Chapter 6

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 -$9,000 x 0.06 = $540

Which methods may be used to estimate the stand-alone prices of goods and services?

-Adjusted market assessment approach -Expected cost plus margin -Residual Approach

Based on past experience, a seller can usually estimate the returns on a given volume of sales. Once estimated, these returns will

-Reduce net accounts receivable -Increase liabilities -Reduce reported revenue

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:

8460

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

Accounts Receivable Billings on Construction Contract

Agent

Acts as a facilitator for helping seller transact with buyers -Earns a commission for helping seller transact with buyer

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:

CIP $500,000 Cost of Construction $1.5 million Revenues $2 million

What is the journal entry to recognize gross profit when revenue is recognized upon completion of a long-term construction project?

Debit Construction in Progress and Debit Cost of Construction Credit Revenue from long-term contracts

When revenues, costs and gross profit are recognized at the completion of the contract rather than periodically throughout the contract:

Either method results in the same revenues, costs and gross profits being recognized by the end of the project. -Revenue from contract price, cost, and gross profit are recognized whether it's over the term of the contract or only upon completion. The only difference is timing

When is loss recognized on a long-term contract?

In the first period in which the loss becomes evident -We recognize losses as soon as they become evident. Billings, collections, and completion are not relevant to recognizing the loss on a long-term contract.

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

Inventory

Third Party

Is not directly involved in a transaction

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

Munich combines the materials, labor, and use of machinery and tools to construct a ingle complete building

An essential characteristic of a contract is that all parties to the contract are committed to

Performing their obligations and enforcing their rights

Which method provides a better measure of a company's economic activity each period?

Revenue recognition upon completion

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

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

The timing of recognition

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

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

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

Work-in-Process

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

The billings on construction account is a contra account to

construction in progress

The billings on construction contract account is classified as a

contra asset

From a financial reporting perspective the "sales returns" account is a:

contra-revenue

Commitment to performing an obligation and enforcing related rights represents a critical aspect of a ________

contract

At the end of the period, if construction in progress is less than billings on construction contracts, it is recorded as an

contract liability

A transaction price may be uncertain because the price

depends on the outcome of future events

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

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

equal to

For the purpose of allocating the transaction price to multiple performance obligations, if a stand-alone selling price cannot be directly observed, the seller should

estimate it

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

false

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

future events

Methods that can be used to estimate progress toward completion are referred to as _________ -based and ______-based methods

input output

Typical costs included in a construction project include

labor, materials, and overhead

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

over time

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

pattern of recognition of the related gross profit

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

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

residual

The potential that a good does not satisfy the original performance obligation is addressed through a customer's:

right of return

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

stand-alone selling price

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

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

transferred to customers

Which of the following must a seller recognize as separate line items on the balance sheet?

-Contract Assets -Contract Liabilities -Accounts Receivable

Which of the following are included in the journal entry required to record construction costs for a long-term construction contract?

-Credit raw materials -Debit construction in progress

Which of the following are key indicators that control of goods or services has been transferred to the customer?

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

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?

-Debit cash -Credit accounts Receivable

Which of the following situations may make the contract price less apparent?

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

Which of the following services are commonly performed over time?

-Financial statement audits -Consulting engagements -Lending of money

Which of the following support(s) the conceptual basis for separating contractual promises into several performance obligations?

-Financial statements better reflect timing of transfer of goods and services -Promises that can be viewed on a stand-along basis should be separated

Which of the following supports the conceptual basis for separating contractual promises into several performance obligations?

-Financial statements better reflect timing or transfer of goods and services -Promises that can be viewed on a stand-along basis should be separated

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

-Input method -output method

Which of the following are indicators that a company is a principle?

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

Which of the following would indicate that control has passed from the seller to the customer?

-Legal title to the asset has passed to the customer -The customer has assumed the risks and rewards of ownership of the asset -The customer has an obligation to pay the seller

Which statements are true regarding revenue recognition over time and upon completion?

-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

Which of the following are criteria that must be met before revenue can be recognized over time?

