Revenue Recognition

Under IFRS, which of the following is not an allowed method of accounting for long-term construction contracts? A Fair value through profit and loss method B Percentage of completion method C Revenue recognition to the extent of cost incurred D Completed contract method

D Completed contract method The completed contract method is not allowed under IFRS. IFRS requires the percentage of completion method for long-term construction projects. If the percentage cannot be reasonably estimated, then revenue is recognized only to the extent of cost.

Several of Fox, Inc.'s customers are having cash flow problems. Information pertaining to these customers for the years ended March 31, year 1 and year 2, follows: 3/31, year 1 3/31, year 2 Sales $10,000 $15,000 Cost of sales 8,000 9,000 Cash collections on year 1 sales 7,000 3,000 on year 2 sales --- 12,000 If the cost recovery method is used, what amount would Fox report as gross profit from sales to these customers for the year ended March 31, year 2? A $ 2,000 B $ 3,000 C $ 5,000 D $15,000

(1) collections to date on the year 1 sales were $10,000 (i.e., $7,000 + $3,000), permitting the recognition of $2,000 profit above the year 1 cost of sales of $8,000 and (2) collections on the year 2 sales were $12,000, permitting the recognition of $3,000 profit above the year 2 cost of sales of $9,000. Therefore, the amount of gross profit that Fox should recognize for the year ended 3/31, year 2 is $5,000 (i.e., $2,000 + $3,000). C $ 5,000

The following data pertains to Pell Co.'s construction jobs, which commenced during the current year: Project 1 Project 2 Contact price $420,000 $300,000 Cost incurred during the year 240,000 280,000 Estimated costs to complete 120,000 40,000 Billed to customers during the year 150,000 270,000 Received from customers during year 90,000 250,000 If Pell recognizes revenue at a point in time, and the performance obligations were not fulfilled in the current year, what amount of gross profit (loss) would Pell report in its current year income statement? A $(20,000) B $0 C $340,000 D $420,000

A $(20,000) -------------Project 1 Project 2 Contract price $420,000 $300,000 Cost incurred to date $240,000 $280,000 Less: Estimated costs to complete 120,000 40,000 Less: Estimated total costs (360,000) (320,000) Estimated total gross profit $ 60,000 $(20,000)

North Co. entered into a franchise agreement with South Co. for an initial fee of $50,000. North received $10,000 at the agreement's signing. The remaining balance was to be paid at a rate of $10,000 per year, beginning the following year. North's services per the agreement were not complete in the current year. Operating activities will commence next year. What amount should North report as franchise revenue in the current year? A $0 B $10,000 C $20,000 D $50,000

A $0 Initial franchise fees from franchise sales ordinarily must be recognized (with provision for estimated uncollectible amounts) when all material services or conditions relating to the sale have been substantially performed or satisfied by the franchisor. North's services per the agreement were not complete in the current year so no franchise revenue would be reported by North in the current year.

Deer Co., which began operations on January 2, Year 1 recognizes revenue at a point in time. The performance by Deer Co. does not create an asset with an alternative use and Deer Co., has an enforceable right to payment for the completed performance to date. The following information is available for the year: Total Contract Price $300,000 Costs Incurred $70,000 Estimated costs to complete at year end $200,000 Calculate the income (or loss) recognized in Year 1? A $0 B $7,778 C $30,000 D $300,000

A $0 Under ASC 606, when an entity recognizes revenue at a point in time, gross profit is recognized only on completion of the contract. Since the project started in Year 1 and $200,000 of the cost is yet to be incurred. The project is not complete and accordingly, no revenue will be recognized.

Lin Co., a distributor of machinery, bought a machine from the manufacturer in November for $10,000. On December 30, Lin sold this machine to Zee Hardware for $15,000 under the following terms: 2% discount if paid within 30 days, 1% discount if paid after 30 days but within 60 days, or payable in full within 90 days if not paid within the discount periods. However, Zee had the right to return this machine to Lin if Zee was unable to resell the machine before expiration of the 90-day payment period, in which case Zee's obligation to Lin would be canceled. In Lin's net sales for the year ended December 31, how much should be included for the sale of this machine to Zee? A $0 B $14,700 C $14,850 D $15,000

A $0 Zee has the right to return the machine to Lin if Zee is not able to resell the machine before expiration of the 90-day payment period. If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction is not recognized at the time of sale if the buyer is obligated to pay the seller and the obligation is contingent upon resale of the product.

Bear Co., which began operations on January 2, Year 1 recognizes revenue over time in accordance with ASC 606. The performance by Bear Co. does not create an asset with an alternative use and Bear Co., has an enforceable right to payment for the completed performance to date. The following information is available for the year: Year 1 Year 2 Total Contract Price $300,000 $300,000 Costs incurred $70,000 $110,000 Estimated costs to complete at Year-end $200,000 $92,000 What is the income (or loss) recognized in Year 2? A $10,751 B $7,778 C $28,000 D $18,529

A $10,751 Gross Profit recognized in each period of the contract on accrual basis and is calculated as follows: Gross Profit = [(Cost incurred to date / Total Estimated Cost) x Estimated Profit] - Profit Already Recognized Total Contract Price $300,000 $300,000 Actual Cost to Date $70,000 $180,000 Estimated Costs to Complete $200,000 $92,000 Estimated Total Costs at Completion $270,000 $272,000 Estimated Gross Profit $30,000 $28,000 Profit Recognized $7,778* $10,751** *Year 1: ($70,000/$270,000) x $30,000 = $7,778 **Year 2: ($180,000/$272,000) x $28,000 - $7,778 = $10,751

Wren Corp.'s trademark was licensed to Mont Co. for royalties of 15% of sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Wren received the following royalties from Mont: March 15 September 15 Year 2 $10,000 $15,000 Year 3 $12,000 $17,000 Mont estimated that sales of the trademark items would total $60,000 for July through December Year 3. In Wren's Year 3 income statement, the royalty revenue should be: A $26,000 B $29,000 C $38,000 D $41,000

A $26,000 The amount to be recognized is the amount of consideration to which the entity expects to be entitled. Since the actual sales are unknown, the royalty revenue for the period between July to December Year 3 would be based on estimated sales of $60,000. Royalty revenue Year 3 = Revenue for Jan to June Year 3 + Revenue for Jul to Dec Year 3 = $17,000 + 9,000 (i.e. 15% of $60,000) = $26,000.

Barr Corp. started a long-term construction project in the current year. The following data relate to this project: Contract price $4,200,000 Costs incurred in the year $1,750,000 Estimated costs to complete $1,750,000 Progress billings $900,000 Collections on progress billings $800,000 The project is accounted for in accordance with the input method prescribed in ASC 606 and revenue is recognized over time. It should be assumed that all costs incurred to date, as well as all estimated future costs, will advance the progress of the project and no spoilage or waste has occurred. Additionally, the performance by Barr does not create an asset with an alternative use and Barr has an enforceable right to payment for the completed performance to date. In Barr's current year income statement, what amount of gross profit should be reported for this project? A $350,000 B $150,000 C $133,333 D $100,000

A $350,000 Contract price $4,200,000 Costs incurred in the year $1,750,000 $700,000 $1,750,000 Estimated total costs /$3,500,000 = 50% = $350,000

State Co. recognizes construction revenue and expenses using an adjusted version of the percentage-of-completion method in accordance with the input method prescribed in ASC 606 and revenue is recognized over time. During year 1, a single long-term project was begun, which continued through year 2. Information on the project follows: Year 1 Year 2 Accounts receivable from construction contract $100,000 $300,000 Construction expenses 105,000 192,000 Construction in progress 122,000 364,000 Partial billings on contract 100,000 420,000 It should be assumed that all costs incurred to date, as well as all estimated future costs, will advance the progress of the project and no spoilage or waste has occurred. Additionally, the performance by State Co. does not create an asset with an alternative use and State Co. has an enforceable right to payment for the completed performance to date. Profit recognized from the long-term construction contract in year 2 should be A $50,000 B $108,000 C $128,000 D $228,000

A $50,000 Construction in progress, 12/31, year 2 $ 364,000 Construction in progress, 12/31, year 1 (122,000) Increase during year 2 (contract costs incurred and profit recognized in year 2) $ 242,000 Contract costs incurred in year 2 (192,000) Profit recognized in year 2 $ 50,000 Note:

