ECON136C chapter 18

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 False

T

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

T

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

T

A performance obligation may be based on customary business practice. True False

T A performance obligation may be explicit, implicit, or based on customary business practice.

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 transferred legal title to the asset. c) the selling company has right to payment for the good or service. d) the customer has physical possession of the asset.

A

Black Bear Construction Company has a contract to construct a $6,000,000 bridge at an estimated cost of $5,300,000. The contract is to start in July 2017, and the bridge is to be completed in October 2019. The following data pertain to the construction period. (Note that by the end of 2018, Black Bear has revised the estimated total cost from $5,300,000 to $5,400,000.) (see #37 table) What amount of gross profit should Black Bear recognize in 2018 using the percentage-of-completion method? a) $245,000 b) $270,000 c) $315,000 d) $ 0

A

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? a) $ 48,000 b) $ 57,352 c) $ 75,529 d) $229,406

A

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

A

When goods are consigned, the consignee a) only recognizes revenue associated with commissions. b) makes a journal entry when the consigned merchandise is received. c) records advertising paid for the consignment as an expense. d) recognizes both commission revenue and sales revenue.

A

Which type of revenue or gain is generally recognized with the passage of time? a) Long-term construction contracts. b) Revenue from fees or services. c) Gain or loss from disposition. d) Revenue from sales.

A

Sufjan Company has a contract to sell 200 units to a customer for $14,000. After 140 units have been delivered, Sufjan modifies the contact by promising to deliver 30 more units for an additional $60 per unit (the standalone selling price at the time of the contract modification). What is the additional revenue to be earned after the modification? a) $6,000 b) $1,800 c) $6,300 d) $5,400

A $14k/200 = 70 60(70) + 30(60)

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) $20,000 d) $0

A $1m + 20k + 40k = 1060k (40k/1060k)*1m

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) a liability of $200,000. b) sales revenue of $200,000 and a liability of $33,280. c) sales revenue of $200,000. d) sales revenue of $200,000 and interest expense of $33,280.

A This transaction represents a repurchase agreement. At 1/1/16, Hendrix should record a liability of $200,000 because this agreement is a financing transaction and not a sale.

One criteria that indicates that a company should disregard revenue guidance for contracts is when a) each party's rights regarding the goods or services to be transferred can be identified. b) each party can unilaterally terminate the contract without compensation. c) the contract has commercial substance. d) the payment terms for the goods and services to be transferred can be identified.

B

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

B

The Billings on Construction in Process account is reported: a) in the current liability section only. b) in either the current asset or current liability section. c) as a revenue on the income statement. d) in the current asset section only.

B Billings on Construction in Process is reported as a current asset or current liability, depending on whether its balance is larger or smaller than the Construction in Process account balance.

In a consignment sale, the consignee a) records advertising paid for the consignment as an expense. b) records a payable when consigned merchandise is sold. c) recognizes both commission revenue and sales revenue. d) makes a journal entry when the consigned merchandise is received.

B The consignee records a payable to the consignor, not sales revenue, when consigned merchandise is sold. The consignee will later record commission revenue.

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

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

C

A loss in the current period on a contract expected to be profitable upon completion in a later year is: a) recognized under both the completed-contract method and the percentage-of-completion method. b) not recognized under either the completed-contract method or the percentage-of-completion method. c) recognized only under the percentage-of-completion method. d) recognized only under the completed-contract method.

C

An indication that the customer has not taken control of the good or service is a) the customer has physical possession of the asset. b) the selling company has transferred legal title to the asset. c) the customer has no significant risks or rewards of ownership. d) the selling company has right to payment for the good or service.

C

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

C

Companies should use the percentage-of completion method to account for long-term construction contracts a) when estimates of progress towards satisfaction of the performance obligation (completion) are not dependable. b) when there are inherent hazards in the contract beyond the normal, recurring business risks. c) unless required to use the completed-contract method. d) when the company has primarily short-term contracts.

C

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 reason for the bill-and-hold arrangement must be substantive. c) The product must be physically located in the seller's warehouse. d) The seller cannot have the ability to use the product or to direct it to another customer.

