ACCT 5110 Exam 2 Review

Mogul Company ships merchandise to Ski Outfit in a consignment arrangement. The arrangement specifies that Ski Outfit will attempt to sell the merchandise, and in return, Mogul will pay to Ski Outfit a 20% sales commission on any merchandise sold. During the year, Mogul ships inventory with a cost of $80,000 to Ski Outfit. By the end of the year, $60,000 of the merchandise has been sold to customers for a total of $85,000. What amount of inventory will Mogul report at year end? $0 $5,000 $16,000 $20,000

$20,000

On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%. What is the expected transaction price with variable consideration estimated as the most likely amount? -$4,750 -$5,000 -$5,500 -$5,750

$5,500 $5000 base + $500 (5000 * 10%) add'l for a week early because greater probability

(BE 6-7) eLean is an online fitness community, offering access to workout routines, nutrition advice, and eLean coaches. Customers pay a $50 fee to become registered on the website, and then pay $5 per month for access to all eLean services. How many performance obligations exist in the implied contract when a customer registers for the services?

1 performance obligation (providing access to services) Registration and one-time pmt and monthly payments are customer components assoc. w/transaction price.

Factoring Receivables

A company sells the rights to collect a receivable to another company, usually for a fee.

What indicators suggest that performance obligation has been satisfied at a single point in time?

A performance obligation is satisfied at a single point in time when control is transferred to the buyer at a single point in time. (often occurs at delivery).

What criteria determine whether a company can recognize revenue over time?

A performance obligation is satisfied over time if at least one of the following three criteria is met: 1. The customer consumes the benefit of the seller's work as it is performed, 2. The customer controls the asset as it is created, or 3. The seller is creating an asset that has no alternative use to the seller, and the seller can receive payment for its progress even if the customer cancels the contract.

Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction by debiting sales returns and crediting: -Sales. -Sales discounts. -Allowance for uncollectible accounts. -Accounts receivable.

Accounts receivable

(BE 6-4) Sarjit Systems sold software to a customer for $80,000. As part of the contract, Sarjit promises to provide "free" technical support over the next six months. Sarjit sells the same software without technical support for $70,000 and a stand-alone six-month technical support contract for $30,000, so these products would sell for $100,000 if sold separately. Prepare Sarjit's journal entry to record the sale of the software.

Cash 80,000 Sales revenue (software) 56,000 Deferred revenue (tech support) 24,000 Based on relative stand-alone selling prices, the software comprises 70% ($70,000 ÷ 100,000) of the total fair values, and the technical support comprises 30% ($30,000 ÷ $100,000). Therefore, Sarjit would recognize $56,000 ($80,000 * 70%) in revenue when the software is delivered and defer the remaining $24,000 ($80,000 * 30%) to be recognized evenly over the next six months as the technical support service is provided.

Which of the following statements best describes when firms should recognize revenue. -Companies recognize revenue when the earnings process is virtually complete and it is probable that payments will be received. -Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services. -Companies recognize revenue when goods or services are transferred to the customer and payments are received. -Companies recognize revenue when the goods or services are transferred to the customer in an arm's length transaction.

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services

Bad Debt Expense

Companies recognize the possibility of uncollectible accounts by adjusting Bad Debt Expense and the Allowance for Doubtful Accounts at the end of each accounting period, based on an estimate of what they expect bad debt to be.

Companies recognize revenue only when: -A contract is reasonably likely to exist. -A performance obligation is designated in a written contract.- -A written contract is in place and payment is variable. -Control over goods or services has been transferred from the seller to the customer.

Control over goods or services has been transferred from the seller to the customer.

For a typical sale, companies credit inventory and debit which of the following accounts? -Cost of goods sold -Marketing expenses -Net income -PP&E

Cost of goods sold

capitalized cost

Costs that are recorded initially as an asset but then expensed in future periods.

Are gains on sale of assets a debit or a credit?

