Intermediate Accounting II Final

Five Step Process of Revenue Recognition The fifth step..

Recognize revenue when each performance obligation is satisfied

Five Step Process of Revenue Recognition The fourth step..

Allocate transaction price to the separate performance obligations

If a customer fails to meet the discount threshold and it's already been accounted for, the journal entry would be

Debit Cash orig. price, credit Sales Discount Forfeited and A/R

Five Step Process of Revenue Recognition The third step..

Determine Transaction Price

Five Step Process of Revenue Recognition The first step..

Identify contracts with customers

Five Step Process of Revenue Recognition The second step..

Identify separate performance obligations in the contract

Expected Value

Probability-weighted amount in range of possible consideration amounts -->Co's use to est. consideration to be received; may be appropriate if co. has similar contracts

Most Likely Amount

Single most likely amount in a range of possible considerations -->may be appropriate if contract only have 2 poss. consideration amts

Variable consideration

The prices of goods/services dependent on future events e.g. price increases, volume discounts, rebates, etc.

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. If Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16986 a. $1,231,066 b. $1,090,912 c. $1,139,874 d. $1,200,000

a. $1,231,066

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. If the selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, what are the equal annual payments? PVAD PVOA PVSS 8%, 5 periods 4.31213 3.99271 .68058 10%, 5 periods 4.16986 3.79079 .62092 a. $175,820 b. $162,795 c. $181,972 d. $195,356

a. $175,820

Marle Construction enters into a contract with a customer to build a warehouse for $850,000 on March 30, 2021 with a performance bonus of $50,000 if the building is completed by July 31, 2021. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by--Probability July 31, 2021--65% August 7, 2021--25% August 14, 2021--5% August 21, 2021--5% The transaction price for this transaction is a. $895,000 b. $850,000 c. $852,500 d. $585,000

a. $895,000

A single lease expense is recognized on the income statement for a. an operating lease. b. a finance lease. c. both a finance lease and an operating lease. d.neither a finance lease nor an operating lease

a. an operating lease

Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be a. recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed. b. recognized in the current period under the percentage-of-completion method, but the completed-contract method should defer recognition of the loss to the time when the contract is completed. c. recognized in the current period under the completed-contract method, but the percentage-of-completion method should defer the loss until the contract is completed. d. deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

a. recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.

On January 2, 2021, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2021. Brick Co. agrees to guarantee the $150,000 residual value of the asset at the end of the lease term. The expected value of the residual value is $50,000. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What net (two entries combined) journal entry would Brick Co. make at January 2, 2021 to record the lease? PVAD PVOA PVSS 8%, 5 periods 4.31213 3.99271. .68058 10%, 5 periods 4.16986 3.79079 .62092 a. Debit: Right-of-Use Asset 598,449; Credit: Lease Liability 598,449 b. Debit: Right-of-Use Asset 757,999; Credit: Cash 160,000; Credit: Lease Liability 597,999 c. Debit: Right-of-Use Asset 689,941; Credit: Cash 160,000; Credit: Lease Liability 529,941 d. Debit: Right-of-Use Asset 706,892; Credit: Cash 160,000; Credit: Lease Liability 546,892

b. Debit: Right-of-Use Asset 757,999; Credit: Cash 160,000; Credit: Lease Liability 597,999

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year (beginning January 1, 2021). (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. PV Annuity Due PV Ordinary Annuity 8%, 3 periods 2.78326 2.57710 10%, 3 periods 2.73554 2.48685 What type of lease is this from Alt Corporation's viewpoint? a. Operating lease b. Finance lease c. Sales-type lease d. Direct-financing lease

b. Finance lease

What impact does a bargain purchase option have on the present value of the required lease payments used to compute the lease liability by the lessee? a. There is no impact as the option does not enter into the transaction until the end of the lease term. b. The lessee must increase the present value of the required lease payments by the present value of the option price. c. The lessee must decrease the present value of the required lease payments by the present value of the option price. d. The required lease payments would be increased by the option price.

b. The lessee must increase the present value of the required lease payments by the present value of the option price.

Botanic 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 $4,000 of products (cost $2,000). Assuming that based on prior experience, estimated returns are 20%. The journal entry to record the expected sales return and cost of goods sold includes a a. debit to Sales Revenue and a credit to Cash of $4,000. b. debit to Sales Returns and Allowances of $800 and a credit to Cost of Goods Sold of $400. c. debt to Cost of Goods Sold and credit to Inventory for $4,000. d. credit to Estimated Inventory Returns of $400

b. debit to Sales Returns and Allowances of $800 and a credit to Cost of Goods Sold of $400.

