June 1st, Joseph & Company received a $500 deposit for 80 cases of wine. On June 10th the customer identified specific vintages that are included in Joseph’s inventory, and asked that Joseph not ship the wine until June 20 so the customer could ready space to store the wine, so Joseph set those wines aside for the customer, boxed and ready for shipment to the customer. On June 20th the wine was shipped and delivered to the customer. Joseph likely would recognize revenue on
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| 152. | Which of the following is most true regarding consignment arrangements?
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| 153. | Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.
Sweeney most likely should recognize revenue when:
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| 154. | Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.
After Sweeney has transferred a painting to a barbershop, the painting:
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| 155. | Bull’sEye sells gift cards redeemable for Bull’sEye products either in-store or online. During 2016, Bull’sEye sold $2,000,000 of gift cards, and $1,800,000 of the gift cards were redeemed for products. As of December 31, 2016, $150,000 of the remaining gift cards had passed the date at which Bull’sEye concludes that the cards will never be redeemed. How much gift card revenue should Bull’sEye recognize in 2016?
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| 156. | Which of the following is not true about contract assets?
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| 157. | Which of the following is not true about contract liabilities?
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| 158. | Gupta Industries received a $300,000 prepayment from Packard Associates for the sale of new equipment. Gupta will bill Packard an additional $100,000 upon delivery of the equipment. Upon receipt of the $300,000 prepayment, how much should Holt recognize for a contract asset, a contract liability, and accounts receivable?
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| 159. | Which of the following is not something that revenue recognition disclosures typically should help investors to understand?
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| 160. | Which of the following is not true about revenue recognition with respect to long-term construction contracts?
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| 161. | Which of the following is least likely to be a reason why a long-term construction contract would qualify for revenue recognition over time?
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| 162. | Which of the following is true about accounting for long-term construction contracts?
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| 163. | Which of the following is not true about accounting for long-term construction contracts?
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| 164. | A rationale for recognizing revenue over the life of a contract rather than at a single point in time is that:
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| 165. | Revenue on a long-term contract should not be recognized according to the proportion of the performance obligation that has been completed if:
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| 166. | With respect to delaying revenue recognition until completion of a long-term contract, it is the case that:
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| 167. | When accounting for revenue over time for a long-term contract, the percentage of completion used to recognize revenue in the first year usually is determined by measuring:
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| 168. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue over time with respect to these contracts. What would be the journal entry made in 2015 to record revenue?
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| 169. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue over time with respect to these contracts. In its December 31, 2015, balance sheet, ADH would report:
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| 170. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue over time with respect to these contracts. For 2016, what is the journal entry to record revenue?
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| 171. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue upon completion of the contract. For 2015, what is the journal entry to record revenue?
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| 172. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue upon completion of the contract. In its December 31, 2015, balance sheet, ADH would report:
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| 173. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue upon completion of the contract. What is the journal entry in 2016 to record revenue?
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| 174. | JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.
In 2015, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:
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| 175. | JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.
In 2016, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:
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| 176. | JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.
In 2017, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:
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| 177. | Indiana Co. began a construction project in 2016 with a contract price of $150 million to be received when the project is completed in 2018. During 2016, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
Indiana:
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| 178. | Indiana Co. began a construction project in 2016 with a contract price of $150 million to be received when the project is completed in 2018. During 2016, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
In 2017, Indiana incurred additional costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Indiana:
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| 179. | Indiana Co. began a construction project in 2016 with a contract price of $150 million to be received when the project is completed in 2018. During 2016, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
Suppose that, in 2017, Indiana incurred additional costs of $63.75 million and estimated an additional $42.75 million in costs to complete the project. Indiana:
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| 180. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
What is the amount of gross profit on the project recognized by CCC during 2016?
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| 181. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
What are CCC’s estimated remaining construction costs on the project at the end of 2016?
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| 182. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
What is the fixed contract price for CCC’s project?
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| 183. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
What were the construction billings by CCC during 2016?
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| 184. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
How much cash remains to be collected by CCC on the project?
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| 185. | Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in 2016, are presented below:
Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2015 would be (rounded to the nearest thousand):
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| 186. | Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in 2016, are presented below:
Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2016 would be (rounded to the nearest thousand):
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| 187. | Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in 2016, are presented below:
Assuming BCC recognizes revenue upon project completion, what would gross profit have been in 2015 and 2016 (rounded to the nearest thousand)?
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| 188. | In the DuPont formula, return on assets equals:
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| 189. | A company is effectively leveraging when:
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| 190. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s 2016 profit margin is (rounded):
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| 191. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s 2016 average collection period is (rounded):
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| 192. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s return on equity for 2016 is (rounded):
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| 193. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s average total assets for 2016 is (rounded):
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| 194. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s average inventory balance for 2016 is (rounded):
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| 195. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 receivables turnover is:
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| 196. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 inventory turnover is (rounded):
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| 197. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 asset turnover is (rounded):
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| 198. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 average collection period is:
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| 199. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 average days in inventory is (rounded):
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| 200. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 profit margin is (rounded):
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| 201. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 return on assets is (rounded):
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| 202. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 return on shareholders’ equity is (rounded):
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| 203. | Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and:
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| 204. | Under IFRS, which of the following is not a condition for recognizing revenue?
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| 205. | Under IFRS, revenue for a product sale should occur when:
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| 206. | Slick’s Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick’s can usually repossess the cars without loss. The revenue method Slick would use is the:
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| 207. | Bert’s Meat Market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:
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| 208. | On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end.
In 2016, Rigsby would recognize realized gross profit of:
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| 209. | On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end.
In 2017, Rigsby would recognize realized gross profit of:
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| 210. | On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end.
In its December 31, 2016, balance sheet, Rigsby would report:
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| 211. | On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end.
At December 31, 2017, Rigsby would report in its balance sheet:
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| 212. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In 2015, Reliable would recognize gross profit of:
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| 213. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In 2016, Reliable would recognize gross profit of:
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| 214. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In 2017, Reliable would recognize gross profit of:
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| 215. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In its 2015 year-end balance sheet, Reliable would report installment receivables (net) of:
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| 216. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In its 2016 year-end balance sheet, Reliable would report installment receivables (net) of:
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| 217. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
Total cash collections on installment sales during 2016 would be:
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| 218. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2015, Lake would recognize realized gross profit of:
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| 219. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2017, Lake would recognize realized gross profit of:
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| 220. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In its December 31, 2016, balance sheet, Lake would report:
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| 221. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2018, Lake would record a loss on repossession of:
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| 222. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2015, Lake would recognize realized gross profit of:
|
| 223. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2017, Lake would recognize realized gross profit of:
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| 224. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In its December 31, 2016, balance sheet, Lake would report:
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| 225. | When using the cost recovery method of accounting for long-term construction contracts under IFRS:
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| 226. | When using the cost recovery method of accounting for long-term construction contracts under IFRS, early in the life of the contract it is typically the case that:
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| 227. | The cost recovery method of accounting for long-term construction contracts under IFRS is sometimes referred to as the:
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| 228. | The percentage-of-completion method violates the general rule for revenue recognition that:
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| 229. | Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
SDH uses the cost recovery method under IFRS to recognize revenue. What is the journal entry in 2015 to record revenue?
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| 230. | Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
SDH uses the cost recovery method under IFRS to recognize revenue. In its December 31, 2015, balance sheet, SDH would report:
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| 231. | Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
SDH uses the cost recovery method under IFRS to recognize revenue. What is SDH’s journal entry to record revenue in 2016?
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| 232. | Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in 2016, are presented below:
Assuming BCC used the cost recovery method to recognize revenue under IFRS, what would gross profit have been in 2015 and 2016 (rounded to the nearest thousand)?
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| 233. | Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.
Assuming that the initial services to be performed by Flapper Jack’s subsequent to the signing are substantial and that collection of the receivable is reasonably assured, the journal entry required at signing would include a credit to:
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| 234. | Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.
Assume that at the time of signing the contract, collection of the receivable was assured and that service obligations were substantial. However, by October 20, 2015, substantially all continuing obligations had been met. The journal entry required at October 20, 2015 would include a:
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| 235. | Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.
Assume at March 15, 2015, the time of signing the contract, collection of the receivable was reasonably assured and there were no significant continuing obligations. The journal entry at signing would include a:
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| 236. | The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS can recognize revenue associated with the $50,000:
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| 237. | The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS can recognize revenue associated with the $50,000:
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| 238. | The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS has no experience estimating uncollectible accounts associated with these sorts of notes. RS can recognize:
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| 239. | Sullivan Software sells packages of a software program and one year’s worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan’s sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75.
Sullivan should recognize revenue for the two parts of the arrangement as follows:
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| 240. | Sullivan Software sells packages of a software program and one year’s worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan’s sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75.
The amount of revenue that GAAP, regarding software revenue recognition, would require Sullivan to attribute to the software program (as opposed to the technical support) is (rounded):
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| 241. | GAAP that covers revenue recognition for multiple-element arrangements requires that a seller recognize revenue for a particular part if:
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| 242. | Under GAAP, with respect to multiple-element arrangements, if the revenue for a particular part of a multiple-element arrangement does not qualify for separate recognition, it is:
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| 243. | “VSOE” stands for:
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| 244. | “VSOE” is necessary to separately recognize revenue in multiple-element contracts for:
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Essay Questions
| 245. | Squeaky Shine provides car washing services in Jersey City, New Jersey. A three-month pass for automatic car wash sells for $60, which entitles the customer for an unlimited number of car washes during the contract period. Squeaky Shine estimates that pass holders wash their cars equally throughout the three-month period. On December 1st, customers purchased $1,260 of the three-month passes, with purchases of the passes occurring evenly throughout December.
Required: 1) Prepare the journal entries that Squeaky Shine would record on December 1 and on December 31, 2016, with respect to this transaction.
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| 246. | Assume that a customer enrolls in AAA’s Premier Membership, which provides 12 months of roadside assistance for $120. On August 1, 2016, a customer purchases a contract that runs from that date through July 31, 2017. Given that roadside assistance requests occur equally throughout the contract period, AAA uses “proportion of time” as its measure of progress toward completion.
Required: 1) Prepare the journal entries that AAA would record on August 1 and on December 31, 2016, with respect to this transaction.
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| 247. | Lux Hotels, Inc. has signed a service outsourcing contract with Deluxe Rooms, Inc. for $3 million, which was received in cash at contract inception. Under the agreement, Deluxe Rooms is obligated to clean and prepare over 5,000 hotels rooms managed by Lux Hotel on a daily basis from August 1, 2016 to July 31, 2017.
Required: (1) at inception of the contract and
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| 248. | Poseidon Corporation, based in Greece, specializes in painting cargo ships. On December 1, 2016 Poseidon received $300,000 in advance from Worldwide Shipping, Inc. to paint a 40,000-ton cargo vessel. The painting process is scheduled to begin on December 1, 2016, and the ship is to be returned to Worldwide in four months. Worldwide retains legal title to the ship during the contract period, and can sell the ship to another shipper during the contract period if it so chooses.
Required: Assuming Poseidon uses “proportion of time” as its measure of progress toward completion, prepare any journal entry that Poseidon would record: (1) at inception of the contract
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| 249. | Accorsi & Sons specializes in selling and installing upscale home theater systems. On March 1, 2016, Accorsi sold a premium home theater package that includes a projector, set of surround speakers, and high quality leather seats, along with complete installation service, for $32,500. If sold separately, each of these goods and services would have cost $15,000 (projector), $12,500 (speakers), $17,500 (seats), and $3,000 (installation), respectively.
Required: How much of the transaction price would be allocated to the projector, the speakers, the leather seats, and the installation service, assuming that each of these four parts of the contract is a separate performance obligation? Show your work.
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| 250. | Baldi Piano manufactures customized pianos for concert halls. On July 1, 2016, Baldi signed a contract to deliver a concert piano for $150,000. Under the contract, Baldi is also obligated to provide a one-year maintenance service. If sold separately, the piano and the maintenance service would have cost $140,000 and $20,000, respectively.
Required: How much of the transaction price would be allocated to the piano and the maintenance service, assuming they are separate performance obligations? Show your work.
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| 251. | The Rink offers annual $200 memberships that entitle members to unlimited use of ice-skating facilities and locker rooms. Each new membership also entitles the member to receive ten “20% off a $5 meal” coupons that are redeemable at the Rink’s snack bar. The Rink estimates that approximately 80% of the coupons will be redeemed, and that, if the coupons weren’t redeemed, $5 meals still would be discounted by 5% because of ongoing promotions.
Calculate how much of the transaction price should be allocated to each performance obligation in the contract. Show your work.
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| 252. | The Rink offers annual $200 memberships that entitle members to unlimited use of ice-skating facilities and locker rooms. Each new membership also entitles the member to receive ten “20% off a $5 meal” coupons that are redeemable at the Rink’s snack bar. The Rink estimates that approximately 80% of the coupons will be redeemed, and that, if the coupons weren’t redeemed, $5 meals still would be discounted by 5% because of ongoing promotions.
Prepare the journal entry to recognize the sale of a new membership. Clearly identify revenue or deferred revenue associated with each performance obligation.
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| 253. | Antonio’s Car Services provides maintenance services for motorized vehicles. In March 2016, Rick placed an order for a new set of tires for $350. When a customer purchases goods and services in excess of $300, Antonio’s gives the customer a 25% discount coupon for future purchases made in the next three months. Antonio’s estimates that approximately 80% of customers utilize the coupon and that on average those customers will purchase goods and services that typically sell for $75.
Required: (a) How many performance obligations are in Rick’s contract? Explain the reasons for your answer.
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| 254. | DGA Associates, Inc. sells computer workstations designed for architects. In 2016, it sold 120 workstations for $360,000. For each workstation sold, DGA distributed a 40% discount coupon for any additional future purchases made in the next 12 months. Based on historical experience, DGA expects that approximately 30% of the coupons will be utilized, and the goods purchased with the coupons would normally sell for $350.
Required: (a) How many performance obligations are in a contract to purchase a computer workstation? Explain the reasons for your answer.
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| 255. | On February 12, 2016, Mohawk Home and Garden enters into contract with a local business to provide weekly grass-cutting services between May and September of that year, and receives $2,000 in advance. As part of a local business promotion, Mohawk offers a 50% discount on any barbecue grill with a list price in excess of $200. In the past, Mohawk charged the same amount ($2,000) for the same weekly grass-cutting service, but without the grill discount coupon. Based on historical experience with other clients, Mohawk estimates that about 40% of the coupons will be redeemed, purchasing grills with an average total list price of $400.
Required: (a) How many performance obligations are in this contract? Explain the reasons for your answer.
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| 256. | Mammoth Publishing, Inc. owns a weekly magazine called “Nova Health,” and sells annual subscriptions for $96. Customers prepay their subscription fee and receive 52 issues starting in the following month. The company also offers new subscribers a 25% discount coupon on its other weekly magazine called “Fishing & Camping,” which has a list price of $84 for an annual subscription. Mammoth estimates that approximately 10% of the discount coupons will be redeemed.
Required: (a) How many performance obligations are in a single subscription contract? Explain the reasons for your answer.
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| 257. | On July 1, Wiggins Associates enters into a contract to provide consulting services to Pennsylvania University (PU). The contract is anticipated to last four months and is intended to achieve significant cost savings at the university. The contract stipulates that PU will pay Wiggins $25,000 at the end of each month, and, if total cost savings reach a specific target, PU will pay an additional $20,000 to Wiggins at the end of the contract. Wiggins estimates a 75% chance that cost savings will reach the target.
Assume that Wiggins estimates uncertain consideration as the most likely amount. Required: Do the following for Wiggins: a. Prepare the journal entry on July 31 to record the first month of revenue under the contract.
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| 258. | On July 1, Wiggins Associates enters into a contract to provide consulting services to Pennsylvania University (PU). The contract is anticipated to last four months and is intended to achieve significant cost savings at the university. The contract stipulates that PU will pay Wiggins $25,000 at the end of each month, and, if total cost savings reach a specific target, PU will pay an additional $20,000 to Wiggins at the end of the contract. Wiggins estimates a 75% chance that cost savings will reach the target.
Assume that Wiggins estimates variable consideration as the expected value. Required: Prepare the journal entry on July 31 to record the first month of revenue under the contract.
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| 259. | Dr. Privacy, Inc. specializes in shredding office documents and destroying computer hard drives for various clients in the U.S. In June 2016, it enters into a contract with the U.S. government to properly discard computer hard drives. The contract specifies a fixed fee of $50,000 for the first 25,000 hard drives, and an additional $5,000 for each incremental 10,000 drives. The company estimates a 65% chance of handling 25,000 drives or fewer, 30% chance of handling more than 25,000 drives but fewer than 35,000 drives, and 5% chance of handling more than 35,000 drives but fewer than 45,000 drives.
Required: Assuming that the company determines transaction price as the expected value of the consideration, what is Dr. Privacy’s estimate of the transaction price for this contract?
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| 260. | In February 2016, Omnibus Interior Corporation enters into a contract with Pike Realty to remodel a 6-unit luxury condominium in New York City. Under the contract, the company is entitled to receive a fixed fee of $1 million, and an additional performance bonus of $500,000 if the property is sold during the same year.
Required: Given a strong demand for housing, Omnibus estimates that the property would most likely be sold within the same year, and bases estimates of variable consideration on the most likely estimate. On what transaction price should Omnibus base revenue recognition?
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| 261. | Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti’s contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio’s new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus.
Assuming Brunetti uses the most likely value to estimate the variable consideration, calculate the transaction price.
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| 262. | Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti’s contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio’s new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus.
Assuming Brunetti determines transaction price as the “expected value” of the variable consideration, what would be the appropriate transaction price for this contract?
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| 263. | Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti’s contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio’s new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus.
Assume Brunetti uses the “expected value” approach, but is very uncertain of that estimate due to a lack of experience with similar arrangements. What would be the appropriate transaction price?
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| 264. | Omni-Resistor, Inc. specializes in waterproofing homes, office buildings and other structures. Recently it completed a waterproofing renovation for a building at a local university. The contract specifies that Omni-Resistor will receive a flat lump sum of $100,000 for the renovation, and an additional $2,500 if there is no roof leaking through the roof within the first year after the renovation. The seller estimates that there is an 85% chance that no leakage will occur within the first year.
Required: (a) Assuming Omni-Resistor uses the most likely value to estimate the variable consideration, calculate the transaction price. (b) Assuming Omni-Resistor determines transaction price as the “expected value” of the variable consideration, calculate the transaction price. (c) Assume Omni-Resistor uses the “expected value” approach, but is very uncertain of that estimate due to a lack of experience with similar renovations. Calculate the transaction price.
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| 265. | Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will earn the quarterly bonus. Portelli bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Portelli’s April 30 journal entry to account for the revenue earned in April.
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| 266. | Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will earn the quarterly bonus. Portelli bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Portelli’s May 31 journal entry to record the revenue earned in May, as well as any appropriate adjustments to the revenue earned in April.
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| 267. | Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will earn the quarterly bonus. Portelli bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Portelli’s June 30 and July 2 journal entries to record additional service revenue earned, as well as any necessary adjustments to revenue and receipt of payment from Silvia.
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| 268. | Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Romano will receive an additional quarterly bonus of $3,000, if during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Romano estimated that there is a 75% chance that it will earn the quarterly bonus. Romano bases estimates of variable consideration on the expected value of the consideration it expects to receive. Prepare Romano’s April 30 journal entry to account for the revenue earned in April.
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| 269. | Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Romano will receive an additional quarterly bonus of $3,000, if during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Romano estimated that there is a 75% chance that it will earn the quarterly bonus. Romano bases estimates of variable consideration on the expected value of the consideration it expects to receive. Prepare Romano’s May 30 journal entry to record the revenue earned in May, as well as any appropriate adjustments to the revenue earned in April.
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| 270. | Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Romano will receive an additional quarterly bonus of $3,000, if during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Romano estimated that there is a 75% chance that it will earn the quarterly bonus. Romano bases estimates of variable consideration on the expected value of the consideration it expects to receive. Prepare Romano’s June 30 and July 2 journal entries to record additional service revenue earned, as well as any necessary adjustments to revenue and receipt of payment from Silvia.
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| 271. | Veras Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each month. In addition, Veras will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Veras estimated that there is a 75% chance that it will remain free of accidents for the entire year. Veras bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Veras’ January 31 journal entry to account for the revenue earned from January 1 – January 31.
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| 272. | Veras Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each month. In addition, Veras will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Veras estimated that there is a 75% chance that it will remain free of accidents for the entire year. Veras bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Veras’ March 31 journal entry to record the revenue earned from March 1 – March 31, as well as any appropriate adjustments to the revenue already presumed recorded as earned from January 1 – February 28.
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| 273. | Veras Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each month. In addition, Veras will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Veras estimated that there is a 75% chance that it will remain free of accidents for the entire year. Veras bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Veras’ June 30 journal entry to account for the revenue earned from June 1 – June 30, as well as any necessary adjustments to revenue presumed to have been previously recorded.
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| 274. | Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year. Terra bases estimates of variable consideration on the expected value it expects to receive. Prepare Terra’s January journal entry to account for the revenue earned from January 1 – January 31.
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| 275. | Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year. Terra bases estimates of variable consideration on the expected value it expects to receive. Prepare Terra’s March 31 journal entry to record the revenue earned from March 1 – March 31, as well as any appropriate adjustments to the revenue presumed already recorded as earned from January 1 – February 28.
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| 276. | Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year. Terra bases estimates of variable consideration on the expected value it expects to receive. Prepare Terra’s June 30 journal entry to account for the revenue earned from June 1 – June 30, as well as any necessary adjustments to revenue.
