Chapter 6 Part 1

Donau Company sells a video streaming devices for $100. A one-year subscription for unlimited video streaming costs $120. Alternatively, customers can rent videos on demand or subscribe to a competing service. On February 1, Robert purchases both the steaming device and signs-up for one year of service. How much revenue should Donau recognize for the month of February?

$110

Main Company sells a video streaming device for $100. A one-year subscription to unlimited video streaming costs $150. Alternatively, customers can rent videos on demand or subscribe to a competing service. Customers may purchase the streaming device together with the one-year subscription for $200. For customers who purchase the streaming device with the 1-year subscription, Main should allocate how much of the total contract price to the unlimited streaming access?

$120 = $200 (150/250)

Superb Vision sells 100 pairs of eyeglasses for $400 each. Superb Vision delivers each pair of glasses with a coupon that entitles the customer to purchase an additional pair of glasses of the same type at a 50% discount. Based on past experience, Superb Vision estimates that 20% of the coupons will be redeemed by customers. Upon delivery of the 100 eyeglasses, Superb should recognize revenue equal to: (round to whole dollars)

$36,364 = $400/(400+(200x0.2)) x (400x100)

Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the expected value of consideration, what transaction price will Guarder estimate for this contract?

$40,500

Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what transaction price will Guarder estimate for this contract?

$45,000

On January 1st, Guarder Consulting enters into a one-year contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. Smith pays Guarder an up-front fixed fee of $48,000 on January 1st. Guarder will also earn an additional $12,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 70% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what amount of revenue will be recorded at the end of the first month?

$5,000

Soul Spa offers a menu of spa treatments to its customers. Its most popular service is its hot stone massage, which it offers for $240. In November, it performs a hot stone massage for one of its clients and, for the first time, provided its new after-massage skin purification treatment for which it has not determined a stand-alone price. Soul Spa charged the client $300 for the services provided. What amount should Soul Spa allocate to the skin purification treatment?

$60

Main Company sells a video streaming device for $100. A one-year subscription to unlimited video streaming costs $150. Alternatively, customers can rent videos on demand or subscribe to a competing service. Customers may purchase the streaming device together with the one-year subscription for $200. For customers who purchase the streaming device with the 1-year subscription, Main should allocate how much of the total contract price to the streaming device?

$80 - $200 (100/250)

Zahn, DDS, provides various dental services to its patients. In January, Zahn performs a tooth restoration service for a patient and also for the first time performs a new tooth enhancement service, for which is has not yet determined a stand-alone price. Zahn charges $890 for the services; the normal stand-alone price of the tooth restoration is $800. What amount should Zahn allocate to the new tooth enhancement service?

$90

What may provide evidence of possible reversals in the amount of variable consideration that will be received?

- a large number of possible outcomes that could occur - a long delay before uncertainty resolves - a history of changing payment terms on similar contracts

Prepayments for future goods or services should be (2)

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

A seller estimates the stand-alone selling price of goods using the expected cost plus margin approach. Using this method, the seller combines which two components?

- an appropriate profit margin - the cost of satisfying the performance obligation

Holly Inc. sells multi-function office equipment with an extended warranty, which is included in the $10,000 contract price. Holly should recognize the extended warranty

- as a separate performance obligation - by allocating part of the transaction price to the extended warranty

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

- expected cost plus margin approach - residual approach - adjusted market assessment approach

Which methods are appropriate for estimating variable consideration?

- expected value - most likely amount that will be received

Orwell Inc. entered into a 6 month contract with a customer to provide consulting services that requires the customer to pay an upfront fixed fee of $15,000, plus the opportunity for Orwell to earn a bonus of $1,200 for achieving certain performance targets by the end of the 6 month period. Initially, Orwell estimated that it was probable that the bonus would be achieved and recorded a receivable. After one month, they determined they could no longer conclude that it is probable a significant reversal of revenue would not occur in the future related to the variable consideration. What should Orwell do?

- for the remainder of the contract, only recognize revenue related to the fixed fee - adjust revenue for the previously recognized bonus - reverse the bonus receivable

Common note disclosures relating to revenue include:

- outstanding performance obligations - timing of recognition - major product lines

What situations may make the contract price less apparent?

