ACCT 303 Chp 18

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.

Pharoah Company sells prefabricated pools that cost $84000 to customers for $133965. The sales price includes an installation fee, which is valued at $19000. The fair value of the pool is $129850. The installation is considered a separate performance obligation and is expected to take 3 months to complete. The transaction price allocated to the pool and the installation is

$116865 and 17100 respectively

Does a contract exist between the entities to which the revenue recognition criteria may be applied?

A contract to which the revenue recognition criteria applies does not exist because it is cancelable without penalty and no work on the performance obligations has begun.

The transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring a good or service.

True

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

False

Sales with rights of return should not be recognized as revenue due to the contingent refund liability.

False

The first step of the revenue recognition process is to determine the transaction price.

False

Kinnamont Company manufactures farming equipment that includes navigational systems as part of the standard equipment package and offers optional training on any navigational systems for an additional fee. Smith Company enters into a contract with Kinnamont that includes a combine, a navigational system, and training. Identify the performance obligations to which Smith should allocate the transaction price

The combine including the navigational system and the training as two separate performance obligations.

The new standard, Revenue from Contracts with Customers,

adopts an asset-liability approach for revenue recognition.

A transaction price for multiple performance obligations should be allocated

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

Ivanhoe Choice sells natural supplements to customers with an unconditional sales return if they are not satisfied. The sales returns extends 60 days. On February 10, 2018, a customer purchases $4200 of products (cost $2100). Assuming that based on prior experience, estimated returns are 20%. The journal entry to record the expected sales return and cost of goods sold includes a

debit to Allowance for Sales Returns of $840 and a credit to Cost of Goods sold of $420.

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

each party can unilaterally terminate the contract without compensation.

A contract should be treated as having multiple performance obligations if

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

The seller of a good or service should recognize revenue when

each performance obligation is satisfied.

The first step in the process for revenue recognition is to

identify the contract with customers

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

is distinct

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

The best measure of the fair value of a performance obligation is

standalone selling price

In determining the transaction price, the company must consider:

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

Festi Corp. is evaluating if revenue may be recognized for two of their contracts. The customer in Contract A has indicated that they are ready to accept the transfer of the products associated with the contract, but delivery has not yet occurred. The customer in Contract B has received legal title to the products, but has asked Festi to store the products for them until they open the new stores for which the product has been ordered. Festi has clearly labeled and set aside the products in the warehouse for the customer in Contract B, but delivery has not yet occurred.

A: No B: Yes

FASB ASC 606, commonly referred to as the revenue recognition standard, includes all of the following in its five step process to recognize revenue except:

Recognize revenue when (or as) the entity is paid for a performance obligation.

The revenue recognition standard, Revenue from Contracts with Customers, states a specific approach should be used by companies to recognize revenue. The standard:

Requires an asset-liability approach because an asset or a liability may stem from the terms of the contract and measuring the change in the asset or liability over the life of the contract results in a disciplined approach to measuring and recognizing revenue.

Chelsea sells equipment to a customer. The total selling price includes installation and training services. Companies other than Chelsea also provide installation and training services, but the customer has chosen to have Chelsea perform these tasks. What is (are) Chelsea's performance obligation(s)?

Three separate performance obligations: the sale of the equipment, the sale of its installation and the sale of training services.

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 revenue recognition principle states that revenue is recognized when the performance obligation is satisfied.

True

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

True

A performance obligation may be based on customary business practice.

True

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

a bill-and-hold arrangement

A performance obligation exists when

a company provides a distinct product or service.

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.

An indication that the customer has taken control of the good or service is that

the selling company has transferred legal title to the asset.