ch18 revenue recognition.orion

How is the purchase of an optional warranty recorded? A ) As revenue over the period that the service-type warranty is in effect. B ) As a warranty liability for all costs incurred after sale due to correction of defects. C ) As an expense in the period the goods or services are sold. D ) As revenue in the period that the warranty is sold.

A ) As revenue over the period that the service-type warranty is in effect.

Ephraim Equipment entered into a contract to provide Morris with three machines. Morris will submit payment in full once the machines are completed and installed on its factory floor. If the contract is terminated at any point prior to completion, Ephraim retains ownership of the partially or fully completed machines. The contract was signed on February 1, and as of June 1, Ephraim calculates that it has spent $625,000 in performance of its contract obligation. Ephraim's total estimated costs for completing the obligation are $1.1 million. Given these factors, which of the following statements is accurate? A ) Ephraim should not yet have recognized any of the revenue associated with this contract. B ) Ephraim should have recognized approximately 57% of the revenue associated with this contract. C ) Ephraim should have recognized 100% of the revenue associated with this contract. D ) Ephraim should have recognized approximately 43% of the revenue associated with this contract.

A ) Ephraim should not yet have recognized any of the revenue associated with this contract.

Which of the following statements accurately describes a contract's transaction price? A ) The transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring goods and services. B ) The transaction price excludes discounts, volume rebates, coupons and free products, or services. C ) The transaction price excludes time value of money if the contract involves a significant financing component. D ) The transaction price does not consider noncash consideration such as donations, gifts, equipment or labor.

A ) The transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring goods and services.

Which of the following is true about nonrefundable upfront fees? A ) They should not be recorded as revenue at the time of payment if they are for future delivery of products and services. B ) They should be recognized immediately if they are for one-time initiation fees such as in a health club. C ) They should be allocated over the term of the contract if they are for activation fees such as for cable. D ) They should be recognized immediately upon receipt of payment.

A ) They should not be recorded as revenue at the time of payment if they are for future delivery of products and services.

A farm equipment supplier contracted with a farmer to provide the farmer with a new tractor, and the farmer promised to pay at the end of the harvest season after they sold their crops. However, the area suffered a drought, and the crops produced a low yield. This would present a(n) ________ issue for the seller. A ) collectibility B ) impairment C ) credit risk D ) liability

A ) collectibility

Organic Gardens sells flower seeds and seedlings as well as bug and weed killers. They give customers a 90-day unconditional right of return if they are not satisfied with any of the products. On April 6, 2016, a customer purchased $1,500 of products (cost $750). Based on prior experience, Organic Gardens expects returns of 20%. The journal entry to record the return of $100 of merchandise includes a A ) credit to Estimated Inventory Returns for $50. B ) debit to Estimated Inventory Returns for $50. C) credit to Refund Liability for $100. D) credit to Returned Inventory for $50.

A ) credit to Estimated Inventory Returns for $50. To record the return, they would debit Refund Liability for $100 and credit Accounts Payable for $100. They would also debit Returned Inventory for $50 ($100 * 50%) and credit Estimated Inventory Returns for $50.

On January 1, 2016, Brice Truck Repair signed a contract with Harlow Delivery Services to provide maintenance for their fleet of delivery vehicles. Harlow Delivery Services prepaid for 30 oil changes and 20 new tires. Harlow pays $45 per oil change and $90 per tire. Brice Truck Repair provided: • 4 oil changes and 12 new tires in January and February • 3 oil changes and 4 new tires in March and April • 3 oil changes and 0 new tires in May and June On their June 30, 2016, balance sheet, what amount would Brice Truck Repair have in their Unearned Service Revenue account? A )$1,260 B ) $0 C ) $3,150 D ) $1,890

A )$1,260 In the first six months of the contract, Brice Truck Repair did 4 + 3 + 3 = 10 oil changes and put on 12 + 4 + 0 = 16 new tires. Therefore, their Unearned Service Revenue account should have a balance of 20 oil changes and 4 new tires remaining for a total of (20 * $45) + (4 * $90) = $1,260.

When a company is able to receive benefits from an asset, as well as direct the use of that asset, it implies that they have A )control of the asset.

A )control of the asset.

