Chapter 6 - Learn Smart

At the end of the period, if construction in progress exceeds billings on construction contracts, it is recorded as a

contract asset.

True or false: Updated estimates related to contracts for which revenue was recognized during prior periods may necessitate recognition of losses.

True

If construction in progress is greater than billings on construction, the company reports the net amount as

a contract asset.

When should ongoing franchise fees be recognized by the franchisor?

Over time in the periods the services are performed by the franchisor.

Which of the following will not differ between revenue recognized over time and revenue recognized at completion?

Total expense Total revenue Total profit

True or false: Most long-term contracts qualify for revenue recognition over time.

True

For a consignment sale, when is inventory reduced for the cost of the item by the consignor?

When sold by the consignee.

Ebay, Inc. and Amazon act as ____for a variety of sellers.

agents

Star Inc. licenses use of its intellectual property to customers. The benefit the customer receives from the license is not affected by Star's ongoing activity. Star should recognize revenue:

at the beginning of the license period

The billings on construction contract account is classified as a

contra asset.

Good Buy Electronics Inc. encourages its customers to purchase a separate warranty that protects products for up to five years. This warranty represents a

extended warranty

A warranty that is normally sold separate and covers either a longer period of time and or additional risks is a

extended warranty.

A seller is required to include in its income statement or disclosure notes any interest revenue or interest expense as they represent significant ____components related to long-term contracts.

financing

For a particular contract, the timing of revenue recognition is determined

individually for each performance obligation.

Deferred revenue from the sale of gift cards is classified as a___ on the balance sheet

liability

As a practical matter, a seller can assume the time value of money is not significant if the period between delivery and payment is less than

one year.

The contract price received for an extended warranty is recognized as revenue

over the warranty period.

Emil Company evaluates gift cards that it sold two years ago. Based on past experience, it is highly unlikely that gift cards outstanding for two years or longer will be redeemed. Related to these gift cards, Emil should

recognize revenue.

Meissner sells merchandise for $50,000 on account. The company estimates that customers will return 5% of the merchandise. Meissner should debit sales returns and credit:

refund liability

Options for additional goods or services that are treated as separate performance obligations require allocation of the contract price based on their estimated

stand-alone price.

The journal entries used to recognize the costs of long-term construction contracts are identical when revenue is recognized upon completion and when it is recognized over time; however the two methods differ with respect

to the timing of revenue recognition.

The _____price is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services

transaction

In which account is a loss from long-term contracts recorded?

CIP

Rice Corp. recognizes revenue over time to account for long-term contracts and has the following information for the first year of the contract: What is the amount of revenue recognized in year 1?

$75,000

Which of the following are in essence financing (loan) arrangements?

Customer may pay within 60 days of delivery Customer pays prior to delivery of goods

True or false: A right of return represents a performance obligation.

False

True or false: Detailed note disclosures dealing with revenues are fairly uncommon.

False

The seller's belief that it is probable that it will collect substantially all of the amount it is entitled to receive under the contract is referred to as the

collectibility threshold.

The billings on construction account is a contra account to

construction in progress.

Which of the following are included in the journal entry required to record the collection of cash from a customer related to a long-term construction contract?

debit cash credit accounts receivable

The formula: total estimated revenue times percentage completed to date less revenue recognized in prior periods is used to measure

revenue recognized for the current period

Which methods may be used to estimate the stand-alone prices of goods and services?

Adjusted market assessment approach Residual approach Expected cost plus margin approach

When should the initial franchise fee be recognized by the franchisor?

After substantial performance of the initial services by the franchisor.

A seller may need to disclose which of the following long-term contract-related information in its financial statement notes?

bad debt expense contract related interest revenue or expense

For the purpose of allocating the transaction price to multiple performance obligations, the stand-alone selling price of a specific good or service may be estimated if it

cannot be directly observed.

For bill-and-hold arrangements, revenue is typically recognized when

the related goods are delivered.

Which of the following likely will lead to revenue recognition at a point in time?

Buyer has legal title to the asset Buyer has accepted the asset

Which of the following costs must be excluded from the calculation of the cost-to-cost ratio?

Costs that don't reflect progress toward completion Inefficiencies related to the project

True or false: A quality-assurance warranty is a separate performance obligation.

False

According to the IASB, when is the seller required to recognize revenue over time on intellectual property?

Only if the seller's ongoing activities affect the benefits the customer receives.

A seller recognizes contract liabilities, contract assets, and accounts receivable on separate lines of its

balance sheet

When the time value of money is significant, the transaction price is allocated

between the merchandise and the financing component

Cash received from the sale of gift cards is recognized as ____ revenue

deferred

The cost of a quality-assurance warranty is recognized

during the period of sale.

If a contract specifies prepayment before delivery, the customer is essentially making a____ to the seller and, therefore, is getting compensation for the time value of money.

loan

A shortcoming of the output method for estimating progress toward completion is that it may

provide a distorted view of actual completion

Options for additional goods or services that are treated as separate performance obligations

require allocation of the contract price

In a principal-agent relationship, the agent recognizes revenue to the extent of the

sales commission

On January 1, Roberts Company receives $36,000 in cash for providing internet access to customers for the upcoming year. On January 31, Roberts should credit

service revenue for $3,000.