C

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

C

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? a) $240,000 b) $229,406 c) $400,000 d) $629,406

C

One criteria that indicates that a company should disregard revenue guidance for contracts is when a) the payment terms for the goods and services to be transferred can be identified. b) the contract has commercial substance. c) each party can unilaterally terminate the contract without compensation. d) each party's rights regarding the goods or services to be transferred can be identified.

C

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

C

Under the completed contract method, the Construction in Process account balance will consist of a) construction costs and billings. b) gross profit only. c) construction costs only. d) construction costs and gross profit.

C

When using the percentage of completion method, the company a) recognizes revenues and gross profit only when the contract is completed. b) accumulates progress billings in an inventory account (Construction in Process). c) recognizes revenues and gross profit each period during the contract. d) accumulates construction costs only in an inventory account (Construction in Process).

C

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) $ 0 d) $2,000

D

The best measure of the fair value of a performance obligation is a) adjusted market assessment. b) residual value. c) expected cost plus a margin. d) standalone selling price.

D

Under the percentage-of-completion method, how should the balances of Billings on Construction in Process and Construction in Process be reported prior to the completion of a long-term contract? a) Billings on Construction in Process as revenue and Construction in Process as inventory. b) Billings on Construction in Process as a deferred revenue and Construction in Process as a deferred expense. c) Net, as revenue from construction if a credit balance, and as a loss from construction if debit balance. d) Net, as a current asset if a debit balance, and as a current liability if a credit balance.

D

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? a) $480,000 b) $500,000 c) $460,000 d) $486,000

D 400k + .5(100k) + .3(80k) + .2(60k)

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 a) $190,000 b) $ 80,000 c) $ 0 d) $110,000

D Bret should record a Warranty Liability of $80,000 on the assurance warranty, and Unearned Warranty Revenue of $110,000 on the extended warranties.

On January 1, 2017, Purdy Company enters into a contract to transfer Blue and Rain to Georgia Co. for $300,000. The contract specifies that payment for Blue will not occur until Rain is also delivered. In other words, payment will not occur until both Blue and Rain are transferred to Georgia. Purdy determines that standalone prices are $110,000 for Blue and $190,000 for Rain. Purdy delivers Blue to Georgia on February 10, 2017. On March 15, 2017, Purdy delivers Rain to Georgia. Purdy should record a) Accounts Receivable of $110,000 on February 10. b) Accounts Receivable of $300,000 on January 1. c) Contract Asset of $110,000 on January 1. d) Contract Asset of $110,000 on February 10.

D Conditional rights to receive consideration are reported as contract assets rather than as receivables. Thus, a contract asset of $110,000 would be reported on February 10.

Black Sea Construction Company has a contract to construct a $6,000,000 oil rig at an estimated cost of $5,300,000. The contract is to start in July 2017, and the oil rig is to be completed in October 2019. The following data pertain to the construction period. (see #44 table) What amount of gross profit (loss) should Black Sea recognize in 2018 using the percentage-of-completion method? a) ($200,000) b) ($295,000) c) ($900,000) d) ($375,000)

D The entire $200,000 loss must be recognized in addition to offsetting any previously recognized gross profit.

Reedy Builders, Inc. is using the completed-contract method for a $12,400,000 contract that will take three years to complete. Data at December 31, 2017, the end of the first year, are as follows: Costs incurred to date: $5,200k Est costs to complete: 7,800k Billings to date: 4,920k Collections to date: 4,540k The gross profit or loss that should be recognized for 2017 is a) $0. b) a $240,000 loss. c) a $200,000 loss. d) a $600,000 loss.

D Under both the percentage-of-completion and the completed-contract methods, the company must recognize in the current period the entire loss immediately. 12400k - 5200k - 7800k

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

F

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

F

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

F

The principal advantage of the completed-contract method is that reported revenue reflects estimates rather than waiting for final results. True False

F

Companies expense incremental costs if these costs are incurred to obtain a contract with a customer. True False

F Companies capitalize incremental costs if these costs are incurred to obtain a contract with a customer. They do not expense incremental contract costs.

Conditional rights should be reported separately on the balance sheet as contract liabilities. True False

F Conditional rights should be reported separately on the balance sheet as contract assets, not contract liabilities.

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

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

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

T

Assets or liabilities are not recognized until one or both of the parties to the contract perform. True False

T