136C Ch. 18

Under the asset-liability approach, companies account for revenue based on...

the assets and liabilities arising from contracts with customers.

Company does not recognize contract assets or liabilities...

Until one or both parties to the contract perform

The new standard, Revenue from Contracts with Customers (LO 1) (a)adopts an asset-liability approach for revenue recognition. (b)adopts a revenue-gain approach for revenue recognition. (c)adopts "earned and realized" criteria. (d)adopts criteria that deemphasize the importance of contracts with customers.

(a)adopts an asset-liability approach for revenue recognition.

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 Interest Revenue should Fullbright recognize in 2017? (LO 2) (a)$48,000 (b)$57,352 (c)$75,529 (d)$229,406

$48,000 Fullbright should record interest revenue of $48,000 in 2017 ($400,000 × 12%).

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? 1) The product must be physically located in the seller's warehouse. 2) The product currently must be ready for physical transfer to the customer. 3) The seller cannot have the ability to use the product or to direct it to another customer. 4) The reason for the bill-and-hold arrangement must be substantive.

1) The product must be physically located in the seller's warehouse.

Sansung Company offers its customers a 3% volume discount if they purchase at least $2 million of its product during the calendar year. On March 31, 2017, Sansung has made sales of $700,000 to Artic Co. In the previous 2 years, Sansung sold over $3,000,000 to Artic in the period April 1 to December 31. Assume that Sansung prepares financial statements quarterly. (journal entry answer)

Accounts Receivable 679,000 Sales Revenue 679,000 Meets: debit cash & credit A/r 679,000 Does not meet: Cash 700,000 Accounts Receivable 679,000 Sales Discounts Forfeited 21,000

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

False

The first step in the process for revenue recognition is to A) identify the separate performance obligations in the contract. B) determine the transaction price. C) identify the contract with customers. D) allocate transaction price to the separate performance obligations.

C) identify the contract with customers.

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. Stossel estimates that ten 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 Sales Returns and Allowances should Stossel record in the year of the sale? (LO 3) (a)$2,000 (b)$0 (c)$800 (d)$1,200

$2,000 Stossel should record Sales Returns and Allowances of $2,000 (10 × $200).

The seller of a good or service should recognize revenue when (LO 1) (a)they identify the contract with customers. (b)they identify the separate performance obligations in the contract. (c)they determine the transaction price. (d)each performance obligation is satisfied.

(d)each performance obligation is satisfied.

Mocha purchases equipment, installation, and training from Lynne for a price of $1,000,000 and chooses Lynne to do the installation. Lynne charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The price of the installation service is estimated to have a fair value of $20,000. (a)The fair value of the training sessions is estimated at $40,000. Other companies can also provide these training services. (b)Mocha is obligated to pay Lynne the $1,000,000 upon the delivery and installation of the equipment. (c)Lynne delivers the equipment on May 1, 2018, and completes the installation of the equipment on July 1, 2018. Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 8 years. What amount is recorded by Lynne as Unearned Service Revenue at 7/1/18? (LO 2) (a)$0 (b)$18,868 (c)$20,000 (d)$37,736

$37,736 Lynne should record Unearned Service Revenue of $37,736 at 7/1/18 [($40,000/$1,060,000) × $1,000,000] related to the training.

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? (LO 2) (a)$229,406 (b)$240,000 (c)$400,000 (d)$629,406

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

Sherman Company enters into a contract with a customer to build a warehouse for $400,000, with a performance bonus of $100,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 20% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that Sherman has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 50% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed 1 week late, and a 20% probability that it will be completed 2 weeks late. What is the total transaction price for this revenue arrangement? (LO 2) (a)$460,000 (b)$480,000 (c)$486,000 (d)$500,000

$486,000 Total transaction price is $486,000 [($500,000 × 50%) + ($480,000 × 30%) + ($460,000 × 20%)].