In step 1 of revenue recognition,

the legal rights of seller and customer are established.

Revenue related to royalties based on sales or usage of a license are recognized when

the sales or usage has actually occurred.

If a long-term contract doesn't qualify for revenue recognition over time, revenue is recognized

upon completion

Five steps used to apply the core revenue recognition principle into the correct order.

1. Identify the contract with a customer.2. Identify the performance obligation(s) in the contract.3. Determine the transaction price.4. Allocate the transaction price to the performance obligations.5. Recognize revenue when (or as) each performance obligation is satisfied

What is a key difference in accounting for a long-term contract and for a typical sale?

A long-term contract creates a physical asset in the same period it creates a financial asset.

Which of the following promises likely would include multiple distinct performance obligations?

A promise to deliver a cell phone and cellular service A promise to deliver computer hardware and software

In a consignment, who retains the risks and rewards of ownership of the property?

Consignor

When recognizing revenue over time, which account is updated for gross profit each period?

Construction in progress

Which of the following must a seller recognize as separate line items on the balance sheet?

Contract liabilities Contract assets Accounts receivable

Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million, total construction costs are $3.75 million, actual costs incurred during the first year are $1.5 million, and the revenue recognized is $2 million. The journal entry to record revenue during year 1 is:

Debit: Cost of construction $1.5 million Debit: CIP $500,000 Credit: Revenue $2 million

What is the journal entry to recognize a loss on a long-term contract?

Dr. Cost of construction; Cr. Revenue from long-term contracts, Cr. Construction in progress (CIP)

Which of the following conditions must be met for goods or services to be distinct?

Goods or services are separately identified from other goods or services Goods or services are capable of being distinct

What is the difference between journal entries to recognize gross profits when revenue is recognized over time and when revenue is recognized upon completion of a long-term project?

Timing

On January 5, Merkel Inc. purchases office equipment for its new branch office from Norbert Company. Merkel requests that the equipment be delivered after the renovation of the branch location is completed. This agreement is referred as a:

bill-and-hold arrangement

If delivery and payment related to the sale of goods occur relatively near each other, the time value of money

can be ignored.

With respect to goods and services, control has transferred to the customer if the customer:

can obtain the benefits associated with the goods or services has direct influence over goods or services

When revenue is recognized over time in a long-term contract, a loss may have to be recognized in at least one period

even if the project as a whole is expected to be profitable.

In a franchise agreement, the____ pays franchise fees to obtain the right to use a company's name and sell its products.

franchisor

Progress toward completion can be measured based on the proportion of effort expended thus far relative to the total effort expected to satisfy a performance obligation. This is referred to as a

input method.

If a seller determines that the time value of money is significant, the seller adjusts sales or service revenue and recognizes the financing component as:

interest revenue

Sadie performs a service that satisfies just one of the three conditions for considering whether revenue should be recognized over time. Sadie should recognize revenue

over time.

The essential difference between revenue recognition over time and upon completion relates to the

pattern of recognition of the related gross profit.

Revenue recognized each period is determined by multiplying total estimated revenue by

percentage completed to date and subtracting revenue recognized in prior periods

The amount received for an extended warranty is initially

recognized as a deferred revenue liability.

Gerhard Inc. sells airline tickets for New World Global Airlines. Gerhard Inc. receives a 8% commission on the sales price of the tickets. During July, Gerhard Inc. sells $1 million of tickets with a cost of $750,000 for New World Global Airlines. New World Global Airlines should record

sales revenue for $1 million cost of tickets sold for $750,000

The ____-____ selling price is the amount at which the good or service is sold separately under similar circumstance.

stand-alone

When one party to an agreement grants the right to sell its products and use its name to another party, we refer to the arrangement as a:

franchise

When recognizing revenue over the term of the contract, CIP is updated each period for the current year's

gross profit

Licenses typically allow customers to use the seller's ____ property.

intellectual

The cost-to-cost ratio is the most common approach used to estimate

progress toward completion

The stand-alone price of a good or service may be estimated using the adjusted market assessment approach, the expected cost plus margin approach, or the ___ approach

residual

If the consignee can't find a buyer within an agreed upon time, the consignee

returns the goods to the consignor.

For a long-term contract, revenue is recognized when the related performance obligation is completely satisfied if

the criteria for recognizing revenue over time is not met.

What journal entry should be made to recognize accounts receivable for long-term construction projects?

Debit Accounts Receivable and Credit Billings on Construction Contract

In a consignment, the ______ owns the goods; the ______ holds the goods in order to sell them to a buyer.

consignor; consignee

Koster Inc. recognized $10,000 of service revenue, which represents one-half of the estimated bonus it expects to receive at the end of the year. On October 1, Koster re-assesses the situation and is unable to conclude that it is probable it will meet the conditions for receiving the bonus. What should Koster do?

Reverse the already recognized revenue on October 1

True or false: Most long-term contracts should be viewed as single performance obligations.