Credit

On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms 2/10, n/30. Cherokee uses the net method of accounting for sales discounts. Which of the following represents one of the journal entries Cherokee would make on November 10? -Credit sales, $7,840 -Debit accounts receivable, $8,000 -Debit accounts receivable, $160 -Debit sales discounts, $160

Credit sales, $7,840

During 2021, its first year of operations, Ashbaugh Industries recorded sales of $21,000,000 and experienced returns of $1,400,000. Returns are accounted for as they occur, with additional estimated returns accrued at the end of the period. Cost of goods sold totaled $12,600,000 (60% of sales). The company estimates that 8% of all sales will be returned. The year-end adjusting journal entry to account for anticipated sales returns would include a: -Credit to sales returns of $280,000. -Credit to allowance for sales returns of $280,000. -Debit to sales returns of $1,680,000. -Debit to cost of sales of $168,000.

Credit to allowance for sales returns of $280,000

Cash includes:

Currency and coins money held in checking accounts valid checks and money orders received from customers

Current vs. Noncurrent Receivables

Current = will be converted to cash in less than 1 year

Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for sales discounts. Which of the following represents one of the journal entries Oswego would make on April 12? -Debit accounts receivable, $46,000 -Debit accounts receivable, $45,540 -Credit sales, $45,540 -Credit sales discounts, $460

Debit accounts receivable, $46,000

What is the depreciable base?

Depreciable Base = Original Cost - Salvage (Residual) Value *This becomes the numerator in calculating depreciation rate.

Straight-line Depreciation Method

Depreciation Rate = (cost - salvage value) / useful life OR Depreciable base/Est. life e.g. Equipment purchase price $115,000, Residual value $5,000, est. Useful life 10 yrs Deprec. rate: (115,000-5,000)/10 = $11,000 per yr.

Units of Production Depreciation Method (Activity-Based)

Depreciation Rate per unit = Depreciation base (cost-residual value)/Est. Total output) e.g. Delivery Truck: Purchased $33,000, Residual value $3000, est total miles driven 100,000 Deprec rate: (33,000 - 3,000)/100,000 mi. = $0.30/mi.

Bad Debt Expense Income Statement Approach

Estimate bad debt expense as a percentage of each period's net credit sales

Bad Debt Expense Balance Sheet Approach

Estimate bad debt expense by computing the net realizable value (NVR) of all accounts receivables (NVR = the net amount co. expects to receive in cash)

T/F? Inventory shipped f.o.b. shipping point remains in the seller's accounting inventory records during transit.

False

T/F? Relative to the gross method of accounting for cash discounts on sales, the net method of accounting for cash discounts on sales requires an additional subsequent journal entry if a discount is taken.

False

How do you calculate Gains or losses from Sale of Assets

Gain or loss = Book value of asset sold — price received for that asset (BV=Historical cost - Accumulated depreciation)

How do you calculate gains and losses from exchange of assets?

Gain or loss = Fair value of asset received — book value of asset given up

What are the two methods used for sales discounts?

Gross Method and Net Method

What is an asset's book value? (a.k.a. carrying value)

Historical cost — Accumulated depreciation

What are the two approaches to Accounting for Bad Debt Expense

Income statement approach: Estimate bad debt expense as a percentage of each period's net credit sales Balance sheet approach: Estimate bad debt expense by computing the net realizable value of all accounts receivables

What is accumulated depreciation?

It equals the total depreciation taken on an asset from when it was purchased until the current date.

(BE 6-3) On May 1, 2021,Varga Tech Services signed a $6,000 consulting contract with Shaffer Holdings. The contract requires Varga to provide computer technology support services whenever requested over the period from May 1, 2021, to April 30, 2022, with Shaffer paying the entire $6,000 on May 1, 2021. How much revenue should Varga recognize in 2021?

Performance obligation is consumed by the customer as the seller's work is performed. Therefore, Varga should recognize revenue over time: $4,000 ($6,000 × 8/12 months) in 2021.

Performance obligation

Promise by seller to transfer goods/services to customer

Nontrade Receivables

Receivables not having to do with day-to-day operations Loans to officers, employees, directors, subsidiaries Deposits paid Interest/dividends receivable Insurance reimbursements Court settlements Tax refunds

Gross Method for Sales Discounts

Recognize full amount of sale Any sales discount realized goes to Sales Discounts, a contra-revenue account, when paid, which offsets revenue according to the discount taken

Net method for Sales Discounts

Recognize full amount of sale less any potential discount If customer does not pay in time to realize discount, the portion of cash received above the discounted price is recorded as interest revenue

Which of the following does not reduce the balance in accounts receivable? -Returns on credit sales. -Collections from customers. -Recognizing bad debts expense. -Write-offs.