- payment by the seller to the customer -variable consideration provisions - the time value of money

What may provide evidence of possible reversals in the amount of the variable consideration that will be received?

- poor evidence on which estimates were based - estimates were based on factors beyond the seller's control - long delay until uncertainty is resolved

A license for symbolic intellectual property (2)

- provides the customer with the right of access to the intellectual property - does not have significant standalone functionality

Thomson Tractor Supply sells farm equipment and offers its customers the option to purchase an extended warranty that covers the product for three years beyond the standard one-year manufacturer's warranty. In January 2021, Thomson records cash sales for three tractors for $75,000 each, and seven more tractors with extended warranties for $77,000 each. Which of the following statements are true?

- the extended warranty should be treated as a separate performance obligation - the revenue for the extended warranties should be recorded over the three year period covered by the extended warranty - deferred revenue should be recorded for the price of the extended warranties

Which situations may make the contract price less apparent?

- variable consideration provisions - determining whether the seller is acting as a principal or agent - sales with right of return - payments by the seller to the customer

On January 1st, Guarder Consulting enters into a one-year contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. Smith pays Guarder an up-front fixed fee of $48,000 on January 1st. Guarder will also earn an additional $12,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 70% chance that Smith will achieve $100,000 of cost savings. What journal entry will Guarder make on January 1st to recognize the up-front cash payment?

Debit cash $48,000 Credit deferred revenue $48,000

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

False

On January 2, Main Company sells a video streaming device for $100. A one-year subscription to unlimited video streaming costs $150. Alternatively, customers can rent videos on demand or subscribe to a competing service. Customers may purchase the streaming device together with the one-year subscription for $200. Main should recognize revenue related to the video streaming device on

January 2

A seller estimates the stand-alone selling price of a good using the adjusted market assessment approach. Using this method, the seller may refer to what?

a competitor's selling price

If a company hires a contractor to construct its new headquarters building, the delivery of the materials and the labor and oversight services provided by the contractor represent

a single performance obligation because the contractor is promising to provide a building and the individual goods and services are inputs

When should the initial franchise fee be recognized by the franchisor?

after substantial performance of the initial services by the franchisor

Which of the following likely would be treated as a separate performance obligation related to the purchase of a pair of prescription eye glasses? - a micro-fiber cleaning cloth that is included with the glasses - an eye glass case needed to protect the lenses - an unlimited time coupon for 50% off an additional pair of eye glasses

an unlimited time coupon for 50% off an additional pair of eye glasses

Star Inc. licenses use of its intellectual property to customers. The benefit the customer receives from the license is not affected by Star's ongoing activity. Star should recognize revenue:

at the beginning of the license period

For licenses of functional intellectual property, revenue is typically recognized

at the start of the license period

Jonathan is estimating the amount of variable consideration for a specific contract. In deciding which estimation method to use, Jonathan should chose the one that

best predicts the amount he will receive

When the time value of money is significant, the transaction price is allocated

between the merchandise and financing componenet

If delivery and payment related to the sale of goods occur relatively near each other, the time value of money

can be ignored

Goods or services that are not distinct are ____ and treated as a ____ performance obligation.

combined; single

If Company A physically transfers goods to another company to sell on its behalf, but Company A retains title to the goods, this is referred to as a ____.

consignment

In a consignment, the entity who owns the goods, referred to as the ______, physically transfers the goods to another company, called the ______, who will attempt to sell the goods.

consignor; consignee

A good or service is capable of being distinct only if the customer

could use to good or service on its own or in combination with goods or services acquired elsewhere

