ACC3100 CH 6

Prepayments for future goods or services should be (Select all that apply.)

included in the transaction price allocated to the various performance obligations in the contract

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

over time.

Berta Company owns inventory prior to a customer ordering it from Norman Company. If a customer returns the merchandise, Berta Company owns the returned inventory. Berta Company is a(n) _. (Enter only one word.)

principal or principle

The amount of revenue that is recognized each period for a long-term contract that qualifies for revenue recognition over time is determined based on

progress toward completion.

Meissner sells merchandise for $50,000 on account. The company estimates that customers will return 5% of the merchandise. Meissner should debit sales returns and credit:

refund liability

Which of the following are often provided by the franchisor at start-up of a new franchise? (Select those that apply at start-up)

remodeling of franchisee's facilities training of franchisee's employees

Which of the following agreements may qualify as contracts? (Select all that apply.)

written documents oral agreements implicit agreements

If a contract qualifies for revenue recognition over time, revenue is recognized based on progress toward )_. (Enter only one word.)

completion

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.)

consignment

The billings on construction account is a contra account to

construction in progress.

The billings on construction contract account is classified as a(n)

contra asset.

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

contract

At the end of the period, if construction in progress exceeds billings on construction contracts, it is recorded as a(n)

contract asset.

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

upon completion.

James Corporation is an agent of Alten Corporation. Their agreement specifies that James will receive a commission equal to 15% of the sales price. During May, James sells goods with a sales price of $200,000 for Alten. For the month ended May 31, Alten Corporation should recognize revenue of:

$200,000

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

James Corporation is an agent of Alten Corporation. Their agreement specifies that James will receive a commission equal to 15% of the sales price. During May, James sells goods with a sales price of $200,000 for Alten. For the month ended May 31, James Corporation should recognize revenue of:

$30,000

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

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

When revenue is recognized on long-term construction projects, a journal entry is recorded to recognize revenue and cost of goods sold. The difference between revenue and cost of goods sold (gross profit) is recognized in which account?

Construction in progress

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

Construction in progress

Related to long-term construction contracts, at the end of the period which accounts are netted?

Construction in progress and billings on construction contracts.

Which of the following must a seller recognize as separate line items on the balance sheet? (Select all that apply.)

Contract liabilities Accounts receivable Contract assets

Which of the following services are commonly performed over time? (Select all that apply.)

Financial statement audits Consulting engagements Lending of money

For the purpose of allocating the transaction price to multiple performance obligations, the stand-alone selling price of a specific good or service may be estimated if it

cannot be directly observed.

Goods or services that are not distinct are ____ and treated as a ____ performance obligation.

combined; single

In a consignment, the ______ owns the goods; the ______ holds the goods in order to sell them to a buyer.

consignor; consignee

Jones Company receives a prepayment from a customer consistent with a promise to deliver 20 new office printers to Smith Inc. The prepayment (Select all that apply.)

does not create a separate performance obligation should be recorded as deferred revenue

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

direct labor overhead direct material

At the end of a long-term construction project, the amounts in the construction in progress account will be ______ the billings on construction contract.

equal to

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

In a franchise arrangement, the _ grants to the _ the right to sell products and use its name.

franchisor, franchisee

A contract is said to have variable consideration if the price depends on the outcome of

future events

Typical costs included in a construction project include

labor, materials, and overhead.

Agreements that allow customers to use the seller's intellectual property are referred to as _. (Enter only one word.)

licenses

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

pattern of recognition of the related gross profit.

Revenue recognized each period is determined by multiplying total estimated revenue by

percentage completed to date and subtracting revenue recognized in prior periods

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

performance

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.

The amount at which a good or service is sold separately under similar circumstances is referred to as the

stand-alone selling price

The billings on construction account represents

the amount billed to customers to date.

From a financial reporting perspective the "sales returns" account is a(n) _-_ account. (Enter one word per blank.)

contra revenue

Which of the following are key indicators that control of goods or services has been transferred to the customer? (Select all that apply.)

Customer has legal title to the asset Customer has physical possession of the asset Customer accepted asset Customer accepted the risks and rewards of ownership Customer has an obligation to pay Customer has legal title to the asset

What journal entry should be made to recognize accounts receivable for long-term construction projects?

Debit Accounts Receivable and Credit Billings on Construction Contract

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

False

What method(s) can be used to estimate progress toward completion for the purpose of recognizing revenue over time? (Select all that apply.)

Input method Output method

The construction-in-progress account most closely relates to which type of account?

Inventory

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.)

Reduce reported revenue Increase liabilities

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

Sales commission revenue is recognized by the _____.

agent

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

balance sheet

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

be entitled to receive

Jonathan is estimating the amount of variable consideration for a specific contract. In deciding which estimation method to use, Jonathan should chose the one that

best predicts the amount he will receive.

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

The amount billed to customers on long-term construction project is recorded in the

billings on construction account.