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| 277. | Assume that GM signs a contract to deliver 10 buses to the Tompkins Consolidated Area Transit (TCAT), which provides transit service throughout Tompkins County, for $4 million. Under the contract, TCAT makes a cash payment of $4 million to GM, and the 10 buses are shipped immediately from GM’s existing inventory. At the same time, GM obtains the right to advertise its products on all of TCAT buses for six months, and makes a cash payment of $20,000 to GM for the advertising service. The fair value of the advertising service is $18,000.
Required: Prepare the journal entries GM should record to account for the sale of the buses and the purchase of the advertisements. Indicate the amount of revenue GM should recognize for its sale of buses to TCAT.
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| 278. | Typhoon Sons & Co. manufactures various types of golf clubs to third party vendors. On April 1, 2016, Typhoon delivers a large quantity of golf clubs to Resona Country Club. Under the sales agreement, Resona is obligated to pay Typhoon $200,000 within six months. On May 1, Typhoon purchases for cash the right to advertise its products during Resona’s annual golf tournament event for $3,000. Resona normally charges $2,500 for such services. On August 15, Resona pays Typhoon all amounts owed.
Required: Prepare the journal entries Typhoon should record to account for the transaction on April 1, May 1 and August 15. Indicate the amount of revenue that Typhoon should recognize on its sale of golf clubs to Resona.
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| 279. | AgriFoods, Inc. prepares and delivers agricultural products to industrial-scale kitchens and food service providers. One of its key customers is Home Kitchen & Co., which provides cafeteria solutions for corporations and universities. On January 1, 2016, AgriFoods obtained a one-year contract to supply a pre-specified amount of vegetables to Home Kitchen, and received $600,000 in cash. Then, on March 15, AgriFoods hired Home to run one of its employee cafeterias for a period of six months, from April to September, and paid $70,000 in cash. For similar arrangements, Home usually charged $50,000.
Required: (a) Prepare the journal entries AgriFoods would record on January 1, 2016 and January 31, 2016 with respect to the sales contract. Assume revenue is accrued on a monthly basis. (b) Prepare the journal entry to account for AgriFoods’ purchase of Home’s services.
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| 280. | Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500.
Other competing sellers in the same region charge an average of $250 for a set of goggles and $750 for the lessons, if sold separately. Beaumont Company usually sells at a 5% discount compared to other shops, since it is a bit farther away from the ocean. Required: What would be Beaumont’s stand-alone selling price of the goggles and the lessons, based on adjusted market assessment approach?
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| 281. | Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500.
Typically, Beaumont incurs $375 on compensation and other costs to provide the private lessons, and earns an average of 40% profit over cost on service offerings. Required: Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the certified lessons based on the expected cost plus margin approach.
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| 282. | Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500.
Typically, if Beaumont were to sell the equipment only, it would ask for $2,000. Required: Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the lessons based on the residual approach.
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| 283. | CompuLand Center sells a full assortment of computer parts, including motherboards, video cards, and cables, and also offers complementary computer assembly services. The assembly service is offered by other vendors for $100 on average, and CompuLand typically charges approximately 20% more than other vendors for similar services on a stand-alone basis.
Required: Estimate the stand-alone selling price of the assembly service using the adjusted market assessment approach.
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| 284. | CompuValue Center sells a full assortment of computer parts, including motherboards, video cards, and cables, and also offers complementary computer assembly services. CompuValue estimates that it incurs $50 in labor and materials on average to complete one assembly order, with an average of 75% profit based on cost.
Required: Assuming that computer parts and assembly service are separate performance obligations, estimate the stand-alone selling price of the assembly service based on the expected cost plus margin approach.
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| 285. | CompuTime Center sells a full assortment of computer parts, including motherboards, video cards, and cables. It also offers complementary computer assembly services. A customer places an order for an advanced workstation, and CompuTime asks for $3,500. If CompuTime were to sell only the parts in an advanced workstation, with no assembly, the price would be $3,300.
Required: Assuming that computer parts and assembly service are separate performance obligations, estimate the stand-alone selling price of the assembly service based on the residual approach.
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| 286. | Bria Furniture sells bed frames and mattresses. One of its products is a premium therapeutic bed set produced by OmniSleep, which comes with a mattress and a bed frame. Bria offers a package consisting of the mattress, the frame, and on-site installation by its staff. All of these components can be sold separately, as often done by other vendors, so Bria concludes that these are separate performance obligations. Bria sells the OmniSleep package for $3,000. The mattress and the frame are sold separately for $2,000 and $900, respectively. Other vendors in the same area typically charge $200 for on-site installation. Bria does not sell on-site installation separately. On average, the prices charged by Bria are 10% higher than those of its competitors. Bria estimates that it incurs about $100 of compensation and other costs to provide the installation service. The profit margin over cost is estimated to be approximately 35%.
Required: Estimate the stand-alone selling price of the installation service using (a) the adjusted market assessment approach, (b) the expected cost plus margin approach, and (3) the residual approach.
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| 287. | Mahogany Billiards sells upscale pool tables and related supplies. It sells a premium package consisting of a pool table imported from Europe, a full set of cues and balls, and on-site installation by its staff. Mahogany determines that each of these components is a performance obligation. Mahogany sells the pool table separately for $3,000 and the set of cues and balls for $1,000. The entire package is sold at $4,500. Mahogany does not offer on-site installation separately, as part of company policy. It also estimates that it incurs about $350 of compensation and other costs per each installation. Other competing vendors sell on-site installation separately for $450, on average. Mahogany typically earns a profit margin of 40% over cost, and its prices are generally 5% lower than those charged by competitors.
Required: Estimate the stand-alone selling price of the installation service using (a) the adjusted market assessment approach, (b) the expected cost plus margin approach, and (3) the residual approach.
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| 288. | Assume that, on April 1, 2016, a customer visits MicrosoftStore.com and purchases Microsoft Windows 7 Ultimate for $170. Windows 7 Ultimate comes in a DVD format which the customer can use permanently, and Microsoft does not expect that its actions subsequent to April 1, 2016 will affect the value the customer obtains from using the software.
Required: How much revenue should Microsoft recognize in 2016 with respect to this particular transaction?
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| 289. | Smith & Sons is a CPA firm that provides proprietary software to its clients. One of its software packages sells for $150 and contains pre-programmed tutorials on basic accounting concepts. Another product sells for $3,000 and contains Smith & Sons’ archive of accounting standards and articles, which Smith & Sons updates on a weekly basis and downloads to archive users for the two years following purchase of the product.
Required: If a customer purchases both software packages on June 1, 2016, how much revenue should Smith & Sons recognize for the year?
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| 290. | Berry Farm produces organic tomatoes and strawberries. In June 2016, it transported 100 boxes of strawberries with a price of $20 per box to the Bay Farmers’ Market. Berry Farm paid an upfront fee of $100 to present its products at the market for one week, and the market earns a 25% profit margin on each item sold, but Berry Farm is responsible for any items that remain unsold at the end of the week.
Required: The market was able to sell 65 boxes of strawberries to customers. How much revenue should Berry Farm recognize with respect to this transaction?
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| 291. | Holmgren Seafoods, Inc. catches and processes salmon and tuna caught off the coast of Maine. In May 2016, it placed 100 freshly caught wild salmon with a retail price of $75 each in Joe’s Fish Shop. Holmgren’s contract with the shop stipulates that the shop will earn a 15% commission on each salmon sold. Joe’s is responsible for purchasing any fish that remain unsold at the end of a three-day period.
Required: During the three-day period, Joe’s Fish Shop was able to sell 88 of the 100 salmon. How much revenue should Holmgren recognize with respect to this transaction?
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| 292. | Colombo Coffee sells gift cards that can be used at its 55 branches. During 2015, customers purchased $25,000 of gift cards, of which $3,000 were redeemed during 2016. It is estimated that a balance of $1,500 of cards sold in 2015 remains unused as of the end of 2016, and Colombo determines that this amount will never be redeemed, based on historical experience. During 2016, Colombo further sold $32,000 of gift cards, of which $26,000 were redeemed and $6,000 remain unused but may be used by customer in 2017.
Required: How much gift card revenue should Colombo recognize in 2016?
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| 293. | Moretti Department Store sells gift cards that expire three years from the date of purchase. During 2014, Moretti sold $50,000 of gift cards, of which $1,500 were redeemed during 2016. At the end of 2016, it is estimated that approximately $800 of the 2014 balance remains unused, and Moretti concludes that it will never be redeemed. Moretti sold another $55,000 of gift cards in 2015, of which $22,000 were redeemed in 2016, and $60,000 of gift cards in 2016, of which $40,000 were redeemed in 2016.
Required: How much revenue with respect to gift cards should Moretti recognize in 2016?
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| 294. | Beck Construction Company began work on a new building project on January 1, 2015. The project is to be completed by December 31, 2017, for a fixed price of $108 million. The following are the actual costs incurred and estimates of remaining costs to complete the project that were made by Beck’s accounting staff:
What amount of gross profit (or loss) would Beck record on this project in each year, assuming that Beck recognizes revenue for this project upon completion of the project? Place answers in the spaces provided below and show supporting computations.
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| 295. | Beck Construction Company began work on a new building project on January 1, 2015. The project is to be completed by December 31, 2017, for a fixed price of $108 million. The following are the actual costs incurred and estimates of remaining costs to complete the project that were made by Beck’s accounting staff:
What amount of gross profit (or loss) would Beck record on this project in each year, assuming that Beck recognizes revenue for this project over time according to percentage of completion? Place answers in the spaces provided below and show supporting computations.
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| 296. | Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that Beavis recognizes revenue on this contract over time according to percentage of completion. Required: Compute the amount of gross profit recognized during 2015 and 2016.
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| 297. | Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that Beavis recognizes revenue on this contract over time according to percentage of completion. Required: Prepare all journal entries to record costs, billings, collections, and profit recognition.
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| 298. | Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that Beavis recognizes revenue upon completion of the project. Required: Compute the amount of gross profit recognized during 2015 and 2016.
|
| 299. | Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that Beavis recognizes revenue upon completion of the project. Required: Prepare all journal entries to record costs, billings, collections, and profit recognition.
|
| 300. | In 2016, Chicago Construction began work on a three-year construction project to build a new performing arts complex (the PAC). The PAC contract price is $150 million. Chicago recognizes revenue on this contract over time according to percentage of completion. At the end of 2016, the following financial statement information indicates the results to date for the PAC (missing items denoted by letter):
Compute the following, placing your answer in the spaces provided and showing supporting computations below:
|
| 301. | In 2016, KP Building Inc. began work on a four-year construction project (called Cincy One). The contract price is $300 million. KP recognizes revenue on this contract over time according to percentage of completion. At the end of 2016, the following financial statement information indicates the results to date for Cincy One:
Compute the following, placing your answer in the spaces provided and showing supporting computations below.
|
| 302. | McCombs Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that McCombs recognizes revenue on this contract over time according to percentage of completion. Required: Compute the amount of gross profit recognized during 2015 and 2016.
|
| 303. | McCombs Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that McCombs recognizes revenue on this contract over time according to percentage of completion. Required: Prepare all journal entries to record costs, billings, collections, and profit recognition. Round your answers to the nearest whole dollar.
|
| 304. | McCombs Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that McCombs recognizes revenue upon project completion. Required: Compute the amount of gross profit recognized by McCombs during 2015 and 2016.
|
| 305. | Missoula Inc. reported the following selected financial statement data:
Required: Compute the receivables turnover ratio for 2016.
|
| 306. | Missoula Inc. reported the following selected financial statement data:
Required: Compute the inventory turnover ratio for 2016.
|
| 307. | Missoula Inc. reported the following selected financial statement data:
Required: Compute the asset turnover ratio for 2016.
|
| 308. | Missoula Inc. reported the following selected financial statement data:
Required:
|
| 309. | Missoula Inc. reported the following selected financial statement data:
Required:
|
| 310. | Missoula Inc. reported the following selected financial statement data:
Required:
|
| 311. | Missoula Inc. reported the following selected financial statement data:
Required:
|
| 312. | Missoula Inc. reported the following selected financial statement data:
Required:
|
| 313. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its profit margin on sales for 2016. Round your answer to one decimal place, e.g., .1234 as 12.3%. |
| 314. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its receivables turnover ratio for 2016. Round your answer to one decimal place. |
| 315. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its inventory turnover ratio for 2016. Round your answer to one decimal place. |
| 316. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its asset turnover ratio for 2016. Round your answer to two decimal places. |
| 317. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its average collection period for 2016. Round your final answer to one decimal place. |
| 318. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its average days in inventory for 2016. Round your final answer to one decimal place. |
| 319. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its return on assets for 2016. Round your answer to one decimal place, e.g., .1234 as 12.3%. |
| 320. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its return on stockholders’ equity for 2016. Round your answer to one decimal place, e.g., .1234 as 12.3%. |
| 321. | The following information is provided in the 2016 annual report to shareholders of paris-perfume.com:
Required:
|
| 322. | The following information is provided in the 2016 annual report to shareholders of The BizStore:
Compute U-Z in the table above.
|
| 323. | Silica Corporation constructs highly specialized communication satellites. A customer in Hong Kong recently placed an order for a cable TV satellite at a price of $20 million. The order was placed in April 2016, and the satellite is to be delivered in one year. The customer has guaranteed to pay in full at the end of 2016, regardless of progress or cancellation. Silica uses “proportion of time” as its measure of progress toward completion.
Required: When should Silica recognize revenue: at completion, or as the construction is performed?
|
| 324. | Hans Cars & Trucks sells various types of used vehicles with a one-year warranty that covers any defects. When customers make a purchase, they also receive a coupon for 10 free engine oil changes and an option to change all of the tires for $50 after 30,000 miles. Typically, customers pay $25 for an oil change and $250 for a new set of tires.
Required: (a) Given the information above, how many performance obligations exist in the contract to purchase a vehicle?
|
| 325. | Lexikon Pianos sells customized concert pianos throughout the U.S. Its grand concert piano sells for $200,000, which includes delivery and installation. The product comes with a two-year warranty that covers any product defects, and customers can choose to add an extended three-year warranty for maintenance and repair at a price of $2,000. Customers also get an option to upgrade traditional plastic keys to bone ones for an additional $20,000. The extended warranty would normally sell for $3,500, and the installation of bone keys carries a standalone price of $30,000.
Required: (a) Given the information above, how many performance obligations exist in the contract to purchase a grand concert piano?
|
| 326. | Summerhill Construction builds luxury houses in remote areas. On June 1, 2016, the company signed a contract to build a house in an undeveloped section of a mountainside, and received $2 million in advance for the job. To complete the project, the company must construct a pathway leading to the building lot, clear a large hillside, and construct a wooden house. Normally, the company would charge $400,000, $1,400,000, and $500,000, respectively, for each of these tasks if done separately.
Required: Given the information above, how many performance obligations are included in this contract?
|
| 327. | Optimus Pools, Inc. constructs outdoor swimming pools for wealthy individuals. Recently it obtained an order to build a three-lane swimming pool of 25 yards in length in the customer’s backyard. Under the contract, Optimus is also obligated to install a water heater and a filtration system, which are necessary to make a swimming pool fully functional. Total price for the construction was $55,000. Each of these smaller components would typically cost $40,000, $10,000, and 20,000 if installed separately.
Required: Given the information above, how many performance obligations are included in this contract?
|
| 328. | FlexMotors, Inc. manufactures a variety of electronic drills and grass cutters. Recently, it introduced a new line of handheld drills that generates much less noise and consumes much less energy, but carries a much higher price tag. The company is currently considering whether it should record $1.2 million of revenue upon shipment. Under the contract, FlexMotors is obligated to accept any products from the distributors if they are not sold within 6 months. The company is confident that the new model will sell, but is unable to accurately estimate returns, because it has never sold anything quite like it.
Required: How much revenue should FlexMotors recognize upon shipment to distributors?
|
| 329. | Horowitz Paint Shop sold $3,000 of paint to a local construction company for cash on June 25, 2016. Because of a flood in the area, the customer requested that Horowitz not ship the items from its warehouse until July 3, 2016, so Horowitz set aside the paint on June 25, packaged and ready to ship on July 3.
Required: For the second quarter ending on June 30, how much revenue should Horowitz recognize for the sale to the local construction company? Explain your answer.
|
| 330. | On December 28, 2016, Omega Steel, Inc. sold $100,000 of steel sheets to a car manufacturer. Due to holidays, Omega was unable to find a truck driver to deliver the product. Delivery was finally made on January 5, 2017.
Required: How much revenue should Omega recognize in 2016 for the sale to the car manufacturer? Explain your answer.
|
| 331. | The following disclosure note appeared in a recent annual report to stockholders of Dell Inc., the computer manufacturer: “Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. Dell allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative list price of each element. For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs. Product revenue is recognized, net of an allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended warranty and service contracts, for which Dell is not obligated to perform, is recognized on a net basis at the time of sale.”
Briefly explain why Dell Computer recognizes revenue at different times for (a) product sales, (b) extended warranty and service contracts for which Dell is obligated to perform, and (c) extended warranty and service contracts for which a third party is obligated to perform.
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| 332. | Are the following separate performance obligations: prepayments, quality-assurance warranty, extended warranty, right of return? For each, indicate yes or no, and explain.
|
| 333. | Explain two approaches a seller can use to estimate variable consideration, and when each approach is likely to be more appropriate.
|
| 334. | Are sellers ever constrained from including variable consideration in the transaction price used to estimate revenue? Explain, providing indicators of circumstances that could require that constraint.
|
| 335. | Briefly describe at least two indicators that can be used to distinguish whether a seller is a principal or an agent according to GAAP.
|
| 336. | Explain the differences between how a principal and agent would show a sale of a product that has gross revenues of $1,000, cost of goods sold of $750, and a commission paid by the principle of 10% of gross sales on their respective income statements.
|
| 337. | Explain briefly how a company who sells to distributors with a right of return might manage earnings if the company was falling short of profit projections. What sort of ethical problems could result from that earnings management?
|
| 338. | Many high-tech companies sell products with the opportunity for retailers to return the merchandise if it is unsold after a certain period. This reduces the retailer’s risk of inventory obsolescence. Explain the implications on revenue recognition under this kind of policy. Include a specific example.
|
| 339. | Briefly explain the circumstances in which license revenue is recognized over time versus at a point in time. Provide an example of each.
|
| 340. | Briefly explain the circumstances that indicate the seller has a bill-and-hold sale and a consignment sale, and how that affects the timing of revenue recognition for each.
|
| 341. | Briefly explain the difference between an account receivable, a contract asset, and a contract liability.
|
| 342. | What is the objective of disclosures about revenue recognition? Indicate at least two common types of important revenue recognition disclosures.
|
| 343. | Imagine that the Ace Construction Company (ACC) concludes that it must switch from recognizing revenue on long-term contracts over time according to percentage of completion to recognizing revenue upon completion of each contract. Assume that none of their construction projects are going to produce a loss. Is it possible that, in a particular year, ACC will show higher gross profit under the new approach (recognizing revenue upon contract completion) than they did under the old approach (recognizing revenue over time according to percentage of completion)? Explain.
|
| 344. | Briefly explain how a company that recognized revenue over time by estimating percentage of completion using a cost-to-cost ratio could manage earnings upward to meet a profit projection. What sort of ethical problems could result from that earnings management?
|
| 345. | Briefly explain how gross profit is recorded when revenue on long-term construction projects is recognized over time according to percentage of completion.
|
| 346. | Under what circumstances can revenue on long-term construction contracts be recognized over time according to percentage of completion?
|
| 347. | Briefly explain how you can determine if a company is effectively using leverage.
|
| 348. | The following table presents a summary of ratio analysis for McDonald’s and averages for their peer group:
Using the information provided above, use the DuPont framework to briefly summarize the operating performance of McDonald’s relative to its benchmark competitors.
|
| 349. | The following table presents a summary of ratio analysis for McDonald’s and averages for their peer group:
Are differences between McDonald’s and the industry likely driven by differences in size between McDonald’s and the average company in their industry peer group? Explain briefly.
|
| 350. | The following table presents a summary of ratio analysis for McDonald’s and averages for their peer group:
Besides size differences, what other differences between McDonald’s and its industry peer group could limit your ability to make meaningful comparisons about the performance of McDonald’s from the data above?
|
| 351. | The following table presents a summary of ratio analysis for McDonald’s and averages for their peer group:
Based on this information, if you were going to advise McDonald’s about how it could enhance return on shareholders’ equity, what would you suggest? Be as specific as possible in the operational or financial changes you would recommend.
|
| 352. | The following table presents a summary of ratio analysis for Uncle Joe’s Coffee, based on the most recent 12 months and five-year comparisons of Uncle Joe’s with averages in the restaurant industry and the services sector, respectively.
Using the information provided above, briefly summarize the operating performance of Uncle Joe’s relative to its benchmark competitors.
|
| 353. | The following table presents a summary of ratio analysis for Uncle Joe’s Coffee, based on the most recent 12 months and five-year comparisons of Uncle Joe’s with averages in the restaurant industry and the services sector, respectively.