True

At the end of the period, if construction in progress is less than billings on construction contracts, it is recorded as a

contract liability.

A good or service is capable of being distinct only if the customer

could use the good or service on its own or in combination with goods or services acquired elsewhere

The account name "contract liability" is another name for

deferred revenue.

Malone Corp. properly recognizes revenue upon completion of a long-term construction project. Malone has the following information for a 3-year contract.

debit cost of construction $24,000. credit revenue from contracts $50,000. debit construction in progress $26,000.

On January 1, Roberts Company receives $36,000 in cash for providing internet access to customers for the upcoming year. On January 31, Roberts should debit

deferred revenue for $3,000.

On January 1, Roberts Company receives $36,000 in cash for providing internet access to customers for the upcoming year. On January 1, Roberts should debit cash and credit

deferred revenue for $36,000.

Goods or services that are not distinct are ____ and treated as a ____ performance obligation.

combined; single

What is the correct journal entry to recognize profit for a long-term construction project for which revenue is recognized over time?

Debit construction in progress and debit cost of construction; credit revenue from long-term contracts

Which of the following prevents double-counting of assets for a long-term construction contract?

Netting of CIP and billings on construction contract

On the balance sheet, billings on construction is

On the balance sheet, billings on construction is

The amount billed to customers on long-term construction project is recorded in the

billings on construction account.

In a bill-and-hold arrangement, the ____ requests that the ____ ship the products ______.

buyer; seller; at a later date

For performance obligations performed over time, assessment of progress toward completion that results in an adjustment to the related revenue is treated as a

change in estimate

Fuller contracted with the owners of "Healthy Bakeries" to open a bakery, sell its signature products and use its name and logo. This agreement refers to a

franchise

In a franchise agreement, the ___owns the company and gives an individual the right to use its name and sell its products.

franchisor

The construction in progress account represents the total construction costs (labor, material, overhead) and

gross profit recognized to date.

The stand-alone selling price of a good or service may be highly uncertain because the seller

has not previously sold the good or service. provides the same good or service to different customers at substantially different prices.

A seller estimates the stand-alone selling price of goods and services using the residual approach. Using this method, the seller will estimate the stand-alone price by subtracting from the total contract price the:

known stand-alone prices of the other products or services

Typical costs included in a construction project include

labor, materials, and overhead.

For sales involving a right of return, the amount related to expected returns

must be estimated and accrued is recognized as a liability reduces the amount of revenue recognized on sales.

Adding another performance obligation to an existing contract that requires that the customer pay an additional price equal to the added good or service's stand-alone price results in a contact modification that is treated as a

new separate contract

When the seller transfers control of goods or services to the customer the related _____ is complete.

performance obligation

Holly Inc. sells multi-function office equipment with an extended warranty, which is included in the $10,000 contract price. Holly should recognize the extended warranty as a

separate performance obligation. by allocating part of the transaction price to the extended warranty.

Ronin Corp. recognizes revenue over time related to a long-term contract. The contract price is $5,000,000, total expected construction costs are $3,000,000, and actual costs incurred during the first year are $300,000. Actual costs for year 2 are $900,000 and estimated cost to complete is $1,800,000. The amount of previously recognized revenue is $500,000. Revenue recognized for year 2 is:

$1.5 million

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. For year one, Jones recognizes $1 million of revenue and $800,000 of cost. During year 2, Jones incurs $1.2 million in cost and estimates that during year 3 an additional $1.1 million will be necessary to complete the project. Actual costs incurred during the third year were $1.2 million. For year 3, Jones should recognize a loss of:

$100,000

Donau Company sells a video streaming devices for $100. A one-year subscription for unlimited video streaming costs $120. Alternatively, customers can rent videos on demand or subscribe to a competing service. On February 1, Robert purchases both the steaming device and signs-up for one year of service. How much revenue should Donau recognize for the month of February?

$110 $100 for device and $10 for one month of service

Main Company sells a video streaming device for $100. A one-year subscription to unlimited video streaming costs $150. Alternatively, customers can rent videos on demand or subscribe to a competing service. Customers may purchase the streaming device together with the one-year subscription for $200. For customers who purchase the streaming device with the 1-year subscription, Main should allocate how much of the total contract price to the unlimited streaming access?

$120

Main Company sells video streaming devices for $100. A one-year subscription to unlimited video streaming costs $150. Alternatively, customers can rent videos on demand or subscribe to a competing service. In an effort to boost December sales prior to the release of a second generation device, Main offers the device at a sharp discount. The discount specifically applies to the streaming device. If during December a customer purchases the streaming device with a 1-year subscription for $210, Main should allocate how much of the total contract price to the streaming service?

$150

Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million total construction costs are $3.75 million and actual cost incurred during the first year are $1.5 million. Calculate the revenue recognized during year 1.

$2 million

James Corporation is an agent of Alten Corporation. Their agreement specifies that James will receive a commission equal to 15% of the sales price. During May, James sells goods with a sales price of $200,000 for Alten. For the month ended May 31, Alten Corporation should recognize revenue of:

$200,000

Lorna Corp. recognizes revenue over time for long-term contracts. At the date the contract is signed, the contract price is $600,000 and the expected costs to complete the contract are $400,000. The following information is available: What is the amount of revenue recognized during year 2?