Bret Company sold 3,000 Holsks during 2018 at a total price of $12,000,000, with a warranty guarantee that the product was free of any defects. The cost of Holsks sold is $7,200,000. The term of the assurance warranty is two years, with an estimated cost of $80,000. In addition, Bret sold extended warranties related to 1,100 Holsks for 3 years beyond the 2-year period for $110,000. Bret should recognize Unearned Warranty Revenue in 2018 of (LO 3) (a)$110,000 (b)$0 (c)$80,000 (d)$190,000

(a)$110,000 Bret should record a Warranty Liability of $80,000 on the assurance warranty, and Unearned Warranty Revenue of $110,000 on the extended warranties.

A loss in the current period on a contract expected to be profitable upon completion in a later year is (LO 7): (a)recognized only under the completed-contract method. (b)not recognized under either the completed-contract method or the percentage-of-completion method. (c)recognized under both the completed-contract method and the percentage-of-completion method. (d)recognized only under the percentage-of-completion method.

(d) recognized only under the percentage-of-completion method. The loss is recognized under the percentage-of-completion method, but is not recognized under the completed contract method.

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? (LO 3) (a)The reason for the bill-and-hold arrangement must be substantive. (b)The product must be physically located in the seller's warehouse. (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.

(b) The product must be physically located in the seller's warehouse. 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, and (d) the seller cannot have the ability to use the product or to direct it to another customer.

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? (LO 2) (a)adjusted market assessment. (b)residual value. (c)expected cost plus a margin. (d)standalone selling price.

(b) 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

One criteria that indicates the company should disregard revenue guidance to contracts is (LO 2) (a)the contract has commercial substance. (b)each party can unilaterally terminate the contract without compensation. (c)each party's rights regarding the goods or services to be transferred can be identified. (d)the payment terms for the goods and services to be transferred can be identified.

(b)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.

When using the percentage of completion method, the company (LO 5) (a)recognizes revenues and gross profit only when the contract is completed. (b)recognizes revenues and gross profit each period during the contract. (c)accumulates construction costs only in an inventory account (Construction in Process). (d)accumulates progress billings in an inventory account (Construction in Process).

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

Pizza Factory enters into a franchise agreement on 11/1/17 giving Mow's House the right to operate as a franchisee of Pizza Factory for 5 years. Pizza Factory prepared this entry on 11/1/17: 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 3/1/18. Other than interest, how much revenue should Pizza factory recognize on 3/1/18? (a)$0. (b)$43,957. (c)$87,914. (d)$100,000.

(c) $87,914. All of the Unearned Revenue amounts are recognized when the performance obligations are satisfied.

Sufjan Company has a contract to sell 200 units to a customer for $14,000. After 140 units have been delivered, Sufjan modifies the contact by promising to deliver 30 more units for an additional $60 per unit (the standalone selling price at the time of the contract modification). What is the total revenue after the modification? (LO 2) (a)$1,800 (b)$5,400 (c)$6,000 (d)$6,300

(c)$6,000 Total revenue after the modification is $6,000 [(60 × $70) + (30 × $60)].

On January 1, 2018, 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, 2018. On March 15, 2018, Purdy delivers Rain to Georgia. Purdy should record (LO 4) (a)Accounts Receivable of $300,000 on January 1. (b)Accounts Receivable of $110,000 on February 10. (c)Contract Asset of $110,000 on February 10. (d)Contract Asset of $110,000 on January 1.

(c)Contract Asset of $110,000 on February 10. Conditional rights to receive consideration are reported as contract assets rather than as receivables.

Which type of revenue or gain is generally recognized as time passes? (LO 2) (a)Revenue from sales. (b)Revenue from fees or services. (c)Revenue from interest, rents, and royalties. (d)Gain or loss from disposition.

(c)Revenue from interest, rents, and royalties.

In a consignment sale, the consignee (LO 3) (a)makes a journal entry when the consigned merchandise is received. (b)records advertising paid for the consignment as an expense. (c)records a payable when consigned merchandise is sold. (d)recognizes both commission revenue and sales revenue

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

An indication that the customer has not taken control of the good or service is (LO 2) (a)the selling company has right to payment for the good or service. (b)the customer has physical possession of the asset. (c)the customer has no significant risks or rewards of ownership. (d)the selling company has transferred legal title to the asset

(c)the customer has no significant risks or rewards of ownership. 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.