Recognizing bad debts expense

Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the returned material, Tom's would credit accounts receivable and debit: -Sales. -Sales discount. -Sales returns. -Sales allowances.

Sales returns

We recognize service revenue either at one point in time or over a period of time. Explain the rationale for recognizing service revenue using these two approaches.

Services typically qualify for revenue recognition over time because the customer consumes the benefit of the seller's work as it is performed. However, for convenience, even if the service qualifies for recognition of revenue over time, the seller might wait to recognize revenue until the service has been completed because it is more convenient to account for it that way.

Revenue Recognition Principles (5 Key Steps to apply)

Step 1: Identify the contract Step 2: Identify the performance obligation(s) (Single v. multiple) Step 3: Determine transaction price Step 4: Allocate transaction price (no allocation in single) Step 5: Recognize revenue when (or as) each performance obligation is satisfied. (Either Point In Time or Over Period of Time)

Historical Costs

The cash or cash equivalent cost of obtaining an asset and bringing it to location and preparing it for its intended use (What costs to include? Think: "Can you use the asset as intended without a particular cost?")

What are the five key indicators that decide whether control of a good or service has passed from the seller to the buyer?

The customer is more likely to control a good or service if the customer has: 1. An obligation to pay the seller. 2. Legal title to the asset. 3. Physical possession of the asset. 4. Assumed the risks and rewards of ownership. 5. Accepted the asset. *Management should evaluate these indicators individually and in combination to decide whether control has been transferred.

For a typical manufacturing company, the most common critical point for recognizing revenue is the date: An order is received. Production is completed. The product is delivered. Payment is received.

The product is delivered

What are the two types of sales discounts?

Trade discounts: percentage reduction from the normal selling price (unrelated to when payment occurs) Cash discounts: reductions in the selling price related to prompt payment of cash (Such as "2/10, n/30," which implies a 2% disc. if full pmt made w/in 10 days, and no disc. if pmt made on day 11 to day 30

T/F? For a sale of goods or services, the transaction price should be allocated to the contract's performance obligations in proportion to the stand-alone selling prices of the performance obligations.

True

T/F? Recognizing sales returns only when merchandise is returned could result in an overstatement of income in the period of the related sale.

True

T/F? Revenue typically should not be recognized when payment is received but the goods are still in the seller's warehouse.

True

T/F? The allowance method for estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to their appropriate carrying value.

True

(BE 6-2) Estate Construction is constructing a building for CyberB, an online retailing company. Under the construction agreement, if for any reason Estate can't complete construction, CyberB would own the partially completed building and could hire another construction company to complete the job. When should Estate recognize revenue: as the building is constructed, or after construction is completed?

Under Estate's construction agreement with CyberB, if for any reason Estate can't complete construction, CyberB would own the partially completed building. Therefore, criterion 2 (the customer controls the asset as it is created) is satisfied, and revenue should be recognized as the building is being constructed.

Internal Controls

Used to: Ensure corporate policy is being followed, Help to minimize errors and thefts, Improve the accuracy and reliability of the financial statements

Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue: -When Boomerang delivers a computer to a customer, ignoring potential returns. -When Boomerang delivers a computer to a customer, in an amount that is reduced by the expected returns either immediately or as an adjusting entry at the end of the accounting period. -When Boomerang receives cash from the customer. -When a customer returns a computer.

When Boomerang delivers a computer to a customer, in an amount that is reduced by the expected returns either immediately or as an adjusting entry at the end of the accounting period.

What are the two types of factoring receivables?

With recourse: the seller retains all the risk of bad debts. (If buyer fails to pay, seller must reimburse buyer) Without recourse: the buyer cannot ask the seller for more money if the receivables prove to be uncollectible later

Notes receivables

Written promises to pay a specific sum on a specified future date (collected 60 + days out)

Cash equivalents include:

money market funds treasury bills commercial debt (To qualify as a cash equivalent, the security must have a maturity date no longer than three months from the date of purchase)