Chapter 6: Revenue Recognition

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

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

over time.

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

pattern of recognition of the related gross profit.

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

performing their obligations and enforcing their rights

Which of the following likely will lead to revenue recognition at a point in time? (Select all that apply.)

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

Prepayments for future goods or services should be (Select all that apply.)

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

For profitable long-term contracts, income is recognized in each year when revenue is recognized:

percentage of completion

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

transferred to customers

The core revenue recognition principle stipulates that companies recognize revenue when goods or services are Multiple choice question.

transferred to customers

Sandlewood Construction Inc. recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2018, Sandlewood began work on a $10,000,000 construction contract, which was completed in 2019. The accounting records disclosed the following data at the end of 2018:Costs incurred$5,400,000 Estimated cost to complete 3,600,000 Progress billings 4,100,000 Cash collections 3,200,000In addition to accounts receivable, what would appear in the 2018 balance sheet related to the construction accounts?

Construction in progress (CIP) would include cost + gross profit, or $5,400,000 + 600,000 = $6,000,000. The balance sheet would show a current asset for CIP − progress billings, or $6,000,000 − $4,100,000 = $1,900,000.

Which of the following are key indicators that control of goods or services has been transferred to the customer? (Select all that apply.)

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

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

Debit Accounts Receivable and Credit Billings on Construction Contract

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

Input method Output method

Methods that can be used to estimate progress toward completion are referred to as _____-based and _____-based methods. (Enter one word per blank.)

Input, output

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

License

Munch Inc. delivers various types of construction materials to a customer's building site. Over an 18-month period, Munch's employees utilize Munch's machinery and tools to construct a new office building for the customer. Munch identifies only one performance obligation related to this contract because Multiple choice question.

Munch combines the materials, labor, and use of machinery and tools to construct a single complete building.

Berta Company owns inventory prior to a customer ordering it from Norman Company. If a customer returns the merchandise, Berta Company owns the returned inventory. Berta Company is a(n)

Principal

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

Transaction

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

True. Reason: Most are viewed as single performance obligations because a single bundled product or service is delivered.

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

combined; single

Long-term contracts require careful consideration in identifying performance obligations because these type of contracts typically include many products and services that

could be viewed as separate performance obligations.

Malone Corp. properly recognizes revenue upon completion of a long-term construction project. Malone has the following information for a 3-year contract. Year 1 Year 2 Year 3 Billings on contracts 10,000 10,000 30,000 Construction costs 8,000 8,000 8,000 The journal entry required at the end of the contract to recognize revenue and expenses will include (Select all that apply.)

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

Which of the following must a seller recognize as separate line items on the balance sheet? (Select all that apply.)

Accounts receivable Contract liabilities Contract assets

Sandlewood Construction Inc. recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2018, Sandlewood began work on a $10,000,000 construction contract, which was completed in 2019. The accounting records disclosed the following data at the end of 2018:Costs incurred$5,400,000 Estimated cost to complete 3,600,000 Progress billings 4,100,000 Cash collections 3,200,000How much gross profit should Sandlewood have recognized

As of year-end 2018, revenue recognized to date is ($5,400,000 ÷ ($5,400,000 + 3,600,000)) × $10,000,000 = $6,000,000, and cost of construction recognized to date is $5,400,000, so gross profit recognized to date is $600,000.

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.

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

Assume a prepayment is made six months in advance of delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?

Ignore the time value of money.

Which methods may be used to estimate the stand-alone prices of goods and services? (Select all that apply.)

Residual approach Expected cost plus margin approach Adjusted market assessment approach

Inflows or other enhancements of assets or settlements of an entity's liabilities from delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations are ______.

Revenues

What account tracks the inflow of net assets that occurs when a business provides goods or services to its customers?

Revenues

CrayFry offers a discount on an extended warranty on its CrayFrier when the warranty is purchased at the time the fryer is purchased. The warranty normally has a price of $25, but CrayFry offers it for $20 when purchased along with a fryer. CrayFry anticipates a 60% chance that a customer will purchase the extended warranty along with the fryer. Assume CrayFry sells to 1,000 fryers with the extended warranty discount offer. What is the total stand-alone selling price that CrayFry would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 fryer contracts?

The $5 discount has a 60% chance of being taken by a customer, so the stand-alone selling price associated with 1,000 warranties is $3,000 (computed as $5 × 60% × 1,000 fryers).

Which statements are true regarding revenue recognition over time and upon completion? (Select all that apply.)

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

Which of the following is an indicator that revenue for a service can be recognized over time?

The seller is enhancing an asset that the buyer controls as the service is performed.

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? (Select all that apply.)

credit accounts receivable debit cash

Which of the following are included in the journal entry required to record construction costs for a long-term construction contract? (Select all that apply.)

debit construction in progress credit raw materials

For a promise to provide a good or service to be accounted for as a separate performance obligation, the good or service must be

distinct from other goods and services in the contract.

Jones Company receives a prepayment from a customer consistent with a promise to deliver 20 new office printers to Smith Inc. The prepayment (Select all that apply.)

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

For the purpose of allocating the transaction price to multiple performance obligations, if a stand-alone selling price cannot be directly observed, the seller should

estimate it.

A contract is an agreement that creates ____ enforceable rights and obligations.

legally

The amount at which a good or service is sold separately under similar circumstances is referred to as the

stand-alone selling price.

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

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.

The___ price is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services.

transaction

Hollywood Construction Company recognizes revenue over time according to percentage of completion for its long-term construction contracts. During 2018, Hollywood began work on a $3,000,000 fixed-fee construction contract, which was completed in 2021. The accounting records disclosed the following data at year-end:Cumulative contractcosts incurred Estimated coststo complete atend of year2018$200,000 $1,800,000 2019 1,100,000 1,100,000 2020 2,000,000 400,000For the 2020 year, Hollywood should have recognized gross profit on this contract of:

As of year-end 2019, revenue recognized to date is ($1,100,000 ÷ ($1,100,000 + 1,100,000)) × $3,000,000 = $1,500,000, and cost of construction recognized to date is $1,100,000, so gross profit recognized to date is $400,000. As of year-end 2020, revenue recognized to date is ($2,000,000 ÷ ($2,000,000 + 400,000)) × $3,000,000 = $2,500,000, and cost of construction recognized to date is $2,000,000, so gross profit recognized to date is $500,000. Therefore, gross profit recognized in 2020 should be $500,000 − 400,000 = $100,000.