Chapter 18

How should the balances of Progress Billings and Construction in Process be shown at reporting dates prior to the completion of a long-term contract? a. Progress Billings as deferred income, Construction in Progress as a deferred expense. b. Progress Billings as income, Construction in Process as inventory. c. Net balance, as a current asset if debit balance, and current liability if credit balance. d. Net balance, as income from construction if credit balance, and loss from construction if debit balance

Net balance, as a current asset if debit balance, and current liability if credit balance.

To address inconsistencies and weaknesses in revenue recognition, a comprehensive revenue recognition standard was developed entitled the a. Revenue Recognition Principle. b. Principle-based Revenue Accounting. c. Rules-based Revenue Accounting. d. Revenue from Contracts with Customers

Revenue from Contracts with Customers

Cost estimates at the end of the second year indicate that a loss will result on completion of the entire contract. Which of the following statements is correct? a. Under the completed-contract method, the loss is not recognized until the year the construction is completed. b. Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed. c. Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability. d. Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs.

Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.

When there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract, which of the following is correct? a. Under both the percentage-of-completion and the completed-contract methods, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. b. Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. c. Under the completed-contract method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. d. No current period adjustment is required

Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.

A contract liability is a company's obligations to transfer goods or services to a customer for which the company has received consideration from the customer. An example of a contract liability is a. Prepaid subscription. b. Unearned magazine subscription. c. Mortgage Payable. d. Service Revenue.

Unearned magazine subscription.

When a customer purchases a product but is not yet ready for delivery, this is referred to as a. a repurchase agreement. b. a consignment. c. a principal-agent relationship. d. a bill-and-hold arrangement

a bill-and-hold arrangement

Companies can use the expected value to estimate variable consideration when a. the contract has only two possible outcomes. b. a company has a small number of contracts with similar characteristics. c. a company can use the most likely amount in a range of possible outcomes. d. a company has a large number of contracts with similar characteristics.

a company has a large number of contracts with similar characteristics.

A performance obligation exists when a. a company receives the right to receive consideration. b. a contract is approved and signed. c. a company provides a distinct product or service. d. a company provides interdependent product or service

a company provides a distinct product or service.

Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing the software, the company also provides consulting services and support to ensure smooth operation of the software. The total transaction price is $420,000. Based on standalone values, the company estimates the consulting services and support have a value of $120,000 and the software license has a value of $300,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes a. a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000. b. a credit to Service Revenue of $120,000. c. a credit to Unearned Service Revenue of $120,000. d. a credit to Sales Revenue of $420,000.

a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000.

New Age Computers manufactures and sells pagers and radio paging systems which include a 180 day warranty on product defects. It also sells an extended warranty which provides an additional two years of protection. On May 10, it sold a paging system for $4,500 and an extended warranty for another $1,400. The journal entry to record this transaction would include a. a credit to Warranty Revenue of $5,900. b. a credit to Warranty Revenue of $1,400 c. a credit to Sales of $4,500 and a credit to Warranty Revenue of $1,400 d. a credit to Unearned Warranty Revenue of $1,400.

a credit to Unearned Warranty Revenue of $1,400.

The fourth step in the process for revenue recognition is to a. recognize revenue when each performance obligation is satisfied. b. identify the separate performance obligations in the contract. c. allocate transaction price to the separate performance obligations. d. determine the transaction price.

allocate transaction price to the separate performance obligations

The role of the agent in a Principal-Agent relationship is to a. arrange for the principal to provide goods or services to a customer. b. provide the goods or services for a customer. c. market the principal goods and services to prospective customers. d. develop and maintain goodwill of the principal's customers

arrange for the principal to provide goods or services to a customer.

Continuing franchise fees should be recorded by the franchisor a. as revenue when uncertainty related to the variable consideration is resolved. b. as revenue when received. c. in accordance with the accounting procedures specified in the franchise agreement. d. as revenue only after the balance of the initial franchise fee has been collected.

as revenue when uncertainty related to the variable consideration is resolved.

A transaction price for multiple performance obligations should be allocated a. based on selling price from the company's competitors. b. based on what the company could sell the goods for on a standalone basis. c. based on forecasted cost of satisfying performance obligation. d. based on total transaction price less residual value

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

When a contract modification does not result in a separate performance obligation, the additional products are priced at the a. standalone price of the product. b. blended price of original contract and contract modification. c. average selling price of original selling price and standalone price. d. selling price specified in contract modification

blended price of original contract and contract modification.

Revenue from a contract with a customer a. is recognized when the customer receives the rights to receive consideration. b. is recognized even if the contract is still wholly unperformed. c. can be recognized even when a contract is still pending. d. cannot be recognized until a contract exists.

cannot be recognized until a contract exists.