Which of the following is the most popular input measure used to determine progress toward completion of a performance obligation? A ) Cost-to-cost basis B ) Units-produced method C ) Labor hours-worked basis D ) Units-of-delivery method

A) Cost to cost basis

In which of the following scenarios would it be inappropriate for a firm to account for the time value of money when determining the transaction price? A ) The firm has just sold goods but will not receive payment for those goods until a date 6 months in the future. B ) The firm has just sold goods but will not receive payment for those goods until a date 24 months from now. C ) The firm has just sold goods but will not receive payment for those goods until a date one year in the future. D ) The firm has just sold goods but will not receive payment for those goods until a date four years in the future

A) The firm has just sold goods but will not receive payment for those goods until a date 6 months in the future.

A company's obligation to transfer goods or services to a customer for which the company has already received financial compensation from the customer is called a contract liability. A) True B)False

A) True

If the purchasing company in a repurchase agreement has the right to require the selling company to repurchase the merchandise, it is treated as a A ) put option. B ) right of return. C )consignment. D )warranty.

A) put option

Super Score entered into a contract to provide Stadium with one extra-large, customized, combined scoreboard and video replay screen. Memorial Stadium submits progress payments upon completion of each stage of the contract. If the contract is terminated at any point, the partly completed scoreboard immediately becomes the property of Memorial Stadium. At what point should Super Scoreboards recognize revenue related to this contract, and why? A ) Super Scoreboards should recognize the revenue upon satisfaction of its entire performance obligation, because it does not have an alternative use for the scoreboard and possesses an enforceable right to payment. B ) Super Scoreboards should recognize the revenue over time, because it does not have an alternative use for the scoreboard and possesses an enforceable right to payment. C ) Super Scoreboards should recognize the revenue over time, because it has neither an alternative use for the scoreboard nor an enforceable right to payment. D ) Super Scoreboards should recognize the revenue upon satisfaction of its entire performance obligation, because it has neither an alternative use for the scoreboard nor an enforceable right to payment.

B ) Super Scoreboards should recognize the revenue over time, because it does not have an alternative use for the scoreboard and possesses an enforceable right to payment. Super Scoreboards does not create an asset with an alternative use because it is prohibited from using the scoreboard itself or redirecting it to another customer. In addition, Super is entitled to payment for performance to date, and it expects to complete the project. Thus, the contract meets the criteria for recognizing revenue over time.

Which of the following is true about consignment? A ) The consignee (agent) holds title to the product. B ) The consignee takes possession of merchandise but title remains with manufacturer. C ) The consignee purchases goods for sale and sends payment when goods are sold. D) The consignee pays for good up front and is paid when merchandise is sold.

B ) The consignee takes possession of merchandise but title remains with manufacturer.

Q 18.32: How are the second and fourth steps in the revenue recognition process different from one another? The second step discusses the contract as a whole, while the fourth step discusses individualized transaction prices. B The second step works to outline the performance obligations, while the fourth step discusses the transaction prices associated with the obligations. C The second step works to discuss the transaction prices associated with performance obligations, while the fourth step discusses the revenue associated with the obligations. D The second step determines transaction prices, while the fourth step allocates those prices to each performance obligation.

B ) The second step works to outline the performance obligations, while the fourth step discusses the transaction prices associated with the obligations.

In their financial statements, Levesque Trucking needs to disclose qualitative information about the contracts they have with several customers. Which of the following pieces of information might they be trying to disclose? A ) One contract will begin on January 1, 2016, and end on December 31, 2017. B ) They have an obligation to deliver products on time from the client to the destination. C ) They have a new short-term contract to provide trucking services amounting to $240,000 in service revenue and $175,000 in costs. D ) They had a $478,000 opening balance and $342,000 closing balance in their Contract Assets account in 2016.

B ) They have an obligation to deliver products on time from the client to the destination.

Which of the following will require a debit to interest expense for the seller? A ) nonrefundable upfront fee B ) repurchase agreement C ) consignment D ) bill-and-hold arrangement

B ) repurchase agreement

In order to allocate transaction prices, Alpha Aviation forecasts the costs of satisfying a performance obligation. Then, it adds an appropriate markup for the goods or services involved in the obligation. Based on this information, which type of transaction price allocation does Alpha use? A ) the bundling approach B ) the expected cost plus a margin approach C ) the adjusted market assessment approach D ) the residual approach

