Chapter 6 Revenue Recognition

True or false: An estimated overall loss on a long-term contract is fully recognized in the first period the loss becomes evident, regardless of the revenue recognition method used.

True

True or false: Most long-term contracts should be viewed as single performance obligations.

True

Commitment to performing an obligation and enforcing related rights represents a critical aspect of a(n) _.

contract

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.

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

future events

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

individually for each performance obligation.

Methods that can be used to estimate progress toward completion are referred to as _-based and _-based methods.

input, output

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

intellectual

Typical costs included in a construction project include

labor, materials, and overhead.

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

licenses

Revenue recognition for services such as lending money and performing financial statement audits is typically

over time.

Revenue recognized each period is determined by multiplying total estimated revenue by

percentage completed to date and subtracting revenue recognized in prior periods

Revenue is recognized when the _ obligation is satisfied.

performance

An essential characteristic of a contract is that all parties to the contract are committed to

performing their obligations and enforcing their rights

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

The _ price is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services.

transaction

The amount the seller expects to be entitled to receive from the customer in exchange for providing goods or services is referred to as the

transaction price.

The core revenue recognition principle stipulates that companies recognize revenue when goods or services are

transferred to customers

A contract is said to have _ consideration if the price depends on the outcome of future events.

variable

What method(s) can be used to estimate progress toward completion for the purpose of recognizing revenue over time? (Select all that apply.)

-Output method -Input method

Which of the following support(s) the conceptual basis for separating contractual promises into several performance obligations? (Select all that apply.)

-Promises that can be viewed on a stand-alone basis should be separated -Financial statements better reflect timing of transfer of goods and services

Which statements are true regarding revenue recognition over time and upon completion? (Select all that apply.)

-Revenue recognition over time provides a more realistic measure of a project's periodic performance. -The same total amount of gross profit is recognized under both methods.

Which of the following situations may make the contract price less apparent? (Select all that apply.)

-Sales with right of return -Determining whether the seller is acting as principal or agent -Variable consideration provisions

Which of the following will not differ between revenue recognized over time and revenue recognized at completion? (Select all that apply.)

-Total revenue -Total expense -Total profit Select a concept resource

Which of the following situations may make the contract price less apparent? (Select all that apply.)

-Variable consideration provisions -The time value of money -Payment by the seller to the customer

Which of the following are included in the journal entry required to record construction costs for a long-term construction contract? (Select all that apply.)

-credit raw materials -debit construction in progress

Which of the following are included in the journal entry required to record the collection of cash from a customer related to a long-term construction contract? (Select all that apply.)

-debit cash -credit accounts receivable

When revenue related to a long-term construction contract is recognized over time, the journal entry to recognize revenue includes which of the following? (Select all that apply.)

-debit construction in progress -credit revenue from long-term contracts -debit cost of construction

Malone Corp. properly recognizes revenue upon completion of a long-term construction project. Malone has the following information for a 3-year contract. Year 1 Year 2 Year 3 Billings on contracts 10,000 10,000 30,000 Construction costs 8,000 8,000 8,000 The journal entry required at the end of the contract to recognize revenue and expenses will include (Select all that apply.)

-debit construction in progress $26,000. -credit revenue from contracts $50,000. -debit cost of construction $24,000.

Which of the following costs are included in a long-term construction contract? (Select all that apply.)

-direct material -overhead -direct labor

Prepayments for future goods or services should be (Select all that apply.)

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

Which of the following are indicators that a company is a principal? (Select all that apply.)

-it owns the inventory prior to delivery -It has primary responsibility for providing the product or service -it sets the sales price

When is a loss recognized on a long-term contract?

In the first period in which the loss become evident.

Which of the following services are commonly performed over time? (Select all that apply.)

-Lending of money -Consulting engagements -Financial statement audits

Which of the following likely will lead to revenue recognition at a point in time? (Select all that apply.)

-Buyer has legal title to the asset -Buyer has accepted the asset

Which of the following must a seller recognize as separate line items on the balance sheet? (Select all that apply.)

-Contract liabilities -Contract assets -Accounts receivable

Which of the following are key indicators that control of goods or services has been transferred to the customer? (Select all that apply.)

-Customer has legal title to the asset -Customer has an obligation to pay -Customer accepted the risks and rewards of ownership Select a concept resource to continue.

Which of the following are key indicators that control of goods or services has been transferred to the customer? (Select all that apply.)

-Customer has physical possession of the asset -Customer accepted asset -Customer has legal title to the asset

Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million, total construction costs are $3.75 million, actual costs incurred during the first year are $1.5 million, and the revenue recognized is $2 million. The journal entry to record revenue during year 1 is: (Select all that apply.)

-Debit: CIP $500,000 -Credit: Revenue $2 million -Debit: Cost of construction $1.5 million

Which methods may be used to estimate the stand-alone prices of goods and services? (Select all that apply.)

-Expected cost plus margin approach -Residual approach -Adjusted market assessment approach

When is gross profit recorded in the construction in progress account for a long-term contract accounted for upon completion?

At the completion of the contract.

The concept or principle that states that companies should recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for goods and services is referred to as the:

Core revenue recognition principle

What is the journal entry to recognize gross profit when revenue is recognized upon completion of a long-term construction project?

Debit Construction in Progress and Debit Cost of Construction; Credit Revenue from Long-Term Contracts

What is the correct journal entry to recognize profit for a long-term construction project for which revenue is recognized over time?

Debit construction in progress and debit cost of construction; credit revenue from long-term contracts

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

False

Munch Inc. delivers various types of construction materials to a customer's building site. Over an 18-month period, Munch's employees utilize Munch's machinery and tools to construct a new office building for the customer. Munch identifies only one performance obligation related to this contract because

Munch combines the materials, labor, and use of machinery and tools to construct a single complete building.

Match the term with the correct description.

Principal - Carries risks and rewards associated with collecting the contract price Agent - Earns a commission for helping seller transact with buyer Third Party - Is not directly involved with the transaction

Which method provides a better measure of a company's economic activity each period?

Revenue recognition over time

Which of the following differs between revenue recognized over time and revenue recognized at completion?

The timing of recognition

A seller recognizes contract liabilities, contract assets, and accounts receivable on separate lines of its __.

balance sheet

The transaction price is the amount the seller expects to ______ from the customer in exchange for providing goods and services.

be entitled to receive

Long-term contracts require careful consideration in identifying performance obligations because these type of contracts typically include many products and services that

could be viewed as separate performance obligations.

Prepayments by customers for future goods or services should initially be recorded as

deferred revenue.

For a promise to provide a good or service to be accounted for as a separate performance obligation, the good or service must be

distinct from other goods and services in the contract.

The formula: total estimated revenue times percentage completed to date less revenue recognized in prior periods is used to measure:

revenue recognized for the current period

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

stand-alone

Arthur Inc. provides services to consulting clients. Arthur should recognize the related revenue when

the related performance obligation is satisfied.

As compared to revenue recognition over time, the total amount of gross profit recognized related to revenue upon completion is:

the same

A long-term contract that includes many products and services that are capable of being distinct, may be accounted for as a single performance obligation because

the seller's role is to combine those products and services prior to delivery or completion.