A company has satisfied its performance obligation when the a. company has received payment for goods or services. b. company has significant risks and rewards of ownership. c. company has legal title to the asset. d. company has transferred physical possession of the asset.

company has transferred physical possession of the asset.

The cost-to-cost basis measures progress towards completion by a. comparing costs incurred to date with total costs to complete the contract. b. tracking results of work completed to date; it is an output measure. c. tracking floors of a building completed versus floors still to be completed. d. tracking miles of a highway completed versus miles of highway still to be completed.

comparing costs incurred to date with total costs to complete the contract.

Consignments are a specialized marketing method whereby the a. consignee purchases goods for sale and sends payment when goods are sold. b. consignee (agent) holds title to the product. c. consignee pays for good up front and is paid when merchandise is sold. d. consignee takes possession of merchandise but title remains with manufacturer.

consignee takes possession of merchandise but title remains with manufacturer.

Consigned goods are recognized as revenues by the a. consignor when a sale to a third party has occurred. b. consignor when the merchandise has been shipped to a consignee. c. consignee when a sale to a third party has occurred. d. consignor when it receives payment from consignee for goods sold.

consignor when it receives payment from consignee for goods sold.

The Billings on Construction in Progress account is a(n) a. contract revenue account. b. inventory account. c. contra-inventory account. d. construction expense account.

contra-inventory account.

Partial satisfaction of a multiple performance obligation is reported on the balance sheet as a. contract liability. b. receivable. c. contract asset. d. unearned service revenue.

contract asset.

The most popular input measure used to determine the progress toward completion is a. units-of-delivery method. b. cost-to-cost basis. c. labor hours worked. d. tons produced.

cost-to-cost basis.

Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days. Entertainment Tonight also offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the extended warranty is $3,000. The standalone price of each is $2,300 and $900, respectively. The estimated cost of the assurance-warranty is $350. The accounting for warranty will include a a. debit to Warranty Expense, $900. b. debit to Warranty Liability, $350 c. credit to Warranty Liability, $900 d. credit to Unearned Warranty Revenue, $900

credit to Unearned Warranty Revenue, $900

On July 31, O'Malley Company contracted to have two products built by Taylor Manufacturing for a total of $370,000. The contract specifies that payment will only occur after both products have been transferred to O'Malley Company. Taylor determines that the standalone prices are $200,000 for Product 1 and $170,000 for Product 2. On August 1, when Product 1 has been transferred, Taylor's journal entry to record this event includes a a. debit to Accounts Receivable for $200,000. b. debit to Accounts Receivable for $170,000. c. debit to Contract Assets for $170,000. d. debit to Contract Assets for $200,000.

debit to Contract Assets for $200,000.

The third step in the process for revenue recognition is to a. determine the transaction price. b. identify the separate performance obligations in the contract. c. allocate transaction price to the separate performance obligations. d. recognize revenue when each performance obligation is satisfied.

determine the transaction price

When multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when a. each service is interdependent and interrelated. b. both performance obligations are distinct but interdependent. c. the product is distinct within the contract. d. determination cannot be made.

each service is interdependent and interrelated.

A company can only satisfy its performance obligations at a point in time.

false

A loss in the current period on a profitable contract must be recognized under both the percentage-of-completion and completed-contract method.

false

A performance obligation is a written guarantee in a contract to provide a product or service to a customer.

false

Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the completed-contract method.

false

Companies use the expected value, a probability-weighted amount to estimate variable consideration.

false

The Construction in Process account includes only construction costs under the percentage-of-completion method.

false

The first step in the revenue recognition process is to identify the separate performance obligations in the contract.

false

The new revenue recognition standard adopts a liability approach as the basis for revenue recognition

false

The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not completed-contract.

false

Under the completed-contract method, companies recognize costs only when the contract is completed.

false

When a company sells a product but gives the buyer the right to return it, revenue should not be recognized until the sale is collected.

false

When a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price, the transaction should be treated as a a. outright sale. b. financing transaction. c. repurchase transaction. d. put option.

financing transaction.

A company must account for a contract modification as a new contract if the a. goods or services are interdependent on each other. b. promised goods or services are distinct. c. company has the right to receive consideration equal to standalone price. d. goods or services are distinct and company has right to receive the standalone price.

goods or services are distinct and company has right to receive the standalone price.