What limitations exist in drawing meaningful comparisons about the performance of Uncle Joe’s from the data above?
|
Chapter 05 Revenue Recognition and Profitability Analysis Answer Key
True / False Questions
| 1. | Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 State the core revenue recognition principle and the five key steps in applying it. Level of Difficulty: 1 Easy Topic Area: Introduction to revenue recognition |
| 2. | Companies always recognize revenue when goods or services are transferred to customers for the amount the company expects to receive in exchange for those goods or services.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 State the core revenue recognition principle and the five key steps in applying it. Level of Difficulty: 2 Medium Topic Area: Introduction to revenue recognition |
| 3. | “Determine whether it is probable the seller will collect the consideration it is entitled to receive” is one of the five steps to applying the core revenue recognition principle.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 State the core revenue recognition principle and the five key steps in applying it. Level of Difficulty: 2 Medium Topic Area: Introduction to revenue recognition |
| 4. | Staff Accounting Bulletin No. 101 was issued by the FASB to clarify its guidelines on revenue recognition.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Research Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 State the core revenue recognition principle and the five key steps in applying it. Level of Difficulty: 1 Easy Topic Area: Introduction to revenue recognition |
| 5. | A transfer of goods or services is complete when the customer has control over the goods or services.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 Explain when it is appropriate to recognize revenue at a single point in time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue-transfer of control |
| 6. | Revenue always is recognized once the buyer has physical possession of goods.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 Explain when it is appropriate to recognize revenue at a single point in time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue-transfer of control |
| 7. | Sellers should recognize revenue over time for a long term contract in which the seller is receiving periodic payments for progress to date but may need to refund those payments in the event the contract is cancelled.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 2 Medium Topic Area: Recognizing revenue over time-Criteria |
| 8. | A common output method used to measure progress towards completion is to compare cost incurred to date to total costs estimated to complete the job.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue over time-Progress toward completion |
| 9. | Revenue should be recognized over time for the construction of an annex to a building that the customer owns, even if the seller will not receive payment until the annex is completed.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue over time-Criteria |
| 10. | A common output method used to measure progress towards completion is to determine the proportion of promised goods and services that have been transferred to date.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue over time-Progress toward completion |
| 11. | No allocation of contract price is required if the transaction involves a performance obligation to be satisfied over time.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 1 Easy Topic Area: Multiple performance obligations |
| 12. | The transaction price should be allocated to the contract’s performance obligations in proportion to the stand-alone selling prices of the performance obligations.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 1 Easy Topic Area: Multiple performance obligations-Allocate the transaction price |
| 13. | No allocation of contract price is required if the transaction involves multiple performance obligations that are satisfied at different points in time.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 1 Easy Topic Area: Multiple performance obligations-Allocate the transaction price |
| 14. | If the contract contains multiple performance obligations, revenue must be recognized in an amount equal to the fair value of each of the separate performance obligations.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 1 Easy Topic Area: Multiple performance obligations-Allocate the transaction price |
| 15. | The transaction price is only allocated to goods and services that are both capable of being distinct and that are separately identifiable.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 1 Easy Topic Area: Multiple performance obligations-Identify the performance obligation |
| 16. | Goods and services are distinct if they are either capable of being distinct or are separately identifiable.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 1 Easy Topic Area: Multiple performance obligations-Identify the performance obligation |
| 17. | A contract between a seller and a buyer need not be in writing to be enforceable.
TRUE |
| AACSB: Reflective Thinking AICPA: BB Legal Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Identify the contract |
| 18. | If the contract is not in writing, revenue cannot be recognized, even though goods have been transferred and payment is expected to be received in exchange.
FALSE |
| AACSB: Reflective Thinking AICPA: BB Legal Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Identify the contract |
| 19. | The probability that the customer will pay the seller does not affect whether a contract exists for purposes of revenue recognition.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Identify the contract |
| 20. | A contract exists for purposes of revenue recognition if either the seller or customer has performed an obligation specified by the contract.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Identify the contract |
| 21. | An option for a customer to purchase additional goods at a discount from list price is only a performance obligation if the discount is a material right that the customer would not receive otherwise.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Customer options |
| 22. | A warranty that the customer can purchase separately and that covers a long period of time after the purchase date is likely to be a quality-assurance warranty.
FALSE |
| AACSB: Reflective Thinking AICPA: BB Industry Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Warranties |
| 23. | If an option to purchase an extended warranty at a special discount is included with a product when the product is purchased, a portion of the contract price needs to be allocated to the option.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Warranties |
| 24. | A fee for recording a new customer in the seller’s information system should be treated as a separate performance obligation and should be recognized upon payment.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 2 Medium Topic Area: Contract features-Prepayments |
| 25. | An option for a customer to purchase additional goods at a discount from list price is always a performance obligation, because it confers a material right.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 2 Medium Topic Area: Contract features-Customer options |
| 26. | Accounting for quality-assurance warranties includes a credit to warranty expense and a debit to contingent liability.
FALSE |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 2 Medium Topic Area: Contract features-Warranties |
| 27. | When a contract includes variable consideration, the probability-weighted amount must be used when there are different probabilities of occurrence.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Variable consideration |
| 28. | To account for variable consideration using the most likely amount, the probability of each possible amount is multiplied by the possible amount to get an expected contract price.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Variable consideration |
| 29. | If the estimate of a transaction price is revised, the price change is allocated entirely to the remaining performance obligations that are yet to be satisfied.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Variable consideration |
| 30. | The amount of variable consideration that can be recognized is limited to the amount for which it is probable that there won’t be a significant reversal of revenue recognized to date when uncertainty resolves in the future.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Variable consideration constraint |
| 31. | The right of return is a separate performance obligation, and a portion of the transaction price needs to be allocated to it for revenue recognition.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Right of return |
| 32. | When the right of return exists, revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Right of return |
| 33. | If the seller is a principal, the seller has primary responsibility for delivering a product or service.
TRUE |
| AACSB: Reflective Thinking AICPA: BB Legal Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 34. | If the seller is a principal, the seller typically is not vulnerable to risks associated with delivering the product or service.
FALSE |
| AACSB: Reflective Thinking AICPA: BB Legal Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 35. | If the seller is a principal, the seller typically is vulnerable to risks associated with collecting payment from the customer.
TRUE |
| AACSB: Reflective Thinking AICPA: BB Legal Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 36. | If the seller is a principal, the seller should recognize gross revenue and cost of sales associated with the transaction.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 37. | If the seller is an agent, the seller typically is vulnerable to risk associated with delivering the product or service.
FALSE |
| AACSB: Reflective Thinking AICPA: BB Legal Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 38. | If the seller is an agent, the seller typically recognizes cost associated with the sale on its own line in the income statement.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 39. | The transaction price should be adjusted to reflect the time value of money for interest payable, but not for interest receivable.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Time value of money |
| 40. | Sellers are only required to adjust the transaction price to reflect the time value of money when the contract has a significant financing component.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Time value of money |
| 41. | If a seller makes payments to a customer to purchase goods and services, and those payments are equal to the stand-alone selling prices of those goods and services, part of those payments are a refund to the customer.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Payments by seller to customer |
| 42. | The adjusted market assessment approach can be used to estimate the stand-alone selling price of a good or service.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Allocate the transaction price-Adjusted market assessment approach |
| 43. | The residual approach to estimate stand-alone selling prices is often used for goods or services that are sold separately and that have stable prices.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Allocate the transaction price-Residual approach |
| 44. | Revenue typically should not be recognized when payment is received but the goods are warehoused at the seller’s facility.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Bill-and-hold |
| 45. | In a bill-and-hold arrangement, revenue only can be recognized after the sale of the goods to the end user.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Bill-and-hold |
| 46. | In franchise arrangements, the franchisor’s performance obligations are not separately identifiable, so revenue must be recognized over time.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Franchises |
| 47. | The same revenue recognition requirements always apply to franchise arrangements that apply to other selling arrangements.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Franchises |
| 48. | In a consignment arrangement, revenue typically should not be recognized until sale to a third party occurs, even though there has been a physical transfer of goods to the consignee, because the consignor still retains legal title to the goods.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Consignment arrangements |
| 49. | Sellers recognize revenue for gift cards at the point in time control of the gift card is transferred to the customer.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Gift cards |
| 50. | If a license is acquired to use intellectual property for a 5-year period, revenue always is recognized at the point in time the customer begins to benefit from the license.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Licenses |
| 51. | If a licensee benefits from the seller’s activity over the license period with respect to the licensed intellectual property, revenue should be recognized over time.
TRUE |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Licenses |
| 52. | Contract liability, deferred revenue and unearned revenue are all ways to describe a liability that the seller recognizes with respect to unsatisfied performance obligations for which the seller has already been paid.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 1 Easy Topic Area: Disclosures-Balance sheet |
| 53. | An account receivable is recognized if the seller has a conditional right to receive payment.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 1 Easy Topic Area: Disclosures-Balance sheet |
| 54. | Disclosure notes to the financial statements regarding significant revenue recognition policies are only required when they will not reveal important information to competitors, suppliers or customers.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 1 Easy Topic Area: Disclosures-Notes |
| 55. | When recognizing revenue over time on a long-term contract, amounts billed and the cash actually received affect income recognition.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 56. | When recognizing revenue over time on a long-term contract, the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 57. | Firms have free choice as to whether to recognize revenue over time or at a point in time to account for a long-term contract.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts |
| 58. | When revenue is recognized over time versus upon completion of the contract, different amounts of total profit or loss are recognized for a particular contract.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts |
| 59. | Estimated losses on long-term contracts are recognized as ratable over the contract term regardless of whether revenue is recognized over time or upon contract completion.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts Topic Area: Loss on contract |
| 60. | When a long-term contract does not qualify for revenue recognition over time, all gross profit and loss recognition occurs when the contract is completed.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition upon project completion |
| 61. | A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection.
FALSE |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 62. | The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Risk Analysis Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 63. | A company could improve its return on assets by increasing its income or by increasing its total assets.
FALSE |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 64. | Return on shareholders’ equity is increased if a firm can maintain its return on assets but increase its leverage.
TRUE |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 65. | Revenue is not recognized under the realization principle unless the earnings process is complete or virtually complete and there is reasonable certainty about the expected collection of the asset received.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Realization principle |
| 66. | Under IFRS, one of the conditions for revenue from product sales to be recognized is when the risks and rewards of ownership have been transferred to the customer.
TRUE |
| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Revenue recognition |
| 67. | Use of the installment sales method requires that firms track the gross profit percentage associated with a particular sale.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Installment sales method |
| 68. | When the expected collection of accounts receivable is difficult to estimate, companies must use the cost recovery method.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Installment sales |
| 69. | Use of the installment sales method indicates little uncertainty about collection of the receivable.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Installment sales method |
| 70. | Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment sales method and the cost recovery method.
TRUE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Installment sales |
| 71. | When the right of return exists and a seller cannot make reliable estimates of future returns, the installment sales method can be used.
FALSE |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Installment sales method |
| 72. | Under IFRS, firms have free choice as to whether they use the percentage-of-completion method or the cost recovery method to account for a long-term construction contract.
FALSE |
| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Long-term construction contracts |
| 73. | For long-term construction contracts, the cost recovery method under IFRS requires recognizing equal amounts of revenue and cost until all costs are recovered.
TRUE |
| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: IFRS Long-term construction contracts |
| 74. | When the cost recovery method is used to account for a long-term construction contract under IFRS, an equal amount of cost and revenue is typically recognized during the early life of the contract, such that high initial gross profit is recognized in net income.
FALSE |
| AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Revenue recognition |
| 75. | Under IFRS, firms typically use the cost recovery method if they conclude that the percentage-of-completion method is not appropriate to account for a long-term construction contract.
TRUE |
| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Long-term construction contracts |
| 76. | Revenue from the sale of computer software is always recognized at the point of sale.
FALSE |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Software and other multiple-element arrangements |
| 77. | Revenue on a multiple-element contract typically is allocated to independent parts of the contract based on their relative selling prices.
TRUE |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Software and other multiple-element arrangements |
| 78. | Vendor-specific objective evidence of separate sales prices is required for multiple-element software contracts, but estimated selling prices can be used for other multiple-element contracts under U.S. GAAP.
TRUE |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Software and other multiple-element arrangements |
| 79. | Recognition of franchise fee revenue is dependent on judgments of both substantial performance and expected collection of fees.
TRUE |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Franchise sales |
| 80. | Initial franchise fees are always recognized on the date they are received.
FALSE |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Franchise sales |
| 81. | When accounting for multiple-element software arrangements, the revenue for each element is based on the separate prices stated for each element in the software contract.
FALSE |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Software and other multiple-element arrangements |
| 82. | When accounting for multiple-element arrangements, GAAP indicates that sellers can separately record revenue for part of an arrangement even if the part does not have value to the customer on a stand-alone basis.
FALSE |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Software and other multiple-element arrangements |
| 83. | IFRS provides detailed guidance concerning accounting for revenue with respect to multiple-element contracts.
FALSE |
| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS multiple-deliverable arrangements |
Multiple Choice Questions
| 84. | Companies recognize revenue only when
The key to revenue recognition is transfer of control of goods or services from the seller to the customer. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 State the core revenue recognition principle and the five key steps in applying it. Level of Difficulty: 2 Medium Topic Area: Introduction to revenue recognition-Core revenue recognition principle |
| 85. | Which of the following is one of the steps for recognizing revenue?
The second step requires identification of the performance obligations in the contract. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 State the core revenue recognition principle and the five key steps in applying it. Level of Difficulty: 1 Easy Topic Area: Introduction to revenue recognition-5 steps to recognizing revenue |
| 86. | Which of the following is not one of the five steps for recognizing revenue?
Estimating variable consideration is part of determining the transaction price. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 State the core revenue recognition principle and the five key steps in applying it. Level of Difficulty: 1 Easy Topic Area: Introduction to revenue recognition-5 steps to recognizing revenue |
| 87. | Which of the following is not one of the five steps for recognizing revenue?
The fifth step is to recognize revenue when (or as) each performance obligation is satisfied, not to wait until all have been satisfied. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 State the core revenue recognition principle and the five key steps in applying it. Level of Difficulty: 2 Medium Topic Area: Introduction to revenue recognition-5 steps to recognizing revenue |
| 88. | For a typical manufacturing company, the most common critical point for recognizing revenue is the date:
Control typically passes from the manufacturer to the customer when the product is delivered. |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 Explain when it is appropriate to recognize revenue at a single point in time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue at a single point in time-Transfer of control indicators |
| 89. | Stayman Associates has sold a good to a buyer and wants to recognize revenue. Which of the following is an indicator that control of a good has passed from Stayman to the buyer?
One of the indicators that control has passed from a seller to a buyer is if the buyer has assumed the risk and rewards of ownership. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 Explain when it is appropriate to recognize revenue at a single point in time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue at a single point in time-Transfer of control indicators |
| 90. | Which of the following is not an indicator that the customer is likely to have control over a good?
“Asset warehoused by seller-affiliated third party” is an indicator that control has not passed. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 Explain when it is appropriate to recognize revenue at a single point in time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue-Transfer of control indicators |
| 91. | On June 1st, Lucy & Bros received an order for 500 cupcakes. Lucy delivered the cupcakes to the client on June 25th. A $50 deposit was received on June 5th and the remaining $450 was paid on June 30th. Lucy likely would recognize revenue on
Revenue should be recognized when control passes to the customer, which typically occurs upon delivery. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-02 Explain when it is appropriate to recognize revenue at a single point in time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue at a point in time-Transfer of control indicators |
| 92. | The core revenue principle states that
Recognizing revenue when the earnings process is virtually complete and it is probably that payments will be received is incorrect because it includes the earnings process notion from the realization principle. Recognizing revenue when goods or services are transferred to the customer and payments are received is incorrect because it focuses on receipt of payment. Recognizing revenue when the goods or services are transferred to the customer in an arm’s length transaction is incorrect because it focuses on arm’s length transactions and doesn’t consider the amount the company expects to be entitled to receive. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 Explain when it is appropriate to recognize revenue at a single point in time. Level of Difficulty: 1 Easy Topic Area: Introduction to revenue recognition-Core revenue recognition principle |
| 93. | Consider the following three scenarios:
I. ABC Lawncare performed lawn maintenance services for Drake Inc. on June 1st, and received payment of $500 for those services. Given these scenarios, revenue can not be recognized on June 1st for
Revenue can be recognized for scenario I because the seller has satisfied a performance obligation. For scenario II, the seller must wait until raw material has been delivered. For scenario III, the seller should have recognized revenue on May 1st when the performance obligation was satisfied by rendering services. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-02 Explain when it is appropriate to recognize revenue at a single point in time. Level of Difficulty: 2 Medium Topic Area: Recognizing revenue at a point in time-Transfer of control indicators |
| 94. | Which of the following is not an indicator that revenue can be recognized over time?
An indicator that revenue recognition over time is appropriate is that the seller is creating an asset that does not have an alternative use to the seller, and the seller can receive payment for its progress even if the customer cancels the contract. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 2 Medium Topic Area: Recognizing revenue over time-Criteria |
| 95. | Revenue likely is recognized over time for all of the following arrangements except for
Manufacturing generally stocked items ordered by a favored customer does not meet any of the criteria for revenue recognition over time. The fact that the items are ordered by a favored customer doesn’t matter, as they are generally stocked and therefore not specific to that customer. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue over time-Criteria |
| 96. | On November 1, 2016, Taylor signed a one-year contract to provide handyman services on an as-needed basis to King Associates, with the contract to start immediately. King agreed to pay Taylor $4,800 for the one-year period. Taylor is confident that King will pay that amount, but payment is not scheduled to occur until 2017. Taylor should recognize revenue in 2016 in the amount of
This arrangement qualifies for revenue recognition over time because the customer consumes the benefit of the seller’s service as the seller provides it. Therefore, Taylor would recognize revenue of $800 ($4,800 × 2/12 of the contract duration). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue over time-Criteria |
| 97. | Mary signed up and paid $1200 for a 6 month ceramics course on June 1st with Choplet Ceramics. As of August 1st, Choplet’s accounting records would indicate:
This arrangement qualifies for revenue recognition over time because the customer consumes the benefit of the seller’s service as the seller provides it. Therefore, Choplet would recognize revenue of $400 ($1,200 × 2/6 of the contract duration) and deferred revenue of $800 ($1,200 contract price paid in advance – $400 revenue recognized to date). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 2 Medium Topic Area: Recognizing revenue over time-Progress toward completion |
| 98. | On February 1st, H&B Bank originated a loan for $50,000 at an interest rate of 7.2%. On March 15th, an interest payment of $300 was received. Which of the following best describes when interest revenue should be recognized?
This arrangement qualifies for revenue recognition over time because the customer consumes the benefit of the seller’s service as the seller provides it. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 2 Medium Topic Area: Recognizing revenue over time-Progress toward completion |
| 99. | Rothbart Manufacturing agrees to manufacture bumper cars for 12 Banners Amusement Parks. Under the terms of the contract, 12 Banners will pay Rothbart a total of $60,000, and 12 Banners can cancel the contract if it so chooses but must pay Rothbart for work completed. Rothbart believes that, if 12 Banners cancelled the contract, Rothbart could sell the bumper cars to another amusement park and still make a profit. The manufacturing contract is expected to last six months, and as of December 31, 2016, the job is 80% complete. How much revenue should Rothbart recognize in 2016 for this contract?
This arrangement does not qualify for revenue recognition over time, because the asset the seller is creating has an alternative use to it. Therefore, Rothbart must wait until completion of the contract before recognizing revenue. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 3 Hard Topic Area: Recognizing revenue over time-Progress toward completion |
| 100. | Which of the following is not a characteristic of a distinct good or service?
A good or service is distinct if it is both capable of being distinct, as in it can be used on its own or in combination with other goods or services the seller could obtain elsewhere, and it is separately identifiable, as in it is not interrelated with other goods or services in the contract. The good or service having a stand-alone selling price is not part of the definition of a distinct good or service. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 2 Medium Topic Area: Multiple performance obligations-Identify the performance obligation |
| 101. | For contracts that include more than one separate performance obligation:
Allocating the contract price to each performance obligation in proportion to the obligations’ stand-alone selling prices is how companies apply the fourth step to recognizing revenue, “Allocate the transaction price to each performance obligation.” |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 1 Easy Topic Area: Multiple performance obligations-Allocate the transaction price |
| 102. | Binz Company provides cleaning services and sells garbage bins to office clients. On June 1st, Binz delivered 100 garbage bins to a client, and also entered into a 5-year contract for Binz to provide cleaning services to that client. Which of the following is most likely to be true?
The garbage bins and cleaning services are two performance obligations, as they are both capable of being distinct and separately identifiable. The cleaning services qualify for revenue recognition over time, as the customer will consume those services as they are provided. The garbage bins do not qualify for revenue recognition over time, so revenue will be recognized at the point in time when control of the bins passes to the customer, which occurs upon delivery. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 2 Medium Topic Area: Multiple performance obligations-Identify the performance obligation |
| 103. | Goods and services are capable of being distinct if:
A good or service is capable of being distinct if the seller regularly sells the good or service separately, or the customer could use the good or service on its own or in combination with other goods and services it could obtain elsewhere. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 2 Medium Topic Area: Multiple performance obligations-Identify the performance obligation |
| 104. | Minarski Electronics sells computers and provides hardware maintenance services. On April 1st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $840 and the one-year unlimited maintenance/repair service costs $360. How much revenue does Minarski Electronics recognize for the month ended April 30th, assuming that revenue is accrued monthly?
The computer and maintenance services are distinct, because they are both capable of being distinct and are separately identifiable. Therefore, they qualify as performance obligations. The total bundle price of $1,000 would be allocated to each of them, with $700 (computed as $1,000 × ($840 ÷ (840 + 360))) allocated to the computer, and $300 (computed as $1,000 × ($360 ÷ (840 + 360))) allocated to the maintenance contract. During April, Minarski has delivered the computer and one month of maintenance, so it should recognize revenue of $725 (computed as $700 + ($300 × 1/12 of the duration of the contract)). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 3 Hard Topic Area: Multiple performance obligations-Allocate the transaction price Topic Area: Multiple performance obligations-Identify the performance obligation |
| 105. | On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods and services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2016, and the calibration service commenced on that date.
How many performance obligations exist in this contract?