Bear Co., which began operations on January 2, Year 1 recognizes revenue over time in accordance with ASC 606. The performance by Bear Co. does not create an asset with an alternative use and Bear Co., has an enforceable right to payment for the completed performance to date. The following information is available for the year: Year 1 Year 2 Year 3 Total Contract Price $300,000 $300,000 $300,000 Costs Incurred $70,000 $110,000 $93,000 Estimated costs to complete at year end $200,000 $92,000 N/A Calculate the income (or less) recognized in Year 3: A $8,471 B $10,751 C $27,000 D $300,000

A $8,471 Gross Profit = [(Cost incurred to date / Total Estimated Cost) x Estimated Profit] - Profit Already Recognized Total Contract Price $300,000 $300,000 $300,000 Actual Cost to Date $70,000 $180,000 $273,000 Estimated Costs to Complete $200,000 $92,000 N/A Estimated Total Costs at Completion $270,000 $272,000 $273,000 Estimated Gross Profit $30,000 $28,000 $27,000 Profit Recognized $7,778* $10,751** $8,471*** 200+70 = 270 180+92 = 272 300-270= 30 300-272 = 28 *Year 1: ($70,000/$270,000) x $30,000 = $7,778 **Year 2: ($180,000/$272,000) x $28,000 - $7,778 = $10,751 ***Year 3: ($273,000/$273,000) x $27,000 - $18,529 = $8,471

Fenn Stores, Inc. had sales of $1,000,000 during December. Experience has shown that merchandise equaling 7% of sales will be returned within 30 days and an additional 3% will be returned within 90 days. Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value. What amount should Fenn report for net sales in its income statement for the month of December? A $900,000 B $850,000 C $780,000 D $750,000

A $900,000 Sales, December $1,000,000 Less: Estimated sales that will be returned [$1,000,000 × (7% + 3%)] 100,000 Net sales, December $ 900,000

Howard Co. had the following first-year amounts for a $7,000,000 construction contract: Actual costs $2,000,000 Estimated costs to complete $6,000,000 Progress billings $1,800,000 Cash collected $1,500,000 Howard Co recognizes revenue over time in accordance with ASC 606. What amount should Howard recognize as gross profit (loss)? A ($1,000,000) B ($200,000) C $800,000 D $1,750,000

A ($1,000,000) Howard Co., recognizes revenue over time and would report a gross loss of ($1,000,000). Construction cost (actual + estimate) exceeds the value of the contract resulting in a loss. Summary Amount Actual costs incurred $2,000,000 Estimated costs to complete $6,000,000 Total cost to complete $8,000,000 Total contract value $7,000,000 Gross loss on the construction contract ($1,000,000)

A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following? # Redemption of certificates: Lapse of certificates: A Decrease Decrease B Decrease No effect C No effect Decrease D No effect No effect

A Decrease Decrease Upon receipt of a prepayment from a customer, an entity should recognize a contract liability (deferred revenue in this case). Thereafter, entity should derecognize that contract liability (and recognize revenue) when it transfers those goods or services and, therefore, satisfies its performance obligation. The deferred revenue account is credited when gift certificates are sold. When the certificates are redeemed, sales revenues are recognized by debiting deferred revenues. When certificates lapse, deferred revenues are reduced as they are not a liability anymore.

A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following? # Redemption of certificates Lapse of certificates A Decrease Decrease B Decrease No effect C No effect Decrease D No effect No effect

A Decrease Decrease When the redeemable gift certificates are sold, the sales price collected represents unearned revenue and an unearned revenue account is credited (i.e. increased). As the certificates are redeemed, the earned revenue is recognized, decreasing the unearned portion. Lapsed certificates would also decrease unearned revenue, but would increase Gain on Lapsed Certificates rather than Revenue account. In either case, the Deferred Revenue account is decreased.

Which of the following statements is correct regarding deferred revenues recorded by a company that provides services to customers? A Deferred revenue is a liability until the service had been performed. B Deferred revenues represent revenues earned but not yet received in cash. C Deferred revenues result from services that have been performed but have not been billed. D A deferred revenue on the books of one company is an accrued expense on the books of another company.

A Deferred revenue is a liability until the service had been performed. Deferred revenue is revenue collected or collectible in cash but not yet earned. When a company provides services to customers, deferred revenue is a liability until the service has been performed because the company has not yet earned that revenue.

Which of the following statements is correct regarding deferred revenues recorded by a company that provides services to customers? A Deferred revenue is a liability until the service has been performed. B Deferred revenues represent revenues earned but not yet received in cash. C Deferred revenues result from services that have been performed but have not been billed. D A deferred revenue on the books of one company is an accrued expense on the books of another company

A Deferred revenue is a liability until the service has been performed. Deferred revenue or unearned revenue is accounted when the cash is received, but revenue is not earned as the entity has not yet satisfied its performance obligation. It is accounted as a liability till the entity satisfies the performance obligation.

Which of the following is not one of the benefits of the revenue recognition standard under ASC 606: A Enhances the interchangeability of revenue recognition practices. B Eliminates inconsistencies and weaknesses of existing revenue requirements C Provides a more robust revenue management framework D Simplifies the preparation of financial statements by reducing the number of requirements referred to by an organization.

A Enhances the interchangeability of revenue recognition practices. ASC 606 enhances the comparability of revenue recognition practices. 5 Benefits of the revenue recognition standard under ASC 606: • Eliminates inconsistencies and weaknesses of existing revenue requirements • Provides a more robust revenue management framework • Enhances the comparability of revenue recognition practices. • Provides users of financial statements with more useful information through improved disclosure requirements • Simplifies the preparation of financial statements by reducing the number of requirements referred to by an organization.

Which of the following statements regarding the milestone method of revenue recognition is true? A It is an application of the proportional performance method. B It is the only revenue recognition method that is available for research and development arrangements. C With the issuance of ASU 2010-17, reporting entities will not be able to utilize other revenue recognition methods. D All of the above are true.

A It is an application of the proportional performance method. The milestone method of revenue recognition is, at its core, an application of the proportional performance method.

Under ASC 606, cash collection is a critical event for income recognized # Over Time at a Point in Time A No No B Yes Yes C No Yes D Yes No

A No No Cash collection is neither a critical event for income recognized at a "Point in Time" or "Over Time" under ASC 606. Performance Obligation Satisfied at a "point in time": If an obligation to perform is not fulfilled over time, the obligation to perform is fulfilled at a point in time: • Entity currently has a right to collect payment for the asset • The legal title for the asset is with the customer • Physical possession of the asset is transferred by the entity to the customer • Significant risks and rewards of ownership of the asset are with the customer • The asset has been accepted by the customer

Which of the following is a method of recognizing revenue over time? A Output method B Throughput method C Conservation method D Completion method

A Output method The output method is one of the two methods for recognizing revenue over time. If the performance obligation is met by the "over time " entity, the revenue is also recognized as "over time " according to the following two methods: • Output Method: Revenue shall be recognized by the value of the goods and services transferred to the customer to date. • Input Method: The revenue is recognized on the basis of the efforts of the entity or its inputs.

Which of the following statements is false concerning long-term construction contract accounting? A Revenue recognized at a point in time reflects the periodic recognition of income as it is earned B Revenue recognized over time reflects the status of uncompleted contracts that is provided through the current estimates of costs to complete or of progress toward completion C Revenue recognized at a point in time does not permit the recording of income prior to completion, or substantial completion, of the contract D Revenue recognized at a point in time does not reflect current performance when the contract extends into more than one accounting period

A Revenue recognized at a point in time reflects the periodic recognition of income as it is earned Revenue recognized over time reflects the periodic recognition of income as it is earned. Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

___________________ is(are) used to alter the terms and conditions of recorded sales transactions to entice customers to accept the delivery of goods and services. A Side agreements B Channel stuffing C Related-party transactions D Trade loading

A Side agreements Side agreements are used to alter the terms and conditions of recorded sales transactions to entice customers to accept the delivery of goods and services. They may create obligations or contingencies relating to financing arrangements or to product installation or customization that may relieve the customer of some of the risks and rewards of ownership.

For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring? A The total future cash payments. B The present value of the debt at the original interest rate. C The present value of the debt at the modified interest rate. D The amount of future cash payments designated as principal repayments.

A The total future cash payments. Accounting for debtors when the restructuring is a modification of terms is determined by whether the sum of the cash payments under the new terms (not discounted to present value) equal or exceed the amount of the obligation.

