Chapter 18

when the price of a good or service is dependent on a future event, the company should?

estimate the amount of variable consideration

In a consignment sale, the consignee

records a payable to the consignor, not sales revenue, when consigned merchandise is sold. The consignee will later record commission revenue.

what is revenue from contracts with customers?

the FASB and IASB issued converged standard on revenue recognition

what is transaction price?

-the amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services -In a contract is often easily determined because customer agrees to pay a fixed amount.

A performance obligation may be based on customary business practice.

A performance obligation may be explicit, implicit, or based on customary business practice.

True or False: In a principal-agent relationship, the agent should use the gross method to recognize revenue.

False

True or False: The principal advantage of the completed-contract method is that reported revenue reflects estimates rather than waiting for final results.

False

True or False: A contract is an agreement between two parties that creates enforceable rights or obligations.

True

Companies can use the expected value to estimate variable consideration when

a company has a large number of contracts with similar characteristics.

the sales returns and allowances account is?

a contra revenue account

a performance obligation is?

a promise to provide a distinct product or service to a customer

to account for sales returns and allowances, company should recognize the following

a. Revenue for the transferred products in the amount of consideration to which the company is reasonably assured to be entitled (considering the products to be returned or allowance granted). b. An asset (and corresponding adjustment to cost of goods sold) for the goods returned from customers

an allowance for sales returns and allowance account is a contra account to ?

accounts receivables

The new standard, Revenue from Contracts with Customers,

adopts an asset-liability approach for revenue recognition.

One criteria that indicates that a company should disregard revenue guidance for contracts is when

each party can unilaterally terminate the contract without compensation.

revenue from contracts with customers adopts an asset-liability approach that recognizes and measures revenue based on?

changes in assets and liabilities

Under the completed contract method, the Construction in Process account balance will consist of

construction costs only.

The seller of a good or service should recognize revenue when

each performance obligation is satisfied.

what are non cash considerations?

goods, services, or other non-cash considerations Ex: - Companies sometimes receive contributions (e.g., donations and gifts). - Customers sometimes contribute goods or services, such as equipment or labor, as consideration for goods provided or services performed. -Companies generally recognize revenue on the basis of the fair value of what is received.

when is the expected value appropriate?

if a company has a large number of contracts with similar charcteristics

when is the most likely amount appropriate?

if the contract has only 2 possible outcomes

An indication that the customer has not taken control of the good or service is

the customer has no significant risks or rewards of ownership.

what is most likely amount?

the single most likely amount in a range of possible consideration outcome

a return inventory account is used?

to separate returned inventory from regular inventory

Wildhorse Pharmaceuticals entered into a licensing agreement with Zenith Lab for a new drug under development. Wildhorse will receive $7950000 if the new drug receives FDA approval. Based on prior approval, Wildhorse determines that it is 90% likely that the drug will gain approval. The transaction price of this arrangement should be

$7950000.

For the customer to have obtained control of a product in a bill-and-hold arrangement, what criteria should be met

(a) The reason for the bill-and-hold arrangement must be substantive, (b) The product must be identified separately as belonging to the customer, (c) The product currently must be ready for physical transfer to the customer, and (d) the seller cannot have the ability to use the product or to direct it to another customer.

What is a repurchase agreement?

- Allows company to transfer an asset to a customer but have an unconditional (forward) obligation or unconditional right (call option) to repurchase the asset at a later date.

what is an example of nonrefundable upfront fees?

- Membership fee in a health club - Activation fees for phone, Internet, or cable

what are variables to consider when determining the transaction price?

- price because it is dependent on future events (might include discounts, rebates, credits, performance, bonuses, or royalties) - companies estimate amount of revenue to recognize ( expected value, most likely amount)

what is a principle-agent relationship?

-Agent's performance obligation is to arrange for principal to provide goods or services to a customer

what is bill-and-hold arrangements?

-Contract under which an entity bills a customer for a product but the entity retains physical possession of the product until a point in time in the future. -Result when buyer is not yet ready to take delivery but does take title and accepts billing

what is a consignment?

-Manufacturers (or wholesalers) deliver goods but retain title to the goods until they are sold. -Consignor (manufacturer or wholesaler) ships merchandise to the consignee (dealer), who is to act as an agent for the consignor in selling the merchandise.