Goods and services must be distinct to qualify as performance obligations. To be distinct, goods and services must be both capable of being distinct and separately identifiable. The scales and software appear capable of being distinct, as they could be sold separately, but they are not separately identifiable, as they are integrated with each other and not useable without each other. The one-year calibration contract is capable of being distinct and separately identifiable, as other vendors could provide similar services. Therefore, the contract has two performance obligations: the combination of the scales and software, and the calibration contract. |
| AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 2 Medium Topic Area: Multiple performance obligations-Identify the performance obligation |
| 106. | On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods and services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2016, and the calibration service commenced on that date.
Assume that the scales, software and calibration service are all separate performance obligations. How much revenue will Ortiz recognize in 2016 for this contract?
The scales will be allocated $54,000 of transaction price (computed as $90,000 × ($60,000 ÷ ($60,000 + 10,000 + 30,000))). The software will be allocated $9,000 of transaction price (computed as $90,000 × ($10,000 ÷ ($60,000 + 10,000 + 30,000))). The calibration contract will be allocated $27,000 of transaction price (computed as $90,000 × ($30,000 ÷ ($60,000 + 10,000 + 30,000))). The revenue for the scales and software all would be recognized upon delivery on August 1, 2016. Since the calibration contract has a one-year duration and commenced on August 1, revenue for five months has been earned in 2016, equal to $11,250 (computed as $27,000 × 5/12). Therefore, total revenue recognized in 2016 is $74,250 (computed as $54,000 + 9,000 + 11,250). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 3 Hard Topic Area: Multiple performance obligations-Allocate the transaction price Topic Area: Multiple performance obligations-When (or as) performance obligation(s) satisfied |
| 107. | On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods and services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2016, and the calibration service commenced on that date.
Assume that the scales, software and calibration service are viewed as one performance obligation. How much revenue will Ortiz recognize in 2016 for this contract?
If the contract has only one performance obligation, that revenue will be recognized over time as the Ortiz provides the combination of scales, software and calibration service. No revenue can be recognized upon delivery of the computer or software. Since the contract has a one-year duration and commenced on August 1, revenue for five months has been earned in 2016, equal to $37,500 (computed as $90,000 × 5/12). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 3 Hard Topic Area: Multiple performance obligations-When (or as) performance obligation(s) satisfied |
| 108. | A contract does not exist for purposes of applying the revenue recognition principle in all of the following cases except for when:
The contract does not have to be written to exist for purposes of revenue recognition. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features |
| 109. | Which of the following is a characteristic of a contract for purposes of revenue recognition?
A contract must have commercial substance for revenue recognition to occur. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features |
| 110. | Waldman Associates received a written, approved contract to deliver economic consulting services, with service and payment commencing in one month. The contract specifies the services that Waldman is to perform, and the payment terms. Waldman and the customer both can cancel the contract without penalty prior to commencing service. Does Waldman have a contract for purposes of revenue recognition on the day the contract is received?
If both parties can cancel without penalty and the contract is wholly unperformed, no contract exists for purposes of revenue recognition. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features |
| 111. | What is the effect of bad debts on revenue recognition?
A contract does not exist for purposes of applying the revenue recognition model if the seller believes it’s not probable that it will collect the amount it’s entitled to receive under the contract. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 2 Medium Topic Area: Contract features |
| 112. | Which of the following is considered a performance obligation?
An extended warranty represents a performance obligation. An up-front registration fee and processing fee are prepayments, and a quality-assurance warranty represents a promise to fulfill the performance obligation to deliver goods of acceptable quality. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Identify the contract |
| 113. | Which of the following is not a performance obligation?
A right of return regards the completion of the performance obligation to deliver satisfactory goods in the first place, and so is not a separate performance obligation. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Identify the contract |
| 114. | Which of the following is an example of an extended warranty?
All warranties except for Mark Electronics are examples of quality assurance warranties. They are promises to fulfill the performance obligation to deliver goods of acceptable quality, rather than being performance obligations in their own right. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Contract features-Warranties |
| 115. | Orange Inc. offers a discount on an extended warranty on its oPhone when the warranty is purchased at the time the oPhone is purchased. The warranty normally has a price of $150, but Orange offers it for $120 when purchased along with an oPhone. Orange anticipates a 75% chance that a customer will purchase the extended warranty along with the oPhone. Assume Orange sells to 1,000 oPhones with the extended warranty discount offer. What is the total stand-alone selling price that Orange would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 oPhone contracts?
The $30 discount has a 75% chance of being taken by a customer, so the stand-alone selling price associated with 1,000 oPhones is $22,500 (computed as $30 × 75% × 1,000 phones). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Contract features-Warranties Topic Area: Determine the transaction price-Variable consideration |
| 116. | In which of the following is the option described not a performance obligation?
5% cash back is an adjustment of list price, and therefore must be considered when calculating the transaction price. It is not a performance obligation. |
| AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 2 Medium Topic Area: Contract features-Customer options |
| 117. | Which of the following statement is most true?
Consideration is variable because it depends on the future resolution of some uncertainty. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Variable consideration |
| 118. | Which of the following is an example of a variable consideration?
The Excellent Electronics’ example is correct because it describes consideration that has uncertainty that will be resolved by some future event. The example of John’s tutoring services is not correct because it simply requires accurate records in order to be paid a certain fee. The Melody’s Piano example is not correct because it describes a quality assurance warranty, which does not change consideration expected to be received. The Cantankerous Computers example is not correct because it indicates a fee that is certain given the number of hours of service provided. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Variable consideration |
| 119. | Which of the following is correct about changes in estimated variable consideration?
Like other changes in estimate, changes in estimated variable consideration are applied prospectively, and should be recognized as an adjustment to revenue in the period the change in estimate is made. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Variable consideration |
| 120. | On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%.
What is the expected transaction price with variable consideration estimated as the expected value?
The expected value of the transaction price is $5,750, computed as [$5,000 plus (30% × $5,000 × 30%) + (10% × $5,000 × 60%) + (0% × $5,000 × 10%)], or $5,000 + 450 + 300 + 0. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Expected value Topic Area: Determine the transaction price-Variable consideration |
| 121. | On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%.
What is the expected transaction price with variable consideration estimated as the most likely amount?
The likelihood that the job is finished a week early = 60%, in which case it is more likely that Bob would be paid the bonus than to not receive the bonus. The total expected amount is $5,000 + ($5,000 × 10%) = $5,500. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Most likely amount Topic Area: Determine the transaction price-Variable consideration |
| 122. | Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume Sanjeev estimates variable consideration as the most likely amount. What is the amount of revenue Sanjeev would recognize for the first month of the contract?
The most likely outcome is that Sanjeev receives the $2,000 bonus (likelihood = 60%), in which case Sanjeev would be paid a total of ($1,000 × 6 months) + $2,000, or $8,000. Therefore, Sanjeev would recognize $8,000 ÷ 6 = $1,333 each month. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Most likely amount Topic Area: Determine the transaction price-Variable consideration |
| 123. | Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume Sanjeev estimates variable consideration as the expected value. What is the amount of revenue Sanjeev would recognize for the first month of the contract?
The expected value of the transaction price is $8,400, computed as $1,000 × 6 months + (60% × $2,000) + (40% × $3,000). Therefore, Sanjeev would recognize $8,400 ÷ 6 = $1,400 each month. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Expected value Topic Area: Determine the transaction price-Variable consideration |
| 124. | Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume that Sanjeev estimates variable consideration as the most likely amount. After Sanjeev has recognized revenue for two months of the contract, he changes his assessment of the chance the contract will pay him $3,000 to 70%. What adjustment to revenue should Sanjeev recognize to account for that change in estimate?
In the first two months of the contract, the most likely outcome is that Sanjeev receives a $2,000 bonus (likelihood = 60%), in which case Sanjeev would be paid a total of ($1,000 × 6 months) + $2,000, or $8,000. Therefore, Sanjeev would recognize $8,000 ÷ 6 = $1,333 each month, and after two months would have recognized $2,666. Then Sanjeev concludes that the most likely outcome is that Sanjeev receives a $3,000 bonus (likelihood = 70%), in which case Sanjeev would be paid a total of ($1,000 × 6 months) + $3,000, or $9,000. Therefore, Sanjeev should have recognized $9,000 ÷ 6 = $1,500 each month, and after two months should have recognized $3,000. The amount of adjustment Sanjeev should record is a credit of $334, calculated as $3,000 – $2,666. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Most likely amount Topic Area: Determine the transaction price-Variable consideration |
| 125. | On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
Assume Emmet estimates variable consideration as the expected value. How much revenue should Emmet recognize on this contract in 2016?
The expected value of the transaction price is $52,250 for one year, computed as $50,000 + (30% × $50,000 × 15%). Since six months have elapsed, Emmet should recognize revenue of $52,250 × 6/12 = $26,125. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Expected value Topic Area: Determine the transaction price-Variable consideration |
| 126. | On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
Assume Emmet estimates variable consideration as the most likely amount. How much revenue should Emmet recognize on this contract in 2016?
The most likely amount to be received by Emmet is $50,000 per year. Since there is a 30% chance of receiving an additional amount, there is a 70% (100% – 30%) chance of not receiving any additional amount. Therefore the most likely amount of an additional fee is zero. Since six months have elapsed, Emmet should recognize revenue of only the fixed fee for that period: $50,000 × 6/12 = $25,000. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Most likely amount Topic Area: Determine the transaction price-Variable consideration |
| 127. | On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
Assume that Emmet accrues revenue each month, and estimates variable consideration as the most likely amount. On November 1, Emmet revises its estimate of the chance the building will exceed the 90% occupancy threshold to a 70% chance. What is the total amount of revenue Emmet should recognize on this contract in November of 2016?
In July, August, September, and October, Emmet would have based revenue recognition on the most likely amount of $50,000, and so would have recognized revenue of $50,000 × 4/12 = $16,667. Starting in November, Emmet believes the most likely amount is $50,000 + ($50,000 × 15%) = $57,500, such that by the end of November Emmet should have recognized revenue totaling $57,500 × 5/12 = $23,958. Therefore, the amount of revenue Emmet should recognize in November to revise its estimate is $7,291, calculated as $23,958 – $16,667. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Most likely amount Topic Area: Determine the transaction price-Variable consideration |
| 128. | Which of the following is not an indicator that the constraint on recognizing variable consideration should be applied?
A long delay before uncertainty resolves is an indicator that the constraint applies. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Variable consideration Topic Area: Determine the transaction price-Variable consideration constraint |
| 129. | On January 1, 2016, Elite Advertising was contracted to run a marketing campaign for Pharm King’s new dieting pills. In addition to getting a base fee of $150,000 for the 3-year campaign, Elite also may get an additional 5% of the base fee as a bonus if a targeted sales level is reached at the end of three years. Elite currently lacks sufficient information to make an estimate of the likelihood of the expected bonus, with the marketing director indicating that “If you forced me to make an estimate, I’d say we have a 50/50 chance. But don’t quote me on that – it’s really too early to tell.” Elite concludes this contract qualifies for revenue recognition over time, and estimates variable consideration using the most likely amount. How much revenue should Elite recognize as of December 31, 2016?
Elite would not include the bonus in its estimate of the transaction price, as it is not probable that the bonus revenue would not have to be reversed at a future date. Therefore, Elite would use a $150,000 transaction price, and since it provided advertising services for 1/3 of the duration of the contract, would recognize revenue of $50,000 = $150,000 × 1/3. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Variable consideration Topic Area: Determine the transaction price-Variable consideration constraint |
| 130. | Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:
Boomerang can estimate returns reliably enough for the constraint on recognizing variable consideration to not apply, so Boomerang would adjust the transaction price for expected returns and recognize revenue in that amount upon delivery. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Right of return |
| 131. | Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing revenue associated with one of these sales?
If returns can’t be estimated, the constraint on recognizing variable consideration applies, and revenue should be deferred until returns can be estimated or until the return of right expires. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Right of return |
| 132. | Under which of the following circumstances is it most appropriate to use the residual method to estimate stand-alone selling prices?
The residual approach is allowed only if the stand-alone selling price is highly uncertain, either because the seller hasn’t previously sold the good or service and hasn’t yet determined a price for it, or because the seller provides the same good or service to different customers at substantially different prices. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Allocate the transaction price-Residual approach |
| 133. | Which of the following is not an approach for estimating stand-alone selling prices?
The other three answers are the three methods indicated for assessing stand-alone selling prices. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Allocate the transaction price-various approaches |
| 134. | Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson’s prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.
Estimate the stand-alone selling price of the software using the adjusted market assessment approach.
Under the adjusted market assessment approach, Wilson considers the prices charged by other vendors for similar goods and adjusts them as necessary. In this case, Wilson would start with $100 charged by other vendors, and subtract 10% to estimate its own stand-alone selling price, yielding an estimate of $90. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Allocate the transaction price-Adjusted market assessment approach |
| 135. | Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson’s prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.
Estimate the stand-alone selling price of the software using the expected cost plus margin approach.
Under the expected cost plus margin approach, Wilson considers its cost and then adds a normal margin. In this case, Wilson would start with its cost of $65 and add its margin of $65 × 50%, or $32.50, yielding an estimate of $97.50. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Allocate the transaction price-Expected cost plus margin approach |
| 136. | Estimate the stand-alone selling price of the software using the residual approach.
Under the residual approach, Wilson calculates the stand-alone selling price of the software by subtracting the known stand-alone selling prices of other goods and services in the contract from the total transaction price. In this case, Wilson would calculate a stand-alone selling price of $50 (calculated as $200 – $150). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Allocate the transaction price-Residual approach |
| 137. | Which of the following does not apply to a seller who is a principal?
An agent’s primary performance obligation is to facilitate the transfer of goods or services. |
| AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 138. | Which of the following applies to a seller who is an agent?
Agents recognize as revenue their commission for facilitating sales. |
| AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 139. | Explodia.com sells fireworks over the Internet. Customers access Explodia’s website and select particular products, and Explodia refers the customer order to a fireworks manufacturer who fulfills the order, ships to the customer, and pays Explodia a 20% commission. Which of the following is true about Explodia?
Explodia has the characteristics of an agent. It does not have control of the fireworks that are purchased by customers, because it doesn’t have primary responsibility for delivering the product, is not vulnerable to risks associated with holding inventory, and doesn’t collect payment from the customer. Rather, Explodia is an agent, with its primary performance obligation being to facilitate transactions between fireworks customers and manufacturers. |
| AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 140. | Jing Statistical Services operates a website that links experienced statisticians with businesses that need data analyzed. Statisticians post their rates, qualifications, and references on the website, and Jing receives 25% of the fee paid to the statisticians in exchange for identifying potential customers. VetMed Associates contacts Jing and arranges to pay a consultant $1,500 in exchange for analyzing some data. Jing’s income statement would include the following with respect to this transaction:
Jing is an agent. It doesn’t have primary responsibility for delivering the statistics services and doesn’t collect payment from the customer. Rather, Jing is an agent, with its primary performance obligation being to facilitate transactions between customers and statisticians. Therefore, Jing would recognize as revenue only its commission of $375 (computed as 25% × $1,500). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Principal or agent |
| 141. | Assume a contract for the sale of goods specifies that payment is to be made four months after delivery of a product. The seller is likely to do which of the following, with respect to the time value of money over the life of the contract?
If the payment is made nine months after delivery, the seller is essentially loaning money to the buyer. However, since the payment is within one year of delivery, the financing component of the contract is viewed as insignificant, so the time value of money is ignored. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Time value of money |
| 142. | Assume a contract for the sale of goods specifies that payment is to be made 15 months prior to delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?
If the payment is made fifteen months prior delivery, the contract includes a financing component whereby the seller is essentially borrowing money from the buyer. And, since the payment is outside one year of delivery, the financing component is viewed as significant, so interest expense is recognized. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Time value of money |
| 143. | Johnson sells $100,000 of product to Robbins, and also purchases $10,000 of advertising services from Robbins. The advertising services have a fair value of $8,000. Johnson should record revenue on its sale of product to Robbins of:
Johnson is paying more for advertising services than the fair value of those services, so the excess of $2,000 (computed as $10,000 price paid – 8,000 fair value of the services) is viewed as a refund of part of the $100,000 sale. Therefore, Johnson records revenue of $98,000 (computed as $100,000 – 2,000). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Payments by seller to customer |
| 144. | Which of the following is not true?
If the seller provides access to its intellectual property, revenue is recognized over the period of time for which access is provided, not deferred until the end of the license period. |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Licenses |
| 145. | Maas LLP developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectiveness of irrigation. Sunny Dale paid a licensing fee of $20,000 for a copy of the software. Although Sunny Dale can use the software as long as it wants, Maas expects that Sunny Dale will use the software for approximately 5 years. Maas does not anticipate any further interaction with Sunny Dale following transfer of the license. How much revenue should Maas recognize in the first year of the contract?
Because Maas will have no more continuing involvement, the license transfers a right of use, and all license revenue can be recognized upon transfer of control of the software to the customer. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Licenses |
| 146. | The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years.
How much of the $1 million initial license fee should the UFL recognize as revenue in the first year of the contract?
Because the UNFL’s ongoing activities affect the value of the trademark to Tank-Skin, the UFL should recognize revenue over time. Therefore, the amount of $1 million initial license fee that the NFL should recognize as revenue is $250,000 (computed as $1 million ÷ 4 years). |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue over time Topic Area: When (or as) performance obligation(s) satisfied-Licenses |
| 147. | The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years.
Assume that the UFL anticipates that, in addition to receiving the $1 million license fee, it will receive a bonus of $2 million in year 1 of the contract and a bonus of $3 million in years 2-4 of the contract based on Tank-Skin’s sales. Also assume that the UFL is convinced that it is probable there will not be a significant reversal of any revenue recognized with respect to the bonus in subsequent periods. At the inception of the contract, what is the amount of transaction price that the UFL would estimate with respect to this license arrangement?
Normally the UFL would include an estimate of variable consideration in its estimate of the transaction price, yielding an estimate of $12 million (computed as $1 million initial fee + $2 million year 1 bonus + ($3 million × 3 years for subsequent-year bonuses). However, ASU No. 2014-09 does not allow estimates of sales-based royalties on licenses to be included in the transaction price until that consideration is no longer variable, so those amounts would be excluded from the transaction price estimated at the inception of the contract, and the transaction price would only include the $1 million initial fee. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Variable consideration Topic Area: When (or as) performance obligation(s) satisfied-Licenses |
| 148. | Which of the following is not true about accounting for revenue from franchise arrangements?
Franchise arrangements typically include multiple performance obligations because the goods and services included in the arrangement are both capable of being distinct and are separately identifiable. |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Franchises |
| 149. | Pita Pal sells fast-food franchises. Pita Pal receives $75,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of $75,000. Pita Pal also receives $36,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 2016, and on May 1, 2016 Rachel had completed training and was open for business. How much revenue in 2016 will Pita Pal recognize for its arrangement with Rachel?
Because Rachel had completed training and was open for business on May 1, 2016, Pita Pal apparently has satisfied its performance obligation with respect to the initial training, equipment and furnishings, so it would recognize $75,000 of revenue in 2016. In addition, since Rachel was a franchisee and using the Pita Pal name and consulting services for the last eight months of 2016, Pita Pal should recognize 8 ÷ 12 = 2/3 of a yearly fee of $36,000, or $24,000. In total, Pita Pal recognizes revenue from Rachel of $75,000 + 24,000 = $99,000 in 2016. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: Multiple performance obligations-Identify the contract Topic Area: When (or as) performance obligation(s) satisfied-Franchises |
| 150. | Which of the following is typically true for a bill-and-hold arrangement?
Bill-and-hold arrangements normally do not qualify for revenue recognition until delivery is made to the customer. Prior to that point, control of goods is not viewed as having passed to the customer. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Bill-and-hold |
| 151. | On June 1st, Joseph & Company received a $500 deposit for 80 cases of wine. On June 10th the customer identified specific vintages that are included in Joseph’s inventory, and asked that Joseph not ship the wine until June 20 so the customer could ready space to store the wine, so Joseph set those wines aside for the customer, boxed and ready for shipment to the customer. On June 20th the wine was shipped and delivered to the customer. Joseph likely would recognize revenue on
Bill-and-hold arrangements normally do not qualify for revenue recognition until delivery is made to the customer. Prior to that point, control of goods is not viewed as having passed to the customer. However, sellers can recognize revenue prior to delivery if it is concluded that the customer controls the product (the customer specifically identified the goods), there is good reason for the bill-and-hold arrangement (the customer needed time to make space for the wine), and the product is specifically identified as belonging to the customer and is ready for shipment (Joseph has a good faith deposit, the customer selected the goods, the goods were prepared for shipment and set aside from regular goods for sale). |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 3 Hard Topic Area: When (or as) performance obligation(s) satisfied-Bill-and-hold |
| 152. | Which of the following is most true regarding consignment arrangements?
Consignment arrangements normally do not qualify for revenue recognition until delivery is made to the end customer. Prior to that point, control of goods is viewed as having been retained by the consignor, not by the consignee. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Consignment arrangements |
| 153. | Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.
Sweeney most likely should recognize revenue when:
Consignment arrangements normally do not qualify for revenue recognition until delivery is made to the end customer. Prior to that point, control of goods is viewed as having been retained by the consignor, not by the consignee. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Consignment arrangements |
| 154. | Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.
After Sweeney has transferred a painting to a barbershop, the painting:
Consignment arrangements normally do not qualify for revenue recognition until delivery is made to the end customer. Prior to that point, control of goods is viewed as having been retained by the consignor, not by the consignee, so the consignor retains the goods in the consignor’s inventory. In this case, that means that Sweeney will retain the painting in its inventory until the painting is sold to an end customer. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Consignment arrangements |
| 155. | Bull’sEye sells gift cards redeemable for Bull’sEye products either in-store or online. During 2016, Bull’sEye sold $2,000,000 of gift cards, and $1,800,000 of the gift cards were redeemed for products. As of December 31, 2016, $150,000 of the remaining gift cards had passed the date at which Bull’sEye concludes that the cards will never be redeemed. How much gift card revenue should Bull’sEye recognize in 2016?
