ACCT 3210: Review Chapter 6: Revenue Recognition

When is a loss recognized on a long-term contract?

In the first period in which the loss become evident.

The cost of a quality-assurance warranty is recognized

during the period of sale.

Mueller Company sold merchandise costing $120,000 for $240,000. Mueller estimates that merchandise costing $5,000 will be returned for a refund of $10,000. Mueller should report net sales of:

$230,000

Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the expected value of consideration, what transaction price will Guarder estimate for this contract?

$40,500

Robbie Inc. estimated that it will receive $60,000 of consideration for providing services to Stan Company over a 6-month period. Robbie properly accrues $10,000 each month; after two months, Robbie estimates that the total consideration it will receive is only $50,000. For each of the remaining months, Robbie should recognize service revenue of:

$8,333

Margery sells 100 TV top boxes to customers for $90 each. Margery estimates that 6% of the units will be returned for a full refund. Margery should report net sales revenue of:

$8,460

On January 1st, Guarder Consulting enters into a one-year contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. Smith pays Guarder an up-front fixed fee of $48,000 on January 1st. Guarder will also earn an additional $12,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 70% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what amount of revenue will be recorded at the end of the first month?

5,000

A seller estimates the stand-alone selling price of a good using the adjusted market assessment approach. Using this method, the seller may refer to which of the following?

A competitor's selling price

Which of the following likely would qualify for revenue recognition over time?

A long-term construction contract

If Company A physically transfers goods to another company to sell on its behalf, but Company A retains title to the goods, this is referred to as a . (Enter only one word.)

Blank 1: consignment

If Company A physically transfers goods to another company to sell on its behalf, but Company A retains title to the goods, this is referred to as a _____. (Enter only one word.)

Blank 1: consignment

A contract liability is a term that refers to a _____ revenue account. (Enter only one word.)

Blank 1: deferred or unearned

Cash received from the sale of gift cards is recognized as _____ revenue. (Enter only one word.)

Blank 1: deferred or unearned

Revenue is recognized when the _____ obligation is satisfied. (Enter one word.)

Blank 1: performance

True or false: A right of return represents a performance obligation.

False

For many companies, which number is often the largest one reported in the financial statements?

Revenue

_____ accounting standards help ensure that the appropriate amount of revenue appears in each period's income statement.

Revenue recognition

In a consignment, the entity who owns the goods, referred to as the ______, physically transfers the goods to another company, called the ______, who will attempt to sell the goods.

consignor; consignee

Commitment to performing an obligation and enforcing related rights represents a critical aspect of a(n) _____. (Enter only one word.)

contract

Cash received from the sale of gift cards is recognized as

deferred revenue.

The account name "contract liability" is another name for

deferred revenue.

Licenses typically allow customers to use the seller's ____ property.

intellectual

If a seller determines that the time value of money is significant, the seller adjusts sales or service revenue and recognizes the financing component as:

interest revenue

When revenue is recognized upon completion of a long-term contract, CIP is updated to include gross profit

upon completion.

True or false: An extended warranty provides protection beyond the manufacturer's quality-assurance warranty.

True

For sales involving a right of return, the amount related to expected returns (Select all that apply.)

is recognized as a liability must be estimated

For sales involving a right of return, the amount related to expected returns (Select all that apply.)

must be estimated is recognized as a liability

Measuring and reporting revenue represents one of the most critical aspects of financial reporting in part because revenue

often represents the largest number reported in the financial statements

Revenue related to a company providing cleaning services to a customer for a period of time should be recognized

over time.

The previous requirement for revenue recognition, which dictated that the earnings process must be virtually complete and the collectiblity of the related assets reasonably assured was referred to as the

realization principle

Emil Company evaluates gift cards that it sold two years ago. Based on past experience, it is highly unlikely that gift cards outstanding for two years or longer will be redeemed. Related to these gift cards, Emil should

recognize revenue.

For sales involving a right of return, the amount related to expected returns (Select all that apply.)

reduces the amount of revenue recognized on sales. must be estimated and accrued

If the consignee can't find a buyer within an agreed upon time, the consignee

returns the goods to the consignor.

If based on past experience only a remote likelihood exists that a previously sold gift card will still be redeemed, the seller should recognize

revenue.

