CH 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

Sally collects a nonrefundable up-front fee of $192 when a new customer signs up for a 24-month contract for services. A monthly fee of $32 is also assessed for each customer. How much revenue does Sally record on the date the contract is signed?

$0

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

A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month?

$190,000

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?

$2,000

On June 1, 2021, Cullumber & Sons sold equipment to James Landscaping Service in exchange for a zero-interest bearing note with a face value of $97200, with payment due in 12 months. The fair value of the equipment on the date of sale was $85200. The amount of revenue to be recognized on this transaction in 2021 is

$85200 sales revenue and $7000 interest revenue.

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?

$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?

$400,000

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?

$486,000

ClipClop Company sells horseshoes to customers at a discount of 4% if the customer orders more than 10,000 horseshoes in a year. The price per shoe is $2. In April, Oats Company orders 4,000 horseshoes from ClipClop. Based on past experience with Oats Company, ClipClop expects Oats to meet the volume threshold of 10,000 horseshoes by the end of the year. What amount of revenue should ClipClop record in connection with the April sale?

$7,680

Shaw Company engages Maya Company to produce a large machine, install the machine, and train their employees on the machine. The machine, installation, and training are distinct, and Maya determines that the contract includes three separate performance obligations. The machine, installation, and training typically cost $800,000, $100,000, and $100,000 respectively when each is provided in a separate contract. Shaw and Maya agree to a total contract price of $920,000. How much of the contract price should Maya allocate to the machine, installation, and training, respectively?

$736,000; $92,000; $92,000

Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Crane Corporation purchased computer equipment, installation and training for a total cost of $175680 on March 15, 2021. Estimated standalone fair values of the equipment, installation, and training are $106500, $73200, and $39900respectively. The transaction price allocated to equipment, installation and training is

$85200, $58560, $31920 respectively.

Cullumber Pharmaceuticals entered into a licensing agreement with Zenith Lab for a new drug under development. Cullumber will receive $8700000 if the new drug receives FDA approval. Based on prior approval, Cullumber determines that it is 80% likely that the drug will gain approval. The transaction price of this arrangement should be

$8700000.

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 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.

Which type of transaction generally results in revenue being recognized with the passage of time?

Customer controls the asset as it is created or the company does not have an alternative use for the asset.

Foghorn Company entered into a sales transaction in which it agreed to receive common stock from Leghorn Corporation as payment for services provided to Leghorn Corporation. The journal entry to record the receipt of payment for the sales transaction will include a

Debit to Leghorn Investment.

Lavender Corporation sells 100 jars of essential oil to Bed, Bath, and Relax on December 1, 20X5, for $10 each on account. Lavender offers a right to return the product for any reason. Based on past sales, Lavender expects Bed, Bath, and Relax to return 5 jars. What adjusting journal entry, if any, should Lavender record on December 31, 20X5, to reflect Bed, Bath, and Relax's expected sales returns?

Dr Sales Returns and Allowances Cr Allowance for Sales Returns and Allowances $50

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

False

Sales with rights of return should not be recognized as revenue due to the contingent refund liability.

False

The first step of the revenue recognition process is to determine the transaction price.

False

Allocating a transaction price to multiple performance obligations includes which of the following steps:

Identify distinct goods and/or services as separate performance obligations.

A company incurred costs to fulfill a contract that has a four-year life. The costs are a direct result of the contract and would not have been incurred had the contract not existed. How should the costs to fulfill the contract be accounted for?

Recorded as an asset and amortized over four years

To address inconsistencies and weaknesses in revenue recognition, a comprehensive revenue recognition standard was developed entitled the

Revenue from Contracts with Customers.

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:

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

A company enters into a contract that includes three separate performance obligations. The standalone prices are not readily available for the performance obligations. How should the company proceed in allocating the transaction price?

The company should estimate the standalone prices of the performance obligations in order to allocate the transaction price based on the proportion of the total standalone price represented by each performance obligation.

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

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)?

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

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

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

True

A performance obligation may be based on customary business practice.

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

Conditional rights should be reported separately on the balance sheet as contract assets.

True

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

True

The revenue recognition principle states that revenue is recognized when the performance obligation is satisfied.

True

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.

True

When a customer purchases a product but is not yet ready for delivery, this is referred to as

a bill-and-hold arrangement

Companies can use the expected value to estimate variable consideration when

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

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 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 credit to Unearned Warranty Revenue of $1,400.

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 liability of $200,000.

The new standard, Revenue from Contracts with Customers,

adopts an asset-liability approach for revenue recognition.

The fourth step in the process for revenue recognition is to

allocate transaction price to the separate performance obligations.

The role of the agent in a Principal-Agent relationship is to

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

A transaction price for multiple performance obligations should be allocated

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

Revenue from a contract with a customer

cannot be recognized until a contract exists.

A company has satisfied its performance obligation when the

company has transferred physical possession of the asset.

P & G Auto Parts sells parts to Sandhill Car Repair during 2021. P&G offers rebates of 1% on purchases up to $60000 and 2% on purchases above $60000 if the customer's purchases for the year exceed $200000. In the past, Sandhill normally purchases $300000 in parts during a calendar year. On March 25, 2021, Sandhill Car Repair purchased $70000 of parts. The journal entry to record the purchase includes a

credit to Sales Revenue for $69200.

On November 1, 2021, Sheridan Farm entered into a contract to buy a $143000 harvester from John Deere. The contract required Sheridan Farm to pay $143000 in advance on November 1, 2021. The harvester (cost of $103000) was delivered on November 30, 2021. The journal entry to record the contract on November 1, 2021 includes a

credit to Unearned Sales Revenue for $143000.

Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Pharoah Corporation purchased computer equipment, installation and training for a total cost of $149040 on March 15, 2021. Estimated standalone fair values of the equipment, installation and training are $102000, $58800 and $25500respectively. The journal entry to record the transaction on March 15, 2021 will include a

credit to Unearned Service Revenue of $20400.

Cullumber Choice sells natural supplements to customers with an unconditional sales return if they are not satisfied. The sales returns extends 60 days. On February 10, 2021, a customer purchases $4100 of products (cost $2050). Assuming that based on prior experience, estimated returns are 30%. The journal entry to record the expected sales return and cost of goods sold includes a

debit to Allowance for Sales Returns of $1230 and a credit to Cost of Goods sold of $615.

The third step in the process for revenue recognition is to

determine the transaction price.

One criteria that indicates that a company should disregard revenue guidance for contracts is when

each party can unilaterally terminate the contract without compensation.

A contract should be treated as having multiple performance obligations if

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

The seller of a good or service should recognize revenue when

each performance obligation is satisfied.

When multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when

each service is interdependent and interrelated.

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

financing transaction.

The first step in the process for revenue recognition is to

identify the contract with customers.

The second step in the process for revenue recognition is to

identify the separate performance obligations in the contract.

The transaction price

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

is the correct method in a principal-agent relationship.

The last step in the process for revenue recognition is to

recognize revenue when each performance obligation is satisfied.

In determining the transaction price, the company must consider:

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

On January 15, 2021, 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

recorded on March 31, 2021.

In a consignment sale, the consignee

records a payable when consigned merchandise is sold.

Consideration paid or payable to customers

reduces the consideration received and the revenue to be recognized.

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?

residual value.

The best measure of the fair value of a performance obligation is

standalone selling price.

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.

A company accounts for a contract modification as a new contract if

the promised goods and services are distinct and the company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services.

An indication that the customer has taken control of the good or service is that

the selling company has transferred legal title to the asset.

If a contract involves a significant financing component

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