B ) the expected cost plus a margin approach

O'Neill Manufacturing offers a 4% volume discount to all customers who purchase at least $150,000 of its product during the year. For the past five years, Murphy Machining has exceeded this purchase amount. Thus, when Murphy bought $60,000 of product on June 1, O'Neill recognized revenue of only $57,600. If Murphy later fails to meet the discount threshold, which of the following entries should O'Neill make in its books? A ) $57,600 credit to Cash, $60,000 debit to Accounts Receivable, and $2,400 credit to Sales Discounts Forfeited B ) $60,000 debit to Cash, $57,600 credit to Accounts Receivable, and $2,400 credit to Sales Discounts Forfeited C ) $57,600 debit to Cash, $60,000 credit to Accounts Receivable, and $2,400 debit to Sales Discounts Forfeited D ) $60,000 credit to Cash, $57,600 debit to Accounts Receivable, and $2,400 debit to Sales Discounts Forfeited

B) $60,000 debit to Cash, $57,600 credit to Accounts Receivable, and $2,400 credit to Sales Discounts Forfeited O'Neill should debit Cash for the full purchase price ($60,000), then credit Accounts Receivable for the discounted price ($57,600) and credit Sales Discounts Forfeited for the amount of the discount ($60,000 x 4% = $2,400).

A __________ occurs when a customer purchases a product but it not yet ready for delivery. A ) principal-agent relationship B ) bill-and-hold arrangement C ) consignment D ) repurchase agreement

B) Bill and hold arranement

A company that gives the buyer the right to return a product after purchase should not recognize revenue until they know with certainty how many products will be returned. A) True B) False

B) False

Whenever a sales transaction involves a significant financing component, the fair value must be determined by discounting the payment using an imputed interest rate. A )True B )False

B) False 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.

When a company sells a bundle of goods at a discount, the discount should be allocated to the entire bundle rather than the product or products that caused the discount. A )True B )False

B) False. the discount should be allocated to only the product(s) that cause the discount

Which of the following is false regarding a type of contractual promise typically involved in a performance obligation? A )It may be an implicit promise B ) It may be a promise contingent upon recognition of revenue. C ) It may be a promise based on customary business practice. D ) It may be an explicit promise.

B) It may be a promise contingent upon recognition of revenue.

A real estate agent sold a house for $287,000. The commission for the sale of the house was 3%, or $8,610. What amount should the real estate agent record as revenue? A )$287,000 B ) $278,390 C ) $8,610 D) $295,610

C $8,610

Which of the following sales involves noncash consideration? A ) A firm offers customers a 5% volume discount. B ) A firm offers customers a 3% prompt settlement discount. C ) A firm receives 10,000 shares of stock as payment for services rendered. D ) A firm offers customers 1 free month of services for every 12 months of services purchased.

C ) A firm receives 10,000 shares of stock as payment for services rendered.

Which of the following would be considered a receivable on the balance sheet? A ) A customer ordered 50 boxes of chocolates and 250 candy favors from Gossett Candies for a wedding, but no payment has been made and no candy has been delivered. B ) Gossett Candies partially fulfilled a contract by delivering 50 boxes of chocolates for a rehearsal dinner but will not receive payment until they deliver 250 candy favors for the wedding. C ) Gossett Candies fulfilled a contract by delivering 50 boxes of chocolates and 250 candy favors for a wedding, but they have not yet received payment. D ) A customer prepaid Gossett Candies for 50 boxes of chocolates and 250 candy favors for a wedding, but Gossett has not yet delivered the candy.

C ) Gossett Candies fulfilled a contract by delivering 50 boxes of chocolates and 250 candy favors for a wedding, but they have not yet received payment.

Which of the following statements is accurate with regard to noncash consideration? A ) Noncash consideration should be recognized on the basis of the original cost paid by the customer. B ) Noncash consideration should be recognized on the basis of the fair value of equivalent goods or services. C )Noncash consideration should be recognized on the basis of the fair value of what is received. D ) Noncash consideration should be recognized on the basis of the fair value of what has been given up.

C ) Noncash consideration should be recognized on the basis of the fair value of what is received.

What changes in control occur between the buyer and the seller when a contract is agreed upon and when revenue is finally recognized? A ) When the contract is agreed upon, the buyer has control of the asset, whereas when revenue is recognized, the seller has control of the asset. B ) When the contract is agreed upon, the seller and buyer both have control of the asset, whereas when revenue is recognized, only the buyer has control of the asset. C ) When the contract is agreed upon, the seller has control of the asset, whereas when revenue is recognized, the buyer has control of the asset. D ) When the contract is agreed upon, the seller has control of the asset, whereas when revenue is recognized, the buyer and seller both have control of the asset.

C ) When the contract is agreed upon, the seller has control of the asset, whereas when revenue is recognized, the buyer has control of the asset.

