CH 17 exam study guide

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How should the balances of Progress Billings and Construction in Process be shown at reporting dates before the completion of a long-term contract?

Net balance, as a current asset if debit balance, and current liability if credit balance

To address inconsistencies and weaknesses in revenue recognition, a comprehensive revenue recognition standard was developed entitled

Revenue from Contracts with Customers.

When a customer purchases a product but is not yet ready for delivery, this is referred to as

a bill-and-hold arrangement.

Companies can use the expected value to estimate variable consideration when

a company has a large number of contracts with similar characteristics

When dealing with contract modifications, one condition necessary for a separate performance obligation to exist is when

a company provides a distinct product or service.

an agreement that creates enforceable rights and obligations.

a contract

Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing the software, the company also provides consulting services and support to ensure the smooth operation of the software. The total transaction price is $420,000. Based on standalone values, the company estimates the consulting services and support have a value of $120,000 and the software license has a value of $300,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes

a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000.

New Age Computers manufactures and sells pagers and radio paging systems which include a 180-day warranty on product defects. It also sells an extended warranty which provides an additional two years of protection. On May 10, it sold a paging system for $4,500 and an extended warranty for another $1,400. The journal entry to record this transaction would include

a credit to Sales Revenue of $4,500 and a credit to Unearned Warranty Revenue of $1,400

When a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price, the transaction should be accounted for as

a financing transaction

The percentage-of-completion method

recognizes revenue and gross profit each period based upon progress

The fourth step in the process for revenue recognition is to

allocate the transaction price to the separate performance obligations

The role of the agent in a Principal-Agent relationship is to

arrange for the principal to provide goods or services to a customer

A transaction price for multiple performance obligations should be allocated

based on what the company could sell the goods for on a standalone basis.

Revenue from a contract with a customer

cannot be recognized until a contract exists

A company has satisfied its performance obligation when the

company has transferred physical possession of the asset

The cost-to-cost basis measures progress towards completion by

comparing costs incurred to date with total costs to complete the contract

Consignments are a specialized marketing method whereby the

consignee takes possession of merchandise but the title remains with the manufacturer

Consigned goods are recognized as revenues by the

consignor when it receives notification and payment from consignee for goods sold.

The Billings on Construction in Progress account is a(n)

contra inventory account

The most popular input measure used to determine the progress toward completion is

cost-to-cost basis

Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days. Entertainment Tonight also offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the extended warranty is $3,000. The standalone price of each is $2,100 and $900, respectively. The estimated cost of the assurance-type warranty is $350. The accounting for warranty will include a

credit to Unearned Warranty Revenue, $900

The third step in the process for revenue recognition is to

determine the transaction price.

When multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when

each service is interdependent and interrelated.

In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be

the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable

Nonrefundable upfront fees should not be recorded as revenue at the time of payment if they are for

future delivery of products and services

The first step in the process for revenue recognition is to

identify the contract with the customers

The second step in the process for revenue recognition is to

identify the separate performance obligations in the contract.

A contract between Boeing and Delta in which Boeing supplies planes to Delta

is an agreement that creates enforceable rights and obligations for both parties

When a customer can benefit from a good or service on its own or together with other readily available resources, the good or service

is distinct

The use of the net method of recognizing revenue by an agent

is the correct method in a principal-agent relationship

The last step in the process for revenue recognition is to

recognize revenue when each performance obligation is satisfied

Noncash consideration is

recognized on the basis of the fair value of what is received.

The converged standard on revenue recognition

recognizes and measures revenue based on changes in assets and liabilities

On January 15, 2024, Bella Vista Company enters into a contract to build custom equipment for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000, 30 days after delivery. The revenue for this contract should be

recorded on March 31, 2024.

When sales are made with a right of return, the company

records the returned asset in a separate inventory account

Consideration paid or payable to customers

reduces the consideration received and the revenue to be recognized

The sale of an extended warranty is recorded as

revenue in the period(s) in which the service-type warranty is in effect

If a contract involves a significant financing component

the time value of money is used to determine the fair value of the transaction

In accounting for a long-term construction-type contract using the percentage-of- completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract multiplied by the percentage of the costs incurred during the year to the

total estimated cost

the amount of consideration that a company expects to receive from a customer is the

transaction price


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