The calculation of the income recognized in the third year of a five-year construction contract accounted for using the uses input method prescribed in ASC 606 that recognizes revenue over time includes the ratio of A Total costs incurred to date to total estimated costs. B Cost incurred in year three to total estimated costs. C Costs incurred in year three to total billings to date. D Total costs incurred to date to total billings.

A Total costs incurred to date to total estimated costs. When income is recognized over time per ASC 606, Gross Profit is calculated using the following: [ (Cost incurred to date / Total Estimated Cost) x Estimated Profit) ] - Profit already recognized

On January 2 of the current year, Boulder Co. assigned its patent to Castle Co. for royalties of 10% of patent-related sales. The assignment is for the remaining four years of the patent's life. Castle guaranteed Boulder a minimum royalty of $100,000 over the life of the patent and paid Boulder $50,000 against future royalties during the year. Patent-related sales for the year were $300,000. In its current year income statement, what amount should Boulder report as royalty revenue? A $ 25,000 B $ 30,000 C $ 50,000 D $100,000

B $ 30,000 Revenue generally is recognized when both the earnings process is complete and an exchange has taken place. Deferred revenue is revenue collected, but not yet earned. Royalty revenue to Boulder would be $30,000 ($300,000 × .10). The remaining $20,000 balance of Castle's payment against future royalties is deferred revenue.

On October 1, year 1, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty-thousand gallons were delivered on December 15, year 1, and the remaining 50,000 gallons were delivered on January 15, year 2. Payment terms were: 50% due on October 1, year 1, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale during year 1? A $75,000 B $150,000 C $225,000 D $300,000

B $150,000 Therefore, Acme should only recognize revenue of $150,000 (i.e., 50,000 gallons × $3) during year 1 from this sale.

A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month? A $185,000 B $190,000 C $195,000 D $200,000

B $190,000 Revenue from sales when the buyer has the right to return the product should be recognized at the time of sale only if all of several conditions are met. Since the amount of returns can be estimated based on past experience, the amount reported for net sales should be reduced for the 5% of sales expected to be returned within 90 days. Net sales would not be reduced for returns from prior months, as that sales revenue would have already been reduced in compliance with the matching concept. Sales, current month $200,000 Less: Estimated sales that will be returned [$200,000 × 5%] 10,000 Net sales, current month $190,000

A clothing retailer allows customers to return shoes within 90 days of purchase. The company estimates that 10% of sales will be returned within the 90-day period. During the month, the company has sales of $500,000 and returns of sales made in prior months of $30,000. What amount should the company record as net sales revenue for new sales made during the month? A $420,000 B $450,000 C $500,000 D $75,000

B $450,000 To account for the transfer of goods with a right of return (and for some services that are provided subject to a refund), an entity should recognize all of the following: Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled; therefore, revenue would not be recognized for the products expected to be returned Refund liability based on expectations about the number of refunds Asset (and the corresponding adjustment to cost of sales) for its right to recover products from customers on settling the refund liability. The company will have to make a provision for returns from the sales revenue amount. The actual returns in the prior months will not affect the provision to be made for future months. Thus the net sales revenue for the month will be $450,000 [500,000 - (500,000 x 10%)].

During 2002, Fleet Co.'s trademark was licensed to Hitch Corp. for royalties of 10% of net sales of the trademarked items. Returns were estimated to be 1% of gross sales. On signing the licensing agreement, Hitch paid Fleet $75,000 as an advance against future royalty earnings. Gross sales of the trademarked items during the year were $600,000. What amount should Fleet report as royalty income for 2002? A $54,000 B $59,400 C $60,000 D $75,000

B $59,400 Royalty revenue is recognized in the period(s) the royalties are earned. The $75,000 is an advance and has not yet been earned. There were $600,000 in gross sales with $6,000 (1% of gross sales) estimated for returns leaving a total of net sales at $594,000. With royalties calculated at 10% of net sales there would be $59,400 ($594,000 × 0.10) earned and reported as royalty income for the year.

Bear Co., which began operations on January 2, Year 1 appropriately uses the input method prescribed in ASC 606 and recognizes revenue over time. The performance by Bear Co. does not create an asset with an alternative use and Bear Co., has an enforceable right to payment for the completed performance to date. The following information is available for the year: Total Contract Price $300,000 Costs incurred $70,000 Estimated costs to complete at year end $200,000 Calculate the income (or loss) recognized in Year 1? A $0 B $7,778 C $30,000 D $300,000

B $7,778 Gross Profit recognized in each period of the contract on an accrual basis and is calculated as follows: Gross Profit = (Cost incurred to date / Total Estimated Cost) x Estimated Profit Total Contract price $300,000 Actual cost to date $70,000 Estimated costs to complete $200,000 Estimated total costs at completion $270,000 Estimated Gross Profit $30,000 Profit Recognized in Year 1 ($70,000/$270,000) x $30,000 $7,778

UVW Broadcast Co. entered into a contract to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, advertising commercials of $10,000 were used. However, travel and lodging services were not provided. How should UVW account for advertising in its June 30 financial statements? A Revenue and expense is recognized when the agreement is complete B An asset and revenue for $10,000 is recognized C Both the revenue and expense of $10,000 are recognized D Not reported

B An asset and revenue for $10,000 is recognized Accrual accounting recognizes and reports the effects of transactions and other events on the assets and liabilities of a business enterprise in the time periods to which they relate rather than only when cash is received or paid. Revenues are recognized when earned. A deferred (prepaid) expense is an expense paid or payable in cash but not yet incurred. A prepaid expense is reported in the financial statements as an asset.

Anchor Co. is experiencing financial difficulties. Anchor negotiated a settlement of $100,000 in debt owed to Bowden, Inc. in exchange for Anchor's gross receivables of $100,000. The receivables have an allowance for uncollectible accounts of $25,000. The impact of this transaction on Anchor's net income is a $25,000 A Increase in bad debt expense B Gain on restructuring of payables C Loss on restructuring of payables D Decrease in bad debt expense

B Gain on restructuring of payables To recognize revenue at a point in time, the following criteria must be met: • Entity currently has a right to collect payment for the asset • The legal title for the asset is with the customer • Physical possession of the asset is transferred by the entity to the customer • Significant risks and rewards of ownership of the asset are with the customer • Asset has been accepted by the customer

At the beginning of the current year, Hayworth Co. sold equipment with a two-year service contract for a single payment of $20,000. The fair value of the equipment was $18,000. Hayworth recorded this transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the following statements is correct regarding Hayworth's current-year financial statements? A The financial statements are correct. B Net income will be overstated. C Total assets will be overstated. D Total liabilities will be overstated.

B Net income will be overstated. Of the $20,000 Hayworth received, $18,000 should have been for sales revenue from the equipment and $2,000 should have been allocated to the two-year service contract. Because only one year has passed, Hayworth has only earned $1,000 from that service contract and still has a liability for the next year. Recording the transaction the way Hayworth did means net income will be overstated, the financial statements are not correct, total assets are not affected, and total liabilities will be understated.

A construction company recognizes revenue at a point in time. Which of the following is one of the criteria for recognizing revenue at a point in time? A Simultaneous receipt and consumption of customer benefits as and when the company performs. B Significant risks and rewards of ownership of the asset are with the customer C The performance of the entity creates or enhances an asset controlled by the customer. D The performance of the entity does not create an asset with an alternative use.

B Significant risks and rewards of ownership of the asset are with the customer Significant risks and rewards of ownership of the asset are with the customer. All other options are the criteria for revenue to be recognized over time. To recognize revenue at a point in time, the following criteria must be met: • Entity currently has a right to collect payment for the asset • The legal title for the asset is with the customer • Physical possession of the asset is transferred by the entity to the customer • Significant risks and rewards of ownership of the asset are with the customer • Asset has been accepted by the customer

Which of the following is not one of the criteria for recognizing revenue over time? A Simultaneous receipt and consumption of customer benefits as and when the company performs. B The legal title for the asset is with the customer. C The performance of the entity creates or enhances an asset controlled by the customer. D The performance of the entity does not create an asset with an alternative use.

B The legal title for the asset is with the customer. An entity transfers control of goods or services over time and fulfills an obligation to perform and recognizes revenue over time if one of the following criteria is met: • Simultaneous receipt and consumption of customer benefits as and when the company performs. • The performance of the entity creates or enhances an asset controlled by the customer. • The performance of the entity does not create an asset with an alternative use of the entity and the entity has an enforceable right to payment for the completed performance to date.