Sale of a gift card created deferred revenue, as it is a prepayment by a customer for goods or services to be delivered at a future date. Revenue is recognized when goods or services are delivered or when the likelihood of redemption is remote. In this case, $1,800,000 were redeemed and another $150,000 were viewed as broken, yielding total revenue of $1,950,000. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Gift cards |
| 156. | Which of the following is not true about contract assets?
Contract assets are recognized when the seller has at least partially fulfilled its performance obligations but not yet been paid, and payment depends on something other than the passage of time. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 2 Medium Topic Area: Disclosures-Balance sheet |
| 157. | Which of the following is not true about contract liabilities?
Contract liabilities are not conditional obligations. They are an obligation that arises due to a customer prepayment. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 2 Medium Topic Area: Disclosures-Balance sheet |
| 158. | Gupta Industries received a $300,000 prepayment from Packard Associates for the sale of new equipment. Gupta will bill Packard an additional $100,000 upon delivery of the equipment. Upon receipt of the $300,000 prepayment, how much should Holt recognize for a contract asset, a contract liability, and accounts receivable?
The $300,000 is a prepayment and so is a contract liability. The $100,000 owed upon delivery is neither a contract asset nor an account receivable, because Gupta has not fulfilled its performance obligation and so has neither a conditional nor an unconditional right to receive payment. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 2 Medium Topic Area: Disclosures-Balance sheet |
| 159. | Which of the following is not something that revenue recognition disclosures typically should help investors to understand?
Long-term debt fluctuations to finance future revenue increases are not specific to revenue recognition practices, so are least likely to appear with revenue recognition disclosures. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 1 Easy Topic Area: Disclosures-Notes |
| 160. | Which of the following is not true about revenue recognition with respect to long-term construction contracts?
Long-term contracts include goods and services that are highly interrelated, so they are not viewed as separately identifiable and are combined into a single performance obligation. Long-term contracts often qualify for revenue recognition over time, either because the customer owns the seller’s work in process, such that the seller is creating an asset that the customer controls as it is completed, or because the seller is creating an asset that is customized for the customer, so the seller has no other use for the asset and has the right to be paid for progress even if the customer cancels the contract. |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 2 Medium Topic Area: Long-term contracts |
| 161. | Which of the following is least likely to be a reason why a long-term construction contract would qualify for revenue recognition over time?
A construction contract is least likely to be viewed as a service that the customer consumes as it is provided. Long-term contracts often qualify for revenue recognition over time for the other two reasons: either because the customer owns the seller’s work in process, such that the seller is creating an asset that the customer controls as it is completed (which would be the case if the seller is constructing an addition to property that is owned by the customer), or because the seller is creating an asset that is customized for the customer, so the seller has no other use for the asset and has the right to be paid for progress even if the customer cancels the contract. |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 1 Easy Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 162. | Which of the following is true about accounting for long-term construction contracts?
Construction in progress includes both cost and gross profit (or overall contract loss) when revenue is recognized over time, but only cost (and overall contract loss) when revenue is recognized upon contract completion, so the contract asset is likely to be larger when revenue is recognized over time. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 3 Hard Topic Area: Long-term contracts |
| 163. | Which of the following is not true about accounting for long-term construction contracts?
Billings is contra to Construction in progress, not Accounts receivable. |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 2 Medium Topic Area: Long-term contracts |
| 164. | A rationale for recognizing revenue over the life of a contract rather than at a single point in time is that:
Recognizing revenue over time better conveys the benefit to the company of satisfying performance obligations over time. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 165. | Revenue on a long-term contract should not be recognized according to the proportion of the performance obligation that has been completed if:
The same three criteria for determining whether it is appropriate to recognize revenue over time apply to long-term contracts as apply to other contracts. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 166. | With respect to delaying revenue recognition until completion of a long-term contract, it is the case that:
Even when revenue recognition over time is not appropriate, such that revenue recognition is delayed until the completion of a contract, estimated losses on the overall contract are recognized in the period in which the company realizes that those losses become evident. |
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts Topic Area: Revenue recognition upon project completion |
| 167. | When accounting for revenue over time for a long-term contract, the percentage of completion used to recognize revenue in the first year usually is determined by measuring:
Use of a “cost-to-cost” ratio to estimate percentage of completion is typical. |
| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 168. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue over time with respect to these contracts. What would be the journal entry made in 2015 to record revenue?
Percentage complete = $1,200,000/($1,200,000 + $600,000) = 2/3 |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 169. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue over time with respect to these contracts. In its December 31, 2015, balance sheet, ADH would report:
|
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 170. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue over time with respect to these contracts. For 2016, what is the journal entry to record revenue?
Total revenue $3,000,000 – Revenue previously recognized $2,000,000 = Revenue to recognize this year $1,000,000. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 171. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue upon completion of the contract. For 2015, what is the journal entry to record revenue?
Under the completed contract method, no entry would be recorded. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition upon project completion |
| 172. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue upon completion of the contract. In its December 31, 2015, balance sheet, ADH would report:
|
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition upon project completion |
| 173. | Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
ADH recognizes revenue upon completion of the contract. What is the journal entry in 2016 to record revenue?
When revenue is recognized at a point in time for long-term contracts, total revenue, total cost, and total gross profit are recognized at the completion of the contract. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition upon project completion |
| 174. | JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.
In 2015, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:
Total estimated gross profit ($2,200,000 – 250,000 – 1,550,000 = $400,000), so don’t need to recognize any contract loss. |
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Loss on contract Topic Area: Revenue recognition upon project completion |
| 175. | JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.
In 2016, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:
In 2016: $2,200,000 – ($250,000 + 1,600,000 + 500,000) = $(150,000) loss to recognize. |
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Long-term contracts Topic Area: Loss on contract Topic Area: Revenue recognition upon project completion |
| 176. | JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.
In 2017, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:
|
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Long-term contracts Topic Area: Loss on contract Topic Area: Revenue recognition upon project completion |
| 177. | Indiana Co. began a construction project in 2016 with a contract price of $150 million to be received when the project is completed in 2018. During 2016, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
Indiana:
The project is expected to make a gross profit of $30 million (i.e., $150 million – $36 million – $84 million) and the % completed is 30% (i.e., $36 million/$120 million). Therefore, 30% × $30 million = $9 million. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 178. | Indiana Co. began a construction project in 2016 with a contract price of $150 million to be received when the project is completed in 2018. During 2016, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
In 2017, Indiana incurred additional costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Indiana:
The project is 70% complete after 2017 (i.e., $94.5 million costs to date/$135 million estimated total costs). The estimated gross profit is now $15 million (i.e., $150 million – $135 million), so gross profit to date is $10.5 million (70% × $15 million). $9 million was recognized in 2016, so $1.5 million more is recognized in 2017. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 179. | Indiana Co. began a construction project in 2016 with a contract price of $150 million to be received when the project is completed in 2018. During 2016, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
Suppose that, in 2017, Indiana incurred additional costs of $63.75 million and estimated an additional $42.75 million in costs to complete the project. Indiana:
The project is 70% complete after 2017 (i.e., $99.75 million costs to date/$142.5 million estimated total costs). The estimated gross profit is now $7.5 million (i.e., $150 million – $142.5 million), so gross profit to date is $5.25 million. $9 million was recognized in 2016, so a $3.75 million loss is recognized in 2017. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Long-term contracts Topic Area: Loss on contract Topic Area: Revenue recognition over time according to percentage complete |
| 180. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
What is the amount of gross profit on the project recognized by CCC during 2016?
Construction in progress = Actual costs incurred + Gross profit recognized; so $207 million = $135 million + X. Solve for X. X = $72 million. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 181. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
What are CCC’s estimated remaining construction costs on the project at the end of 2016?
Percentage completion to date = 60 % = Actual costs to date of $135 million/Total estimated project costs of $X. Solve for X. Estimated total costs = $225 million; therefore, Estimated remaining costs of construction = $225 million – $135 million = $90 million. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 182. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
What is the fixed contract price for CCC’s project?
Gross profit recognized in 2016 of $72 million = 60% of estimated gross project on the project. Therefore, total gross profit is estimated at $72 million/.6 = $120 million. Since Gross profit = Contract price – Estimated total construction costs of $225 million, the Contract price = $120 million + $225 million = $345 million. Alternatively, construction in progress = cost to date + profit recognized to date = $207 million (given) = 60% of total project price. $207 million/.6 = $345 million contract price. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 183. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
What were the construction billings by CCC during 2016?
Billings – Cash collections = Accounts receivable, so Billings = Accounts receivable at year-end of $37.5 million + Cash collections of $105 million = $142.5 million. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 184. | In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
How much cash remains to be collected by CCC on the project?
Total contract price of $345 million – cash collected to date of $105 million = $240 million remaining. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 185. | Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in 2016, are presented below:
Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2015 would be (rounded to the nearest thousand):
$180,000/($180,000 + 200,000) = 47.37% complete |
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| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 186. | Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in 2016, are presented below:
Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2016 would be (rounded to the nearest thousand):
2016: Total profit = $450,000 – ($180,000 + 195,000) = $75,000 – 33,159 = $41,841 or $42,000 rounded. |
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| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Long-term contracts Topic Area: Revenue recognition over time according to percentage complete |
| 187. | Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in 2016, are presented below:
Assuming BCC recognizes revenue upon project completion, what would gross profit have been in 2015 and 2016 (rounded to the nearest thousand)?
No revenue is recognized until completion of project in year 2016. |
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| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 1 Easy Topic Area: Long-term contracts Topic Area: Revenue recognition upon project completion |
| 188. | In the DuPont formula, return on assets equals:
|
| AACSB: Reflective Thinking AICPA: FN Risk Analysis Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 1 Easy Topic Area: Profitability analysis |
| 189. | A company is effectively leveraging when:
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| AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 190. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s 2016 profit margin is (rounded):
$20/$115 = 17.4% |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 1 Easy Topic Area: Profitability analysis |
| 191. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s 2016 average collection period is (rounded):
Avg. collection period = 365/(accounts receivable turnover) |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 192. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s return on equity for 2016 is (rounded):
ROE = ROA × equity multiple = 10.3% × 2.36 = 24.3% |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 193. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s average total assets for 2016 is (rounded):
Return on assets = Net income/(Average assets), so Average assets = Net income/ROA = 20/.103 = 194 |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 194. | Excerpts from Dowling Company’s December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):
Dowling’s average inventory balance for 2016 is (rounded):
Inventory turnover = Cost of goods sold/(Average inventory), so Average inventory = COGS/(Inventory turnover) = 60/5.22 = 11.5. |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 195. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 receivables turnover is:
|
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 196. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 inventory turnover is (rounded):
|
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 197. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 asset turnover is (rounded):
|
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 198. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 average collection period is:
Average collection period = 365/5.0 = 73 days |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 199. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 average days in inventory is (rounded):
Average days in inventory = 365/3.62 = 100.8 days = 101 days rounded. |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 200. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 profit margin is (rounded):
$32,500/$190,000 = 17.1% |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 1 Easy Topic Area: Profitability analysis |
| 201. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 return on assets is (rounded):
|
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 1 Easy Topic Area: Profitability analysis |
| 202. | Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements are presented below:
Hulkster’s 2016 return on shareholders’ equity is (rounded):
|
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 1 Easy Topic Area: Profitability analysis |
| 203. | Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and:
|
| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Realization principle |
| 204. | Under IFRS, which of the following is not a condition for recognizing revenue?
|
| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Revenue recognition |
| 205. | Under IFRS, revenue for a product sale should occur when:
|
| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Revenue recognition |
| 206. | Slick’s Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick’s can usually repossess the cars without loss. The revenue method Slick would use is the:
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| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Installment sales |
| 207. | Bert’s Meat Market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:
|
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Installment sales |
| 208. | On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end.
In 2016, Rigsby would recognize realized gross profit of:
Gross profit % = ($4,500,000 – 3,600,000)/$4,500,000 = 20% |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Installment sales method |
| 209. | On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end.
In 2017, Rigsby would recognize realized gross profit of:
Gross profit % = ($4,500,000 – 3,600,000)/$4,500,000 = 20% |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Installment sales method |
| 210. | On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end.
In its December 31, 2016, balance sheet, Rigsby would report:
Balance sheet:
|
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Installment sales method |
| 211. | On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end.
At December 31, 2017, Rigsby would report in its balance sheet:
Balance sheet: |
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Installment sales method |
| 212. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In 2015, Reliable would recognize gross profit of:
Costs not yet recovered. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Cost recovery method |
| 213. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In 2016, Reliable would recognize gross profit of:
|
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Cost recovery method |
| 214. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In 2017, Reliable would recognize gross profit of:
The entire $20,000 payment received in 2017 is recognized as gross profit. |
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Cost recovery method |
| 215. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In its 2015 year-end balance sheet, Reliable would report installment receivables (net) of:
Balance sheet:
|
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Cost recovery method |
| 216. | Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.
In its 2016 year-end balance sheet, Reliable would report installment receivables (net) of:
Balance sheet:
|
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Cost recovery method |
| 217. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
Total cash collections on installment sales during 2016 would be:
$300,000 (2015 sales) + $500,000 (2016 sales) = $800,000 |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Installment sales method |
| 218. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2015, Lake would recognize realized gross profit of:
Gross profit % = ($900,000 – $450,000)/$900,000 = 50% |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Installment sales method |
| 219. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2017, Lake would recognize realized gross profit of:
|
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Installment sales method |
| 220. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In its December 31, 2016, balance sheet, Lake would report:
As of 12/31/2016, the installment receivable would be as follows:
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| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Installment sales method |
| 221. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2018, Lake would record a loss on repossession of:
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| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Installment sales method |
| 222. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2015, Lake would recognize realized gross profit of:
$450,000 cost – $300,000 collections = $150,000 unrecovered costs as of the end of 2015. Under the cost recovery method, Lake can only begin realizing gross profit when its unrecovered costs have been reduced to zero, so it realizes no gross profit in 2015. |
| AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Cost recovery method |
| 223. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2017, Lake would recognize realized gross profit of:
2015 sales: 2016 sales: Total: $300,000 + $0 = $300,000 |
| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Cost recovery method |
| 224. | Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In its December 31, 2016, balance sheet, Lake would report:
As of 12/31/2016, the installment receivable would be as follows:
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| AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Cost recovery method |
| 225. | When using the cost recovery method of accounting for long-term construction contracts under IFRS:
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| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Long-term construction contracts |
| 226. | When using the cost recovery method of accounting for long-term construction contracts under IFRS, early in the life of the contract it is typically the case that:
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| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Long-term construction contracts |
| 227. | The cost recovery method of accounting for long-term construction contracts under IFRS is sometimes referred to as the:
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| AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Long-term construction contracts |
| 228. | The percentage-of-completion method violates the general rule for revenue recognition that:
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| AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Realization principle |
| 229. | Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
SDH uses the cost recovery method under IFRS to recognize revenue. What is the journal entry in 2015 to record revenue?
Under the IFRS cost recovery method, record equal amounts of revenue and cost until cost recovered. |
| AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: IFRS Long-term construction contracts |
| 230. | Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
SDH uses the cost recovery method under IFRS to recognize revenue. In its December 31, 2015, balance sheet, SDH would report:
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| AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: IFRS Long-term construction contracts |
| 231. | Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:
SDH uses the cost recovery method under IFRS to recognize revenue. What is SDH’s journal entry to record revenue in 2016?
Under the IFRS cost recovery method, record equal amounts of revenue and cost until cost recovered, and then record gross profit. In 2015, recorded revenue and cost of $1,200,000, so record remaining cost of $600,000 and all gross profit of $1,200,000 in 2016. |
| AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: IFRS Long-term construction contracts |
| 232. | Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in 2016, are presented below:
Assuming BCC used the cost recovery method to recognize revenue under IFRS, what would gross profit have been in 2015 and 2016 (rounded to the nearest thousand)?
No revenue is recognized until completion of project in year 2016. |
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| AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: IFRS Long-term construction contracts |
| 233. | Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.
Assuming that the initial services to be performed by Flapper Jack’s subsequent to the signing are substantial and that collection of the receivable is reasonably assured, the journal entry required at signing would include a credit to:
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| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Franchise sales |
| 234. | Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.
Assume that at the time of signing the contract, collection of the receivable was assured and that service obligations were substantial. However, by October 20, 2015, substantially all continuing obligations had been met. The journal entry required at October 20, 2015 would include a:
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| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Franchise sales |
| 235. | Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.
Assume at March 15, 2015, the time of signing the contract, collection of the receivable was reasonably assured and there were no significant continuing obligations. The journal entry at signing would include a:
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| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Franchise sales |
| 236. | The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS can recognize revenue associated with the $50,000:
Substantial performance has occurred. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Franchise sales |
| 237. | The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS can recognize revenue associated with the $50,000:
Substantial performance has occurred and can estimate bad debts. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Franchise sales |
| 238. | The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS has no experience estimating uncollectible accounts associated with these sorts of notes. RS can recognize:
Substantial performance has occurred but cannot estimate bad debts, so use the installment sales method. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Franchise sales |
| 239. | Sullivan Software sells packages of a software program and one year’s worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan’s sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75.
Sullivan should recognize revenue for the two parts of the arrangement as follows:
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| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Software and other multiple-element arrangements |
| 240. | Sullivan Software sells packages of a software program and one year’s worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan’s sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75.
The amount of revenue that GAAP, regarding software revenue recognition, would require Sullivan to attribute to the software program (as opposed to the technical support) is (rounded):
Per GAAP regarding software revenue recognition based on relative fair values, the amount attributable to the program is ($475/{$475 + $75}) × $500 = $432. |
| AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 3 Hard Topic Area: Software and other multiple-element arrangements |
| 241. | GAAP that covers revenue recognition for multiple-element arrangements requires that a seller recognize revenue for a particular part if:
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| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Software and other multiple-element arrangements |
| 242. | Under GAAP, with respect to multiple-element arrangements, if the revenue for a particular part of a multiple-element arrangement does not qualify for separate recognition, it is:
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| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 2 Medium Topic Area: Software and other multiple-element arrangements |
| 243. | “VSOE” stands for:
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| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Software and other multiple-element arrangements |
| 244. | “VSOE” is necessary to separately recognize revenue in multiple-element contracts for:
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| AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-Appendix Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09. Level of Difficulty: 1 Easy Topic Area: Software and other multiple-element arrangements |
Essay Questions
| 245. | Squeaky Shine provides car washing services in Jersey City, New Jersey. A three-month pass for automatic car wash sells for $60, which entitles the customer for an unlimited number of car washes during the contract period. Squeaky Shine estimates that pass holders wash their cars equally throughout the three-month period. On December 1st, customers purchased $1,260 of the three-month passes, with purchases of the passes occurring evenly throughout December.
Required: 1) Prepare the journal entries that Squeaky Shine would record on December 1 and on December 31, 2016, with respect to this transaction. 1) December 1
December 31
2) $210 is included as revenue in the income statement, $1,260 of cash is included in the balance sheet, and $1,050 is included as deferred revenue in the balance sheet. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 2 Medium Topic Area: Recognizing revenue over time-Progress toward completion |
| 246. | Assume that a customer enrolls in AAA’s Premier Membership, which provides 12 months of roadside assistance for $120. On August 1, 2016, a customer purchases a contract that runs from that date through July 31, 2017. Given that roadside assistance requests occur equally throughout the contract period, AAA uses “proportion of time” as its measure of progress toward completion.
Required: 1) Prepare the journal entries that AAA would record on August 1 and on December 31, 2016, with respect to this transaction. 1) August 1
December 31
2) $50 is included as revenue in the income statement, and $70 is included in current liability section of the balance sheet. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 2 Medium Topic Area: Recognizing revenue over time-Progress toward completion |
| 247. | Lux Hotels, Inc. has signed a service outsourcing contract with Deluxe Rooms, Inc. for $3 million, which was received in cash at contract inception. Under the agreement, Deluxe Rooms is obligated to clean and prepare over 5,000 hotels rooms managed by Lux Hotel on a daily basis from August 1, 2016 to July 31, 2017.
Required: (1) at inception of the contract and This service contract qualifies for revenue recognition over time, because the customer consumes the benefit of the seller’s work as it is performed. Hence, at the end of 2016, Deluxe Rooms should recognize $3 million × 5/12 = $1.25 million of revenue.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue over time-Progress toward completion |
| 248. | Poseidon Corporation, based in Greece, specializes in painting cargo ships. On December 1, 2016 Poseidon received $300,000 in advance from Worldwide Shipping, Inc. to paint a 40,000-ton cargo vessel. The painting process is scheduled to begin on December 1, 2016, and the ship is to be returned to Worldwide in four months. Worldwide retains legal title to the ship during the contract period, and can sell the ship to another shipper during the contract period if it so chooses.
Required: Assuming Poseidon uses “proportion of time” as its measure of progress toward completion, prepare any journal entry that Poseidon would record: (1) at inception of the contract This contract qualifies for revenue recognition over time, because the customer controls the asset as it is being worked on. Hence, Poseidon should recognize $10 million × 1/4 = $2.5 million of revenue.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue over time-Progress toward completion |
| 249. | Accorsi & Sons specializes in selling and installing upscale home theater systems. On March 1, 2016, Accorsi sold a premium home theater package that includes a projector, set of surround speakers, and high quality leather seats, along with complete installation service, for $32,500. If sold separately, each of these goods and services would have cost $15,000 (projector), $12,500 (speakers), $17,500 (seats), and $3,000 (installation), respectively.