Inflows or other enhancements of assets or settlements of an entity's liabilities from delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations are _____.

revenues

The inflow of cash or other assets that a business receives when it provides goods or services to customers is referred to as

revenues

A seller estimates the stand-alone selling price of goods using the expected cost plus margin approach. Using this method, the seller will estimate the cost of ______ and add an appropriate profit margin.

satisfying the performance obligation

The _____ - _____ selling price is the amount at which the good or service is sold separately under similar circumstance. (Enter one word per blank.)

stand alone

A seller estimates the stand-alone selling price of goods using the expected cost plus margin approach. Using this method, the seller combines which two components?

the cost of satisfying the performance obligation an appropriate profit margin

Consistent with the realization principle, historically, revenue was recognized if two conditions were satisfied. These were:

the earnings process was virtually complete collectibility of related assets was reasonably assured

For bill-and-hold arrangements, revenue is typically recognized when

the related goods are delivered.

As a practical matter, a seller can assume the time value of money is not significant if the period between delivery and payment is less than

one year.

The final step used to apply the core revenue recognition principle is to recognize revenue

when (or as) each performance obligation is satisfied

Margery sells 100 TV top boxes to customers for $90 each. Margery estimates that 6% of the units will be returned for a full refund. Margery should debit sales returns for:

$540

When should the initial franchise fee be recognized by the franchisor?

After substantial performance of the initial services by the franchisor.

Which of the following likely would be treated as a separate performance obligation related to the purchase of a pair of prescription eye glasses?

An unlimited time coupon for 50% off an additional pair of eye glasses

When revenue is recognized upon completion of a long-term contract, gross profit is recognized upon completion in which account?

Construction in progress

Which of the following is most commonly used to estimate progress toward completion of a long-term contract?

Cost-to-cost ratio

True or false: A prepayment from a customer typically creates a performance obligation.

False

True or false: A quality-assurance warranty is a separate performance obligation.

False

True or false: Detailed note disclosures dealing with revenues are fairly uncommon.

False

Orwell Inc. entered into a 6 month contract with a customer to provide consulting services that requires the customer to pay an upfront fixed fee of $15,000, plus the opportunity for Orwell to earn a bonus of $1,200 for achieving certain performance targets by the end of the 6 month period. Initially, Orwell estimated that it was probable that the bonus would be achieved and recorded a receivable. After one month, they determined they could no longer conclude that it is probable a significant reversal of revenue would not occur in the future related to the variable consideration. What should Orwell do? (Select all that apply.)

For the remainder of the contract, only recognize revenue related to the fixed fee. Adjust revenue for the previously recognized bonus Reverse the bonus receivable

The first step used to apply the core revenue recognition principle is:

Identify the contract with a customer

Which of the following costs must be excluded from the calculation of the cost-to-cost ratio? (Select all that apply.)

Inefficiencies related to the project Costs that don't reflect progress toward completion

On January 5, Merkel Inc. purchases office equipment for its new branch office from Norbert Company. Merkel requests that the equipment be delivered after the renovation of the branch location is completed. On May 1, Merkel informs Norbert that it wishes delivery as soon as possible. The equipment is delivered on May 4. On what date should Norbert recognize the related revenue?

May 4

When should ongoing franchise fees be recognized by the franchisor?

Over time in the periods the services are performed by the franchisor.

Which of the following situations may make the contract price less apparent? (Select all that apply.)

Payment by the seller to the customer Variable consideration provisions The time value of money

Which method provides a better measure of a company's economic activity each period?

Revenue recognition over time

Koster Inc. recognized $10,000 of service revenue, which represents one-half of the estimated bonus it expects to receive at the end of the year. On October 1, Koster re-assesses the situation and is unable to conclude that it is probable it will meet the conditions for receiving the bonus. What should Koster do?

Reverse the already recognized revenue on October 1

Some software licenses transfer a right-of-use, while others transfer the right-of-access. Match the type of license transferred with its typical revenue recognition. Instructions

Right-of-use matches Choice, recognize revenue at a point in time recognize revenue at a point in time Right-of-access matches Choice, recognize revenue over time recognize revenue over time

Which of the following conditions will cause revenue to be recognized over time? (Select all that apply.)

Seller creates an asset that has no alternative use, and the seller has the right to receive payment for progress to date. Customer consumes the benefit of the seller's work as it is performed Customer controls the asset as it is created

Revenue recognition previously was based on the "realization principle." What were the two general criteria required by the realization principle that had to be satisfied before a company could record revenue?

The earnings process is complete or virtually complete. There is reasonable certainty as to collectibility of the asset to be received.

Peter Inc. recognized deferred revenue for variable consideration under a multi-year contract. Which of the following correctly describes the requirement in subsequent years related to the estimated variable consideration?