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

buyer; seller; at a later date

If delivery and payment related to the sale of goods occur relatively near each other, the time value of money

can be ignored.

In a consignment, who retains the risks and rewards of ownership of the property?

cosignor

Long-term contracts require careful consideration in identifying performance obligations because these type of contracts typically include many products and services that

could be viewed as separate performance obligations.

Select all that apply When revenue related to a long-term construction contract is recognized over time, the journal entry to recognize revenue includes which of the following? (Select all that apply.)

debit cost of construction debit construction in progress credit revenue from long-term contracts

Select all that apply Malone Corp. properly recognizes revenue upon completion of a long-term construction project. Malone has the following information for a 3-year contract. Year 1 Year 2 Year 3 Billings on contracts 10,000 10,000 30,000 Construction costs 8,000 8,000 8,000 The journal entry required at the end of the contract to recognize revenue and expenses will include (Select all that apply.)

debit cost of construction $24,000. debit construction in progress $26,000. credit revenue from contracts $50,000.

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

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

franchisee

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

input output

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

intellectual

Which of the following are indicators that a company is a principal? (Select all that apply.)

it owns the inventory prior to delivery it sets the sales price It has primary responsibility for providing the product or service

Gerhard Inc. sells merchandise to a customer with a long payment period. Gerhard determines that the time value of money related to this transaction is significant. Gerhard should allocate the

transaction price between the merchandise cash price and the financing component.

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

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

A transaction price may be uncertain because the price

depends on the outcome of future events.

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

Which methods may be used to estimate the stand-alone prices of goods and services? (Select all that apply.)

Adjusted market assessment approach Residual approach Expected cost plus margin approach

When is gross profit recorded in the construction in progress account for a long-term contract accounted for upon completion?

At the completion of the contract.

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

What is the correct journal entry to recognize profit for a long-term construction project for which revenue is recognized over time?

Debit construction in progress and debit cost of construction; credit revenue from long-term contracts

Margery sells 100 TV top boxes to customers for $90 each and credited sales revenue for $9,000. Margery estimates that six of the units will be returned for a full refund of $540. What additional journal entry should Margery make?

Debit sales returns and credit refund liability

Select all that apply Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million, total construction costs are $3.75 million, actual costs incurred during the first year are $1.5 million, and the revenue recognized is $2 million. The journal entry to record revenue during year 1 is: (Select all that apply.)

Debit: CIP $500,000 Credit: Revenue $2 million Debit: Cost of construction $1.5 million

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

Determining whether the seller is acting as principal or agent Variable consideration provisions Sales with right of return Variable consideration provisions The time value of money Payment by the seller to the customer

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

In the first period in which the loss become evident.

Munch Inc. delivers various types of construction materials to a customer's building site. Over an 18-month period, Munch's employees utilize Munch's machinery and tools to construct a new office building for the customer. Munch identifies only one performance obligation related to this contract because

Munch combines the materials, labor, and use of machinery and tools to construct a single complete building.

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?

Reason: This is the expected value amount. There is a 55% chance that the bonus will be earned so the most likely amount is $35,000 + $10,000.

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

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

What account tracks the inflow of net assets that occurs when a business provides goods or services to its customers?

Revenues

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

The timing of recognition

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

The construction in progress account is equivalent to which account in a manufacturing environment?

Work-in-process

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

between the merchandise and the financing component

Which of the following are included in the journal entry required to record the collection of cash from a customer related to a long-term construction contract? (Select all that apply.)

debit cash credit accounts receivable

Which of the following are included in the journal entry required to record construction costs for a long-term construction contract? (Select all that apply.)

debit construction in progress credit raw materials

Prepayments by customers for future goods or services should initially be recorded as

deferred revenue.

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.)

residual

The formula: total estimated revenue times percentage completed to date less revenue recognized in prior periods is used to measure:

revenue recognized for the current period

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

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

On a long-term construction project, the amount in the construction in progress account represents the costs of construction plus the gross profit recognized to date, and the billings on construction represents

the amounts billed to the customer.

Revenue is recognized upon completion of a long-term contract if:

the contract does not qualify for revenue recognition over time

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.

A long-term contract that includes many products and services that are capable of being distinct, may be accounted for as a single performance obligation because

the seller's role is to combine those products and services prior to delivery or completion.

What is the difference between journal entries to recognize gross profits when revenue is recognized over time and when revenue is recognized upon completion of a long-term project?

timing

The journal entries used to recognize the costs of long-term construction contracts are identical when revenue is recognized upon completion and when it is recognized over time; however the two methods differ with respect

to the timing of revenue recognition.

The _ price is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services. (Enter only one word.)

transaction

The core revenue recognition principle stipulates that companies recognize revenue when goods or services are

transferred to customers

If a long-term contract doesn't qualify for revenue recognition over time, revenue is recognized ____.

upon completion

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

variable