Consideration paid or payable to customers

-May include discounts, volume rebates, coupons, free products, or services. -In general, these elements reduce the consideration received and the revenue to be recognized.

companies focus on what 2 things when it comes to the revenue from contracts wit customers?

-Recognition and measurement of assets and liabilities -Changes in those assets and liabilities over the life of the contract to bring more discipline to the measurement of revenue.

what is an example of a principle-agent relationship?

-Travel Company (agent) facilitates booking of cruise for Cruise Company (principal). -Priceline (agent) facilitates sale of various services such as car rentals at Hertz (principal).

companies only recognize variable consideration if?

1. they have experience with similar contracts and are able to estimate the cumulative amount of revenue, and 2. based on experience, they do not expect a significant reversal of revenue previously recognized.

product or service is distinct when a customer is able to?

-benefit from a good or service on its own or -together with other readily available resources

change in control indicators are?

1. Company has a right to payment for asset. 2. Company has transferred legal title to asset. 3. Company has transferred physical possession of asset. 4. Customer has significant risks and rewards of ownership. 5. Customer has accepted the asset.

what are the 5 steps for revenue recognition?

1. identify the contract with customers 2. identify the separate performance obligations in contract 3. determine the transaction price 4. allocate the transaction price to the separate performance obligations 5. recognize revenue when each performance obligation is satisfied

what are 2 types of warranties to customers?

1.Product meets agreed-upon specifications in contract at time product is sold. - Warranty is included in sales price (assurance-type warranty). 2.Not included in sales price of product (service-type warranty). - Recorded as a separate performance obligation

True or False: A nonrefundable upfront fee is generally recorded as revenue when received.

False - A nonrefundable upfront fee should generally be recorded as revenue over the periods which benefit.

True or False: Conditional rights should be reported separately on the balance sheet as contract liabilities

False -Conditional rights should be reported separately on the balance sheet as contract assets, not contract liabilities

True or False: Franchise companies derive their revenue primarily from the sale of initial franchises.

False -Franchise companies derive their revenue from one or both of two sources: (1) from the sale of initial franchises and related assets or services, and (2) from continuing fees based on the operations of franchises.

True or False: Companies expense incremental costs if these costs are incurred to obtain a contract with a customer.

False - Companies capitalize incremental costs if these costs are incurred to obtain a contract with a customer. They do not expense incremental contract costs.

Which type of revenue or gain is generally recognized with the passage of time?

Long-term construction contracts

Under the percentage-of-completion method, how should the balances of Billings on Construction in Process and Construction in Process be reported prior to the completion of a long-term contract?

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

what is nonrefundable upfront fees?

Payments from customers before - Delivery of a product - Performance of a service Generally relate to initiation, activation, or setup of a good or service to be provided or performed in the future.

True or False: Most revenue transactions pose few problems for revenue recognition because often the transaction is initiated and completed at the same time.

True

True or False: Companies recognize revenue over a period of time if (1) the customer controls the asset as it is created or (2) the company does not have an alternative use for the asset, with the following conditions: (a) the customer receives benefits as the company performs, and (b) the company has a right to payment.

True

True or False: In situations where the franchisor provides access to the rights rather than transferring control of the franchise rights, the franchise rights' revenue is recognized over a period of time rather than at a point in time.

True

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.

The Billings on Construction in Process account is reported:

in either the current asset or current liability section.

only allocate variable consideration if?

it is reasonably assured that it will be entitled to the amount

companies satisfies its performance obligation when the customer?

obtains control of the good or service

what is expected value?

probability-weighted amount in a range of possible consideration amounts

A loss in the current period on a contract expected to be profitable upon completion in a later year is:

recognized only under the percentage-of-completion method.

When using the percentage of completion method, the company

recognizes revenues and gross profit each period during the contract.

In determining the transaction price, the company must consider:

variable consideration, non-cash consideration, time value of money, and consideration payable.

Which method of measuring the fair value of a performance obligation is dependent on the standalone selling prices of other goods or services promised in the contract?

residual value.

An option to purchase a warranty is recorded as

revenue in the period that the service-type warranty is in effect.

companies account for the time value of money if?

the contract involves a significant financing component

Companies should use the percentage-of completion method to account for long-term construction contracts

unless required to use the completed-contract method.