The first step in the process for revenue recognition is to a. determine the transaction price. b. identify the contract with customers. c. allocate transaction price to the separate performance obligations. d. identify the separate performance obligations in the contract.

identify the contract with customers

The second step in the process for revenue recognition is to a. allocate transaction price to the separate performance obligations. b. determine the transaction price. c. identify the contract with customers. d. identify the separate performance obligations in the contract.

identify the separate performance obligations in the contract

A contract a. must be in writing to be an enforceable contract. b. is an agreement that creates enforceable rights and obligations. c. is enforceable if each party can unilaterally terminate the contract. d. does not need to have commercial substance.

is an agreement that creates enforceable rights and obligations

A contract between Boeing and Delta in which Boeing supplies planes to Delta a. is an agreement that creates enforceable rights and obligations for both parties. b. is an agreement that creates enforceable rights and obligations for Boeing only. c. cannot create multiple performance obligations. d. is considered wholly unperformed until Boeing receives payment from Delta.

is an agreement that creates enforceable rights and obligations for both parties

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 a. is distinct. b. is a contract. c. is interdependent. d. uses variable consideration

is distinct.

The transaction price a. excludes discounts, volume rebates, coupons and free products, or services. b. is the amount of consideration that a company expects to receive from a customer c. excludes time value of money if the contract involves a significant financing component. d. does not consider noncash consideration such as donations, gifts, equipment or labor.

is the amount of consideration that a company expects to receive from a customer

The use of the net method of recognizing revenue by an agent a. is appropriate as long as both revenue and costs are included. b. is the correct method in a principal-agent relationship. c. could result in an overstatement of the agent's revenue. d. could result in an understatement of the agent's revenue.

is the correct method in a principal-agent relationship.

The last step in the process for revenue recognition is to a. allocate transaction price to the separate performance obligations. b. recognize revenue when each performance obligation is satisfied. c. determine the transaction price. d. identify the contract with customers.

recognize revenue when each performance obligation is satisfied

Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be a. recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed. b. recognized in the current period under the percentage-of-completion method, but the completed-contract method defers recognition of the loss to the time when the contract is completed. c. recognized in the current period under the completed-contract method, but the percentage-of-completion method defers the loss until the contract is completed. d. deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.

Noncash consideration should be a. recognized on the basis of fair value of what is given up. b. recognized on the basis of original cost paid by customer. c. recognized on the basis of fair value of what is received. d. recognized on the basis of fair value of equivalent goods or services.

recognized on the basis of fair value of what is received.

The converged standard on revenue recognition a. reduces the number of disclosures required for revenue reporting. b. increases the complexity of financial statement preparation. c. recognizes and measures revenue based on changes in assets and liabilities. d. simplify revenue recognition practices across entities and industries.

recognizes and measures revenue based on changes in assets and liabilities

The percentage-of-completion method a. recognizes revenue and gross profit each period based upon progress. b. is used primarily for short-term contracts. c. accumulates construction costs in the Billings on Construction in Progress account. d. recognizes revenue and gross profits only when contract is completed.

recognizes revenue and gross profit each period based upon progress.

On January 15, 2018, Bella Vista Company enters into a contract to build custom equipment for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000 30 days after delivery. The revenue for this contract should be a. recorded on January 15, 2018. b. recorded on March 1, 2018. c. recorded on March 31, 2018. d. recorded on April 30, 2018.

recorded on March 31, 2018.

When sales are made with a right of return, the company a. should not recognize any revenue. b. should recognize revenue for the full sales price. c. records the returned asset in a separate inventory account. d. records the estimated returns in the Sales Returns account.

records the returned asset in a separate inventory account.

Consideration paid or payable to customers a. includes volume rebates which increases the cost to the customer. b. includes discounts which reduces the cost of purchases to the company. c. reduces the consideration received and the revenue to be recognized. d. includes prompt settlement discount which increases revenues.

reduces the consideration received and the revenue to be recognized.

Unconditional rights to receive consideration because a performance obligation has been satisfied are a. reported as a receivable on the balance sheet. b. reported as a contract asset on the balance sheet. c. reported as a contract liability on the balance sheet. d. are not reported on the balance sheet.

reported as a receivable on the balance sheet.

The principal advantage of the completed-contract method is that a. reported revenue is based on final results rather than estimates of unperformed work. b. it reflects current performance when the period of a contract extends into more than one accounting period. c. it is not necessary to recognize revenue at the point of sale. d. a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used

reported revenue is based on final results rather than estimates of unperformed work.

Disclosure related to revenue a. does not require capitalized costs to obtain and fulfill a contract. b. does not require judgments that affect amount and timing of revenues from contracts. c. requires disclosure of remaining performance obligations. d. requires disaggregation of revenues by reportable segments.

requires disclosure of remaining performance obligations.