Hendrix Inc., an equipment dealer, sells equipment on January 1, 2018, to Jimi Company for $200,000. It agrees to repurchase this equipment from Jimi Company on December 31, 2019, for a price of $233,280. At 1/1/18, Hendrix should record (LO 3) (a)Sales revenue of $200,000. (b)Sales revenue of $200,000 and a liability of $33,280. (c)Sales revenue of $200,000 and interest expense of $33,280. (d)A liability of $200,000.

(d) A liability of $200,000. At 1/1/18, Hendrix should record a liability of $200,000 because this agreement is a financing transaction and not a sale.

In determining the transaction price, the company must consider (LO 2): (a)variable consideration, but not noncash consideration. (b)noncash consideration, but not the time value of money. (c)the time value of money, but not consideration payable. (d)variable consideration, noncash consideration, time value of money, and consideration payable

(d)variable consideration, noncash consideration, time value of money, and consideration payable

The new standard, Revenue from Contracts with Customers, 1) adopts an asset-liability approach for revenue recognition. 2) adopts a revenue-gain approach for revenue recognition. 3) adopts criteria that de-emphasize the importance of contracts with customers. 4) adopts "earned and realized" criteria.

1) adopts an asset-liability approach for revenue recognition.

A contract should be treated as having multiple performance obligations if 1) each performance obligation is not highly dependent on other promises in the contract. 2) each service provided in the contract is interdependent. 3) each service provided in the contract is interrelated. 4) the contract creates enforceable rights or obligations.

1) each performance obligation is not highly dependent on other promises in the contract.

The best measure of the fair value of a performance obligation is 1) standalone selling price. 2) adjusted market assessment. 3) residual value. 4) expected cost plus a margin.

1) standalone selling price.

5 components of a valid contract EX: Assume that Tyler Angler orders a large cup of black coffee costing $3 from BEAN. Tyler gives $3 to a BEAN barista, who pours the coffee into a large cup and gives it to Tyler.

1. The contract has commercial substance: Tyler gives cash for the coffee. 2. The parties have approved the contract: Tyler agrees to purchase the coffee and BEAN agrees to sell it. 3. Identification of the rights of the parties is established: Tyler has the right to the coffee and BEAN has the right to receive $3. 4. Payment terms are identified: Tyler agrees to pay $3 for the coffee. 5. It is probable that the consideration will be collected: BEAN has received $3 before it delivered the coffee

An indication that the customer has taken control of the good or service is that 1) the selling company has no right to payment for the good or service. 2) the selling company has transferred legal title to the asset. 3) the selling company has physical possession of the asset. 4) the customer has no significant risks or rewards of ownership.

2) the selling company has transferred legal title to the asset.

In determining the transaction price, the company must consider 1) the time value of money, but not non-cash consideration. 2) variable consideration, time value of money, non-cash consideration, and consideration payable. 3) variable consideration, but not the time value of money. 4) non-cash consideration, but not consideration payable.

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

The seller of a good or service should recognize revenue when 1) they identify the separate performance obligations in the contract. 2) they identify the contract with customers. 3) each performance obligation is satisfied. 4) they determine the transaction price.

3) each performance obligation is satisfied.

When goods are consigned, the consignee 1) records advertising paid for the consignment as an expense. 2) recognizes both commission revenue and sales revenue. 3) makes a journal entry when the consigned merchandise is received. 4) only recognizes revenue associated with commissions

4) only recognizes revenue associated with commissions

An indication that the customer has not taken control of the good or service is 1) the customer has physical possession of the asset. 2) the selling company has transferred legal title to the asset. 3) the selling company has right to payment for the good or service. 4) the customer has no significant risks or rewards of ownership.

4) the customer has no significant risks or rewards of ownership.

The revenue recognition principle dictates that revenue is recognized in the period in which the cash is received. True or false?

False Revenue should be recognized in the accounting period in which the performance obligation is satisfied.

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

False, as revenue over the periods benefitted