$210,000

Superb Vision sells 100 pairs of eyeglasses for $400 each. Superb Vision delivers each pair of glasses with a coupon that entitles the customer to purchase an additional pair of glasses of the same type at a 50% discount. Based on past experience, Superb Vision estimates that 20% of the coupons will be redeemed by customers. Upon delivery of the 100 eyeglasses, Superb should recognize deferred revenue of

$3,636

James Corporation is an agent of Alten Corporation. Their agreement specifies that James will receive a commission equal to 15% of the sales price. During May, James sells goods with a sales price of $200,000 for Alten. For the month ended May 31, James Corporation should recognize revenue of:

$30,000

Megan Corp. recognizes revenue over time to account for long-term contracts. At the date the contract is signed, the price is $600,000 and the expected costs to complete the contract are $400,000. The following information is available: What is the amount of gross profit or loss that is recognized in year 2?

$30,000 loss

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. For year one, Jones recognizes $1 million of revenue and $800,000 of cost. During year 2, Jones incurs $1.2 million in cost and estimates that during year 3 an additional $1.1 million will be necessary to complete the project. For year 2, Jones will recognize a loss of:

$300,000

Superb Vision sells 100 pairs of eyeglasses for $400 each. Superb Vision delivers each pair of glasses with a coupon that entitles the customer to purchase an additional pair of glasses of the same type at a 50% discount. Based on past experience, Superb Vision estimates that 20% of the coupons will be redeemed by customers. Upon delivery of the 100 eyeglasses, Superb should recognize revenue equal to:

$36,364 $400/(400+(200x0.2)) x(400x100)

Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the expected value of consideration, what transaction price will Guarder estimate for this contract?

$40,500 Rationale:$45,000 x 55% = $24,750 $35,000 x 45% = $15,750

Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what transaction price will Guarder estimate for this contract?

$45,000

On January 1st, Guarder Consulting enters into a one-year contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. Smith pays Guarder an up-front fixed fee of $48,000 on January 1st. Guarder will also earn an additional $12,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 70% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what amount of revenue will be recorded at the end of the first month?

$5,000 Rationale:$4,000 of the up-front fee plus $1,000 of the bonus will be recognized each month

Soul Spa offers a menu of spa treatments to its customers. Its most popular service is its hot stone massage, which it offers for $240. In November, it performs a hot stone massage for one of its clients and, for the first time, provided its new after-massage skin purification treatment for which it has not determined a stand-alone price. Soul Spa charged the client $300 for the services provided. What amount should Soul Spa allocate to the skin purification treatment?

$60

Main Company sells video streaming devices for $100. A one-year subscription to unlimited video streaming costs $150. Alternatively, customers can rent videos on demand or subscribe to a competing service. In an effort to boost December sales prior to the release of a second generation device, Main offers the device at a sharp discount. The discount specifically applies to the streaming device. If during December a customer purchases the streaming device with a 1-year subscription for $210, Main should allocate how much of the total contract price to the steaming device?

$60 $210-150.

Linx Corp. recognizes revenue over time to account for long-term construction contracts. The contract price is $1,000,000 and the estimated costs to complete the project are $500,000 on the date the contract was signed. Linx subsequently has the following information: Linx recognized $200,000 of gross profit during year 1. What is the gross profit or loss recognized in year 2?

$65,000 loss

Robbie Inc. estimated that it will receive $60,000 of consideration for providing services to Stan Company over a 6-month period. Robbie properly accrues $10,000 each month; after two months, Robbie estimates that the total consideration it will receive is only $50,000. For each of the remaining months, Robbie should recognize service revenue of:

$8,333 Rationale:$50,000/6 = $8,333 per month

Margery sells 100 TV top boxes to customers for $90 each. Margery estimates that 6% of the units will be returned for a full refund. Margery should report net sales revenue of:

$8,460 Rationale:$9,000-(9,000*.06) = 8,460

Main Company sells a video streaming device for $100. A one-year subscription to unlimited video streaming costs $150. Alternatively, customers can rent videos on demand or subscribe to a competing service. Customers may purchase the streaming device together with the one-year subscription for $200. For customers who purchase the streaming device with the 1-year subscription, Main should allocate how much of the total contract price to the streaming device?

$80 $200 (100/250)

To date, Gunter Construction completed 89% of a construction project with a contract price of $1 million. Consistent with the contract provisions, at this time, Gunter may bill 80% of the agreed-upon price. Gunter will report an accounts receivable of

$800,000

Zahn, DDS, provides various dental services to its patients. In January, Zahn performs a tooth restoration service for a patient and also for the first time performs a new tooth enhancement service, for which is has not yet determined a stand-alone price. Zahn charges $890 for the services; the normal stand-alone price of the tooth restoration is $800. What amount should Zahn allocate to the new tooth enhancement service?

$90 Rationale:$890-800

A seller estimates the stand-alone selling price of a good using the adjusted market assessment approach. Using this method, the seller may refer to which of the following?

