Chapter 18 Practice Quiz

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

A) records a payable when consigned merchandise is sold.

In determining the transaction price, the company must consider: A) variable consideration, non-cash consideration, time value of money, and consideration payable. B) variable consideration, but not non-cash consideration. C) non-cash consideration, but not the time value of money. D) the time value of money, but not consideration payable.

A) variable consideration, non-cash consideration, time value of money, and consideration payable.

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) $400,000 C) $629,406 D) $229,406

B) $400,000 ($400,000 is recorded as Sales Revenue, while the other $229,406 will eventually be Interest Revenue. $629,406 is the amount recorded as Notes Receivable.)

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) Contract Asset of $110,000 on February 10. C) Contract Asset of $110,000 on January 1. D) Accounts Receivable of $300,000 on January 1.

B) Contract Asset of $110,000 on February 10.

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

B) The product must be physically located in the seller's warehouse.

Pizza Factory enters into a franchise agreement on 11/1/16 giving Mow's House the right to operate as a franchisee of Pizza Factory for 5 years. Pizza Factory prepared this entry on 11/1/16: Cash 40,000 Notes Receivable 60,000 Discount on Notes Receivable 12,086 Unearned Franchise Revenue 40,000 Unearned Service Revenue (training) 19,914 Unearned Sales Revenue (equipment) 28,000 Pizza Factory satisfies the performance obligations related to the elements above when the franchise opens on 3/1/17. Other than interest, how much revenue should Pizza factory recognize on 3/1/17? A) $ 43,957. B) $ 0. C) $100,000. D) $ 87,914.

D) $ 87,914. (Since Pizza Factory satisfies the performance obligations related to the elements above when the franchise opens on 3/1/17, all of the Unearned Revenue amounts are recognized. Total revenue to be recognized is computed as follows: Unearned Franchise Revenue, $40,000 + Unearned Service Revenue (Training), $19,914 + Unearned Sales Revenue (Equipment), $28,000 = $87,914.)

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) $ 0 B) $1,200 C) $800 D) $2,000

D) $2,000 (Stossel should record a refund liability of $2,000 (10 estimated units to be returned X $200 selling price), not $800 which is the difference between the refund liability of $2,000 and the asset, Estimated Inventory Returns, of $1,200 (10 estimated units to be returned X $120 cost per unit).)

Which type of revenue or gain is generally recognized with the passage of time? A) Revenue from sales. B) Revenue from fees or services. C) Gain or loss from disposition. D) Long-term construction contracts.

D) Long-term construction contracts.

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) the payment terms for the goods and services to be transferred can be identified. C) the contract has commercial substance. D) each party can unilaterally terminate the contract without compensation.

D) each party can unilaterally terminate the contract without compensation. (The company should disregard revenue guidance to contracts if the contract is wholly unperformed, or if each party can unilaterally terminate the contract without compensation.)

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) expected cost plus a margin. B) adjusted market assessment. C) standalone selling price. D) residual value.

D) residual value.

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

D) the customer has no significant risks or rewards of ownership.

T/F: A nonrefundable upfront fee is generally recorded as revenue when received.

False (A nonrefundable upfront fee should generally be recorded as revenue over the periods which benefit.)

T/F: Franchise companies derive their revenue primarily from the sale of initial franchises.

false (Franchise companies derive their revenue from one or both of two sources: (1) from the sale of initial franchises and related assets or services, and (2) from continuing fees based on the operations of franchises.)

T/F: A contract is an agreement between two parties that creates enforceable rights or obligations.

true

T/F: Most revenue transactions pose few problems for revenue recognition because often the transaction is initiated and completed at the same time.

true