Chapter 18 Revenue recognition

The Billings on Construction in Process account is reported: *as a revenue on the income statement. *in the current liability section only. *in the current asset section only. *in either the current asset or current liability section.

Billings on Construction in Process is reported as a current asset or current liability, depending on whether its balance is larger or smaller than the Construction in Process account balance.

On January 1, 2017, Purdy Company enters into a contract to transfer Blue and Rain to Georgia Co. for $300,000. The contract specifies that payment for Blue will not occur until Rain is also delivered. In other words, payment will not occur until both Blue and Rain are transferred to Georgia. Purdy determines that standalone prices are $110,000 for Blue and $190,000 for Rain. Purdy delivers Blue to Georgia on February 10, 2017. On March 15, 2017, Purdy delivers Rain to Georgia. Purdy should record *Contract Asset of $110,000 on January 1. *Accounts Receivable of $300,000 on January 1. *Accounts Receivable of $110,000 on February 10. *Contract Asset of $110,000 on February 10.

Conditional rights to receive consideration are reported as contract assets rather than as receivables. Thus, a contract asset of $110,000 would be reported on February 10.

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

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

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

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.

In a bill-and-hold arrangement, which of the following is not one of the criteria which must be met for the customer to have obtained control of the product? *The product must be physically located in the seller's warehouse. *The product currently must be ready for physical transfer to the customer. *The reason for the bill-and-hold arrangement must be substantive. *The seller cannot have the ability to use the product or to direct it to another customer.

For the customer to have obtained control of a product in a bill-and-hold arrangement, all of the following 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 (d) the seller cannot have the ability to use the product or to direct it to another customer.

On January 1, 2017, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $629,406 (imputed rate of 12%). The goods have an inventory cost on Fullbright's books of $240,000. What amount of Sales Revenue should Fullbright recognize in 2017? *$629,406 *$240,000 *$400,000 *$229,406

Fullbright should record Sales Revenue of $400,000 on January 1, 2017, which is the fair value of the inventory.

ELO Construction Co. began operations in 2017. Construction activity for 2017 is shown below. ELO uses the completed-contract method. Contract Contract Price Billings Through 12/31/17 Collections Through 12/31/17 Costs to 12/31/17 Estimated Costs to Complete 1 $4,650,000 $4,450,000 $3,900,000 $3,700,000 - 2 3,600,000 1,800,000 1,600,000 870,000 $2,030,000 3 3,100,000 1,860,000 1,600,000 1,680,000 1,120,000 What amount of gross profit should be reported on the income statement for 2017? *$1,340,000 *$950,000 *$1,480,000 *$0

Gross profit is recognized only on the completed contract (Contract 1). Contract 1 Price, $4,650,000 - Contract 1 Costs, $3,700,000 = Contract 1 Gross Profit, $950,000.

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? *standalone selling price. *residual value. *expected cost plus a margin. *adjusted market assessment.

Residual value The residual value 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.

Which type of revenue or gain is generally recognized with the passage of time? *Revenue from sales. *Long-term construction contracts. *Gain or loss from disposition. *Revenue from fees or services.

Revenue from long-term construction contracts is generally recognized as time passes

Pizza Factory enters into a franchise agreement on 11/1/16 giving Mow's House the right to operate as a franchisee of Pizza Factory for 5 years. Pizza Factory prepared this entry on 11/1/16: Cash 40,000 Notes Receivable 60,000 Discount on Notes Receivable 12,086 Unearned Franchise Revenue 40,000 Unearned Service Revenue (training) 19,914 Unearned Sales Revenue (equipment) 28,000 Pizza Factory satisfies the performance obligations related to the elements above when the franchise opens on 3/1/17. Other than interest, how much revenue should Pizza factory recognize on 3/1/17? *$ 43,957. *$ 87,914. *$ 0. *$100,000.

Since Pizza Factory satisfies the performance obligations related to the elements above when the franchise opens on 3/1/17, all of the Unearned Revenue amounts are recognized. Total revenue to be recognized is computed as follows: Unearned Franchise Revenue, $40,000 + Unearned Service Revenue (Training), $19,914 + Unearned Sales Revenue (Equipment), $28,000 = $87,914.