A competitor's selling price

Which of the following likely would qualify for revenue recognition over time?

A long-term construction contract

Orwell Inc. entered into a 6 month contract with a customer to provide consulting services that requires the customer to pay an upfront fixed fee of $15,000, plus the opportunity for Orwell to earn a bonus of $1,200 for achieving certain performance targets by the end of the 6 month period. Initially, Orwell estimated that it was probable that the bonus would be achieved and recorded a receivable. After one month, they determined they could no longer conclude that it is probable a significant reversal of revenue would not occur in the future related to the variable consideration. What should Orwell do?

Adjust revenue for the previously recognized bonus For the remainder of the contract, only recognize revenue related to the fixed fee. Reverse the bonus receivable

Which of the following likely would be treated as a separate performance obligation related to the purchase of a pair of prescription eye glasses?

An unlimited time coupon for 50% off an additional pair of eye glasses

Which of the following methods of estimating progress toward completion represent output-type measures?

Appraisal of performance completed to date Achievement of milestones Number of units produced or delivered

When is gross profit recorded in the construction in progress account for a long-term contract accounted for upon completion?

At the completion of the contract.

Which of the following are typically agents?

Auction houses Travel facilitators Realtors

When revenue is recognized on long-term construction projects, a journal entry is recorded to recognize revenue and cost of goods sold. The difference between revenue and cost of goods sold (gross profit) is recognized in which account?

Construction in progress

When revenue is recognized upon completion of a long-term contract, gross profit is recognized upon completion in which account?

Construction in progress

Related to long-term construction contracts, at the end of the period which accounts are netted?

Construction in progress and billings on construction contracts.

Why are estimated losses on an entire long-term project fully recognized in the first period the loss is anticipated?

Construction in progress would be valued at an amount greater than the company expects to realize from the contract

Which of the following services are commonly performed over time?

Consulting engagements Financial statement audits Lending of money

From a financial reporting perspective the "sales returns" account is a___ -____ account.

Contra-Revenue

Performance obligations are satisfied when the seller transfers _____ of goods or services to the customer.

Control

The concept or principle that states that companies should recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for goods and services is referred to as the:

Core revenue recognition principle

Which of the following are key indicators that control of goods or services has been transferred to the customer?

Customer accepted the risks and rewards of ownership Customer has an obligation to pay Customer has legal title to the asset Customer accepted asset Customer has physical possession of the asset

Which of the following conditions will cause revenue to be recognized over time?

Customer controls the asset as it is created Customer consumes the benefit of the seller's work as it is performed Seller creates an asset that has no alternative use, and the seller has the right to receive payment for progress to date.

On January 1st, Guarder Consulting enters into a one-year contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. Smith pays Guarder an up-front fixed fee of $48,000 on January 1st. Guarder will also earn an additional $12,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 70% chance that Smith will achieve $100,000 of cost savings. What journal entry will Guarder make on January 1st to recognize the up-front cash payment?

Debit cash $48,000, credit deferred revenue $48,000

Margery sells 100 TV top boxes to customers for $90 each and credited sales revenue for $9,000. Margery estimates that six of the units will be returned for a full refund of $540. What additional journal entry should Margery make?

Debit sales returns and credit refund liability

Thomson Tractor Supply sells farm equipment and offers its customers the option to purchase an extended warranty that covers the product for three years beyond the standard one-year manufacturer's warranty. In January 2021, Thomson records cash sales for three tractors for $75,000 each, and seven more tractors with extended warranties for $77,000 each. Which of the following statements are true?

Deferred revenue should be recorded for the price of the extended warranties. The extended warranty should be treated as a separate performance obligation. The revenue for the extended warranties should be recorded over the three year period covered by the extended warranty.

Which of the following conditions or situations make the timing of revenue recognition for long-term contracts especially critical?

Delayed recognition doesn't provide information to financial statement users in a timely manner. There tends to be a considerable difference between recognition over time and when the performance obligation is completed.

Southland Construction. has entered into a three year contract to construct an office plaza for Northville Company for $300,000,000. Southland agrees to bill Northville 50% at the end of the first year, 30% at the end of the second year, and 20% at the end of the third year. At the end of year 1, Southland estimates it has completed 35% of the building and has incurred $55 million in construction costs. Which of the following is the correct entry to record billings for Southland Construction?

Dr. Accounts receivable $150 million; Cr. Billings on construction contract $150 million

What is the journal entry to recognize a loss on long-term contracts?

Dr: Cost of Construction; Cr: Revenue from Long-Term Contracts and Cr: Construction in Progress

True or false: If a project qualifies for revenue recognition over time and the project as a whole is expected to be profitable, a loss should not ever be recognized in a given period along the way.

False

Which of the following support(s) the conceptual basis for separating contractual promises into several performance obligations?

Financial statements better reflect timing of transfer of goods and services Promises that can be viewed on a stand-alone basis should be separated

When is a loss recognized on a long-term contract?

In the first period in which the loss become evident.

For a contract that qualifies for revenue recognition over time, revenue and cost of construction are reported in the

Income Statement

Based on past experience, a seller can usually estimate the returns on a given volume of sales. Once estimated, these returns will

Increase liabilities Reduce reported revenue

What method(s) can be used to estimate progress toward completion for the purpose of recognizing revenue over time?