Cash received from the sale of gift cards is recognized as _____ revenue

deferred

The account name "contract liability" is another name for

deferred revenue

On January 1, Roberts Company receives $36,000 in cash for providing internet access to customers for the upcoming year. On January 1, Roberts should debit cash and credit

deferred revenue for $36,000

A transaction price may be uncertain because the price

depends on the outcome of future events

Financial statement users can learn the amount of revenue reported by a company by reviewing its income statement and learn additional detailed revenue-related information by reviewing the company's

disclosure notes

The cost of a quality-assurance warranty is recognized

during the period of sale

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

Because the exact cost of a quality-assurance warranty is unknown when the related product is sold, the cost is

estimated and accrued during the year of sale

A warranty that is normally sold separate and covers either a longer period of time and or additional risks is a(n)

extended warranty

Good Buy Electronics Inc. encourages its customers to purchase a separate warranty that protects products for up to five years. This warranty represents a(n)

extended warranty

Fuller contracted with the owners of "Healthy Bakeries" to open a bakery, sell its signature products and use its name and logo. This agreement refers to a

franchise

When one party to an agreement grants the right to sell its products and use its name to another party, we refer to the arrangement as a:

franchise

In a franchise agreement, the ____ owns the company and gives an individual the right to use its name and sell its products.

franchisor

In a franchise arrangement, the ____ grants to the ______ the right to sell products and use its name.

franchisor; franchisee

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

future events

For contracts with multiple performance obligations, the seller allocates the transaction price to each performance obligation

in proportion to the stand-alone selling price of each good or service in the contract

A seller estimates the stand-alone selling price of goods and services using the adjusted market assessment approach. Using this method, the seller will consider what it could sell the goods or services for in the market

in which is normally conducts business

For a particular contract, the timing of revenue recognition is determined

individually for each performance obligation

Licenses typically allow customers to use the seller's ____ property.

intellectual

If a seller determines that the time value of money is significant, the seller adjusts sales or service revenue and recognizes the financing component as:

interest revenue

A seller estimates the stand-alone selling price of goods and services using the residual approach. Using this method, the seller will estimate the stand-alone price by subtracting from the total contract price the:

known stand-alone prices of the other products or services

Deferred revenue from the sale of gift cards is classified as a(n):

liability

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

licenses

As a practical matter, a seller can assume the time value of money is not significant if the period between delivery and payment is less than

one year

Revenue is typically recognized _____ for a license that provides the customer with the right of access to the seller's intellectual property.

over the license period

The contract price received for an extended warranty is recognized as revenue

over the warranty period

When should ongoing franchise fees be recognized by the franchisor?

over time in the periods the services are performed by the franchisor

Revenue is recognized when the _____ obligation is satisfied.

performance

A seller may recognize variable consideration only if it is _____ that there will not be significant reversals with respect to the amount that will be received in the future.

probable

Variable consideration can only be recognized if it is

probable that the amount will be received in the future

A(n) _____ warranty represents the cost of satisfying the performance obligation to deliver products of acceptable quality.

quality assurance

Emil Company evaluates gift cards that it sold two years ago. Based on past experience, it is highly unlikely that gift cards outstanding for two years or longer will be redeemed. Related to these gift cards, Emil should

recognize revenue

The amount received for an extended warranty is initially

recognized as a deferred revenue liability

Options for additional goods or services that are treated as separate performance obligations

require allocation of the contract price

If the stand-alone price of a good or service is very uncertain, the _____ approach may be used.

residual

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

If the consignee can't find a buyer within an agreed upon time, the consignee

returns the goods to the consignor

If based on past experience only a remote likelihood exists that a previously sold gift card will still be redeemed, the seller should recognize

revenue

Koster Inc. recognized $10,000 of service revenue, which represents one-half of the estimated bonus it expects to receive at the end of the year. On October 1, Koster re-assesses the situation and is unable to conclude that it is probable it will meet the conditions for receiving the bonus. What should Koster do?

reverse the already recognized revenue on October 1

A seller estimates the stand-alone selling price of goods using the expected cost plus margin approach. Using this method, the seller will estimate the cost of ______ and add an appropriate profit margin.

satisfying the performance obligation

The _____-_____ selling price is the amount at which the good or service is sold separately under similar circumstance.

stand-alone

Options for additional goods or services that are treated as separate performance obligations require allocation of the contract price based on their estimated

stand-alone price

A quality-assurance ______ obligates the seller to make repairs or replace products

warranty

The cost of a quality-assurance warranty is recognized during the year of sale and debited to ____ and credited to ______.

warranty expense; contingent warranty liability

For a consignment sale, when is inventory reduced for the cost of the item by the consignor?

when sold by the consignee

Options for additional goods or services are considered performance obligations if they provide a material right to the customer that the customer

would not receive otherwise