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(n) a. outright sale. b. financing transaction. c. bill and hold transaction. d.put option

b. financing transaction

On August 5, 2021, Famous Furniture shipped 20 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was $350 each. The cost of shipping the dining sets amounted to $1,800 and was paid for by Famous Furniture. On December 31, 2021, the consignee reported the sale of 15 dining sets at $850 each. The consignee remitted payment for the amount due after deducting a 6% commission, advertising expense of $300, and installation and setup costs of $390. The amount cash received by Famous furniture is a. $12,750 b. $11,985 c. $11,295 d.$11,685

c. $11,295

On December 31, 2019, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 31, 2027. Equal annual payments of $500,000 are due on December 31 of each year, beginning with December 31, 2019. The lease is properly classified as a finance lease on Lang 's books. The present value at December 31, 2019 of the eight lease payments over the lease term discounted at 10% is $2,934,213. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total liability for finance leases on its December 31, 2020 balance sheet is a. $2,727,635. b. $2,500,397. c. $2,177,634. d.$3,000,000.

c. $2,177,634.

Harter Company leased machinery to Stine Company on July 1, 2020, for a ten-year period expiring June 30, 2030. Equal annual payments under the lease are $250,000 and are due on July 1 of each year. The first payment was made on July 1, 2020. The rate of interest used by Harter and Stine is 9%. The lease receivable before the first payment is $1,750,000 and the cost of the machinery on Harter's accounting records was $1,550,000. Assuming that the lease is appropriately recorded as a sales-type lease for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2020? a. $157,500 b. $135,000 c. $67,500 d. $0

c. $67,500

P & G Auto Parts sells parts to AAA Car Repair during 2020. P&G offers rebates of 2% on purchases up to $30,000 and 3% on purchases above $30,000 if the customer's purchases for the year exceed $100,000. In the past, AAA normally purchases $150,000 in parts during a calendar year. On March 25, 2021, AAA Car Repair purchased $37,000 of parts. The journal entry to record the purchase includes a a. credit to Accounts Receivable for $37,000. b. debit to Accounts Receivable for $36,400. c. credit to Sales Revenue for $36,190. d.credit to Sales Revenue for $36,400

c. credit to Sales Revenue for $36,190.

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. Container Corporation purchased computer equipment, installation and future training for a total cost of $144,000 on March 15, 2021. The computer equipment was immediately installed. Estimated standalone fair values of the equipment, installation and training are $90,000, $60,000 and $30,000 respectively. The journal entry to record the transaction on March 15, 2021 will include a a. credit to Sales Revenue for $144,000. b. debit to Unearned Service Revenue of $30,000. c. credit to Unearned Service Revenue of $24,000. d. credit to Service Revenue of $60,000.

c. credit to Unearned Service Revenue of $24,000

For a sales-type lease, a. sales revenue includes the present value of the unguaranteed residual value. b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold. c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. d.assets are depreciated by the lessor

c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. d.assets are depreciated by the lessor

Consideration Paid or Payable to Customers

co's s/t make pmts to customers as part of revenue arrangement --> discounts, volume rebates, coupons, free products/services, etc.

Noncash Consideration

co's s/t receive consideration in the form of goods, services, etc -->generally recognized on FV basis of what's received

A co. satisfies its performance obligations when..

customer obtains control of good/service

Sales Returns and Allowances..

customers may receive.... 1. full/partial refund 2. exchange 3. credit towards amt owed

During 2019, Gates Corp. started a construction job with a total contract price of $7,000,000. The job was completed on December 15, 2020. Additional data are as follows: 2019 2020 Actual costs incurred $2,700,000 $3,050,000 Estimated remaining costs 2,700,000 — Billed to customer 2,400,000 4,600,000 Received from customer 2,000,000 4,800,000 Under the completed-contract method, what amount should Gates recognize as gross profit for 2020? a. $450,000 b. $625,000 c. $950,000 d. $1,250,000

d. $1,250,000

On January 2, 2021, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $300,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a finance lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line amortization for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,800,000, based on implicit interest of 10%. In its 2021 income statement, what amount of amortization expense should Hernandez report from this lease transaction? a. $300,000 b. $240,000 c. $180,000 d. $120,000

d. $120,000

Bruner Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2020, Bruner started work on a $28,000,000 construction contract that was completed in 2021. The following information was taken from Bruner's 2020 accounting records: Progress billings $8,800,000 Costs incurred 8,400,000 Collections 5,600,000 Estimated costs to complete 16,800,000 What amount of gross profit should Bruner have recognized in 2020 on this contract? a. $2,800,000 b. $1,866,667 c. $1,400,000 d. $933,333

d. $933,333

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. Revenue should be a. recorded on January 15, 2021. b. recorded on March 1, 2021. c. recorded on March 31, 2021. d.recorded on April 30, 2021

d. recorded on March 31, 2021

The best measure of FV is..

the standalone selling price

TVM

timing of pmt doesn't always match transfer of goods/services to customer -->used if contract involves a significant financing component