ACCT-304: Ch. 18

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 False

True

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

residual value.

The most popular input measure used to determine progress toward completion of a performance obligation over a period of time is tons produced. labor hours worked. floors completed. the cost-to-cost basis.

the cost-to-cost basis.

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 $800 $1,200 $2,000

$2,000

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. 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? $ 0 $245,000 $270,000 $315,000

$245,000

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? Entry field with correct answer $229,406 $240,000 $400,000 $629,406

$400,000

A contract liability is generally referred to as an Accounts Payable. True False

False

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

False

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

False

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

False

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

Long-term construction contracts.

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

construction costs only.

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

each party can unilaterally terminate the contract without compensation.

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

in either the current asset or current liability section.

When using the percentage of completion method, the company recognizes revenues and gross profit only when the contract is completed. 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 each period during the contract.

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

records a payable when consigned merchandise is sold.

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

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

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 Accounts Receivable of $300,000 on January 1. Accounts Receivable of $110,000 on February 10. Contract Asset of $110,000 on February 10. Contract Asset of $110,000 on January 1.

Contract Asset of $110,000 on February 10.

Which type of transaction generally results in revenue being recognized with the passage of time? Sale of an asset other than inventory. Rendering a service. Sale of product from inventory. Customer controls the asset as it is created or the company does not have an alternative use for the asset

Customer controls the asset as it is created or the company does not have an alternative use for the asset

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? Entry field with correct answer $ 0. $ 43,957. $ 87,914. $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.

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

The product must be physically located in the seller's warehouse. **bill-and-hold arrangement. 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.

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)? Two separate performance obligations: one performance obligation consisting of the sale of the equipment and the sale of a second performance obligation: the sale of a separate unit (installation and training). Three separate performance obligations: the sale of the equipment, the sale of its installation and the sale of training services. One performance obligation: the sale of unit (equipment, installation, training). Two separate performance obligations: the sale of a performance obligation consisting of the sale of the equipment and its installation, and a second performance obligation: the sale of a separate unit (training).

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

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

True

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

True

The franchisor satisfies its performance obligation for a franchise license when control of the franchise rights is transferred. True False

True

The new FASB standard, Revenue from Contracts with Customers, adopts an asset-liability approach as the basis for revenue recognition. True False

True

At the end of the first year of a $9,000,000 contract, Mars Corporation provides the following information: Costs to date: $3,000,000 Estimated costs to complete 7,000,000 Progress billings during the year 1,800,000 Cash collected during the year 1,500,000 In the first year, Mars should recognize gross profit (loss) of ($300,000) under the percentage-of-completion method and $0 under the completed-contract method. ($1,000,000) under either the percentage-of-completion method or the completed-contract method. $0 under either the percentage-of-completion method or the completed-contract method. ($300,000) under either the percentage-of-completion method or the completed-contract method.

Under both methods, the company must recognize in the current period the entire expected contract loss as follows: [Contract Price, $9,000,000 - Estimated Total Costs, $10,000,000 (Costs to date, $3,000,000 + Estimated Costs to Complete, $7,000,000)] = ($1,000,000) Expected Contract Loss.

Mars Corporation uses the completed-contract method. At the end of the first year of a $9,000,000 contract, the following information is available: Costs to date: $2,000,000 Estimated costs to complete 6,000,000 Progress billings during the year 1,800,000 Cash collected during the year 1,500,000 In the first year, Mars should recognize gross profit of $250,000 $300,000 $1,000,000 $0

Under the completed-contract method, companies recognize revenue and gross profit only when the contract is completed. Therefore, none of revenue or gross profit is to be recognized in year one since the contract is not complete. $0

Mars Corporation uses the percentage-of-completion method. At the end of the first year of a $9,000,000 contract, the following information is available: Costs to date: $2,000,000 Estimated costs to complete 6,000,000 Progress billings during the year 1,800,000 Cash collected during the year 1,500,000 In the first year, Mars should recognize gross profit of $750,000 $1,000,000 $250,000 $300,000

[($2,000,000/Costs to date, $2,000,000 + Estimated costs to complete, $6,000,000 = $8,000,000) X (Contract price, $9,000,000 - Total estimated costs, $8,000,000) = Gross profit, =$250,000.

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 customer has physical possession of the asset. the customer has no significant risks or rewards of ownership. the selling company has transferred legal title to the asset.

the customer has no significant risks or rewards of ownership.

A company accounts for a contract modification as a new contract if the prospective approach is used. the promised goods and services are distinct and the company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services. the promised goods and services are distinct. the company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services.

the promised goods and services are distinct and the company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services.