-The customer consumes the benefit of the seller's work as it is performed -The customer controls the asset as it is created -The seller is creating an asset that has no alternative use to the seller, and the seller has the legal right to receive payment for progress to date.

Which of the following will not differ between revenue recognized over time and revenue recognized at completion?

-Total Profit -Total Expenses -Total Revenue

When revenue related to a long-term construction contract is recognized over time, the journal entry to recognize revenue includes which of the following?

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

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 _____ most likely method will tend to be most appropriate

-expected value -most likely amount

Prepayments for future goods or services should be

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

Which of the following costs are included in a long-term construction contract?

-overhead -direct material -direct labor

Which of the following agreements may qualify as contracts?

-written documents -oral agreements -implicit agreements

Five steps to Recognizing Revenue

1. Identify the contract 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when (or as) each performance obligation is satisfied

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

A seller recognizes contract liabilities, contract assets, and accounts receivable on separate lines of its ______ _____

Balance Sheet

What is the relationship between Construction-in-progress (CIP) and the Billings on Construction Contract account?

Billings is contra to CIP and reduces the balance of the CIP account -The use of the CIP account creates a physical asset (CIP) in the same periods it recognizes a financial asset (first recognizing accounts receivable when the customer is billed and then recognizing cash when the receivable is collected). Having both the physical asset and the financial asset in the balance sheet at the same time constitutes double counting the same arrangement. The billings account solves this problem. Whenever an account receivable is recognized, the other side of the journal entry increases the billings account, which is contra to (and thus reduces) CIP.

Which is correct regarding changes in estimated variable consideration?

Changes in estimated variable consideration should be recognized as an adjustment to revenue in the period the change in estimate is made -Like other changes in estimate, changes in estimated variable consideration are applied prospectively, and should be recognized as an adjustment to revenue in the period the change in estimate is made.

If a contract qualifies for revenue recognition over time, revenue is recognized based on progress toward:

Completion -If a contract qualifies for revenue recognition over time, revenue is recognized based on progress toward completion. Contracts that qualify for revenue recognition over time are not recognized based on when the company bills or as of a specific date.

At the end of the period, if construction in progress exceed billings on contracts, it is recorded as a

Contract asset

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

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

Deferred Revenue

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

Which of the following is a performance obligation?

Extended warranty on the electronics package of a car -An extended warranty, also called a service-type warranty, provides protection beyond the manufacturer's quality-assurance warranty. Because an extended warranty usually is priced and sold separately from the product, it constitutes a performance obligation

True or False: A prepayment from a customer typically creates a performance obligation

False -Prepayments are not considered performance obligations because they are not a promise to transfer goods or services

Principal

Has primary responsibility for delivering goods or services -Carries risks and rewards associated with collecting contract price

Which of the following is one of the steps used to apply the revenue recognizing principle?

Identify the performance obligation(s) in the contract

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

In the first period in which teh loss become evident

Agreements that allow customers to use the seller's intellectual property are referred to as ______

Licenses

Which of the following is true regarding an agent?

The agent's revenue is equal to the commission is entitled to receive on each transaction -The principle records the sales price as revenue, sets the commission for the agent and has a performance obligation to provide goods and services.

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

Arthur Inc. provides services to consulting clients. Arthur should recognize the related revenue when

The related performance obligation is satisfied

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

Which of the following statements is true with regards to variable consideration

Variable consideration means the transaction price is uncertain -Consideration is variable when it depends on the future resolution of some uncertainty. Expected value is calculated by multiplying the possible amounts by their respective probability. Revenue should be recognized, even if there is uncertainty in the transaction price, as long as it is probable that a significant revenue reversal will not occur when uncertainty is resolved in the future.

A right of return ______ a separate performance obligation for the seller

does not create

Licenses typically allow customer to use the seller's ________ property

intellectual

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

performance

Revenue is recognized when the _______ obligation is satisfied

performance

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

transaction

The amount the seller expects to be entitled to receive from the customer in exchange for providing goods or services is referred to as the

transaction price

A contract is said to have _________ consideration if the price depends on the outcome of future events

variable