The estimate must be reassessed each period

Which statements are true regarding revenue recognition over time and upon completion? (Select all that apply.)

The same total amount of gross profit is recognized under both methods. Revenue recognition over time provides a more realistic measure of a project's periodic performance.

When consigned goods are sold, the consignee remits what amount to the consignor?

The selling price less commissions and expenses

Which of the following differs between revenue recognized over time and revenue recognized at completion?

The timing of recognition

True or false: An estimated overall loss on a long-term contract is fully recognized in the first period the loss becomes evident, regardless of the revenue recognition method used.

True

True or false: Most long-term contracts qualify for revenue recognition over time.

True

Which of the following may provide evidence of possible reversals in the amount of variable consideration that will be received? (select all that apply)

a history of changing payment terms on similar contracts a long delay before uncertainty resolves a large number of possible outcomes that could occur

Revenue recognition standards help ensure that the appropriate _____ of revenue appears in each _____ financial statement.

amount; period's

Star Inc. licenses use of its intellectual property to customers. The benefit the customer receives from the license is not affected by Star's ongoing activity. Star should recognize revenue:

at the beginning of the license period

In a bill-and-hold arrangement, the ____ requests that the ____ ship the products ______.

buyer; seller; at a later date

Financial statement users can learn the amount of revenue reported by a company by reviewing its income statement and learn additional detailed revenue-related information by reviewing the company's

disclosure notes

A seller estimates the stand-alone selling price of goods and services using the adjusted market assessment approach. Using this method, the seller will consider what it could sell the goods or services for in the market

in which it normally conducts business

For sales involving a right of return, the amount related to expected returns (Select all that apply.)

is recognized as a liability must be estimated reduces the amount of revenue recognized on sales.

If a seller lacks sufficient information to be able to accurately estimate returns, the seller should recognize revenue only to the extent that

it is probable that significant future reversals in revenue will not occur.

Typical costs included in a construction project include

labor, materials, and overhead.

For sales involving a right of return, the amount related to expected returns (Select all that apply.)

must be estimated is recognized as a liability

Common note disclosures relating to revenue include: (Select all that apply.)

outstanding performance obligations timing of recognition major product lines

Revenue is typically recognized _____ for a license that provides the customer with the right of access to the seller's intellectual property.

over the license period

The contract price received for an extended warranty is recognized as revenue

over the warranty period.

Xavier Inc. is adding two more floors to Tamara Company's existing office building. Revenue related to this service likely should be recognized

over time

Revenue recognition for services such as lending money and performing financial statement audits is typically

over time.

The essential difference between revenue recognition over time and upon completion relates to the

pattern of recognition of the related gross profit.

Which of the following may provide evidence of possible reversals in the amount of the variable consideration that will be received? (Select all that apply.)

poor evidence on which estimates were based long delay until uncertainty is resolved estimates were based on factors beyond the seller's control

A license for symbolic intellectual property (Select all that apply.)

provides the customer with the right of access to the intellectual property does not have significant standalone functionality

A(n) _____ warranty represents the cost of satisfying the performance obligation to deliver products of acceptable quality.

quality assurance

Revenue recognition was previously based on the _____ principle, which required that two criteria be satisfied before revenue can be recognized: The earnings process is complete or virtually complete and there is reasonable certainty as to collectibility. (Enter only one word.)

realization

The amount received for an extended warranty is initially

recognized as a deferred revenue liability.

Arthur Inc. provides services to consulting clients. Arthur should recognize the related revenue when

the related performance obligation is satisfied.

As compared to revenue recognition over time, the total amount of gross profit recognized related to revenue upon completion is:

the same.

Knights Inc. is selling a new product and is unable to estimate reliably the amount of future returns. Knights Inc. may want to postpone revenue recognition until

the uncertainty about returns is resolved.

The cost of a quality-assurance warranty is recognized during the year of sale and debited to ____ and credited to ______.

warranty expense; contingent warranty liability

Options for additional goods or services are considered performance obligations if they provide a material right to the customer that the customer

would not receive otherwise.

Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what transaction price will Guarder estimate for this contract?

$45,000

In a franchise agreement, the _____ pays franchise fees to obtain the right to use a company's name and sell its products.

Blank 1: franchisee

In a franchise agreement, the _____ owns the company and gives an individual the right to use its name and sell its products.

Blank 1: franchisor

Methods that can be used to estimate progress toward completion are referred to as _____ -based and _____ -based methods. (Enter one word per blank.)

Blank 1: input or input-based Blank 2: output or output-based

Deferred revenue from the sale of gift cards is classified as a(n) _____ on the balance sheet. (Enter only one word.)