Required: How much of the transaction price would be allocated to the projector, the speakers, the leather seats, and the installation service, assuming that each of these four parts of the contract is a separate performance obligation? Show your work. Accorsi & Sons must identify each obligation’s share of the sum of the stand-alone selling prices of all performance obligations:
Accorsi & Sons would allocate the total selling price of $32,500 based on the stand-alone selling prices, as shown below:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 2 Medium Topic Area: Multiple performance obligations-Allocate the transaction price |
| 250. | Baldi Piano manufactures customized pianos for concert halls. On July 1, 2016, Baldi signed a contract to deliver a concert piano for $150,000. Under the contract, Baldi is also obligated to provide a one-year maintenance service. If sold separately, the piano and the maintenance service would have cost $140,000 and $20,000, respectively.
Required: How much of the transaction price would be allocated to the piano and the maintenance service, assuming they are separate performance obligations? Show your work. Baldi must identify each performance obligation’s share of the sum of the stand-alone selling prices of all performance obligations:
Baldi would allocate the total selling price of $150,000 based on the stand-alone selling prices, as shown below:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 1 Easy Topic Area: Multiple performance obligations-Allocate the transaction price |
| 251. | The Rink offers annual $200 memberships that entitle members to unlimited use of ice-skating facilities and locker rooms. Each new membership also entitles the member to receive ten “20% off a $5 meal” coupons that are redeemable at the Rink’s snack bar. The Rink estimates that approximately 80% of the coupons will be redeemed, and that, if the coupons weren’t redeemed, $5 meals still would be discounted by 5% because of ongoing promotions.
Calculate how much of the transaction price should be allocated to each performance obligation in the contract. Show your work. The discount coupon provides a material right to the customer that the customer would not receive otherwise (a 20% discount rather than a 5% discount). This discount coupon is both capable of being distinct, as it could be sold or provided separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of providing membership access, so this contract has two performance obligations. To allocate the contract price to the performance obligation, we should first consider that the Rink would offer a 5% discount on $5 meals sold to all customers. So, a 20% discount provides a customer with an incremental value of 15% (20% – 5%). Thus, the estimated stand-alone selling price of the meal coupons is $6 (= 10 coupons × $5 base price of meal × 15% savings × 80% redeemed). Since the stand-alone selling price of the annual membership fee is $200, the Rink would allocate $5.83 {= $200 × [6 ÷ (6 + 200)]} of the $200 transaction price to the discount coupon. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 3 Hard Topic Area: Contract features-Customer options Topic Area: Contract features-Prepayments Topic Area: Multiple performance obligations-Allocate the transaction price |
| 252. | The Rink offers annual $200 memberships that entitle members to unlimited use of ice-skating facilities and locker rooms. Each new membership also entitles the member to receive ten “20% off a $5 meal” coupons that are redeemable at the Rink’s snack bar. The Rink estimates that approximately 80% of the coupons will be redeemed, and that, if the coupons weren’t redeemed, $5 meals still would be discounted by 5% because of ongoing promotions.
Prepare the journal entry to recognize the sale of a new membership. Clearly identify revenue or deferred revenue associated with each performance obligation. Since the discount coupon would be a performance obligation, the Rink would recognize deferred revenue for the sale of the annual membership fee and deferred revenue for the sale of the discount coupon.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 2 Medium Topic Area: Contract features-Customer options |
| 253. | Antonio’s Car Services provides maintenance services for motorized vehicles. In March 2016, Rick placed an order for a new set of tires for $350. When a customer purchases goods and services in excess of $300, Antonio’s gives the customer a 25% discount coupon for future purchases made in the next three months. Antonio’s estimates that approximately 80% of customers utilize the coupon and that on average those customers will purchase goods and services that typically sell for $75.
Required: (a) How many performance obligations are in Rick’s contract? Explain the reasons for your answer. (a) Number of performance obligations in the contract: 2. The delivery and installation of new tires is one performance obligation. The discount coupon for additional future purchases is a second performance obligation, because it provides a material right to the customer that the customer would not receive otherwise. This discount option is both capable of being distinct, as it could be sold or provided separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering and installing new tires. Hence, the discount coupon is distinct and qualifies as a performance obligation. The seller’s role is not to integrate and customize them to create one product. (b)
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Allocate the transaction price-Residual approach Topic Area: Contract features-Customer options Topic Area: Multiple performance obligations-Identify the performance obligation |
| 254. | DGA Associates, Inc. sells computer workstations designed for architects. In 2016, it sold 120 workstations for $360,000. For each workstation sold, DGA distributed a 40% discount coupon for any additional future purchases made in the next 12 months. Based on historical experience, DGA expects that approximately 30% of the coupons will be utilized, and the goods purchased with the coupons would normally sell for $350.
Required: (a) How many performance obligations are in a contract to purchase a computer workstation? Explain the reasons for your answer. (a) Number of performance obligations in the contract: 2 The delivery of computer workstations is one performance obligation. The discount coupon for additional future purchases is a second performance obligation, because it provides a material right to the customer that the customer would not receive otherwise. This discount option is both capable of being distinct, as it could be sold or provided separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering computer workstations. Hence, the discount coupon is distinct and qualifies as a performance obligation. The seller’s role is not to integrate and customize them to create one product. (b)
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Allocate the transaction price-Residual approach Topic Area: Contract features-Customer options Topic Area: Multiple performance obligations-Identify the performance obligation |
| 255. | On February 12, 2016, Mohawk Home and Garden enters into contract with a local business to provide weekly grass-cutting services between May and September of that year, and receives $2,000 in advance. As part of a local business promotion, Mohawk offers a 50% discount on any barbecue grill with a list price in excess of $200. In the past, Mohawk charged the same amount ($2,000) for the same weekly grass-cutting service, but without the grill discount coupon. Based on historical experience with other clients, Mohawk estimates that about 40% of the coupons will be redeemed, purchasing grills with an average total list price of $400.
Required: (a) How many performance obligations are in this contract? Explain the reasons for your answer. (a) Number of performance obligations in the contract: 2. Performing the grass-cutting services is one performance obligation. The 50% discount coupon on any barbecue grill with a list price in excess of $200 qualifies as a second performance obligation. First, it is an option that conveys a material right to the recipient (as opposed to a general marketing offer), so it is a performance obligation. Second, it is both capable of being distinct, as it could be sold or provided separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering grass-cutting services, so it is distinct and qualifies as a performance obligation. Mohawk will record deferred revenue associated with the coupons, and recognize revenue when either the coupon is exercised or the company estimates that it will not be redeemed. (b) Mohawk must first establish stand-alone selling prices of each performance obligation:
Mohawk should identify each performance obligation’s share of the sum of the stand-alone selling prices of all deliverables:
Mohawk would allocate the total selling price of $2,000 based on the stand-alone selling prices, as shown below:
Upon receiving $2,000, the journal entry would be:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 3 Hard Topic Area: Contract features-Customer options Topic Area: Contract features-Prepayments Topic Area: Multiple performance obligations-Identify the performance obligation |
| 256. | Mammoth Publishing, Inc. owns a weekly magazine called “Nova Health,” and sells annual subscriptions for $96. Customers prepay their subscription fee and receive 52 issues starting in the following month. The company also offers new subscribers a 25% discount coupon on its other weekly magazine called “Fishing & Camping,” which has a list price of $84 for an annual subscription. Mammoth estimates that approximately 10% of the discount coupons will be redeemed.
Required: (a) How many performance obligations are in a single subscription contract? Explain the reasons for your answer. (a) Number of performance obligations in the contract: 2. Delivery of “Nova Health” magazines on a weekly basis is one performance obligation. The 25% discount coupon on an annual subscription of “Fishing & Camping” qualifies as a second performance obligation. First, it is an option that conveys a material right to the recipient (as opposed to a general marketing offer), so it is a performance obligation. Second, it is both capable of being distinct, as it could be sold or provided separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering “Nova Health” magazines, so it is distinct and qualifies as a performance obligation. Mammoth will record deferred revenue associated with the coupons, and recognize revenue when either the coupon is exercised or the company estimates that it will not be redeemed. (b) Mohawk must first establish stand-alone selling prices of each performance obligation:
Mammoth would allocate the total selling price of $96 based on the stand-alone selling prices, as shown below:
Upon receiving $96, the journal entry would be:
Note: The amount of revenue Mammoth should recognize upon receipt of the service fee is $0. Mammoth has not delivered goods or services at the time of the payment, so it should be viewed as a prepayment for future delivery of goods or services. Hence, Mammoth should record deferred revenue (current liability). Later, when services are delivered, deferred revenue will be reduced and revenue would be recognized. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 3 Hard Topic Area: Contract features-Customer options Topic Area: Contract features-Prepayments Topic Area: Multiple performance obligations-Identify the performance obligation |
| 257. | On July 1, Wiggins Associates enters into a contract to provide consulting services to Pennsylvania University (PU). The contract is anticipated to last four months and is intended to achieve significant cost savings at the university. The contract stipulates that PU will pay Wiggins $25,000 at the end of each month, and, if total cost savings reach a specific target, PU will pay an additional $20,000 to Wiggins at the end of the contract. Wiggins estimates a 75% chance that cost savings will reach the target.
Assume that Wiggins estimates uncertain consideration as the most likely amount. Required: Do the following for Wiggins: a. Prepare the journal entry on July 31 to record the first month of revenue under the contract. a. The most likely amount to be received under the contract is (4 × $25,000) + $20,000 = $120,000 (since there is a 75% chance that the $20,000 payment will be received). Therefore, each month Wiggins would recognize $30,000 ($120,000 ÷ 4) of revenue, using the following journal entry:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Most likely amount |
| 258. | On July 1, Wiggins Associates enters into a contract to provide consulting services to Pennsylvania University (PU). The contract is anticipated to last four months and is intended to achieve significant cost savings at the university. The contract stipulates that PU will pay Wiggins $25,000 at the end of each month, and, if total cost savings reach a specific target, PU will pay an additional $20,000 to Wiggins at the end of the contract. Wiggins estimates a 75% chance that cost savings will reach the target.
Assume that Wiggins estimates variable consideration as the expected value. Required: Prepare the journal entry on July 31 to record the first month of revenue under the contract. Wiggins would estimate the transaction price as follows:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Expected value |
| 259. | Dr. Privacy, Inc. specializes in shredding office documents and destroying computer hard drives for various clients in the U.S. In June 2016, it enters into a contract with the U.S. government to properly discard computer hard drives. The contract specifies a fixed fee of $50,000 for the first 25,000 hard drives, and an additional $5,000 for each incremental 10,000 drives. The company estimates a 65% chance of handling 25,000 drives or fewer, 30% chance of handling more than 25,000 drives but fewer than 35,000 drives, and 5% chance of handling more than 35,000 drives but fewer than 45,000 drives.
Required: Assuming that the company determines transaction price as the expected value of the consideration, what is Dr. Privacy’s estimate of the transaction price for this contract? The expected value would be calculated as follows:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Expected value |
| 260. | In February 2016, Omnibus Interior Corporation enters into a contract with Pike Realty to remodel a 6-unit luxury condominium in New York City. Under the contract, the company is entitled to receive a fixed fee of $1 million, and an additional performance bonus of $500,000 if the property is sold during the same year.
Required: Given a strong demand for housing, Omnibus estimates that the property would most likely be sold within the same year, and bases estimates of variable consideration on the most likely estimate. On what transaction price should Omnibus base revenue recognition? Based on the most likely amount, the transaction price is $1,000,000 + $500,000 = $1,500,000, because there is a greater chance of the property being sold within the year than not being sold. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Most likely amount |
| 261. | Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti’s contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio’s new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus.
Assuming Brunetti uses the most likely value to estimate the variable consideration, calculate the transaction price. Based on the most likely amount, the transaction price is $150,000 + $10,000 = $160,000, because there is a greater chance of receiving the bonus than not receiving it. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Most likely amount |
| 262. | Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti’s contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio’s new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus.
Assuming Brunetti determines transaction price as the “expected value” of the variable consideration, what would be the appropriate transaction price for this contract?
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Expected value |
| 263. | Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti’s contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio’s new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus.
Assume Brunetti uses the “expected value” approach, but is very uncertain of that estimate due to a lack of experience with similar arrangements. What would be the appropriate transaction price? Because the seller is very uncertain of its estimates, it cannot argue that it is probable that it will not have to reverse (adjust downward) a significant amount of revenue in the future due to a change in returns. Therefore, Brunetti should not include the variable consideration (bonus) in the transaction price. Hence, the transaction price at the time of contract inception would be $150,000. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Variable consideration constraint |
| 264. | Omni-Resistor, Inc. specializes in waterproofing homes, office buildings and other structures. Recently it completed a waterproofing renovation for a building at a local university. The contract specifies that Omni-Resistor will receive a flat lump sum of $100,000 for the renovation, and an additional $2,500 if there is no roof leaking through the roof within the first year after the renovation. The seller estimates that there is an 85% chance that no leakage will occur within the first year.
Required: (a) Assuming Omni-Resistor uses the most likely value to estimate the variable consideration, calculate the transaction price. (b) Assuming Omni-Resistor determines transaction price as the “expected value” of the variable consideration, calculate the transaction price. (c) Assume Omni-Resistor uses the “expected value” approach, but is very uncertain of that estimate due to a lack of experience with similar renovations. Calculate the transaction price. Part a): Based on the most likely amount, the transaction price is $100,000 + $2,500 = $102,500, because there is a greater chance of finding a leak during the first year than otherwise.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Expected value Topic Area: Determine the transaction price-Most likely amount Topic Area: Determine the transaction price-Variable consideration constraint |
| 265. | Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will earn the quarterly bonus. Portelli bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Portelli’s April 30 journal entry to account for the revenue earned in April. During the month of April, Portelli estimates a greater than 50% chance it will earn the bonus, so using the “most likely amount” approach, it assumes that the bonus will be achieved, and estimates its revenue for the month as $15,000 + ($3,000 × 1/3 of a quarter) = $16,000.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Most likely amount |
| 266. | Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will earn the quarterly bonus. Portelli bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Portelli’s May 31 journal entry to record the revenue earned in May, as well as any appropriate adjustments to the revenue earned in April. During the month of May, Portelli earns service revenue of another $15,000. At this point, Portelli estimates that it will most likely not be able to earn the quarterly bonus, based on the trend in the number of customer complaints. Thus, Portelli must reduce its bonus receivable recorded in April to zero and record the offsetting adjustment in revenue.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Most likely amount |
| 267. | Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will earn the quarterly bonus. Portelli bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Portelli’s June 30 and July 2 journal entries to record additional service revenue earned, as well as any necessary adjustments to revenue and receipt of payment from Silvia. At the end of June, Portelli earns service revenue of another $15,000, as well as the quarterly bonus of $3,000. Then, on July 2, it receives cash payment for all amounts earned during the quarter.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Most likely amount |
| 268. | Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Romano will receive an additional quarterly bonus of $3,000, if during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Romano estimated that there is a 75% chance that it will earn the quarterly bonus. Romano bases estimates of variable consideration on the expected value of the consideration it expects to receive. Prepare Romano’s April 30 journal entry to account for the revenue earned in April. During the month of April, Romano earns the fixed monthly revenue of $15,000. In addition, Romano estimates a 75% chance it will earn the quarterly bonus of $3,000, so its estimate of the expected value of the bonus revenue earned in April is:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Expected value |
| 269. | Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Romano will receive an additional quarterly bonus of $3,000, if during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Romano estimated that there is a 75% chance that it will earn the quarterly bonus. Romano bases estimates of variable consideration on the expected value of the consideration it expects to receive. Prepare Romano’s May 30 journal entry to record the revenue earned in May, as well as any appropriate adjustments to the revenue earned in April. During the month of May, Romano earns fixed service revenue of another $15,000. At this point, Romano believes there is a 40% chance that it will earn the quarterly bonus, based on the trend in the number of customer complaints. Thus, Romano must revise the expected value of the bonus revenue earned to date:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Expected value |
| 270. | Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Romano will receive an additional quarterly bonus of $3,000, if during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Romano estimated that there is a 75% chance that it will earn the quarterly bonus. Romano bases estimates of variable consideration on the expected value of the consideration it expects to receive. Prepare Romano’s June 30 and July 2 journal entries to record additional service revenue earned, as well as any necessary adjustments to revenue and receipt of payment from Silvia. At the end of June, Romano earns service revenue of another $15,000, as well as the quarterly bonus of $3,000. Then, on July 2, it receives cash payment for the revenue earned.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Expected value |
| 271. | Veras Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each month. In addition, Veras will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Veras estimated that there is a 75% chance that it will remain free of accidents for the entire year. Veras bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Veras’ January 31 journal entry to account for the revenue earned from January 1 – January 31. In January, Veras estimates a greater than 50% chance that it will earn the semiannual bonus, so using the “most likely amount” approach it assumes that the bonus will be earned, and estimates its revenue for the month as $100,000 + ($120,000 × 1/6 of semiannual period) = $120,000.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Most likely amount |
| 272. | Veras Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each month. In addition, Veras will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Veras estimated that there is a 75% chance that it will remain free of accidents for the entire year. Veras bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Veras’ March 31 journal entry to record the revenue earned from March 1 – March 31, as well as any appropriate adjustments to the revenue already presumed recorded as earned from January 1 – February 28. In March, Veras’ earns monthly service revenue of $100,000. Veras also estimates that it will most likely not be able to earn the semiannual bonus, based on employee turnover situation. Thus, Veras must reduce its bonus receivable accrued in January and February to zero and record the offsetting adjustment in revenue.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Most likely amount |
| 273. | Veras Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each month. In addition, Veras will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Veras estimated that there is a 75% chance that it will remain free of accidents for the entire year. Veras bases estimates of variable consideration on the most likely amount it expects to receive. Prepare Veras’ June 30 journal entry to account for the revenue earned from June 1 – June 30, as well as any necessary adjustments to revenue presumed to have been previously recorded. At the end of June, Veras earns monthly service revenue of $100,000. It also earns the semiannual bonus of $120,000.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Most likely amount |
| 274. | Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year. Terra bases estimates of variable consideration on the expected value it expects to receive. Prepare Terra’s January journal entry to account for the revenue earned from January 1 – January 31. In January, Terra earns the fixed monthly revenue of $100,000. In addition, Terra estimates a 75% chance that it will earn the semiannual bonus, so its estimate of the expected value of the bonus revenue earned to date is:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Determine the transaction price-Expected value |
| 275. | Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year. Terra bases estimates of variable consideration on the expected value it expects to receive. Prepare Terra’s March 31 journal entry to record the revenue earned from March 1 – March 31, as well as any appropriate adjustments to the revenue presumed already recorded as earned from January 1 – February 28. In March, Terra’s earns monthly service revenue of $100,000. Terra also estimates that it has a 30% chance to earn the semiannual bonus. Thus, the new estimate of the expected value of the bonus revenue earned to date is:
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Expected value |
| 276. | Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year. Terra bases estimates of variable consideration on the expected value it expects to receive. Prepare Terra’s June 30 journal entry to account for the revenue earned from June 1 – June 30, as well as any necessary adjustments to revenue. At the end of June, Terra earns monthly service revenue of $100,000. It also earns the semiannual bonus of $120,000. At the end of March, bonus receivable has an outstanding balance of $18,000. For the next two months (April – May), Terra accrues bonus receivable at a rate of $6,000 per month. Hence, at the end of May, the balance is $18,000 + (2 × $6,000) = $30,000. Hence, when it is confirmed at the end of June that Terra is entitled to the full $120,000 semiannual bonus, and so will receive $220,000 of cash, Terra must recognize an additional $90,000 service revenue associated with bonus and reduce its $30,000 bonus receivable to zero.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Expected value |
| 277. | Assume that GM signs a contract to deliver 10 buses to the Tompkins Consolidated Area Transit (TCAT), which provides transit service throughout Tompkins County, for $4 million. Under the contract, TCAT makes a cash payment of $4 million to GM, and the 10 buses are shipped immediately from GM’s existing inventory. At the same time, GM obtains the right to advertise its products on all of TCAT buses for six months, and makes a cash payment of $20,000 to GM for the advertising service. The fair value of the advertising service is $18,000.
Required: Prepare the journal entries GM should record to account for the sale of the buses and the purchase of the advertisements. Indicate the amount of revenue GM should recognize for its sale of buses to TCAT. GM makes an immediate payment of $20,000 to TCAT, which is $2,000 more than the fair value of such advertising services. Therefore, the original transaction price of bus sales ($4 million) should be reduced by the overpayment of $2,000. Hence, the amount of revenue that GM should recognize for sale of buses is $4,000,000 – $2,000 = $3,998,000.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Payments by seller to customer |
| 278. | Typhoon Sons & Co. manufactures various types of golf clubs to third party vendors. On April 1, 2016, Typhoon delivers a large quantity of golf clubs to Resona Country Club. Under the sales agreement, Resona is obligated to pay Typhoon $200,000 within six months. On May 1, Typhoon purchases for cash the right to advertise its products during Resona’s annual golf tournament event for $3,000. Resona normally charges $2,500 for such services. On August 15, Resona pays Typhoon all amounts owed.
Required: Prepare the journal entries Typhoon should record to account for the transaction on April 1, May 1 and August 15. Indicate the amount of revenue that Typhoon should recognize on its sale of golf clubs to Resona. At the time of original sale (April 1, 2016), there was no indication that Typhoon would purchase a service from Resona at a price higher than its fair value. Hence, the original sale would be recorded based on the full transaction price of $200,000. Then, on May 1, Typhoon’s overpayment of $500 for the services offered by the buyer (Resona) reduces the original transaction price by $500, so Typhoon should debited sales revenue as part of the transaction. Thus, Typhoon recognizes revenue of $200,000 – $500 = $199,500.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Payments by seller to customer |
| 279. | AgriFoods, Inc. prepares and delivers agricultural products to industrial-scale kitchens and food service providers. One of its key customers is Home Kitchen & Co., which provides cafeteria solutions for corporations and universities. On January 1, 2016, AgriFoods obtained a one-year contract to supply a pre-specified amount of vegetables to Home Kitchen, and received $600,000 in cash. Then, on March 15, AgriFoods hired Home to run one of its employee cafeterias for a period of six months, from April to September, and paid $70,000 in cash. For similar arrangements, Home usually charged $50,000.