A construction company recognizes revenue at a point in time. Which of the following is not one of the criteria for recognizing revenue at a point in time? A The legal title for the asset is with the customer B The performance of the entity creates or enhances an asset controlled by the customer C Physical possession of the asset is transferred by the entity to the customer D Significant risks and rewards of ownership of the asset are with the customer

B The performance of the entity creates or enhances an asset controlled by the customer To recognize revenue at a point in time, the following criteria must be met: • Entity currently has a right to collect payment for the asset • The legal title for the asset is with the customer • Physical possession of the asset is transferred by the entity to the customer • Significant risks and rewards of ownership of the asset are with the customer • Asset has been accepted by the customer

How would the proceeds from the advance sale of nonrefundable tickets for a dance performance be reported in the seller's financial statements before the performance? A Revenue for the entire proceeds B Unearned revenue for the entire proceeds C Revenue to the extent of related costs expended D Unearned revenue to the extent of related costs expended

B Unearned revenue for the entire proceeds Proceeds from the advance sale of tickets for a theatrical performance should be reported as unearned revenue as the services/performances are not yet rendered. Revenues will be recognized when the product is delivered or services are rendered to customers. The fact that the tickets are non-refundable doesn't impact the performance obligation. The company still has to perform. The 5-step approach to revenue recognition: Step 1: Identify the Contract(s) with a customer. Step 2: Identify the Performance obligations in the contract. Step 3: Determine the transaction price (i.e., Amount). Step 4: Allocate transaction Price to Performance obligations in the contract. Step 5: Revenue Recognition when/as the entity satisfies a performance obligation.

In June, Northan Retailers sold refundable merchandise coupons. Northan received $10 for each coupon redeemable from July 1 to December 31 for merchandise with a retail price of $11. At June 30, how should Northan report these coupon transactions? A Unearned revenues at the merchandise's retail price B Unearned revenues at the cash received amount C Revenues at the merchandise's retail price D Revenues at the cash received amount

B Unearned revenues at the cash received amount When the refundable merchandise coupons are sold, the sales price collected represents unearned revenue and an unearned revenue account is credited. Earned revenue will be recognized later when the coupons are redeemed.

H&S Ltd. is a manufacturer of huge cardboard boxes to help in transport of huge items. Many shops acquire these boxes for their customers. H&S ships the boxes with full payment due immediately. Legal title does not transfer and H&S retains the right to require shipment of any unsold boxes to other shops. When this right is exercised a full refund is provided. Similarly, shops may return any unsold boxes to H&S for a full refund. Is this a consignment arrangement and should revenue be recognized now? # Consignment Arrangement Revenue Recognition A Yes Yes B Yes No C No Yes D No No

B Yes No H&S has received payment and has transferred physical possession of the boxes, which are indicators that control has transferred. However, because shops can return the boxes and H&S can require shops to ship the boxes to other shops, the risks and rewards of ownership have not transferred. Additionally, legal title remains with H&S. In aggregate, it appears the customer is not able to obtain substantially all of the remaining benefits or the boxes of direct the use of the boxes. Furthermore, all three indicators of a consignment arrangement (control by the vendor, vendor's ability to require return or transfer and no unconditional obligation of consignee to pay) are present.

Lew Co. sold 200,000 corrugated boxes for $2 each. Lew's cost was $1 per unit. The sales agreement gave the customer the right to return up to 60% of the boxes within the first six months, provided an appropriate reason was given. It was immediately determined, with appropriate reason, that 5% of the boxes would be returned. Lew absorbed an additional $10,000 to process the returns and expects to resell the boxes. What amount should Lew report as operating profit from this transaction? A $170,000 B $179,500 C $180,000 D $200,000

C $180,000 Estimated returns: 200,000 x 5% = 10,000 units Net Sales = 200,000 - 10,000 = 190,000 units Sales (190,000 x $2) $380,000 = Cost of Sales ($190,000 x $1) -190,000 Gross Profit 190,000 Less processing costs -10,000 = Operating Profit 180,000

Amar Farms produced 300,000 pounds of cotton during the 20X0 season. Amar sells all of its cotton to Brye Co., which has agreed to purchase Amar's entire production at the prevailing market price. Recent legislation assures that the market price will not fall below $.70 per pound during the next two years. Amar's costs of selling and distributing the cotton are immaterial and can be reasonably estimated. Amar reports its inventory at expected exit value. During year 1, Amar sold and delivered to Brye 200,000 pounds at the market price of $.70. Amar sold the remaining 100,000 pounds during year 2 at the market price of $.72. What amount of revenue should Amar recognize in year 1? A $140,000 B $144,000 C $210,000 D $216,000

C $210,000 Amar recognizes revenue of $210,000 (i.e., 300,000 lbs. × $0.70/lb.) in year 1 for the cotton produced in year 1. It is appropriate for Amar to recognize revenue when the cotton is produced because (1) there is a relatively stable market for the cotton, (2) Amar's costs of selling and distributing the cotton are immaterial and can be reasonably estimated, and (3) the units of cotton are homogeneous.

Ward, a consultant, keeps her accounting records on a cash basis. During the current year, Ward collected $200,000 in fees from clients. At December 31 of the previous year, Ward had accounts receivable of $40,000. At December 31 of the current year, Ward had accounts receivable of $60,000, and unearned fees of $5,000. On an accrual basis, what was Ward's service revenue for the current year? A $175,000 B $180,000 C $215,000 D $225,000

C $215,000 Collection of fees in the year $200,000 Less: Accounts receivable, 1/1 (40,000) Plus: Accounts receivable, 12/31 60,000 Less: Unearned revenue, 12/31 ( 5,000) Service revenue for the year $215,000

Deer Co., which began operations on January 2, Year 1 recognizes revenue at a point in time in accordance with ASC 606. The following information is available for the year: ------------------------Year 1 Year 2 Year 3 Total Contract Price $300,000 $300,000 $300,000 Costs incurred $70,000 $110,000 $273,000 Estimated costs to complete at Year-end $200,000 $72,000 $0 The performance by Deer Co. does not create an asset with an alternative use and Deer Co. has an enforceable right to payment for the completed performance to date. Calculate the income (or loss) recognized in Year 3? A $0 B $8,471 C $27,000 D $30,000

C $27,000 When revenue is recognized at a point in time, gross profit is recognized only on completion of the contract. Since the project started in Year 1 and is completed in Year 3 as evidenced by the fact that the estimated remaining costs the end of Year 3 is $0. The project is completed and accordingly, all of the profit will be recognized i.e. $27,000 ($300,000 - 273,000).

The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob's liability to Mene. Carrying amount of liability liquidated $150,000 Carrying amount of real estate transferred 100,000 Fair value of real estate transferred 90,000 What amount should Knob report as the total amount of pretax gain (loss) as a result of this troubled debt restructuring? A $(10,000) B $0 C $50,000 D $60,000

C $50,000 Knob reports a $10,000 (i.e., $100,000 - $90,000) ordinary loss equal to the excess of the carrying amount over the fair value of the real estate transferred. Knob also reports a $60,000 gain on the debt restructuring. The net gain is reported in income from continuing operations [($10,000) + $60,000 = $50,000].

On January 1, Dell Inc. contracted with the city of Little to provide custom built desks for the city schools. The contract made Dell the city's sole supplier and required Dell to supply no fewer than 4,000 desks and no more than 5,500 desks per year for two years. In turn, Little agreed to pay a fixed price of $110 per desk. During the year, Dell produced 5,000 desks for Little. At December 31, 500 of these desks were segregated from the regular inventory and were accepted and awaiting pickup by Little. Little paid Dell $450,000 during the year. What amount should Dell recognize as contract revenue in this year? A $450,000 B $495,000 C $550,000 D $605,000

C $550,000 The amount of cash paid by Little to Dell does not affect the amount of revenue to be recognized. The contract revenue should be accounted for under the completion of production method. Therefore, Dell should recognize the full amount of revenue pertaining to the desks produced in the year. Revenue should be recognized only for those units produced by year-end, despite the 5,500 maximum. Dell should recognize contract revenue of $550,000 (5,000 × $110) in the year.