Input method Output method

The construction-in-progress account most closely relates to which type of account?

Inventory

Virginia Corp. recognized deferred revenue for cash received on a multi-year contract that also provides for variable consideration (bonus) if certain targets are met by the end of the contract period. Which of the following statements are true if Virginia Corp revises its estimate of variable consideration in subsequent years?

It must reflect the adjustment in that year's revenue.

On January 2, Main Company sells a video streaming device for $100. A one-year subscription to unlimited video streaming costs $150. Alternatively, customers can rent videos on demand or subscribe to a competing service. Customers may purchase the streaming device together with the one-year subscription for $200. Main should recognize revenue related to the video streaming device on

January 2

On January 5, Merkel Inc. purchases office equipment for its new branch office from Norbert Company. Merkel requests that the equipment be delivered after the renovation of the branch location is completed. On May 1, Merkel informs Norbert that it wishes delivery as soon as possible. The equipment is delivered on May 4. On what date should Norbert recognize the related revenue?

May 4

Which of the following methods are appropriate for estimating variable consideration?

Most likely amount that will be received Expected value

Revenue related to a company providing cleaning services to a customer for a period of time should be recognized

Overtime

Which of the following situations may make the contract price less apparent?

Payment by the seller to the customer Variable consideration provisions The time value of money Determining whether the seller is acting as principal or agent Sales with right of return

Promises to transfer goods or services to a customer are referred to as ______obligations.

Performance

Consistent with ASU 2014-09, promises to transfer goods or services to customers are referred to as

Performance obligations

Which method provides a better measure of a company's economic activity each period?

Revenue Recognition over time

Which statements are true regarding revenue recognition over time and upon completion?

Revenue recognition over time provides a more realistic measure of a project's periodic performance. The same total amount of gross profit is recognized under both methods.

Which of the following transactions would likely involve multiple performance obligations?

Seller delivers goods and promises to provide related service over a 12-month period

Peter Inc. recognized deferred revenue for variable consideration under a multi-year contract. Which of the following correctly describes the requirement in subsequent years related to the estimated variable consideration?

The estimate must be reassessed each period

Neither the seller nor the customer have performed any obligation under a written agreement. What additional condition would disqualify this as a contract for purposes of revenue recognition?

The seller and buyer can terminate the agreement without a penalty.

When consigned goods are sold, the consignee remits what amount to the consignor?

The selling price less commissions and expenses

Which of the following differs between revenue recognized over time and revenue recognized at completion?

The timing of recognition

Software vendors typically bundle their products for a lump-sum contract price. What is the critical accounting issue regarding software vendors?

Timing of revenue recognition

The amount the seller expects to be entitled to receive from the customer in exchange for providing goods or services is referred to as the

Transaction price

True or false: An estimated overall loss on a long-term contract is fully recognized in the first period the loss becomes evident, regardless of the revenue recognition method used.

True

True or false: Recognized losses on long-term contracts reduce the construction in progress account.

True

True or false: The account descriptions used in the journal entry to close out the billings and construction in progress accounts are the same whether revenue is recognized upon completion or over time.

True

Key considerations when applying the five steps to revenue recognition include:

Whether the revenue from the performance obligations are recognized at a point in time or over a period of time The need for allocating the transaction price The number of performance obligations

The construction in progress account is equivalent to which account in a manufacturing environment?

Work-in-process

Which of the following may provide evidence of possible reversals in the amount of variable consideration that will be received?

a long delay before uncertainty resolves a large number of possible outcomes that could occur a history of changing payment terms on similar contracts

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. The contract does not qualify for revenue recognition over time. During year 1, Jones incurs costs of $800,000 and during year 2, costs of $1.2 million. At the end of year 2, Jones estimates that an additional $1.1 million will be necessary to complete the project. At the end of year 2, Jones should recognize:

a loss of $100,000

If a company hires a contractor to construct its new headquarters building, the delivery of the materials and the labor and oversight services provided by the contractor represent

a single performance obligation because the contractor is promising to provide a building and the individual goods and services are inputs.

For a contract with multiple performance obligations, a change in estimate related to variable consideration is

allocated to the various performance obligations based on their relative stand-alone price.

With respect to the three criteria used to determine whether revenue on a long-term contract is recognized over time [i.e., (1) customer consumes services while performed, (2) customer controls asset as it is created, and (3) asset has no alternative use], revenue is recognized over time if:

any one of three criteria is satisfied

Goods or services that are highly interdependent, or if one significantly modifies another, typically

are treated as a single performance obligation.

For licenses of functional intellectual property, revenue is typically recognized

at the start of the license period.

Consistent with the new ASU on revenue recognition, the terms "completed contract method" and "percentage-of-completion-method" were replaced by these new terms: revenue recognition ____.

at time of completion. over time

Jonathan is estimating the amount of variable consideration for a specific contract. In deciding which estimation method to use, Jonathan should chose the one that

best predicts the amount he will receive.

