Ch.18 Revenue Recognition

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contract

An agreement between two or more parties that is enforceable rights or obligations. Can be: Written Oral, OR Implied from customary business practice

Revenue from Contracts with Customers

Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that the company receives, or expects to receive, in exchange for these goods or services. - Adopts a Asset-Liability approach

To address inconsistencies and weaknesses in revenue recognition, a comprehensive revenue recognition standard was developed entitled the - Revenue Recognition Principle. - Principle-based Revenue Accounting. - Rules-based Revenue Accounting. - Revenue from Contracts with Customers.

Revenue from Contracts with Customers.

performance obligation

The objective is to determine whether the nature of a company's promise is to transfer individual goods and services to the customer or to transfer a combined item (or items) for which individual goods or services are inputs.

A contract liability is a company's obligations to transfer goods or services to a customer for which the company has received consideration from the customer. An example of a contract liability is - Prepaid subscription. - Unearned magazine subscription. - Mortgage Payable. - Service Revenue.

Unearned magazine subscription.

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 - an outright sale. - a financing transaction. - a repurchase transaction. - a put option.

a financing transaction.

The role of the agent in a Principal-Agent relationship is to - arrange for the principal to provide goods or services to a customer. - provide the goods or services for a customer. - market the principal goods and services to prospective customers. - develop and maintain goodwill of the principal's customers.

arrange for the principal to provide goods or services to a customer.

A transaction price for multiple performance obligations should be allocated - based on selling price from the company's competitors. - based on what the company could sell the goods for on a standalone basis. - based on forecasted cost of satisfying performance obligation. - based on total transaction price less residual value.

based on what the company could sell the goods for on a standalone basis.

A company has satisfied its performance obligation when the - company has received payment for goods or services. - company has significant risks and rewards of ownership. - company has legal title to the asset. - company has transferred physical possession of the asset.

company has transferred physical possession of the asset.

The cost-to-cost basis measures progress towards completion by - comparing costs incurred to date with total costs to complete the contract. - tracking results of work completed to date; it is an output measure. - tracking floors of a building completed versus floors still to be completed. - tracking miles of a highway completed versus miles of highway still to be completed.

comparing costs incurred to date with total costs to complete the contract.

Consignments are a specialized marketing method whereby the - consignee purchases goods for sale and sends payment when goods are sold. - consignee (agent) holds title to the product. - consignee pays for good up front and is paid when merchandise is sold. - consignee takes possession of merchandise but title remains with manufacturer.

consignee takes possession of merchandise but title remains with manufacturer.

Consigned goods are recognized as revenues by the - consignor when a sale to a third party has occurred. - consignor when the merchandise has been shipped to a consignee. - consignee when a sale to a third party has occurred. - consignor when it receives notification and payment from consignee for goods sold.

consignor when it receives notification and payment from consignee for goods sold.

Partial satisfaction of a multiple performance obligation is reported on the balance sheet as - contract liability. - receivable. - contract asset. - unearned service revenue.

contract asset.

The third step in the process for revenue recognition is to - determine the transaction price. - identify the separate performance obligations in the contract. - allocate transaction price to the separate performance obligations. - recognize revenue when each performance obligation is satisfied.

determine the transaction price.

A company must account for a contract modification as a new contract if the - goods or services are interdependent on each other. - promised goods or services are distinct. - company has the right to receive consideration equal to standalone price. - goods or services are distinct and company has right to receive the standalone price.

goods or services are distinct and company has right to receive the standalone price.

The first step in the process for revenue recognition is to - determine the transaction price. - identify the contract with customers. - allocate transaction price to the separate performance obligations. - identify the separate performance obligations in the contract.

identify the contract with customers.

The second step in the process for revenue recognition is to - allocate transaction price to the separate performance obligations. - determine the transaction price. - identify the contract with customers. - identify the separate performance obligations in the contract.

identify the separate performance obligations in the contract.

A contract between Boeing and Delta in which Boeing supplies planes to Delta - is an agreement that creates enforceable rights and obligations for both parties. - is an agreement that creates enforceable rights and obligations for Boeing only. - cannot create multiple performance obligations. - is considered wholly unperformed until Boeing receives payment from Delta.

is an agreement that creates enforceable rights and obligations for both parties.

A contract - must be in writing to be an enforceable contract. - is an agreement that creates enforceable rights and obligations. - is enforceable if each party can unilaterally terminate the contract. - does not need to have commercial substance.

is an agreement that creates enforceable rights and obligations.

The use of the net method of recognizing revenue by an agent - is appropriate as long as both revenue and costs are included. - is the correct method in a principal-agent relationship. - could result in an overstatement of the agent's revenue. - could result in an understatement of the agent's revenue.

is the correct method in a principal-agent relationship.

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 - recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed. - recognized in the current period under the percentage-of-completion method, but the completed-contract method defers recognition of the loss to the time when the contract is completed. - recognized in the current period under the completed-contract method, but the percentage-of-completion method defers the loss until the contract is completed. - deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

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

The converged standard on revenue recognition - reduces the number of disclosures required for revenue reporting. - increases the complexity of financial statement preparation. - recognizes and measures revenue based on changes in assets and liabilities. - simplifies revenue recognition practices across entities and industries.

recognizes and measures revenue based on changes in assets and liabilities.

The percentage-of-completion method - recognizes revenue and gross profit each period based upon progress. - is used primarily for short-term contracts. - accumulates construction costs in the Billings on Construction in Progress account. - recognizes revenue and gross profits only when contract is completed.

recognizes revenue and gross profit each period based upon progress.

Consideration paid or payable to customers - includes volume rebates which increases the cost to the customer. - includes discounts which reduces the cost of purchases to the company. - reduces the consideration received and the revenue to be recognized. - includes prompt settlement discount which increases revenues.

reduces the consideration received and the revenue to be recognized.

Unconditional rights to receive consideration because a performance obligation has been satisfied are - reported as a receivable on the balance sheet. - reported as a contract asset on the balance sheet. - reported as a contract liability on the balance sheet. - not reported on the balance sheet.

reported as a receivable on the balance sheet.

Disclosure related to revenue - does not require capitalized costs to obtain and fulfill a contract. - does not require judgments that affect amount and timing of revenues from contracts. - requires disclosure of remaining performance obligations. - requires disaggregation of revenues by reportable segments.

requires disclosure of remaining performance obligations.

Under the completed-contract method, - revenue, cost, and gross profit are recognized during the production cycle. - revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed. - revenue, cost, and gross profit are recognized at the time the contract is completed. - None of these answers are correct.

revenue, cost, and gross profit are recognized at the time the contract is completed.

In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the - total costs incurred to date. - total estimated cost. - unbilled portion of the contract price. - total contract price.

total estimated cost.


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