Required: (a) Prepare the journal entries AgriFoods would record on January 1, 2016 and January 31, 2016 with respect to the sales contract. Assume revenue is accrued on a monthly basis. (b) Prepare the journal entry to account for AgriFoods’ purchase of Home’s services. Part a) AgriFoods would record deferred revenue at contract inception, and then fully earn it by the end of the year.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Payments by seller to customer Topic Area: Recognizing revenue over time-Progress toward completion |
| 280. | Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500.
Other competing sellers in the same region charge an average of $250 for a set of goggles and $750 for the lessons, if sold separately. Beaumont Company usually sells at a 5% discount compared to other shops, since it is a bit farther away from the ocean. Required: What would be Beaumont’s stand-alone selling price of the goggles and the lessons, based on adjusted market assessment approach? Under the adjusted market assessment approach, Beaumont would base its estimate of the stand-alone selling price of the goggles and the lessons on the prices charged by other sellers for those goods, adjusted as necessary. Because Beaumont typically sells at a 5% discount, it would estimate the stand-alone selling price of the goggles and the lessons to be $250 × 95% = $237.50 and $750 × 95% = $712.50, respectively. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Allocate the transaction price-Adjusted market assessment approach |
| 281. | Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500.
Typically, Beaumont incurs $375 on compensation and other costs to provide the private lessons, and earns an average of 40% profit over cost on service offerings. Required: Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the certified lessons based on the expected cost plus margin approach. Under the expected cost plus margin approach, Beaumont would base its estimate of the stand-alone selling price of the private lessons on the $375 cost it incurs to provide the services, plus its normal margin of 40% × $375 = $150. Therefore, Beaumont would estimate the stand-alone selling price of the private lessons to be $375 + $150 = $525. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Allocate the transaction price-Expected cost plus margin approach |
| 282. | Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500.
Typically, if Beaumont were to sell the equipment only, it would ask for $2,000. Required: Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the lessons based on the residual approach. Under the residual approach, Beaumont would base its estimate of the stand-alone selling price of the private lessons on the total selling price of the package ($2,500) minus the observable stand-alone selling price of equipment ($2,000). Therefore, Beaumont would estimate the stand-alone price of the lessons to be $2,500 – $2,000 = $500. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Allocate the transaction price-Residual approach |
| 283. | CompuLand Center sells a full assortment of computer parts, including motherboards, video cards, and cables, and also offers complementary computer assembly services. The assembly service is offered by other vendors for $100 on average, and CompuLand typically charges approximately 20% more than other vendors for similar services on a stand-alone basis.
Required: Estimate the stand-alone selling price of the assembly service using the adjusted market assessment approach. Under the adjusted market assessment approach, CompuLand would base its estimate of the stand-alone selling price of the assembly service on the prices charged by other vendors for the same service, adjusted as necessary. Because CompuLand typically charges 20% more than competitors, it would estimate the stand-alone price of the assembly service to be $100 × 120% = $120. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Allocate the transaction price-Adjusted market assessment approach |
| 284. | CompuValue Center sells a full assortment of computer parts, including motherboards, video cards, and cables, and also offers complementary computer assembly services. CompuValue estimates that it incurs $50 in labor and materials on average to complete one assembly order, with an average of 75% profit based on cost.
Required: Assuming that computer parts and assembly service are separate performance obligations, estimate the stand-alone selling price of the assembly service based on the expected cost plus margin approach. Under the expected cost plus margin approach, CompuValue would base its estimate of the stand-alone selling price of the assembly service on the $50 cost it incurs, plus its normal margin of 75% × $50 = $37.50. Therefore, CompuValue would estimate the stand-alone selling price of the assembly service to be $50 + $37.50 = $87.50. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Allocate the transaction price-Expected cost plus margin approach |
| 285. | CompuTime Center sells a full assortment of computer parts, including motherboards, video cards, and cables. It also offers complementary computer assembly services. A customer places an order for an advanced workstation, and CompuTime asks for $3,500. If CompuTime were to sell only the parts in an advanced workstation, with no assembly, the price would be $3,300.
Required: Assuming that computer parts and assembly service are separate performance obligations, estimate the stand-alone selling price of the assembly service based on the residual approach. Under the residual approach, CompuTime would base its estimate of the stand-alone selling price of the assembly service on the total selling price of the workstation ($3,500) minus the observable stand-alone selling price of parts ($3,300). Therefore, CompuTime would estimate the stand-alone price of the assembly to be $3,500 – $3,300 = $200. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 1 Easy Topic Area: Allocate the transaction price-Residual approach |
| 286. | Bria Furniture sells bed frames and mattresses. One of its products is a premium therapeutic bed set produced by OmniSleep, which comes with a mattress and a bed frame. Bria offers a package consisting of the mattress, the frame, and on-site installation by its staff. All of these components can be sold separately, as often done by other vendors, so Bria concludes that these are separate performance obligations. Bria sells the OmniSleep package for $3,000. The mattress and the frame are sold separately for $2,000 and $900, respectively. Other vendors in the same area typically charge $200 for on-site installation. Bria does not sell on-site installation separately. On average, the prices charged by Bria are 10% higher than those of its competitors. Bria estimates that it incurs about $100 of compensation and other costs to provide the installation service. The profit margin over cost is estimated to be approximately 35%.
Required: Estimate the stand-alone selling price of the installation service using (a) the adjusted market assessment approach, (b) the expected cost plus margin approach, and (3) the residual approach. Part a) Under the adjusted market assessment approach, Bria would base its estimate of the stand-alone selling price of the installation service on the prices charged by other vendors for the same or similar service, adjusted as necessary. Since Bria’s selling prices are 10% higher on average, Bria would estimate the stand-alone selling price of the installation service to be $200 + ($200 × 10%) = $220. Part b) Under the expected cost plus margin approach, Bria would base its estimate of the stand-alone selling price of the installation service on the $100 cost it incurs to provide the service, plus its mark-up of 35% × $100 = $35. Therefore, Bria would estimate the stand-alone selling price of the installation service to be $100 + 35 = $135. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Allocate the transaction price-Adjusted market assessment approach Topic Area: Allocate the transaction price-Expected cost plus margin approach Topic Area: Allocate the transaction price-Residual approach |
| 287. | Mahogany Billiards sells upscale pool tables and related supplies. It sells a premium package consisting of a pool table imported from Europe, a full set of cues and balls, and on-site installation by its staff. Mahogany determines that each of these components is a performance obligation. Mahogany sells the pool table separately for $3,000 and the set of cues and balls for $1,000. The entire package is sold at $4,500. Mahogany does not offer on-site installation separately, as part of company policy. It also estimates that it incurs about $350 of compensation and other costs per each installation. Other competing vendors sell on-site installation separately for $450, on average. Mahogany typically earns a profit margin of 40% over cost, and its prices are generally 5% lower than those charged by competitors.
Required: Estimate the stand-alone selling price of the installation service using (a) the adjusted market assessment approach, (b) the expected cost plus margin approach, and (3) the residual approach. Part a) Under the adjusted market assessment approach, Mahogany would base its estimate of the stand-alone selling price of the installation service on the prices charged by other vendors for the same or similar service, adjusted as necessary. Since Mahogany carries selling prices that are 5% lower on average, Mahogany would estimate the stand-alone selling price of the installation service to be $450 – ($450 × 5%) = $427.50. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Allocate the transaction price-Adjusted market assessment approach Topic Area: Allocate the transaction price-Expected cost plus margin approach Topic Area: Allocate the transaction price-Residual approach |
| 288. | Assume that, on April 1, 2016, a customer visits MicrosoftStore.com and purchases Microsoft Windows 7 Ultimate for $170. Windows 7 Ultimate comes in a DVD format which the customer can use permanently, and Microsoft does not expect that its actions subsequent to April 1, 2016 will affect the value the customer obtains from using the software.
Required: How much revenue should Microsoft recognize in 2016 with respect to this particular transaction? The software license for Windows 7 Ultimate is a right of use. The customer does not expect Microsoft’s subsequent activity to change the functionality of the software, so Microsoft can recognize the entire $170 upon transfer of the right. Microsoft recognizes revenue of $170 in 2016. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Licenses |
| 289. | Smith & Sons is a CPA firm that provides proprietary software to its clients. One of its software packages sells for $150 and contains pre-programmed tutorials on basic accounting concepts. Another product sells for $3,000 and contains Smith & Sons’ archive of accounting standards and articles, which Smith & Sons updates on a weekly basis and downloads to archive users for the two years following purchase of the product.
Required: If a customer purchases both software packages on June 1, 2016, how much revenue should Smith & Sons recognize for the year? The software license for tutorials is a right of use. The customer does not expect for Smith & Sons’ subsequent activity to change the functionality of the software, so Smith & Sons can recognize the entire $150 upon transfer of the right. However, the license to use the accounting archive is an access right, as the customer should expect that Smith & Sons activity during the license period will affect the value of the software to the customer, so Smith & Sons should recognize revenue as that access is consumed over 24 months. Since the customer uses the archive software for seven months in 2016 (June through December), Smith & Sons should recognize revenue of 7 ÷ 24 = 7/24 of $3,000, or $875 for that access right in 2016. In total, Smith & Sons recognizes revenue of $150 + $875 = $1,025 in 2016. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Licenses |
| 290. | Berry Farm produces organic tomatoes and strawberries. In June 2016, it transported 100 boxes of strawberries with a price of $20 per box to the Bay Farmers’ Market. Berry Farm paid an upfront fee of $100 to present its products at the market for one week, and the market earns a 25% profit margin on each item sold, but Berry Farm is responsible for any items that remain unsold at the end of the week.
Required: The market was able to sell 65 boxes of strawberries to customers. How much revenue should Berry Farm recognize with respect to this transaction? 65 × $20 = $1,300. Berry Farm has a consignment arrangement with Bay Farmers’ Market, so it should not recognize transfer of 100 boxes of strawberries as sales. Although the market has physical possession of the asset for the sales period, Berry Farm retains legal title to the asset as well as the risks and rewards of ownership for the goods placed on consignment. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Consignment arrangements |
| 291. | Holmgren Seafoods, Inc. catches and processes salmon and tuna caught off the coast of Maine. In May 2016, it placed 100 freshly caught wild salmon with a retail price of $75 each in Joe’s Fish Shop. Holmgren’s contract with the shop stipulates that the shop will earn a 15% commission on each salmon sold. Joe’s is responsible for purchasing any fish that remain unsold at the end of a three-day period.
Required: During the three-day period, Joe’s Fish Shop was able to sell 88 of the 100 salmon. How much revenue should Holmgren recognize with respect to this transaction? 100 × $75 = $7,500. Holmgren Seafoods, Inc. has transferred control of the salmon to Joe’s Fish Shop, because Joe’s holds the risks and rewards of ownership. If a fish is unsold, Joe’s must pay for it, so Holmgren is guaranteed to receive payment for all 100 fish. Therefore, Holmgren would view its transfer of fish to Joes’ as a sale rather than as a consignment arrangement. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Consignment arrangements |
| 292. | Colombo Coffee sells gift cards that can be used at its 55 branches. During 2015, customers purchased $25,000 of gift cards, of which $3,000 were redeemed during 2016. It is estimated that a balance of $1,500 of cards sold in 2015 remains unused as of the end of 2016, and Colombo determines that this amount will never be redeemed, based on historical experience. During 2016, Colombo further sold $32,000 of gift cards, of which $26,000 were redeemed and $6,000 remain unused but may be used by customer in 2017.
Required: How much gift card revenue should Colombo recognize in 2016? Colombo should not recognize revenue when it sells the gift cards, because it has not yet satisfied its performance obligation to deliver goods upon redemption of the cards. Colombo should recognize revenue only to the extent gift cards are redeemed, plus the amount it estimates will never be redeemed. Hence, the revenue to be recognized for 2016 is $3,000 + $1,500 + $26,000 = $30,500. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 1 Easy Topic Area: When (or as) performance obligation(s) satisfied-Gift cards |
| 293. | Moretti Department Store sells gift cards that expire three years from the date of purchase. During 2014, Moretti sold $50,000 of gift cards, of which $1,500 were redeemed during 2016. At the end of 2016, it is estimated that approximately $800 of the 2014 balance remains unused, and Moretti concludes that it will never be redeemed. Moretti sold another $55,000 of gift cards in 2015, of which $22,000 were redeemed in 2016, and $60,000 of gift cards in 2016, of which $40,000 were redeemed in 2016.
Required: How much revenue with respect to gift cards should Moretti recognize in 2016? Moretti should recognize revenue only to the extent gift cards are redeemed, plus the amount it estimates will never be redeemed. Hence, the revenue to be recognized for 2016 is $1,500 + $800 + $22,000 + $40,000 = $64,300. |
| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Gift cards |
| 294. | Beck Construction Company began work on a new building project on January 1, 2015. The project is to be completed by December 31, 2017, for a fixed price of $108 million. The following are the actual costs incurred and estimates of remaining costs to complete the project that were made by Beck’s accounting staff:
What amount of gross profit (or loss) would Beck record on this project in each year, assuming that Beck recognizes revenue for this project upon completion of the project? Place answers in the spaces provided below and show supporting computations.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Loss on contract Topic Area: Revenue recognition upon project completion |
| 295. | Beck Construction Company began work on a new building project on January 1, 2015. The project is to be completed by December 31, 2017, for a fixed price of $108 million. The following are the actual costs incurred and estimates of remaining costs to complete the project that were made by Beck’s accounting staff:
What amount of gross profit (or loss) would Beck record on this project in each year, assuming that Beck recognizes revenue for this project over time according to percentage of completion? Place answers in the spaces provided below and show supporting computations.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Loss on contract Topic Area: Revenue recognition over time according to percentage complete |
| 296. | Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that Beavis recognizes revenue on this contract over time according to percentage of completion. Required: Compute the amount of gross profit recognized during 2015 and 2016.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Revenue recognition over time according to percentage complete |
| 297. | Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that Beavis recognizes revenue on this contract over time according to percentage of completion. Required: Prepare all journal entries to record costs, billings, collections, and profit recognition.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Revenue recognition over time according to percentage complete |
| 298. | Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that Beavis recognizes revenue upon completion of the project. Required: Compute the amount of gross profit recognized during 2015 and 2016.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Revenue recognition upon project completion |
| 299. | Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that Beavis recognizes revenue upon completion of the project. Required: Prepare all journal entries to record costs, billings, collections, and profit recognition.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Revenue recognition upon project completion |
| 300. | In 2016, Chicago Construction began work on a three-year construction project to build a new performing arts complex (the PAC). The PAC contract price is $150 million. Chicago recognizes revenue on this contract over time according to percentage of completion. At the end of 2016, the following financial statement information indicates the results to date for the PAC (missing items denoted by letter):
Compute the following, placing your answer in the spaces provided and showing supporting computations below:
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| AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Revenue recognition over time according to percentage complete |
| 301. | In 2016, KP Building Inc. began work on a four-year construction project (called Cincy One). The contract price is $300 million. KP recognizes revenue on this contract over time according to percentage of completion. At the end of 2016, the following financial statement information indicates the results to date for Cincy One:
Compute the following, placing your answer in the spaces provided and showing supporting computations below.
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| AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Revenue recognition over time according to percentage complete |
| 302. | McCombs Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that McCombs recognizes revenue on this contract over time according to percentage of completion. Required: Compute the amount of gross profit recognized during 2015 and 2016.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Revenue recognition over time according to percentage complete |
| 303. | McCombs Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that McCombs recognizes revenue on this contract over time according to percentage of completion. Required: Prepare all journal entries to record costs, billings, collections, and profit recognition. Round your answers to the nearest whole dollar.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Revenue recognition over time according to percentage complete |
| 304. | McCombs Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2015 and completed in 2016. Cost and other data are presented below:
Assume that McCombs recognizes revenue upon project completion. Required: Compute the amount of gross profit recognized by McCombs during 2015 and 2016.
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| AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 3 Hard Topic Area: Revenue recognition upon project completion |
| 305. | Missoula Inc. reported the following selected financial statement data:
Required: Compute the receivables turnover ratio for 2016. $400,000/[($48,000 + 52,000)/2] = 8.0 |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 306. | Missoula Inc. reported the following selected financial statement data:
Required: Compute the inventory turnover ratio for 2016. $280,000/[($68,000 + 72,000)/2] = 4.0 |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 307. | Missoula Inc. reported the following selected financial statement data:
Required: Compute the asset turnover ratio for 2016. $400,000/[($405,000 + 395,000)/2] = 1.0 |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 308. | Missoula Inc. reported the following selected financial statement data:
Required: 365/8.0 = 45.6 days |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 309. | Missoula Inc. reported the following selected financial statement data:
Required: 365/4.0 = 91.25 days |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 310. | Missoula Inc. reported the following selected financial statement data:
Required: $25,000/$400,000 = 6.25% |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 1 Easy Topic Area: Profitability analysis |
| 311. | Missoula Inc. reported the following selected financial statement data:
Required: $25,000/[($405,000 + 395,000)/2] = 6.25% |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 312. | Missoula Inc. reported the following selected financial statement data:
Required: $25,000/[($260,000 + 250,000)/2] = 9.8% |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 313. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its profit margin on sales for 2016. Round your answer to one decimal place, e.g., .1234 as 12.3%. Its profit margin on sales for the year = 458/7,949 = 5.8%. |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 1 Easy Topic Area: Profitability analysis |
| 314. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its receivables turnover ratio for 2016. Round your answer to one decimal place. Its receivables turnover ratio for the year = 7,949/[(1,010 + 664)/2] = 9.5. |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 315. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its inventory turnover ratio for 2016. Round your answer to one decimal place. Its inventory turnover ratio for the year = 4,767/[(1,055 + 519)/2] = 6.1. |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 316. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its asset turnover ratio for 2016. Round your answer to two decimal places. Its asset turnover ratio for the year = 7,949/[(16,540 + 5,091)/2] = 0.73. |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 317. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its average collection period for 2016. Round your final answer to one decimal place. Its average collection period for the year = 365/9.5 = 38.4 days. |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 318. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its average days in inventory for 2016. Round your final answer to one decimal place. Its average days in inventory for the year = 365/6.1 = 59.8 days. |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 319. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its return on assets for 2016. Round your answer to one decimal place, e.g., .1234 as 12.3%. Its return on assets for the year = 458/[(16,540 + 5,091)/2] = 4.2%. |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 320. | The following partial income statement and balance sheet information (in $ millions) comes from the Annual Report of Saratoga Springs Co. for the year ending 12/31/2016:
Required: Compute the following amounts for Saratoga Springs Co. Its return on stockholders’ equity for 2016. Round your answer to one decimal place, e.g., .1234 as 12.3%. Its return on stockholders’ equity for the year = 458/[(3,576 + 52)/2] = 25.2%. |
| AACSB: Knowledge Application AICPA: FN Risk Analysis Blooms: Apply Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 321. | The following information is provided in the 2016 annual report to shareholders of paris-perfume.com:
Required: (A) ROA = 10% = 40/Ave. total assets; Ave. total assets = 400; 12/31/2016 TA = $500 million |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Analyze Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 322. | The following information is provided in the 2016 annual report to shareholders of The BizStore:
Compute U-Z in the table above. • U: Profit margin = NI/sales, so NI = (Profit margin) × (Sales) = (.174)(115) = $20. |
| AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 323. | Silica Corporation constructs highly specialized communication satellites. A customer in Hong Kong recently placed an order for a cable TV satellite at a price of $20 million. The order was placed in April 2016, and the satellite is to be delivered in one year. The customer has guaranteed to pay in full at the end of 2016, regardless of progress or cancellation. Silica uses “proportion of time” as its measure of progress toward completion.
Required: When should Silica recognize revenue: at completion, or as the construction is performed? This contract qualifies for revenue recognition over time, because the seller is creating an asset that has no alternative use to the seller, and the seller can receive payment for its progress even if the customer cancels the contract. |
| AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 1 Easy Topic Area: Recognizing revenue over time-Criteria |
| 324. | Hans Cars & Trucks sells various types of used vehicles with a one-year warranty that covers any defects. When customers make a purchase, they also receive a coupon for 10 free engine oil changes and an option to change all of the tires for $50 after 30,000 miles. Typically, customers pay $25 for an oil change and $250 for a new set of tires.
Required: (a) Given the information above, how many performance obligations exist in the contract to purchase a vehicle? (a) In total, there are three performance obligations. We need to consider four aspects of the car purchase contract: delivery of the vehicle, the one-year quality-assurance warranty, the option to receive 10 oil changes for free, and the option to change the tires for $50. Delivery of the vehicle is a performance obligation. The one-year warranty that is included as part of the purchase (the quality-assurance warranty) is not a performance obligation, but rather is part of the obligation to deliver the vehicle of appropriate quality. The option to receive oil changes for free is a performance obligation within the contract to purchase a vehicle, because (1) it provides a material right to the customer that the customer would not receive otherwise, and thus counts as a performance obligation; (2) the option is capable of being distinct, as the customer could purchase oil changes separately, and it is separately identifiable, as the vehicle itself could be sold without free oil changes. The option to change tires for $50 also constitutes a performance obligation, as it is (1) a material right to the customer that the customer would not receive otherwise, and thus counts as a performance obligation; (b) this option is capable of being distinct, as a new set of tires could be sold separately, and it is also separately identifiable, as the vehicle itself could be sold without a new set of tires. (b) There are two performance obligations. The option to change tires for $250 is not a performance obligation, because customers can purchase the tires for the same amount at other times, so the option itself does not present a material right. |
| AACSB: Analytical Thinking AACSB: Communication AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 2 Medium Topic Area: Contract features-Warranties Topic Area: Multiple performance obligations-Identify the performance obligation |
| 325. | Lexikon Pianos sells customized concert pianos throughout the U.S. Its grand concert piano sells for $200,000, which includes delivery and installation. The product comes with a two-year warranty that covers any product defects, and customers can choose to add an extended three-year warranty for maintenance and repair at a price of $2,000. Customers also get an option to upgrade traditional plastic keys to bone ones for an additional $20,000. The extended warranty would normally sell for $3,500, and the installation of bone keys carries a standalone price of $30,000.