Toddler Care Co. offers three payment plans on its 12-month contracts. Information on the three plans and the number of children enrolled in each plan for the September 1, Year 1, through August 31, Year 2, contract year follows: Plan Initial payment per child Monthly fees per child Number of children #1 $500 $ -- 15 #2 200-30-12 #3 -- 50 -- 9 36 Toddler received $9,900 of initial payments on September 1, Year 1, and $3,240 of monthly fees during the period September 1 through December 31, Year 1. In its December 31, Year 1 balance sheet, what amount should Toddler report as deferred revenues? A $3,300 B $4,380 C $6,600 D $9,900

C $6,600 Todd Care received $9,900 [i.e., ($500 × 15) + ($200 x 12)] of initial payments on its 12-month contracts for the 9/1 year 1 through 8/31 year 2 contract year. Since four months of the initial payments on the contracts have been earned as of 12/31 of year 1, eight months of the initial payments on the contracts should be reported as deferred revenue at that date (i.e., $9,900 × 8/12 = $6,600).

In year 2, May Corp. acquired land by paying $75,000 down and signing a note with a maturity value of $1,000,000. On the note's due date, December 31, year 7, May owed $40,000 of accrued interest and $1,000,000 principal on the note. May was in financial difficulty and was unable to make any payments. May and the bank agreed to amend the note as follows: The $40,000 of interest due on December 31, year 7, was forgiven. The principal of the note was reduced from $1,000,000 to $950,000 and the maturity date extended 1 year to December 31, year 8. May would be required to make one interest payment totaling $30,000 on December 31, year 8. As a result of the troubled debt restructuring, May should report a gain, before taxes, in its year 7 income statement of A $40,000 B $50,000 C $60,000 D $90,000

C $60,000 May Corp. is the debtor and owes $1,000,000 principal plus $40,000 of accrued interest. Under the new terms, May is required to pay future cash payments of $950,000 plus $30,000. The gain, before taxes, is $1,040,000 - $980,000 = $60,000. Note that the creditor (in this case, the bank) would use the present value, not the aggregate, of the future cash payments in its accounting for this loan.

On day 1 Clothes Co. sells clothing to Link Corp. for $40,000. Clothes ships the clothing on day 1 and Link is obligated to pay Clothes within six months. Link is given 12 months to return any of the clothing for a refund if they experience low demand. Link is also given 18 months to exchange any clothing due to low demand. At the time of sale, Clothes cannot reasonably estimate returns but estimates $5,000 in exchanged goods. Clothes should recognize revenue for the aforementioned transaction. A On the day of the sale. B Six months after the date of sale. C 12 months after the date of sale. D 18 months after the date of sale.

C 12 months after the date of sale. A 5-step approach for revenue recognition: Step 1: Identify the Contract(s) with a customer. Step 2: Identify the Performance obligations in the contract. Step 3: Determine the transaction price (i.e., Amount). Step 4: Allocate transaction Price to Performance obligations in the contract. Step 5: Revenue Recognition when/as an entity satisfies a performance obligation.

On January 1, 2018, Aqua Co. sold a water purifier to Dry Co. for $80,000. Aqua shipped the water purifier on the same day. Dry is obligated to pay Aqua within 6 months. Dry is given 12 months to return the water purifier for a refund if they experience low demand and 18 months to exchange any water purifier due to low demand. At the time of the sale Aqua cannot reasonably estimate returns, but estimates $10,000 in exchanged goods. Aqua's recognized revenue for the aforementioned transaction: A On the day of the sale. B Six months after the date of sale. C 12 months after the date of sale. D 18 months after the date of sale.

C 12 months after the date of sale. To account for transfer of goods with a right of return (and for some services that are provided subject to a refund), an entity should recognize all of the following: Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled; therefore, revenue would not be recognized for products expected to be returned. Revenue cannot be recognized at the time of sale because neither collection of payment from the buyer is reasonably assured nor can the company reasonably estimate the returns.

On day 1, Clothes Co., sells clothing to Link Corp. for $40,000. Clothes ships the clothing on day 1 and Link is obligated to pay Clothes within six months. Link is given 12 months to return any of the clothing for a refund if they experience low demand. Link is also given 18 months to exchange any clothing due to low demand. At the time of sale, Clothes cannot reasonably estimate returns, but estimates $5,000 in exchanged goods. Clothes should recognize revenue for the aforementioned transaction A On the day of the sale. B Six months after the date of sale. C 12 months after the date of sale. D 18 months after the date of sale.

C 12 months after the date of sale. When the buyer has the right to return the product, revenue should be recognized at the time of sale only if certain conditions are met. One of those conditions is that the amount of future returns can be reasonably estimated. Clothes can estimate the $5,000 of exchanged goods, but not the amount of returns. If the conditions are not met, revenue must be recognized when the return privilege has substantially expired or when the conditions are subsequently met, whichever comes first. There was no indication the conditions were ever met, so the revenue would be recognized 12 months after the sale date when the return privilege expired.

On September 21, 2018 Big Ltd. sold 10 laptops to Small Ltd. for $10,000. For this price, promise was given by Big Ltd. that these laptops complied with agreed upon specifications and would operate as promised for one year from the date of purchase. Big Ltd. also agrees to send its personnel every four months for a period of two years for an on-site maintenance of the laptops as Small Ltd. was one of its major customers. Big Ltd. estimated that it would incur a cost of $1,000 per annum for such a service and the company usually earns a profit of 20% for such a service. Big Ltd. records for this transaction by crediting revenue by $10,000. What should be the correcting entry? A Credit revenue with a further $2,400. B Credit revenue with a further $1,200. C Debit revenue with $2,400. D No correction required.

C Debit revenue with $2,400. The value of maintenance service would be $1,000 + 20% per annum = $1,200. The service is promised for two years and would have revenue worth $2,400. This revenue has to be recognized over time as and when Big Ltd. provides the maintenance service. This implies the revenue to be recognized this year for the sale of the laptop would be $10,000 - $2,400 = $7,600. As revenue is already credited with $10,000, the correcting entry would be to debit revenue with $2,400.

According to the input method prescribed in ASC 606 and recognizes revenue over time, gross profit on contracts are to be recognized in income A On the date of sale B On the date the final cash collection is received C In proportion to the satisfaction of the performance obligation D After cash collections equal to the cost of sales have been received

C In proportion to the satisfaction of the performance obligation An entity that recognizes revenue over time allows revenue to be deferred and recognized each year in proportion to the work done during that year.

ABC Ltd. sells a product to a customer on December 1, Y1 for $121 that is payable 24 months after delivery. The customer obtains control of the product on December 1, Y1. The contract permits the customer to return the product within ninety days. The product is new and the entity has no relevant historical evidence of product returns or other available market evidence. The cash selling price of the product is $100, which represents the amount that a customer would pay upon delivery for the same product sold under otherwise identical terms and conditions as at contract inception. The entity's cost of the product is $80. When will ABC recognize revenue for this transaction and for what amount? A December 1, Y1 for $100. B December 1, Y1 for $121. C March 1, Y2 for $100. D March 1, Y2 for $121.

C March 1, Y2 for $100. The contract includes a significant financing component. This is evident from the difference between the amount of promised consideration of $121 and the cash selling price of $100 at the date that the goods are transferred to the customer. The contract includes an implicit interest rate of 10 percent (that is, the interest rate that over 24 months discounts the promised consideration of $121 to the cash selling price of $100). Thus, revenue is recognized on March 1, Y2 for $100. Until the entity receives the cash payment from the customer, interest income would be recognized consistently. The entity would accrete the receivable up to $121 from the time the right of return lapses until customer payment.

XYZ Ltd. enters into a three years extended warranty service contract. The payment terms are $100,000 payable annually in advance This amount is standalone selling price of services at contract inception. At the beginning of third year (after the customer had paid the $100,000 for that year), the entity agrees to reduce the price for third year of service to $80,000. In addition, the customer agrees to pay an additional $220,000 for an extension of the contract for three years. The standalone selling price of the services at the beginning of the third year is $80,000 per year. How should the contract modification be reflected in third year? A Modification of the existing contract with revenue recognized of $73,333 per year. B Termination of the existing contract and creation of a new contract with revenue of $75,000 per year. C Separate contract with revenue of $80,000 per year. D Contract modification should be reflected only in the fourth year from the new warranty period.