Stossel Company sells 300 units for $200 each to Liberty Inc. for cash. Stossel allows Liberty to return any unused product within 30 days and receive a full refund. The cost of each product is $120. To determine the transaction price, Stossel decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the most likely amount. Using the most likely amount, Stossel estimates that ten (10) units will be returned, the costs of recovering the units will be immaterial, and the returned units are expected to be resold at a profit. What amount of refund liability should Stossel record at the time of sale? *$ 0 *$1,200 *$2,000 *$800

Stossel should record a refund liability of $2,000 (10 estimated units to be returned X $200 selling price).

One criteria that indicates that a company should disregard revenue guidance for contracts is when *the payment terms for the goods and services to be transferred can be identified. *each party's rights regarding the goods or services to be transferred can be identified. *the contract has commercial substance. *each party can unilaterally terminate the contract without compensation.

The company should disregard revenue guidance to contracts if the contract is wholly unperformed, or if each party can unilaterally terminate the contract without compensation.

In a consignment sale, the consignee *records a payable when consigned merchandise is sold. *makes a journal entry when the consigned merchandise is received. *recognizes both commission revenue and sales revenue. *records advertising paid for the consignment as an expense.

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

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

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

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

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

Reedy Builders, Inc. is using the completed-contract method for a $12,400,000 contract that will take three years to complete. Data at December 31, 2017, the end of the first year, are as follows: Costs incurred to date $5,200,000 Estimated costs to complete 7,800,000 Billings to date 4,920,000 Collections to date 4,540,000 The gross profit or loss that should be recognized for 2017 is *a $200,000 loss. *a $240,000 loss. *a $600,000 loss. *$0.

Under both the percentage-of-completion and the completed-contract methods, the company must recognize in the current period the entire loss immediately. The entire contract loss is computed as follows: Contract Price, $12,400,000 - (Costs incurred to date, $5,200,000 + Estimated costs to complete, $7,800,000) = $600,000 loss.

Under the completed contract method, the Construction in Process account balance will consist of *construction costs and billings. *construction costs and gross profit. *gross profit only. *construction costs only.

Under the completed contract method, the Construction in Process account balance consists of construction costs only.

In determining the transaction price, the company must consider: *Entry field with correct answer variable consideration, but not non-cash consideration. *variable consideration, non-cash consideration, time value of money, and consideration payable. *the time value of money, but not consideration payable. *non-cash consideration, but not the time value of money.

Variable consideration, non-cash consideration, time value of money, and consideration payable must all be considered in determining the transaction price.

An indication that the customer has not taken control of the good or service is *the selling company has right to payment for the good or service. *the selling company has transferred legal title to the asset. *the customer has no significant risks or rewards of ownership. *the customer has physical possession of the asset.

When the customer has significant risks or rewards of ownership, it is an indicator that the customer has obtained control, so when the customer has no significant risks or rewards of ownership, it is an indication that the customer has not taken control of the good or service.

When using the percentage of completion method, the company *accumulates construction costs only in an inventory account (Construction in Process). *recognizes revenues and gross profit each period during the contract. *accumulates progress billings in an inventory account (Construction in Process). *recognizes revenues and gross profit only when the contract is completed.

When using the percentage of completion method, the company recognizes revenues and gross profit each period based on the progress of the construction.

Black Bear Construction Company has a contract to construct a $6,000,000 bridge at an estimated cost of $5,300,000. The contract is to start in July 2017, and the bridge is to be completed in October 2019. The following data pertain to the construction period. (Note that by the end of 2018, Black Bear has revised the estimated total cost from $5,300,000 to $5,400,000.) 2017 2018 2019 Costs to date $1,325,000 $3,780,000 $5,430,000 Estimated costs to complete 3,975,000 1,620,000 — Progress billings during the year 1,200,000 3,200,000 1,600,000 Cash collected during the year 1,000,000 2,340,000 2,660,000 What amount of gross profit should Black Bear recognize in 2018 using the percentage-of-completion method?

he gross profit to be recognized in 2018 is computed as follows: 2018 Total Gross Profit to date [(Costs to date for 2018, $3,780.000 / Cost to date for 2018, $3,780,000 + Estimated costs to complete for 2018, $1,620,000) = 70% X (Contract Price, $6,000,000 - Total estimated contract costs at 2018, $5,400,000)] - Gross Profit recognized in 2017: [(Costs to date for 2017, $1,325.000 / Cost to date for 2017, $1,325,000 + Estimated costs to complete for 2017, $3,975,000) = 25% X (Contract Price, $6,000,000 - Total estimated costs at 2017, $5,300,000)] = $245,000 gross profit to be recognized for 2018.