ACCT 303 ch. 18

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

a) True

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

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? a) $37,736 b) $ 18,868 c) $ 0 d) $ 20,000

a) $37,736

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)? a) Three separate performance obligations: the sale of the equipment, the sale of its installation and the sale of training services. b) One performance obligation: the sale of unit (equipment, installation, training). c) 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). d) 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).

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

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. a) True b) False

a) True

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

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

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

a) each performance obligation is satisfied.

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

a) residual value.

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.

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

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

The following information is available about a signed agreement between two entities: • The entities have agreed to specific performance obligations. • The entities have agreed on a price related to the performance obligations. • No work has begun on the performance obligations and the contract is cancelable without payment of penalty or other consideration. • It is probable that the company completing the work will collect the agreed upon consideration. Does a contract exist between the entities to which the revenue recognition criteria may be applied? a) A contract to which the revenue recognition criteria applies does not exist because the transaction price has not yet been allocated to the specific performance obligations. b) A contract to which the revenue recognition criteria applies does not exist because it is cancelable without penalty and no work on the performance obligations has begun. c) A contract to which the revenue recognition criteria applies exists because it identifies specific performance obligations and collectibility of the consideration is probable. d) A contract to which the revenue recognition criteria applies exists because the contract includes important terms such as the agreed upon price and specific performance obligations.

b) A contract to which the revenue recognition criteria applies does not exist because it is cancelable without penalty and no work on the performance obligations has begun.

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

b) False

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

b) False

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

b) False

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

b) adopts an asset-liability approach for revenue recognition.

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.

b) identify the contract with customers.

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

b) is distinct.

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? a) $800 b) $1,200 c) $2,000 d) $ 0

c) $2,000

FASB ASC 606, commonly referred to as the revenue recognition standard, includes all of the following in its five step process to recognize revenue except: a) Identify the performance obligations in the contract. b) Allocate the transaction price to the performance obligations in the contract. c) Recognize revenue when (or as) the entity is paid for a performance obligation. d) Identify the contract with the customer.

c) Recognize revenue when (or as) the entity is paid for a performance obligation.

The revenue recognition standard, Revenue from Contracts with Customers, states a specific approach should be used by companies to recognize revenue. The standard: a) Requires companies to recognize revenue by using a liability-equity approach because a contract results in a company's promise to perform a service and the company reports that promise as a liability until the service is completed. Further, a company's equity is increased because net income is closed to retained earnings. b) Requires companies to recognize revenue by using an asset-equity approach because revenue typically results in an increase in assets through the collection of cash or recognition of accounts receivable and an increase in equity through the closing of net income to retained earnings. c) Requires an asset-liability approach because an asset or a liability may stem from the terms of the contract and measuring the change in the asset or liability over the life of the contract results in a disciplined approach to measuring and recognizing revenue. d) Requires an earned-realized approach because the contract will result in revenue being earned and the collection of payment from the customer will result in the realization of the earned revenue.

c) Requires an asset-liability approach because an asset or a liability may stem from the terms of the contract and measuring the change in the asset or liability over the life of the contract results in a disciplined approach to measuring and recognizing revenue.

Kinnamont Company manufactures farming equipment that includes navigational systems as part of the standard equipment package and offers optional training on any navigational systems for an additional fee. Smith Company enters into a contract with Kinnamont that includes a combine, a navigational system, and training. Identify the performance obligations to which Smith should allocate the transaction price: a) The combine, the navigational system, and the training account for one performance obligation because they are all part of the same contract. b) The combine, the navigational system, and the training as three separate performance obligations. c) The combine including the navigational system and the training as two separate performance obligations. d) No performance obligations exist because the work on the contract, including the training has not begun.

c) The combine including the navigational system and the training as two separate performance obligations.

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 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. d) The reason for the bill-and-hold arrangement must be substantive.

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

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

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

Festi Corp. is evaluating if revenue may be recognized for two of their contracts. The customer in Contract A has indicated that they are ready to accept the transfer of the products associated with the contract, but delivery has not yet occurred. The customer in Contract B has received legal title to the products, but has asked Festi to store the products for them until they open the new stores for which the product has been ordered. Festi has clearly labeled and set aside the products in the warehouse for the customer in Contract B, but delivery has not yet occurred. Should revenue be recognized for: Contract A? Contract B? a) Yes No b) No No c) Yes Yes d) No Yes

d) No Yes

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

d) a bill-and-hold arrangement

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

d) a company provides a distinct product or service.

One criteria that indicates that a company should disregard revenue guidance for contracts is when a) the contract has commercial substance. b) the payment terms for the goods and services to be transferred can be identified. c) each party's rights regarding the goods or 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.

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

d) each service is interdependent and interrelated.

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

d) the selling company has transferred legal title to the asset.