C Separate contract with revenue of $80,000 per year. Contract modifications is a change in the scope or price (or both) of a contract that is approved by the parties to the contract. This is to be accounted for as a separate contract if BOTH of the following conditions are present: Scope of contract increases due to promise of additional goods / services that are distinct. Price of contract increases by an amount of consideration that reflects the entity's standalone selling prices (less any adjustments / discounts) of the additional goods / services.

Which of the following is not an indicator that an entity is an agent A The entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping, or on return. B The entity does not have discretion in establishing prices for the other party's goods or services and, thus, the benefit that the entity can receive from those goods or services is limited. C The entity is exposed to credit risk for the amount receivable from a customer in exchange for the other party's goods or services. D Another party is primarily responsible for fulfilling the contract.

C The entity is exposed to credit risk for the amount receivable from a customer in exchange for the other party's goods or services. The correct answer is (C) An agent is not exposed to credit risk for the amount receivable from a customer in exchange for the other party's goods or services. The following are indicators that an entity is an agent - a. Another party is primarily responsible for fulfilling the contract. b. The entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping, or on return.

For a customer to have obtained control of a product in a bill-and-hold arrangement, which of the following criteria must be met: i. Product must be identified separately as belonging to the customer ii. Product must be ready for physical transfer to the customer iii. Entity cannot use the product or direct it to another customer iv. Substantive reason for the bill-and-hold arrangement A i, ii and iv B i and ii C i, ii, iii and iv D I,III, and iv

C i, ii, iii and iv A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains (i.e., holds) physical possession of the product until it is transferred to the customer at a point in time in the future. Revenue should be recognized only when the customer obtains control of the product.

Tara Co. owns an office building and leases the offices under a variety of rental agreements involving rent paid in advance monthly or annually. Not all tenants make timely payments of their rent. Tara's balance sheets contained the following data: Year 1 Year 2 Rentals receivable $ 9,600 $12,400 Unearned rentals 32,000 24,000 During year 2, Tara received $80,000 cash from tenants. What amount of rental revenue should Tara record for year 2? A $90,800 B $85,200 C $74,800 D $69,200

Cash (given) $80,000 Rentals Receivable ($12,400 - $9,600) 2,800 Unearned Rentals ($32,000 - $24,000) 8,000 Rental Revenue (to balance) $90,800

On December 31, year 1, Rice, Inc., authorized Graf to operate as a franchisee for an initial franchise fee of $150,000. Of this amount, $60,000 was received upon signing the agreement and the balance, represented by a note, is due in three annual payments of $30,000 each beginning December 31, year 2. The present value on December 31, year 1, of the three annual payments appropriately discounted is $72,000. According to the agreement, the nonrefundable down payment represents a fair measure of the services already performed by Rice; however, substantial future services are required of Rice. Collectibility of the note is reasonably certain. In Rice's December 31, year 1, balance sheet, unearned franchise fees from Graf's franchise should be reported as A $132,000 B $100,000 C $ 90,000 D $ 72,000

D $ 72,000 The annual payments should be discounted and reported as unearned franchise fees at their present value of $72,000 at 12/31, year 1.

Winn Co. sells subscriptions to a specialized directory that is published semiannually and shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cutoff dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred subscription revenue. Data relating to the current year are as follows: Deferred subscription revenue 1/1 $ 75,000 Cash receipts from subscribers 3,600,000 In its current year December 31 balance sheet, Winn should report deferred subscription revenue of A $2,700,000 B $1,800,000 C $1,650,000 D $ 900,000

D $ 900,000 Cash receipts from customers during the year $3,600,000 Portion received after 9/30 cutoff date to be earned in the future × 3/12 Deferred subscription revenue at 12/31 $ 900,000

On December 30, Devlin Co. sold goods to Jensen Co. for $10,000, under an arrangement in which (1) Jensen has an unlimited right of return and (2) Jensen's obligation to pay Devlin is contingent upon Jensen's reselling the goods. Past experience has shown that Jensen ordinarily resells 60% of goods and returns the other 40%. What amount should Devlin include in sales revenue for this transaction on its December 31 income statement? A $10,000 B $6,000 C $4,000 D $0

D $0 Revenue from sales when the buyer has the right to return the product should be recognized at the time of sale only if all of several conditions are met. One condition is that the buyer has paid the seller, or is obligated to pay the seller, and the obligation is not contingent on resale of the product. While the amount of returns can be estimated based on past experience, the obligation for Jensen to pay Devlin is contingent upon Jensen reselling the goods. Thus, Devlin has no sales revenue for this transaction.

The following information pertains to a sale of real estate by Ryan Co. to Sud Co. on December 31, year 1: Carrying amount $2,000,000 Sales price: Cash ($300,000) Purchase money mortgage 2,700,000 3,000,000 The mortgage is payable in nine annual installments of $300,000 beginning December 31, year 2, plus interest of 10%. The December 31, year 2, installment was paid as scheduled, together with interest of $270,000. Ryan uses the cost recovery method to account for the sale. What amount of income should Ryan recognize in year 2 from the real estate sale and its financing? A $570,000 B $370,000 C $270,000 D $0

D $0 Under the cost recovery method, no profit is recognized until cash payments by the buyer exceed the seller's cost of goods sold. Therefore, Ryan should not recognize any income in year 2 from the real estate sale and its financing because the accumulated cash payments from the buyer are less than the carrying amount of the real estate. [($300,000 down payment + $300,000 year 2 payment + $270,000 year 2 interest payment) < $2,000,000]

On October 20 of the current year, Grimm Co. consigned 40 freezers to Holden Co. for sale at $1,000 each and paid $800 in transportation costs. On December 30, Holden reported the sale of 10 freezers and remitted $8,500. The remittance was net of the agreed 15% commission. What amount should Grimm recognize as consignment sales revenue for the current year? A $ 7,700 B $ 8,500 C $ 9,800 D $10,000

D $10,000 Consignment sales revenue is recognized at the time of sale. Thus, consignment sales revenue of $10,000 (10 freezers × $1,000 sales price) is reported in the current year. The transportation costs and the 15% commission are reported as selling expense; they are not netted against sales revenue. Cash 8,500 Consignment sales commissions 1,500 Consignment sales revenues 10,000 To record consignment sale .

During year 1, Mitchell Corp. started a construction job with a total contract price of $600,000. The job was completed on December 15, year 2. Additional data are as follows: Year 1 Year 2 Actual costs incurred $225,000 $255,000 Estimated remaining costs 225,000 --- Billed to customer 240,000 360,000 Received from customer 200,000 400,000 Mitchell recognizes revenue for the project at a point in time and did not satisfy any of the performance obligations for revenue recognition in year 1. What amount should Mitchell recognize as gross profit for year 2? A $45,000 B $72,000 C $80,000 D $120,000

D $120,000 Because none of the performance obligations were satisfied in year 1, no portion of the estimated gross profit can be recognized in year 1. The full amount of the gross profit of the contract should be recognized in year 2, the final year of the contract. Contract price $600,000 Actual cost incurred ($225,000 + $255,000) (480,000) Total gross profit of contract $120,000 The amounts billed to and received from the customer do not enter into the computation of the amount of gross profit recognized from the contract.

Frame construction company's contract requires the construction of a bridge in three years. The expected total cost of the bridge is $2,000,000, and Frame will receive $2,500,000 for the project. The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively, during each of the three years. Progress payments received by Frame were $600,000, $1,200,000, and $700,000, respectively. Frame uses the input method prescribed in ASC 606 that recognizes revenue over time. It should be assumed that all costs incurred to date, as well as all estimated future costs, will advance the progress of the project and no spoilage or waste has occurred. Additionally, the performance by Frame does not create an asset with an alternative use and Frame has an enforceable right to payment for the completed performance to date. What amount of gross profit would Frame report during the last year of the project? A $120,000 B $125,000 C $140,000 D $150,000

D $150,000 Contract price $2,500,000 Costs incurred to date (2,000,000) = Estimated total gross profit $ 500,000 Costs incurred to date $2,000,000 Estimated total costs / 2,000,000 Times estimated % of completion × 2 mil / 2 mil * 100% = Gross profit recognizable to date $ 500,000 Less: Gross profit recognized in year 1 & 2 350,000 = Gross profit recognized in year 3 $ 150,000