If a contract qualifies for revenue recognition over time, revenue is recognized based on progress toward

completion

In a consignment, the entity who owns the goods, referred to as the ______, physically transfers the goods to another company, called the ______, who will attempt to sell the goods.

consignor; consignee

From a financial reporting perspective the "sales returns" account is a:

contra-revenue

Commitment to performing an obligation and enforcing related rights represents a critical aspect of a

contract

If a seller satisfies a performance obligation but the payment depends on something other than the passage of time, the seller should recognize a

contract asset.

On February 15, Speedy Construction Company has completed a significant portion of the promised construction. Consistent with the related contract, Speedy may bill the customer on March 15. On February 15, Speedy Construction may recognize a

contract asset.

On February 15, Speedy Construction Company has completed a significant portion of the promised construction. Consistent with the related contract, Speedy may bill the customer on March 15. On February 15, Speedy Construction may recognize a(n)

contract asset.

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. The contract does not qualify for revenue recognition over time. During year 2, Jones estimates that it will incur a loss on the project. For year 2, Jones should:

credit construction in progress debit loss on long-term contract

Which of the following are included in the journal entry required to record construction costs for a long-term construction contract?

credit raw materials debit construction in progress

Jackson Corp. recognizes revenue over time to account for long-term construction contracts. In year 3, Jackson anticipates a loss on the contract for $50,000. In year 3, Jackson recognizes revenues of $800,000 and has $850,000 in construction costs. Indicate which of the following are included in the journal entry at year-end to recognize revenues and profit/loss on the contract.

credit revenue from long-term contracts $800,000 debit cost of construction $850,000 credit construction in progress $50,000

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. For year one, Jones recognizes $1 million of revenue and $800,000 of cost. During year 2, Jones incurs $1.2 million in cost and estimates that during year 3 an additional $1.1 million will be necessary to complete the project. Jones will recognize a loss on the project by:

crediting construction in progress

The closing entry for a long-term construction project when revenue is recognized either over time or upon completion includes which of the following?

debit billings on construction contract credit construction in progress

A contract liability is a term that refers to a ___ revenue account

deferred

A transaction price may be uncertain because the price

depends on the outcome of future events.

The IASB's licensing guidance ______ U.S. GAAP and ________ on the functional/symbolic classifications to guide the timing of revenue recognition for symbolic intellectual property.

differs from / does not rely

Which of the following costs are included in a long-term construction contract?

direct material direct labor overhead

Financial statement users can learn the amount of revenue reported by a company by reviewing its income statement and learn additional detailed revenue-related information by reviewing the company's

disclosure notes

Jones Company receives a prepayment from a customer consistent with a promise to deliver 20 new office printers to Smith Inc. The prepayment

does not create a separate performance obligation should be recorded as deferred revenue

A license for symbolic intellectual property

does not have significant standalone functionality provides the customer with the right of access to the intellectual property

When the billings on construction contract is netted against the construction in progress account, this prevents

double counting of assets.

At the end of a long-term construction project, the amounts in the construction in progress account will be ______ the billings on construction contract.

equal to

Because the exact cost of a quality-assurance warranty is unknown when the related product is sold, the cost is

estimated and accrued during the year of sale.

A contract is said to have variable consideration if the price depends on the outcome of

future events

Estimated losses on the entire long-term project are recognized immediately because otherwise the CIP account would be valued at an amount ____ the amount the company expects to realize on the contract.

greater than

A seller properly recognizes an accounts receivable related to a contract if the seller:

has the unconditional right to receive payment the only remaining requirement is the passage of time.

For contracts with multiple performance obligations, the seller allocates the transaction price to each performance obligation

in proportion to the stand-alone selling price of each good or service in the contract.

A seller estimates the stand-alone selling price of goods and services using the adjusted market assessment approach. Using this method, the seller will consider what it could sell the goods or services for in the market

in which it normally conducts business

Prepayments for future goods or services should be

included in the transaction price allocated to the various performance obligations in the contract

If a contract that has variable consideration includes multiple performance obligations, the seller ______ the variable consideration for the purpose of allocating the transaction price to the various performance obligations.

includes

Methods that can be used to estimate progress toward completion are referred to as _____-based and ____-based methods.

input; output

If a seller lacks sufficient information to be able to accurately estimate returns, the seller should recognize revenue only to the extent that

it is probable that significant future reversals in revenue will not occur.

Which of the following are indicators that a company is a principal?

it sets the sales price it owns the inventory prior to delivery It has primary responsibility for providing the product or service

Agreements that allow customers to use the seller's intellectual property are referred to as

licenses

Which of the following may provide evidence of possible reversals in the amount of the variable consideration that will be received?

long delay until uncertainty is resolved poor evidence on which estimates were based estimates were based on factors beyond the seller's control

The definition of probable under IFRS is _____ the definition in U.S. GAAP.

lower than

Which of the following can be used as indicators of progress toward completion under the input method?

machine hours used costs incurred labor hours expended

Estimates relating to long-term contracts

must be periodically updated.