What is standalone selling price? A ) the price charged for the goods or services in a contract exclusive of any fees or taxes B ) the industry-wide price at which goods or services similar to those in a contract are sold C ) the fair value at which a company could sell the individual goods or services in a contract D ) the bundled price of goods or services in a contract are sold, inclusive of discounts

C ) the fair value at which a company could sell the individual goods or services in a contract

Which of the following represents a put option? A ) A seller has the right to repurchase merchandise for less than the selling price. B ) A seller has the right to repurchase merchandise for more than the selling price. C ) A buyer has the right to require the seller to repurchase merchandise for less than the market value. D ) A buyer has the right to require the seller to repurchase merchandise for more than the selling price.

D ) A buyer has the right to require the seller to repurchase merchandise for more than the selling price.

How is the partial satisfaction of a multiple performance obligation reported on the balance sheet? A ) As a contract liability. B ) As a receivable. C ) As unearned service revenue. D ) As a contract asset.

D ) As a contract asset.

Which of the following is true of the converged standard on revenue recognition? A) It increases the complexity of financial statement preparation. B ) It simplifies revenue recognition practices across entities and industries. C ) It reduces the number of disclosures required for revenue reporting. D ) It recognizes and measures revenue based on changes in assets and liabilities.

D ) It recognizes and measures revenue based on changes in assets and liabilities.

Which of the following is true when a company makes a sale with a right of return? A ) The company record the estimated returns in the Sales Returns account. B ) The company should not recognize any revenue. C ) The company should recognize revenue for the full sales price. D ) The company records the returned asset in a separate inventory account.

D ) The company records the returned asset in a separate inventory account.

In a principal-agent relationship, which of the following should the agent record as revenue? A ) total revenue less commission from the sale of the principal's products or services B) total revenue plus commission from the sale of the principal's products or services C) total revenue from the sale of the principal's products or services D ) commission from the sale of the principal's products or services

D ) commission from the sale of the principal's products or services

Miyagi Motors has a contract to build a custom delivery truck for Pelican Products. At which of the following points would Miyagi's performance obligation to Pelican be considered satisfied? A) when Miyagi assumes the risks and rewards associated with ownership of the delivery truck B ) when Miyagi completes physical construction of the delivery truck C ) when physical construction of the delivery truck is over 50% complete D ) when Pelican takes legal title to the delivery truck

D ) when Pelican takes legal title to the delivery truck

Under which of the following conditions does a performance obligation exist? A ) when a contract is approved and signed B )when a company provides an interdependent product or service C ) when a company is granted the right to receive consideration D ) when a company provides a distinct product or service

D ) when a company provides a distinct product or service

When should multiple performance obligations in the same contract be accounted for as a single performance obligation? A ) when the product is distinct within the contract B ) when a determination cannot be made C) when all performance obligations are distinct but interdependent D ) when each service is interdependent and interrelated

D ) when each service is interdependent and interrelated

In which of the following circumstances should a company use the residual approach to allocate transaction price? A ) when no similar products are currently being sold in the market B ) when information about the company's costs and margins is not readily available C ) when it is unacceptable to include a margin or markup on a good or service D ) when the standalone selling price of a good or service is highly variable or uncertain

D ) when the standalone selling price of a good or service is highly variable or uncertain

What is the role of the agent in the Principal-Agent relationship? A To develop and maintain goodwill of the principal's customers. B To market the principal goods and services to prospective customers. C To provide the goods or services for a customer. D To arrange for the principal to provide goods or services to a customer.

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

Q 18.35: Which of the following are accurate representations concerning revenue recognition? I. Revenue from services rendered is recognized when cash is received or when services have been performed. II. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. III. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used. IV. Revenue from disposing of assets other than products is recognized at the date of sale. A : II, III, and IV. B : I, II, and IV. C : I, II, III and IV. D :

II, III, and IV. II. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. III. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used. IV. Revenue from disposing of assets other than products is recognized at the date of sale.

A consignor should only recognize revenue when it receives cash and notification of the sale from the consignee. T/F

T

On June 1, 2016, Aspen Industries sells goods to Oak Incorporated for $125,000 in exchange for a two-year, zero-interest-bearing note with a face amount of $158,000. Given this information, as of December 31, 2016, Aspen will record a credit/debit in its Interest Revenue account.

credit

When estimating variable consideration, companies use either the expected value, which is a probability-weighted amount, or the most likely amount in a range of possible amounts. A ) True B) False

true