ACCT 3021 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? $229,406 $ 75,529 $ 57,352 $ 48,000

$ 48,000 $400,000X 12%= $ 48,000

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? $ 43,957. $ 87,914. $ 0. $100,000.

$ 87,914. $40,000 + $19,914 + $28,000 = $87,914.

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 $110,000 $ 0 $ 80,000 $190,000

$110,000 Warranty Liability of $80,000 on the assurance warranty, and Unearned Warranty Revenue of $110,000 on the extended warranties.

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? $800 $ 0 $1,200 $2,000

$2,000 (10 estimated units to be returned X $200 selling price)=$2,000

Mocha purchases equipment, installation, and training from Lynne for a price of $1,000,000 and chooses Lynne to do the installation. Lynne charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The price of the installation service is estimated to have a fair value of $20,000. The fair value of the training sessions is estimated at $40,000. Other companies can also provide these training services. Mocha is obligated to pay Lynne the $1,000,000 upon the delivery and installation of the equipment. Lynne delivers the equipment on May 1, 2017, and completes the installation of the equipment on July 1, 2017. Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 8 years. What amount is recorded by Lynne as Unearned Service Revenue at 7/1/17? $0 $18,868 $20,000 $37,736

$37,736 $40,000 + $20,000 + $1,000,000 = $1,060,000 Unearned Service Revenue 7/1/18: [($40,000/$1,060,000) X $1,000,000]=$37,736

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? $240,000 $629,406 $229,406 $400,000

$400,000 Fullbright should record Sales Revenue of $400,000 on January 1, 2017, which is the fair value of the inventory.

Blossom Construction Inc. agrees to construct a boat dock at the Smooth Sailing Marina for $35400. In addition, under the terms of the contract, Smooth Sailing will pay Blossom a performance bonus of up to $11000 based on the timing of completion. The performance bonus will be paid fully if construction is completed by the agreed-upon date. The performance bonus decreases by $2200 per week for every week beyond the agreed-upon completion date. Blossom has constructed a number of boat docks under similar agreements. Blossom's management estimates, that it has a 60% probability of completing the project on time, a 20% probability of completing the project one week late, and a 20% probability of completing the project two weeks late. Management does not believe the project will be more than two weeks late. Determine the transaction price that Blossom should compute for this agreement. Transaction Price $

$45080 The transaction price for this contract should be computed as follow: Contract price $35400 Expected value of the bonus 9680 Transaction Price $45080 On time 60% . $11000 $6600 Within one week 20% 8800 1760 Within two weeks 20% 6600 1320 Total expected value of bonus $9680

Sherman Company enters into a contract with a customer to build a warehouse for $400,000, with a performance bonus of $100,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 20% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that Sherman has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 50% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed 1 week late, and a 20% probability that it will be completed 2 weeks late. What is the total transaction price for this revenue arrangement? $480,000 $486,000 $500,000 $460,000

$486,000 [($500,000 X 50%) + (($500,000 - $20,000 = $480,000 X 30%) + ($500,000 - $40,000 = $460,000 X 20%)].

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? $1,800 $6,000 $5,400 $6,300

$6,000 (60 X $70) + (30 X $60)= $6,000

Black Sea Construction Company has a contract to construct a $6,000,000 oil rig at an estimated cost of $5,300,000. The contract is to start in July 2017, and the oil rig is to be completed in October 2019. The following data pertain to the construction period. 2017 2018 2019 Costs to date $1,325,000 $3,720,000 $6,300,000 Estimated costs to complete 3,975,000 2,480,000 — Progress billings during the yr 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 (loss) should Black Sea recognize in 2018 using the percentage-of-completion method? ($200,000) ($375,000) ($295,000) ($900,000)

($375,000) $1,325,000/$1,325,000+$3,975,000=25% 25%X($6,000,000- $5,300,000)]=25%X$700,000=$175,000 ($175,000) + ($200,000) = ($375,000)

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

Contract Asset of $110,000 on February 10. (Conditional rights to receive consideration are reported as contract assets rather than as receivables. Thus, a contract asset of $110,000 would be reported on February 10.)

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

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

Companies expense incremental costs if these costs are incurred to obtain a contract with a customer. True False

False Companies capitalize incremental costs if these costs are incurred to obtain a contract with a customer. They do not expense incremental contract costs.

Conditional rights should be reported separately on the balance sheet as contract liabilities. True False

False Conditional rights should be reported separately on the balance sheet as contract assets, not contract liabilities.

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

False Franchise companies derive their revenue from one or both of two sources: (1) from the sale of initial franchises and related assets or services, and (2) from continuing fees based on the operations of franchises.

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

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

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

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

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

Long-term construction contracts.

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? Net, as revenue from construction if a credit balance, and as a loss from construction if debit balance. Net, as a current asset if a debit balance, and as a current liability if a credit balance. Billings on Construction in Process as a deferred revenue and Construction in Process as a deferred expense. Billings on Construction in Process as revenue and Construction in Process as inventory.

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

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

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

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

True

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

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. True False

True

In situations where the franchisor provides access to the rights rather than transferring control of the franchise rights, the franchise rights' revenue is recognized over a period of time rather than at a point in time. 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

Reedy Builders, Inc. is using the completed-contract method for a $12,400,000 contract that will take three years to complete. Data at December 31, 2017, the end of the first year, are as follows: Costs incurred to date $5,200,000 Estimated costs to complete 7,800,000 Billings to date 4,920,000 Collections to date 4,540,000 The gross profit or loss that should be recognized for 2017 is a $200,000 loss. $0. a $600,000 loss. a $240,000 loss.

a $600,000 loss. $12,400,000 - ($5,200,000 + $7,800,000) = $600,000 loss.

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 sales revenue of $200,000 and interest expense of $33,280. a liability of $200,000. sales revenue of $200,000. sales revenue of $200,000 and a liability of $33,280.

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, adopts criteria that de-emphasize the importance of contracts with customers. adopts an asset-liability approach for revenue recognition. adopts "earned and realized" criteria. adopts a revenue-gain approach for revenue recognition.

adopts an asset-liability approach for revenue recognition.

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

construction costs only.

One criteria that indicates that a company should disregard revenue guidance for contracts is when the payment terms for the goods and services to be transferred can be identified. 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.

each party can unilaterally terminate the contract without compensation.

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

each performance obligation is satisfied.

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

in either the current asset or current liability section. (Billings on Construction in Process is reported as a current asset or current liability, depending on whether its balance is larger or smaller than the Construction in Process account balance.)

A loss in the current period on a contract expected to be profitable upon completion in a later year is: recognized under both the completed-contract method and the percentage-of-completion method. recognized only under the completed-contract method. recognized only under the percentage-of-completion method. not recognized under either the completed-contract method or the percentage-of-completion method.

recognized only under the percentage-of-completion method.

When using the percentage of completion method, the company accumulates progress billings in an inventory account (Construction in Process). accumulates construction costs only in an inventory account (Construction in Process). recognizes revenues and gross profit only when the contract is completed. recognizes revenues and gross profit each period during the contract.

recognizes revenues and gross profit each period during the contract.

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

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

residual value.

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. the selling company has transferred legal title to the asset. the customer has physical possession of the asset. the selling company has right to payment for the good or service.

the customer has no significant risks or rewards of ownership.

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

unless required to use the completed-contract method.

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

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