An option to purchase a warranty is recorded as a. an expense in the period the goods or services are sold. b. a warranty liability for all costs incurred after sale due to correction of defects. c. revenue in the period that the service-type warranty is in effect. d. an assurance type warranty which is included in the sales price of the product.

revenue in the period that the service-type warranty is in effect.

Under the completed-contract method a. revenue, cost, and gross profit are recognized during the production cycle. b. revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed. c. revenue, cost, and gross profit are recognized at the time the contract is completed. d. None of these answers are correct.

revenue, cost, and gross profit are recognized at the time the contract is completed.

Sources of revenue for franchise companies are a. assistance for site selection and negotiating lease. b. bookkeeping and advisory services. c. sale of initial franchise and continuing fees. d. advertising and promotion.

sale of initial franchise and continuing fees.

Franchise companies derive their revenues from the a. the sale of initial franchises and related services only. b. sale of initial franchises and related services and from continuing fees based on the franchise operation. c. continuing franchise fees based on the operation of the franchise only. d. None of these answers are correct.

sale of initial franchises and related services and from continuing fees based on the franchise operation.

The category of franchising that has given rise to accounting challenges is a. manufacturer-wholesaler. b. service sponsor-retailer. c. manufacturer-retailer. d. wholesaler-retailer.

service sponsor-retailer.

Nonrefundable upfront fees a. should be recognized immediately upon receipt of payment. b. such as activation fees for cable should be allocated over the term of the contract. c. such as a one-time initiation fee in a health club should be recognized immediately. d. should not be recorded as revenue if they are for future delivery of products and services.

should not be recorded as revenue if they are for future delivery of products and services.

In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be a. the terms of payment in the contract. b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. c. the method commonly used by the contractor to account for other long-term construction contracts. d. the inherent nature of the contractor's technical facilities used in construction

the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable

Franchise revenue is recognized over time if a. franchise rights are transferred at a point in time. b. the franchisor is providing access to the right rather than transferring control. c. when performance obligations regarding franchise rights are completed. d. franchisee fee is payable upon signing of contract

the franchisor is providing access to the right rather than transferring control.

If a contract involves a significant financing component, a. the time value of money is used to determine the fair value of the transaction. b. the time value of money is not required to determine transaction price, if the payment is scheduled to occur in more than a year. c. the transaction amount should be based on the current sales price of goods or services. d. interest must be accrued on the current sales price of goods or services.

the time value of money is used to determine the fair value of the transaction.

In accounting for a long-term construction-type contract using the percentage-of- completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the a. total costs incurred to date. b. total estimated cost. c. unbilled portion of the contract price. d. total contract price.

total estimated cost.

A contract liability is a company's obligation to transfer goods or services to a customer for which the company has received consideration from the customer.

true

Companies rarely have to allocate the transaction price to more than one performance obligation in a contract.

true

If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset.

true

If the performance obligation is not highly dependent on, or interrelated with, other promises in the contract, then each performance obligation should be accounted for separately.

true

Neither the Billings account balance nor the Construction in Process account balance can exceed the long-term contract price.

true

Revenue from a contract with a customer cannot be recognized until a contract exists.

true

Revenue is recognized in the accounting period when the performance obligation is satisfied.

true

The most popular input measure used to determine the progress toward completion in long-term contracts is the cost-to-cost basis

true

The principal advantage of the completed-contract method is that reported revenue reflects final results rather than estimates.

true

Warranties that the product meets agreed-upon specifications in the contract at the time the product is sold are referred to as assurance-type warranties.

true

When a company sells a bundle of goods at a discount, the discount should be allocated to the product that caused the discount and not to the entire bundle.

true

When a contract modification is treated as a separate performance obligation or prospectively, the same amount of revenue is recognized before and after the modification

true

When a sales transaction involves a significant financing component, the fair value is determined either by measuring the consideration received or by discounting the payment using an imputed interest rate

true

Franchise fees should be recognized a. on the date the contract was signed. b. on the date the franchise is opened for business. c. on the date the franchise fee is paid to franchisor. d. when performance obligations are satisfied.

when performance obligations are satisfied.

Revenue for ongoing sales-based royalty payments should be recognized a. when the amount of sales can be determined. b. on the date payment is received by the franchisor. c. on the date the performance obligation is satisfied. d. on the date the contract was signed.

when the amount of sales can be determined.

Types of franchising arrangements include all of the following except a. service sponsor-retailer. b. wholesaler-service sponsor. c. manufacturer-wholesaler. d. wholesaler-retailer.

wholesaler-service sponsor.