Blank 1: liability

The stand-alone price of a good or service may be estimated using the adjusted market assessment approach, the expected cost plus margin approach, or the _____ approach. (Enter only one word.)

Blank 1: residual

A contract is said to have _____ consideration if the price depends on the outcome of future events. (Enter only one word.)

Blank 1: variable or varying

Which of the following likely will lead to revenue recognition at a point in time? (Select all that apply.)

Buyer has accepted the asset Buyer has legal title to the asset

Based on past experience, a seller can usually estimate the returns on a given volume of sales. Once estimated, these returns will ____________. (Select all that apply.)

Increase liabilities Reduce reported revenue

Match the term with the correct description. Instructions

Principal matches Choice, Carries risks and rewards associated with collecting the contract price Carries risks and rewards associated with collecting the contract price Agent matches Choice, Earns a commission for helping seller transact with buyer Earns a commission for helping seller transact with buyer Third Party matches Choice, Is not directly involved with the transaction Is not directly involved with the transaction

Which of the following will not differ between revenue recognized over time and revenue recognized at completion? (Select all that apply.)

Total revenue Total expense Total profit

Because extended warranties usually are priced and sold separately from the related product, they (Select all that apply.)

are considered separate performance obligations can be viewed as separate transactions

A seller recognizes contract liabilities, contract assets, and accounts receivable on separate lines of its _____ _____. (Enter one word per blank.)

balance sheet

When the time value of money is significant, the transaction price is allocated

between the merchandise and the financing component

On January 5, Merkel Inc. purchases office equipment for its new branch office from Norbert Company. Merkel requests that the equipment be delivered after the renovation of the branch location is completed. This agreement is referred as a:

bill-and-hold arrangement

Deferred revenue from the sale of gift cards is classified as a(n):

liability

For a promise to provide a good or service to be accounted for as a separate performance obligation, the good or service must be

distinct from other goods and services in the contract.

A right of return ____ a separate performance obligation for the seller.

does not create

Fuller contracted with the owners of "Healthy Bakeries" to open a bakery, sell its signature products and use its name and logo. This agreement refers to a

franchise

A seller may recognize variable consideration only if it is _____ that there will not be significant reversals with respect to the amount that will be received in the future.

probable

The collectibility criteria specifies that a contract only exists for the purpose of revenue recognition if the seller believes that it is

probable that it will collect the amount entitled to them under the contract

Variable consideration can only be recognized if it is

probable that the amount will be received in the future.

The cost-to-cost ratio is the most common approach used to estimate ______.

progress toward completion

The potential that a good does not satisfy the original performance obligation is addressed through a customer's:

right of return

In a principal-agent relationship, the agent recognizes revenue to the extent of the

sales commission

Gerhard Inc. sells airline tickets for New World Global Airlines. Gerhard Inc. receives a 8% commission on the sales price of the tickets. During July, Gerhard Inc. sells $1 million of tickets for New World Global Airlines. Gerhard Inc. should record

sales commission revenue for $80,000

Robbie Inc. estimated that it will receive $60,000 of consideration for providing services to Stan Company over a 6-month period. Robbie properly accrues $10,000 each month; after three months, Robbie estimates that the total consideration it will receive is only $25,000. When the estimate change is determined, the company should debit ____ and credit ____ for ____.

service revenue; contract receivable; $17,500

The concept or principle that states that companies should recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for goods and services is referred to as the:

Core revenue recognition principle

Software vendors typically bundle their products for a lump-sum contract price. What is the critical accounting issue regarding software vendors?

Timing of revenue recognition

The transaction price is the amount the seller expects to ______ from the customer in exchange for providing goods and services.

be entitled to receive

The seller's belief that is probable that it will collect substantially all of the amount it is entitled to receive under the contract is referred to as the

collectibility threshold

The seller's belief that it is probable that it will collect substantially all of the amount it is entitled to receive under the contract is referred to as the

collectibility threshold.

Which of the following costs are included in a long-term construction contract? (Select all that apply.)

direct labor overhead direct material

Because the exact cost of a quality-assurance warranty is unknown when the related product is sold, the cost is

estimated and accrued during the year of sale.

For estimating variable consideration, if there are several possible outcomes, the ______ method will tend to be most appropriate; if there are two possible outcomes, the ______ method will tend to be most appropriate

expected value; most likely amount

Good Buy Electronics Inc. encourages its customers to purchase a separate warranty that protects products for up to five years. This warranty represents a(n)

extended warranty