Haft Construction Co. uses the input method prescribed in ASC 606 and revenue is recognized over time. On January 10, year 1, Haft began work on a $3,000,000 construction contract. At the inception date, the estimated cost of construction was $2,250,000. The following data relate to the progress of the contract: Income recognized at 12/31, year 1 $ 300,000 Costs incurred 1/10, year 1 through 12/31, year 2 1,800,000 Estimated cost to complete at 12/31, year 2 600,000 It should be assumed that all costs incurred to date, as well as all estimated future costs, will advance the progress of the project and no spoilage or waste has occurred. Additionally, the performance by Haft does not create an asset with an alternative use and Haft has an enforceable right to payment for the completed performance to date. In its income statement for the year ended December 31, year 2, what amount of gross profit should Haft report? A $450,000 B $300,000 C $262,500 D $150,000

D $150,000 Contract price $3,000,000 Costs incurred to date $1,800,000 Estimated cost to complete 600,000 Less estimated total costs (2,400,000) Estimated total gross profit $600,000 Costs incurred to date $1,800,000 Estimated total costs / 2,400,000 Times estimated % of completion (1.8 mil/2.4 mil) = 75% 600 * .75 = 450 Gross profit recognizable to date $ 450,000 Less: Gross profit previously recognized 300,000 = Gross profit recognized in year 2 $ 150,000

On October 15, Year 1, Kam Corp. informed Finn Co. that Kam would be unable to repay its $100,000 note due on October 31 to Finn. Finn agreed to accept title to Kam's computer equipment in full settlement of the note. The equipment's carrying value was $80,000 and its fair value was $75,000. This was an unusual and infrequent event. What amounts should Kam report as ordinary gain (loss) or the year ended September 30, Year 2? # Income from Continuing Operations Other Comprehensive Income A $ (5,000) $17,500 B $0 $20,000 C $0 $14,000 D $20,000 $0

D $20,000 $0 The debtor recognizes a loss equal to the excess of the carrying amount over the fair value of the computer equipment transferred [$75,000 - $80,000 = ($5,000)] and a gain equal to the difference between the carrying amount of the obligation and the fair value of the equipment transferred at the restructure date [$100,000 - $75,000 = $25,000]. The net ordinary gain equals $20,000 [($5,000) + $25,000]. Unusual and/or Infrequent is always classified as Income from Continuing Operations.

he following information pertains to Eagle Co.'s current year sales: Cash sales Gross $80,000 Returns and allowance 4,000 Credit sales Gross $120,000 Discounts 6,000 On January 1 of the current year customers owed Eagle $40,000. On December 31, customers owed Eagle $30,000. Eagle uses the direct write-off method for bad debts. No bad debts were recorded in the year. Under the cash basis of accounting, what amount of net revenue should Eagle report for the current year? A $ 76,000 B $170,000 C $190,000 D $200,000

D $200,000 Gross cash sales $ 80,000 Less: Returns and allowances (4,000) Receipts from cash sales $ 76,000 Gross credit sales 120,000 Less: Discounts (6,000) = Net credit sales 114,000 Add: Decrease in accounts receivable ($40,000 - $30,000) 10,000 = Receipts from credit sales 124,000 Receipts from cash and credit sales $200,000

Ninja Company reports under IFRS and has a calendar year end. Samurai Company purchases a service-type warranty from Ninja for $20,000. The warranty is effective for 5 years beginning January 1, 20X5. What is the balance in the unearned warranty revenue account on December 31, 20X8. A $16,000 B $12,000 C $8,000 D $4,000

D $4,000 $4,000. The $20,000 warranty is for a 5 year period and must be recognized as unearned revenue at the inception of the contract. The warranty revenue can only be realized over the life of the warranty. So each year $4,000 of revenue can be recognized. Therefore on December 20X5 the balance in the unearned warranty revenue account will be $16,000. On December 31, 20X6 it will be $12,000. On December 31, 20X7 it will be $8,000. On December 31, 20X8 it will be $4,000 and finally on December 31, 20X9 it will be fully recognized.

Go Ltd. enters into a contract to provide internet services to a customer for one year. Go charges a $192 activation fee for which Go provides a router and sets up the account and connection for the customer. The customer is required to make monthly payments of $72 for the continuing service. A renewal option now exists that enables the customer to renew the contract after the first year without paying an additional activation fee. Based on historical customer data, the company expects each customer to renew for one additional year before changing service providers. What is the revenue to be recognized each month? A $192 in January and $ 72 every month after that B $264 in January and $72 every month after that C $88 each month D $80 each month

D $80 each month Based on historical data, the company expects each customer to renew for one additional year before changing service providers. With the upfront fee of $192 received, Go has a performance obligation for the next two years if the additional $72 is paid each month. The estimate of the total consideration to be received is $192 + (24 months x $72) = $1,920. The company would recognize $80 dollars per month over the two years ($1,920/24).

Class Corp. maintains its accounting records on the cash basis but restates its financial statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax income for year 2. The following information pertains to Class's operations for the years ended December 31, year 2 and year 1: Year 2 Year 1 Accounts receivable $40,000 $20,000 Accounts payable 15,000 30,000 Under the accrual method, what amount of income before taxes should Class report in its December 31, year 2, income statement? A $25,000 B $55,000 C $65,000 D $95,000

D $95,000 Cash basis pretax income, year 2 $60,000 Add: Increase in accounts receivable--revenues earned but not yet collected in cash ($40,000 - $20,000) 20,000 Add: Decrease in accounts payable--payments made not not representing current year expenses ($30,000 - $15,000) 15,000 Accrual basis pretax income, year 2 $95,000

When an entity incurs costs in fulfilling a contract with a customer, which of the following is one of the criteria for recognizing those costs as an asset? A The costs should be recovered. B The costs generate or enhance the entity's resources to fulfill performance obligations in the future. C The costs pertain directly to a contract or to an expected contract. D All of the above.

D All of the above. Costs incurred in fulfilling the contract should be recognized as an asset only if they meet all the following criteria: • The costs pertain directly to a contract or to an expected contract. • The costs generate or enhance the entity's resources to fulfill performance obligations in the future. • The costs should be recovered.

If an entity pays or receives royalties, it should do which as the following? A Recognize royalty revenue and royalty expense under the rules of accrual accounting. B Not recognize royalties received in advance as revenue at the date of the royalty agreement. C Generally compute the amount of royalty revenue or expense for a period by multiplying the period's sales applicable to the royalty agreement, by the royalty percentage. D All of the above.

D All of the above. Royalty revenue and royalty expense are recognized under the rules of accrual accounting, royalties received in advance are not recognized as revenue at the date of the royalty agreement, and an entity generally should compute the amount of royalty revenue or expense for a period by multiplying the period's sales applicable to the royalty agreement by the royalty percentage. Since answers A., B., and C. are all correct, answer D., all of the above, is the best answer choice.

Under IFRS 15 - Revenue Recognition, which of the following is not a step in the revenue recognition process? A Identify the contract with a customer B Allocate the transaction price to the performance obligations in the contract C Identify the performance obligations in the contract D Confirm the contract complies with all applicable laws and regulations

D Confirm the contract complies with all applicable laws and regulations The first steps of revenue recognition under IFRS 15 are: (1) Identify the contract with a customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations in the contract; (5) Recognize revenue when (or as) the entity satisfied a performance obligation.

Which of the following is one of the criteria for recognizing revenue at a point in time? A Simultaneous receipt and consumption of customer benefits as and when the company performs. B The performance of the entity does not create an asset with an alternative use of the entity. C The performance of the entity creates or enhances an asset controlled by the customer. D Entity currently has a right to collect payment for the asset

D Entity currently has a right to collect payment for the asset All other options are criteria to recognize revenue over time. To recognize revenue at a point in time, the following criteria must be met: • Entity currently has a right to collect payment for the asset • The legal title for the asset is with the customer • Physical possession of the asset is transferred by the entity to the customer • Significant risks and rewards of ownership of the asset are with the customer • Asset has been accepted by the customer

For $50 a month, Rawl Co. visits its customers' premises and performs insect control services. If customers experience problems between regularly scheduled visits, Rawl makes service calls at no additional charge. Instead of paying monthly, customers may pay an annual fee of $540 in advance. For a customer who pays the annual fee in advance, Rawl should recognize the related revenue A When the cash is collected. B At the end of the fiscal year. C At the end of the contract year after all of the services have been performed. D Evenly over the contract year as the services are performed.

D Evenly over the contract year as the services are performed. Accrual accounting recognizes revenue in the period(s) it is earned. Therefore, the revenue should be recognized evenly over the contract year as the services are performed.