Revenue is typically recognized _____ for a license that provides the customer with the right of access to the seller's intellectual property.

over the license period

If the seller provides a product or service that is customized by the customer and for which the seller has no alternative use, the seller should probably recognize revenue

over time

Revenue recognition for services such as lending money and performing financial statement audits is typically

over time

For many years, long-term contracts that qualified for recognition over time were accounted for using an approach called the ________ method, and those that did not qualify for recognition over time used a method called _________.

percentage-of-completion; completed contract

When a performance obligation is satisfied over time, revenue is recognized in proportion to the amount of the

performance obligation that has been satisfied.

An essential characteristic of a contract is that all parties to the contract are committed to

performing their obligations and enforcing their rights

A seller may recognize variable consideration only if it is _____ that there will not be significant reversals with respect to the amount that will be received in the future.

probable

The collectibility criteria specifies that a contract only exists for the purpose of revenue recognition if the seller believes that it is

probable that it will collect the amount entitled to them under the contract

Variable consideration can only be recognized if it is

probable that the amount will be received in the future.

The amount of revenue that is recognized each period for a long-term contract that qualifies for revenue recognition over time is determined based on

progress toward completion.

A____warranty represents the cost of satisfying the performance obligation to deliver products of acceptable quality.

quality assurance

If a contract qualifies for revenue recognition over time, the income statement for each year reports related:

revenue cost of construction

If based on past experience only a remote likelihood exists that a previously sold gift card will still be redeemed, the seller should recognize

revenue.

The potential that a good does not satisfy the original performance obligation is addressed through a customer's:

right of return

Gerhard Inc. sells airline tickets for New World Global Airlines. Gerhard Inc. receives a 8% commission on the sales price of the tickets. During July, Gerhard Inc. sells $1 million of tickets for New World Global Airlines. Gerhard Inc. should record

sales commission revenue for $80,000

It is important to distinguish between a principal and an agent because the principal recognizes revenue to the extent of the

sales price

A seller estimates the stand-alone selling price of goods using the expected cost plus margin approach. Using this method, the seller will estimate the cost of ______ and add an appropriate profit margin.

satisfying the performance obligation

If a seller purchases distinct goods or services from a customer at the fair value of the goods or services, the purchase is treated as a

separate transaction.

Robbie Inc. estimated that it will receive $60,000 of consideration for providing services to Stan Company over a 6-month period. Robbie properly accrues $10,000 each month; after three months, Robbie estimates that the total consideration it will receive is only $25,000. When the estimate change is determined, the company should debit ____ and credit ____ for ____.

service revenue; contract receivable; $17,500 Rationale:$25,000 × 3/6 = $12,500; $12,500 - ($60,000 × 3/6) = ($17,500)

Kunze Company sells bundled products to a customer and correctly identifies several separate performance obligations. Kunze should allocate the total contract price in proportion of each obligation's

stand-alone selling price.

If a sellers pays more for distinct goods or services purchased from its customer than the fair value of those goods or services, the excess payment is:

subtracted from the amount the seller is entitled to receive and viewed as a refund

The billings on construction account represents

the amount billed to customers to date.

On a long-term construction project, the amount in the construction in progress account represents the costs of construction plus the gross profit recognized to date, and the billings on construction represents

the amounts billed to the customer.

Revenue is recognized upon completion of a long-term contract if:

the contract does not qualify for revenue recognition over time

A seller estimates the stand-alone selling price of goods using the expected cost plus margin approach. Using this method, the seller combines which two components?

the cost of satisfying the performance obligation an appropriate profit margin

Arthur Inc. provides services to consulting clients. Arthur should recognize the related revenue when

the related performance obligation is satisfied.

As compared to revenue recognition over time, the total amount of gross profit recognized related to revenue upon completion is:

the same.

A long-term contract that includes many products and services that are capable of being distinct, may be accounted for as a single performance obligation because

the seller's role is to combine those products and services prior to delivery or completion.

A contract does not exist if

the transaction lacks commercial substance.

Knights Inc. is selling a new product and is unable to estimate reliably the amount of future returns. Knights Inc. may want to postpone revenue recognition until

the uncertainty about returns is resolved.

Common note disclosures relating to revenue include:

timing of recognition outstanding performance obligations major product lines

Gerhard Inc. sells merchandise to a customer with a long payment period. Gerhard determines that the time value of money related to this transaction is significant. Gerhard should allocate the

transaction price between the merchandise cash price and the financing component

The core revenue recognition principle stipulates that companies recognize revenue when goods or services are

transferred to customers

When revenue is recognized upon completion of a long-term contract, CIP is updated to include gross profit

upon completion.

A quality-assurance ____obligates the seller to make repairs or replace products that later are found to be defective or unsatisfactory

warranty

A quality-assurance ____obligates the seller to make repairs or replace products that later are found to be defective or unsatisfactory.

warranty

If none of the criteria are met for revenue recognition over time, revenue will be recognized

when the performance obligation is completely satisfied.

If variable consideration is based on sales or usage of a license ("royalties"), it is included in the transaction price

when the sales or usage has occurred and royalties are known.

Options for additional goods or services are considered performance obligations if they provide a material right to the customer that the customer

would not receive otherwise.