Chapter 18

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? $ 48,000 $ 57,352 $229,406 $ 75,529

$ 48,000 Fullbright should record interest revenue of $48,000 in 2017 ($400,000, Carrying value of note X 12%, Imputed rate).

The first step of the revenue recognition process is to determine the transaction price. a) True b) False

b) False

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

b) False A nonrefundable upfront fee should generally be recorded as revenue over the periods which benefit.

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

a) Long-term construction contracts

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

a) True

A performance obligation may be based on customary business practice. a) True b) False

a) True

Assets or liabilities are not recognized until one or both of the parties to the contract perform. a) True b) False

a) True

Companies recognize revenue over a period of time if (1) the customer controls the asset as it is created or (2) the company does not have an alternative use for the asset, with the following conditions: (a) the customer receives benefits as the company performs, and (b) the company has a right to payment. a) True b) False

a) True

Companies recognize revenue over a period of time if (1) the customer controls the asset as it is created or (2) the company does not have an alternative use for the asset, with the following conditions: (a) the customer receives benefits as the company performs, and (b) the company has a right to payment. a) True b) False

a) True

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

a) True

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

a) True

The revenue recognition principle states that revenue is recognized when the performance obligation is satisfied. a) True b) False

a) True

When using the percentage-of-completion method, the company accumulates construction costs plus gross profit earned to date in an inventory account. a) True b) False

a) True

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

a) each performance obligation is satisfied

When goods are consigned, the consignee: a) only recognizes revenue associated with commissions b) records advertising paid for the consignment as an expense c) recognizes both commission revenue and sales revenue d) makes a journal entry when the consigned merchandise is received

a) only recognizes revenue associated with commissions

The best measure of the fair value of a performance obligation is: a) standalone selling price b) adjusted market assessment c) residual value d) expected cost plus a margin

a) standalone selling price

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

a) 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.

In determining the transaction price, the company must consider: a) variable consideration, time value of money, non-cash consideration, and consideration payable b) variable consideration, but not the time value of money c) non-cash consideration, but not consideration payable d) the time value of money, but not non-cash consideration

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

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

b) $400,000

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 additional revenue to be earned after the modification? a) $5,400 b) $6,000 c) $6,300 d) $1,800

b) $6,000 Revenue earned after the modification is $6,000 computed as follows: [(60 units remaining from the original contract X $70) + (30 more units from the modification X $60)].

Bret Company sold 3,000 Holsks during 2017 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 2017 of a) $ 80,000 b) 110,000 c) $ 0 d) $190,000

b) 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.

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

b) False In a principal-agent relationship, the agent should use the net method to recognize revenue.

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

b) each party can unilaterally terminate the contract without compensation

When using the percentage of completion method, the company: 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

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

b) the customer has no significant risks or rewards of ownership

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

c) Long-term construction contracts

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

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

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

c) each performance obligation is satisfied

In a consignment sale, the consignee a) records advertising paid for the consignment as an expense b) makes a journal entry when the consigned merchandise is received 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.

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

c) residual value

An indication that the customer has taken control of the good or service is that: a) the customer has no significant risks or rewards of ownership b) the selling company has no right to payment for the good or service c) the selling company has transferred legal title to the asset d) the selling company has physical possession of the asset

c) the selling company has transferred legal title to the asset

Under the percentage-of-completion method, how should the balances of Billings on Construction in Process and Construction in Process be reported prior to the completion of a long-term contract? a) Net, as revenue from construction if a credit balance, and as a loss from construction if debit balance b) Billings on Construction in Process as a deferred revenue and Construction in Process as a deferred expense c) Billings on Construction in Process as revenue and Construction in Process as inventory d) Net, as a current asset if a debit balance, and as a current liability if a credit balance.

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

Hendrix Inc., an equipment dealer, sells equipment on January 1, 2016, to Jimi Company for $200,000. Also, on January 1, 2016, Hendrix agrees to repurchase this equipment from Jimi Company on December 31, 2017, for a price of $233,280. At 1/1/16, Hendrix should record 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 This transaction represents a repurchase agreement. At 1/1/16, Hendrix should record a liability of $200,000 because this agreement is a financing transaction and not a sale.

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

d) adopts an asset-liability approach for revenue recognition

Under the completed contract method, the Construction in Process account balance will consist of: a) construction costs and gross profit b) construction costs and billings c) gross profit only d) construction costs only

d) construction costs only

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

d) each party can unilaterally terminate the contract without compensation

A contract should be treated as having multiple performance obligations if: a) the contract creates enforceable rights or obligations b) each service provided in the contract is interdependent c) each service provided in the contract is interrelated d) each performance obligation is not highly dependent on other promises in the contract

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

Companies should use the percentage-of completion method to account for long-term construction contracts: a) when there are inherent hazards in the contract beyond the normal, recurring business risks b) when the company has primarily short-term contracts c) when estimates of progress towards satisfaction of the performance obligation (completion) are not dependable d) unless required to use the completed-contract method

d) unless required to use the completed-contract method

In determining the transaction price, the company must consider: a) the time value of money, but not consideration payable b) non-cash consideration, but not the time value of money c) variable consideration, but not non-cash consideration d) variable consideration, non-cash consideration, time value of money, and consideration payable

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