When should an anticipated loss on be recognized when recognizing revenue for a project at a point in time, and recognizing revenue over time, respectively? # Over Time Point in Time A Over life of project Contract complete B Immediately Contract complete C Over life of project Immediately D Immediately Immediately

D Immediately Immediately Under the conservatism principle, the full amount of an anticipated loss must be recognized immediately under both revenue recognition methods. The recognition of an anticipated loss cannot be deferred to future periods under either method.

t is proper to recognize revenue prior to the sale of merchandise when The revenue will be reported as a sale on a Consignment Basis. The revenue will be reported under the Percentage of Completion Method. A I only B II only C Both I and II D Neither I nor II

D Neither I nor II Both the sale on Consignment Basis and Percentage of Completion methods report revenue based upon satisfaction of performance obligation based on ASC 606's five-step approach to recognizing revenue.

Which of the following is one of the criteria for recognizing revenue at a point in time? A Simultaneous receipt and consumption of customer benefits as and when the company performs. B The performance of the entity creates or enhances an asset controlled by the customer. C The performance of the entity does not create an asset with an alternative use of the entity D None of the above.

D None of the above. To recognize revenue at a point in time, the following criteria must be met: • Entity currently has a right to collect payment for the asset • The legal title for the asset is with the customer • Physical possession of the asset is transferred by the entity to the customer • Significant risks and rewards of ownership of the asset are with the customer • Asset has been accepted by the customer

Which of the following is not one of the five revenue recognition steps under ASC 606? A Allocate the transaction price to the performance obligations in the contract. B Determine the transaction price. C Identify the contract(s) with a customer. D The customer can benefit from the goods or services either on a standalone basis or with other resources that the customer can easily access

D The customer can benefit from the goods or services either on a standalone basis or with other resources that the customer can easily access The customer can benefit from the goods or services either on a standalone basis or with other resources that the customer can easily access is one of the criteria for a distinct good or service. The 5-Step approach to Revenue Recognition: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

When would a company recognize revenue over time? A When collectability of payments is not predictable B When repossessions of merchandise sold on the Percentage of Completion may result in a future gain or loss. C When costs to complete and estimates of progress towards completion cannot be estimated. D When costs to complete and estimates of progress towards completion are reasonably dependable

D When costs to complete and estimates of progress towards completion are reasonably dependable The Input Method prescribed in ASC 606 recognizes revenue over time for long term contracts and is used when costs to complete and estimates of progress towards completion are reasonably dependable. Revenue is recognized on each period in the contract on an accrual basis in proportion to cost incurred. Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of forty cents on the dollar. Hale holds a $30,000 noninterest-bearing note receivable from Seco collateralized by an asset with a book value of $35,000 and a liquidation value of $5,000. The amount to be realized by Hale on this note is A $ 5,000 B $12,000 C $15,000 D $17,000

Liquidation value of asset $ 5,000 Face amount of note $ 30,000 Less: Liquidation value of asset (5,000) Unsecured portion of note $ 25,000 Times: Percentage for unsecured claims × 40% Amount realized on unsecured portion of note $10,000 = Amount realized on note receivable $15,000

Hull Company is indebted to Apex under a $500,000, 12%, three-year note dated December 31, Year 2. Because of Hull's financial difficulties developing in year 3, Hull owed accrued interest of $60,000 on the note at December 31, Year 4. Hull restructured debt in year 3 on a loan to another creditor. Under a troubled debt restructuring, on December 31, Year 4, Apex agreed to settle the note and accrued interest for a tract of land having a fair value of $450,000.Hull's acquisition cost of the land is $360,000. Ignoring income taxes, on its year 4 income statement Hull should report as a result of the troubled debt restructuring # Income from Continuing Operations Income from Discontinued Operations A $200,000 $0 B $140,000 $0 C $ 90,000 $ 50,000 D $ 90,000 $110,000

The debtor recognizes a gain on the troubled debt restructuring equal to the difference between the carrying amount of the obligation settled and the fair value of the asset transferred. Both the ordinary gain and gain on troubled debt restructuring is reported as income from continuing operations at $200,000 ($110,000 + $90,000). Debt principal $500,000 Add: Accrued interest at restructure date 60,000 Carrying amount of obligation at restructure date $560,000 Less fair value of land transferred (450,000) Gain on restructure $110,000 Fair value of land transferred $450,000 Less: Carrying amount of the land (360,000) Gain on disposition $ 90,000

Lake Construction Company has consistently used the input method prescribed in ASC 606 and recognizes revenue over time. During year 1, Lake entered into a fixed-price contract to construct an office building for $10,000,000. Information relating to the contract is as follows: At December 31 Year 1 Year 2 Percentage of completion 20% 60% Estimated total cost at completion $7,500,000 $8,000,000 Income recognized (cumulative) 500,000 1,200,000 The performance by Lake does not create an asset with an alternative use and Lake has an enforceable right to payment for the completed performance to date. Contract costs incurred during year 2 were A $3,200,000 B $3,300,000 C $3,500,000 D $4,800,000

Year 1 Year 2 Contract price $10,000 $10,000 Estimated total cost at completion (7,500) (8,000) Estimated gross profit $ 2,500 $ 2,000 Estimated total cost at completion $ 7,500 $ 8,000 GP recognized to date $ 500 $ 1,200 Estimated total GP / 2,500 / 2,000 Percentage of completion (500/2500) 20% × 60% 7,500 * .20 = 1,500 Contract costs to date 1,500 4,800 Contract costs, prior years (0) (1,500) Contract costs, current year $ 1,500 $ 3,300 B $3,300,000

Regal Department Store sell gift certificates, redeemable for store merchandise that expires one year after their issuance. Regal has the following information pertaining to its gift certificates sales and redemptions: Unredeemed at 12/31/Yr1 $75,000 Yr2 sales $250,000 Yr2 redemptions of prior year sales $25,000 Yr2 redemptions of current year sales $175,000 Regal's experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31, Yr2, balance sheet, what amount should Regal report as unearned revenue? A $125,000 B $112,500 C $50,000 D $100,000

d Unearned revenue for Yr2 (b-c) $50,000 Ref Summary Amount a Gift certificates sold in Yr2 $250,000 b Expected redemption of gift certificates (i.e. $250,000 x 0.9) $225,000 c Gift certificates redeemed in Yr2 $175,000 d Unearned revenue for Yr2 (b-c) $50,000 Note: Any gift certificate unredeemed will be recognized as revenue at the expiry of the gift certificate validity period as the contract will be deemed terminated and consideration received is non-refundable.

ABC Ltd., after considering many companies, signed on January 1, Y1, a two year contract with S&S entertainers to provide entertainment during any of the events organized by the company during the period of the contract. On March 1, Y1, ABC was holding a 5 day international conference. The following were the costs incurred by S&S entertainers in relation to the contract: Cost to print pamphlets to obtain contract - $750. Travel cost of the marketing team to ABC Ltd. to obtain the contract - $1,000. Legal fees for drafting the contract - $250. Sales commissions to marketing department - $1,000. Building a removable stage, that could be used for all future programs organized by S&S - $1,200. Making props for the show which could be used for any future programs of S&S - $800. Printing brochures about S&S to be distributed to members of the conference - $750. Salary of employee employed primarily to organize events at ABC. This employee could also be used for other shows of S&S - $2,250. ABC is confident that the costs incurred could be recovered from the price charged for performance. What is the cost that should be capitalized? A $3,250 B $2,450 C $5,250 D $3,000

A $3,250 Total cost incurred while fulfilling the contract that has to be capitalized = $1,200 + $800 = $2,000. Total cost to be capitalized = Incremental cost of $1,250 + Cost to fulfill the contract $2,000 = $3,250.

A company provides the following information: Year 1 Year 2 Year 3 Cash receipts from customers: From year 1 sales $95,000 $120,000 From year 2 sales --------$200,000 $ 75,000 From year 3 sales --------$ 50,000 $225,000 What is the accrual-based revenue for year 2? A $200,000 B $275,000 C $320,000 D $370,000

B $275,000 Accrual accounting recognizes and reports the effects of transactions and other events on the assets and liabilities of a business enterprise in the time periods to which they relate rather than only when cash is received or paid. The accrual-based revenue for year 2 would be all the $275,000 total cash receipts from customers for year 2 sales ($200,000 in year 2 + $75,000 in year 3 = $275,000).