Required: (a) Given the information above, how many performance obligations exist in the contract to purchase a grand concert piano? (a) In total, there are three performance obligations. We need to consider four aspects of the piano purchase contract: delivery and installation of the piano, the two-year quality-assurance warranty, the option to purchase an extended three-year warranty for $2,000, and the option to upgrade to bone keys for $20,000. Delivery of the piano is a performance obligation. The two-year quality-assurance warranty is not a performance obligation, but rather is part of the obligation to deliver a piano of appropriate quality. The option to purchase the extended warranty is a performance obligation within the contract to purchase the piano, because it provides (1) a material right to the customer that the customer would not receive otherwise, and thus counts as a performance obligation; (2) the option is capable of being distinct, as the customer could purchase the extended warranty separately, and it is also separately identifiable, as the piano could be sold on its own. The option to upgrade to bone keys is also a performance obligation for the same reasons. (b) There is only one performance obligation. The option to purchase the extended warranty or the bone keys is no longer a material right, because customers can purchase them for the same amount at other times. Hence, the seller has only one performance obligation – delivery and installation of the piano itself. |
| AACSB: Analytical Thinking AACSB: Communication AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Learning Objective: 05-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations. Level of Difficulty: 2 Medium Topic Area: Contract features-Warranties Topic Area: Multiple performance obligations-Identify the performance obligation |
| 326. | Summerhill Construction builds luxury houses in remote areas. On June 1, 2016, the company signed a contract to build a house in an undeveloped section of a mountainside, and received $2 million in advance for the job. To complete the project, the company must construct a pathway leading to the building lot, clear a large hillside, and construct a wooden house. Normally, the company would charge $400,000, $1,400,000, and $500,000, respectively, for each of these tasks if done separately.
Required: Given the information above, how many performance obligations are included in this contract? Number of performance obligations in the contract: 1. Summerhill enters into a contract to construct a house on difficult terrain. The components are not separately identifiable, because each component is highly interrelated with each other, as Summerhill is obligated to integrate the components into a combined final product for delivery to the customer. |
| AACSB: Analytical Thinking AACSB: Communication AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 2 Medium Topic Area: Multiple performance obligations-Identify the performance obligation |
| 327. | Optimus Pools, Inc. constructs outdoor swimming pools for wealthy individuals. Recently it obtained an order to build a three-lane swimming pool of 25 yards in length in the customer’s backyard. Under the contract, Optimus is also obligated to install a water heater and a filtration system, which are necessary to make a swimming pool fully functional. Total price for the construction was $55,000. Each of these smaller components would typically cost $40,000, $10,000, and 20,000 if installed separately.
Required: Given the information above, how many performance obligations are included in this contract? Number of performance obligations in the contract: 1. Optimus enters into a contract to construct a functioning swimming pool. The smaller components are not separately identifiable, because each component is highly interrelated with each other, as Optimus is obligated to integrate the components into a combined final product for delivery to the customer. |
| AACSB: Analytical Thinking AACSB: Communication AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 2 Medium Topic Area: Multiple performance obligations-Identify the performance obligation |
| 328. | FlexMotors, Inc. manufactures a variety of electronic drills and grass cutters. Recently, it introduced a new line of handheld drills that generates much less noise and consumes much less energy, but carries a much higher price tag. The company is currently considering whether it should record $1.2 million of revenue upon shipment. Under the contract, FlexMotors is obligated to accept any products from the distributors if they are not sold within 6 months. The company is confident that the new model will sell, but is unable to accurately estimate returns, because it has never sold anything quite like it.
Required: How much revenue should FlexMotors recognize upon shipment to distributors? The seller should recognize $0 of revenue upon delivery to distributors. The seller should recognize revenue only to the extent it is probable that it will not have to reverse (adjust downward) in the future. Here, the seller is uncertain about estimated returns, so it cannot plausibly assume it will not have to reverse (adjust downward) a significant amount of the $1.2 million revenue in the future due to a change in returns. Hence, the seller must postpone recognizing any revenue until the uncertainty about returns is resolved, which would occur when (a) it can better estimate returns, (b) sales to end consumers take place over time, or (c) distributors eventually return unsold amounts at the end of the 6-month period. At the point of shipment, the seller should treat the transaction as if it is placing those goods on consignment with independent distributors, since it cannot reasonably estimate returns. |
| AACSB: Analytical Thinking AACSB: Communication AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Right of return |
| 329. | Horowitz Paint Shop sold $3,000 of paint to a local construction company for cash on June 25, 2016. Because of a flood in the area, the customer requested that Horowitz not ship the items from its warehouse until July 3, 2016, so Horowitz set aside the paint on June 25, packaged and ready to ship on July 3.
Required: For the second quarter ending on June 30, how much revenue should Horowitz recognize for the sale to the local construction company? Explain your answer. $3,000. In a bill-and-hold arrangement, the key issue normally is that the customer does not have physical possession of the asset until the seller has delivered it. However, since the customer requested that Horowitz hold the goods, has been paid for the goods, and the goods are separated from Horowitz’s inventory and ready for shipment, Horowitz likely would be viewed as shifting control to the customer in June. |
| AACSB: Analytical Thinking AACSB: Communication AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Bill-and-hold |
| 330. | On December 28, 2016, Omega Steel, Inc. sold $100,000 of steel sheets to a car manufacturer. Due to holidays, Omega was unable to find a truck driver to deliver the product. Delivery was finally made on January 5, 2017.
Required: How much revenue should Omega recognize in 2016 for the sale to the car manufacturer? Explain your answer. $0. In a bill-and-hold arrangement, the key issue is that the customer does not have physical possession of the asset until the seller has delivered it. The shipping delay was caused by Omega and was not in response to a customer request. Since the seller maintains control of the inventory prior to delivery, it should not recognize revenue. |
| AACSB: Analytical Thinking AACSB: Communication AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Bill-and-hold |
| 331. | The following disclosure note appeared in a recent annual report to stockholders of Dell Inc., the computer manufacturer: “Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. Dell allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative list price of each element. For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs. Product revenue is recognized, net of an allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended warranty and service contracts, for which Dell is not obligated to perform, is recognized on a net basis at the time of sale.”
Briefly explain why Dell Computer recognizes revenue at different times for (a) product sales, (b) extended warranty and service contracts for which Dell is obligated to perform, and (c) extended warranty and service contracts for which a third party is obligated to perform. (a) Dell recognizes revenue for products at the point in time it transfers control of the goods to buyers, which coincides with transfer of title and risk of loss to the customer. Because of the material possibility of product returns in the computer business, sales returns must be estimated and the sales price adjusted to reflect them in the period of sale. (b) Dell typically collects in advance for service and extended warranty contracts. On contracts that Dell is obligated to perform, it recognizes revenue over time as the customer consumes the benefit of the contract (coverage for warranty and service). (c) However, on contracts that it sells for which a third party is obligated to perform, Dell essentially acts as an agent, and it recognizes net revenue (basically its sales commission) at the time of sale. |
| AACSB: Analytical Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Learning Objective: 05-02 Explain when it is appropriate to recognize revenue at a single point in time. Learning Objective: 05-03 Explain when it is appropriate to recognize revenue over a period of time. Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Principal or agent Topic Area: Disclosures-Notes Topic Area: Recognizing revenue over time-Progress toward completion Topic Area: Recognizing revenue-Transfer of control indicators |
| 332. | Are the following separate performance obligations: prepayments, quality-assurance warranty, extended warranty, right of return? For each, indicate yes or no, and explain.
• Prepayment: No, not a separate performance obligation. Rather, the upfront fee is an advance payment for future products or services and should be included in the transaction price. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Learning Objective: 05-04 Allocate a contract’s transaction price to multiple performance obligations. Level of Difficulty: 2 Medium Topic Area: Multiple performance obligations-Identify the performance obligation |
| 333. | Explain two approaches a seller can use to estimate variable consideration, and when each approach is likely to be more appropriate.
A seller estimates variable consideration as either (a) the expected value (calculated as the sum of each possible amount multiplied by its probability), or (b) the most likely amount, depending on which estimation approach better predicts the amount that the seller will receive. If there are several possible outcomes, the expected value will be more appropriate. On the other hand, if only two outcomes are possible, the most likely amount might be the best indication of the amount the seller will likely receive. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Variable consideration |
| 334. | Are sellers ever constrained from including variable consideration in the transaction price used to estimate revenue? Explain, providing indicators of circumstances that could require that constraint.
Sellers only include an estimate of variable consideration in the transaction price to the extent it is probable that a significant revenue reversal will not occur when the uncertainty associated with the variable consideration is resolved. Indicators that a significant revenue reversal could occur include (a) poor evidence on which to base an estimate, (b) dependence of the estimate on factors outside the seller’s control, (c) a history of the seller changing payment terms on similar contracts, (d) a broad range of outcomes that could occur, and (e) a long delay before uncertainty resolves. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Variable consideration constraint |
| 335. | Briefly describe at least two indicators that can be used to distinguish whether a seller is a principal or an agent according to GAAP.
Indicators that a company is a principal are: 1. Company has primary responsibility for delivering a product or service a. holding inventory, |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Principal or agent |
| 336. | Explain the differences between how a principal and agent would show a sale of a product that has gross revenues of $1,000, cost of goods sold of $750, and a commission paid by the principle of 10% of gross sales on their respective income statements.
The principal would report revenue of $1,000, cost of goods sold of $750, and a commission expense of $100 for a gross profit of $250 and net income before taxes of $150. The agent reports commission revenue of $100. |
| AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Principal or agent |
| 337. | Explain briefly how a company who sells to distributors with a right of return might manage earnings if the company was falling short of profit projections. What sort of ethical problems could result from that earnings management?
The most apparent way would be to change the percentage used to estimate returns. Additionally, a company could ship extra product to distributors and recognize sales to meet profit projections (this is commonly called “channel stuffing”). However, if the company is pushing product onto distributors (that is, it is borrowing sales from the next period), and/or if the company thinks the product will be returned but does not make allowance for that fact, the company is behaving unethically because it is manipulating how the accounting system portrays its underlying economic activity. |
| AACSB: Communication AACSB: Ethics AICPA: BB Critical Thinking AICPA: FN Risk Analysis Blooms: Create Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 2 Medium Topic Area: Determine the transaction price-Right of return |
| 338. | Many high-tech companies sell products with the opportunity for retailers to return the merchandise if it is unsold after a certain period. This reduces the retailer’s risk of inventory obsolescence. Explain the implications on revenue recognition under this kind of policy. Include a specific example.
Assume that the company allows the retailer up to one year to determine if it chooses to keep and sell the merchandise or return it with no questions asked. Allowing returns means that the transaction price includes variable consideration. The seller must estimate that variable consideration and only recognize revenue net of anticipated returns. The seller should only recognize revenue to the extent that it is probable that a significant reversal of revenue will not occur in the future due to returns being higher than the seller anticipated. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Create Blooms: Understand Learning Objective: 05-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price. Level of Difficulty: 3 Hard Topic Area: Determine the transaction price-Right of return |
| 339. | Briefly explain the circumstances in which license revenue is recognized over time versus at a point in time. Provide an example of each.
Some licenses transfer a right to use the seller’s intellectual property as it exists when the license is granted. If a license transfers such a right of use, revenue is recognized at the point in time the right is transferred. Examples include software like Microsoft Office, music CDs, and movie DVDs. For these licenses, subsequent activity by the seller doesn’t affect the benefit that the customer receives. Other licenses provide the customer with access to the seller’s intellectual property with the understanding that the seller will undertake ongoing activities during the license period that affect the benefit the customer receives. If a license provides such a right of access to the seller’s intellectual property, the seller satisfies its performance obligation over time as the customer receives benefits of the seller’s ongoing activities, so revenue is recognized over the period of time for which access is provided. Examples include licenses to use a company’s brand or trademark. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Create Blooms: Understand Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Licenses |
| 340. | Briefly explain the circumstances that indicate the seller has a bill-and-hold sale and a consignment sale, and how that affects the timing of revenue recognition for each.
A bill-and-hold arrangement exists when a customer purchases goods but requests that the seller not ship the product until a later date. Sellers usually conclude that control has not been transferred and revenue should not be recognized until actual delivery to the customer occurs. Consistent with SEC guidance, sellers can recognize revenue prior to delivery only if (a) they conclude that the customer controls the product, (b) there is a good reason for the bill-and-hold arrangement, and (c) the product is specifically identified as belonging to the customer and is ready for shipment. A consignment arrangement exists when the seller (the “consignor”) arranges for another company to sell its product, but the consignor retains legal title. The consignor still has title and retains many of the risks and rewards of ownership for goods it has placed on consignment. Therefore, it’s likely that the consignor would be judged to retain control after transfer to the consignee and would postpone recognizing revenue until sale to an end customer occurs. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Learning Objective: 05-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements. Level of Difficulty: 2 Medium Topic Area: When (or as) performance obligation(s) satisfied-Bill-and-hold Topic Area: When (or as) performance obligation(s) satisfied-Consignment arrangements |
| 341. | Briefly explain the difference between an account receivable, a contract asset, and a contract liability.
• An account receivable is recognized if the seller has an unconditional right to receive payment, which is the case if only the passage of time is required before the payment is due. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 2 Medium Topic Area: Disclosures-Balance sheet |
| 342. | What is the objective of disclosures about revenue recognition? Indicate at least two common types of important revenue recognition disclosures.
The objective of revenue recognition disclosures is to help users of financial statements understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Examples of important disclosures are: • Categories of revenue, such as product lines, geographic regions, types of customers, or types of contracts. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Learning Objective: 05-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities. Level of Difficulty: 2 Medium Topic Area: Disclosures-Notes |
| 343. | Imagine that the Ace Construction Company (ACC) concludes that it must switch from recognizing revenue on long-term contracts over time according to percentage of completion to recognizing revenue upon completion of each contract. Assume that none of their construction projects are going to produce a loss. Is it possible that, in a particular year, ACC will show higher gross profit under the new approach (recognizing revenue upon contract completion) than they did under the old approach (recognizing revenue over time according to percentage of completion)? Explain.
Yes. Under the old approach (recognition over time), a percentage of total profit is recognized each year, while under the new approach (recognition at the end of the contract), the total profit is recognized when the project is completed. Therefore, during the year the project is completed, the new approach will show higher gross profit for that year on the project than would be shown under the old approach. But both methods result in the same total amount of gross profit over the life of the contract. |
| AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Create Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts |
| 344. | Briefly explain how a company that recognized revenue over time by estimating percentage of completion using a cost-to-cost ratio could manage earnings upward to meet a profit projection. What sort of ethical problems could result from that earnings management?
A company could understate its total estimated cost to complete (thus overstating the cost-to-cost ratio by understating the denominator), thereby allowing it to recognize income sooner. The company also could requisition materials to the job sooner than they are needed and count those materials as costs (thus overstating the cost-to-cost ratio by overstating the numerator), thereby allowing it to recognize income sooner. Companies are supposed to adjust cost-to-cost ratios for such manipulation, but it might not be easy for an auditor or investor to detect. Each of these is an unethical, deceptive reporting practice because the company is manipulating how the accounting system portrays its underlying economic activity. |
| AACSB: Ethics AICPA: BB Critical Thinking AICPA: FN Risk Analysis Blooms: Create Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Long-term contracts |
| 345. | Briefly explain how gross profit is recorded when revenue on long-term construction projects is recognized over time according to percentage of completion.
When revenue is recognized over time, gross profit for long-term construction projects is allocated to each period in which the earnings process occurs based on total estimated gross profit times the percentage of projected total cost incurred to date. This is also known as the cost-to-cost method. When an overall loss is projected, the loss should be recognized in the first period that the overall loss is anticipated. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Revenue recognition over time according to percentage complete |
| 346. | Under what circumstances can revenue on long-term construction contracts be recognized over time according to percentage of completion?
Revenue recognition over time is required for long-term construction contracts under the same circumstances that apply to other contracts: 1. The customer consumes the benefit of the seller’s work as it is performed, as when a company provides cleaning services to a customer for a period of time, or Most long-term contracts qualify for revenue recognition over time. Often the customer owns the seller’s work in process, such that the seller is creating an asset that the customer controls as it is completed. Also, often the seller is creating an asset that is customized for the customer, so the seller has no other use for the asset and has the right to be paid for progress even if the customer cancels the contract. In either of those cases, the seller recognizes revenue over time. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Learning Objective: 05-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed. Level of Difficulty: 2 Medium Topic Area: Revenue recognition over time according to percentage complete |
| 347. | Briefly explain how you can determine if a company is effectively using leverage.
A company is successfully using leverage when the return on shareholders’ equity is greater than the return on assets. Successful leverage can be thought of as making money with someone else’s money. |
| AACSB: Reflective Thinking AICPA: FN Risk Analysis Blooms: Remember Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 348. | The following table presents a summary of ratio analysis for McDonald’s and averages for their peer group:
Using the information provided above, use the DuPont framework to briefly summarize the operating performance of McDonald’s relative to its benchmark competitors. McDonald’s has a slightly higher profit margin than its industry peer group, but much lower asset turnover and lower leverage. These combine to provide lower return on equity for McDonald’s than for its industry peer group. McDonald’s poor asset turnover is not due to its inventory management, since it turns over its inventory much more quickly than the industry average. |
| AACSB: Analytical Thinking AACSB: Communication AICPA: BB Resource management AICPA: FN Risk Analysis Blooms: Analyze Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 349. | The following table presents a summary of ratio analysis for McDonald’s and averages for their peer group:
Are differences between McDonald’s and the industry likely driven by differences in size between McDonald’s and the average company in their industry peer group? Explain briefly. No, differences are not likely to be driven by differences in size because ratios adjust for size. It is possible that larger companies enjoy economies of scale that enhance their profitability, but those sorts of advantages or disadvantages are relevant and so should be included in the analysis. |
| AACSB: Analytical Thinking AICPA: FN Risk Analysis Blooms: Analyze Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 2 Medium Topic Area: Profitability analysis |
| 350. | The following table presents a summary of ratio analysis for McDonald’s and averages for their peer group:
Besides size differences, what other differences between McDonald’s and its industry peer group could limit your ability to make meaningful comparisons about the performance of McDonald’s from the data above? The industry peer group might be broadly enough defined to include companies that are not McDonald’s direct competitors. Ideally, the peer group would be based on other companies that serve the kind of food and beverage products that McDonald’s serves (e.g., Wendy’s, Burger King). Also, there could be differences in the accounting methods and estimates made by McDonald’s and its competitors, which could weaken financial comparisons. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: FN Risk Analysis Blooms: Create Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 351. | The following table presents a summary of ratio analysis for McDonald’s and averages for their peer group:
Based on this information, if you were going to advise McDonald’s about how it could enhance return on shareholders’ equity, what would you suggest? Be as specific as possible in the operational or financial changes you would recommend. The company’s profit margin is already higher than the industry average. It is possible McDonald’s could improve it further, but it may be reaching the maximum possible, given competitive pressures in the industry. Therefore, I would encourage McDonald’s to increase its asset turnover and leverage. It could improve asset turnover by selling off poor performing stores or shifting from owning to leasing assets and by focusing on operational efficiency to make more sales with the existing asset base. McDonald’s could also take on debt to buy back equity to enhance leverage. |
| AACSB: Analytical Thinking AICPA: BB Resource management AICPA: FN Risk Analysis Blooms: Create Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 352. | The following table presents a summary of ratio analysis for Uncle Joe’s Coffee, based on the most recent 12 months and five-year comparisons of Uncle Joe’s with averages in the restaurant industry and the services sector, respectively.
Using the information provided above, briefly summarize the operating performance of Uncle Joe’s relative to its benchmark competitors. Uncle Joe’s shows efficient management of assets that is about average for its industry and better than others in the sector over the past five years. Further, its recent performance is on a significant upswing, both in absolute and relative terms. Uncle Joe’s has a return on equity that is below industry averages, but is improving both in relative and absolute terms. Compared to peers, Uncle Joe’s has very fast receivable and asset turnover, but lower than average inventory turnover. |
| AACSB: Analytical Thinking AICPA: BB Resource management AICPA: FN Risk Analysis Blooms: Analyze Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
| 353. | The following table presents a summary of ratio analysis for Uncle Joe’s Coffee, based on the most recent 12 months and five-year comparisons of Uncle Joe’s with averages in the restaurant industry and the services sector, respectively.
What limitations exist in drawing meaningful comparisons about the performance of Uncle Joe’s from the data above? There is a wide array of businesses in the benchmark industry and sector data. More meaningful comparisons could be drawn from data about companies that serve the kind of food and beverage products that Uncle Joe’s does, if these data are available. Further, there may be differences in the accounting methods and estimates used by Uncle Joe’s in comparisons with its competitors. These data do not reflect what the numbers would be if all companies used exactly the same methods and estimates in preparing financial statements. |
| AACSB: Communication AACSB: Reflective Thinking AICPA: FN Risk Analysis Blooms: Understand Learning Objective: 05-10 Identify and calculate the common ratios used to assess profitability. Level of Difficulty: 3 Hard Topic Area: Profitability analysis |
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
