Chapter 6
Related to long-term construction contracts, at the end of the period which accounts are netted?
Construction in progress and billings on construction contracts.
What method(s) can be used to estimate progress toward completion for the purpose of recognizing revenue over time?
Input method Output method
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
The billings on construction account is a contra account to
construction in progress.
The billings on construction contract account is classified as a(n)
contra asset.
At the end of the period, if construction in progress exceeds billings on construction contracts, it is recorded as a(n)
contract asset.
If a seller satisfies a performance obligation but the payment depends on something other than the passage of time, the seller should recognize a(n)
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.
For a particular contract, the timing of revenue recognition is determined
individually for each performance obligation.
Methods that can be used to estimate progress toward completion are referred to as _____-based and ________-based methods.
input, output
Revenue recognition for services such as lending money and performing financial statement audits is typically
over time.
Revenue recognized each period is determined by multiplying total estimated revenue by
percentage completed to date and subtracting revenue recognized in prior periods
Promises to transfer goods or services to a customer are referred to as ___________ obligations.
performance
The previous requirement for revenue recognition, which dictated that the earnings process must be virtually complete and the collectability of the related assets reasonably assured was referred to as the
realization principle
The _________ price is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services.
transaction
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.
The core revenue recognition principle stipulates that companies recognize revenue when goods or services are
transferred to customers
The final step used to apply the core revenue recognition principle is to recognize revenue
when (or as) each performance obligation is satisfied.
The two critical aspects of recognizing revenue are determining:
when to record it how much revenue to record
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 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 services are commonly performed over time?
Consulting engagements Lending of money Financial statement audits
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 has an obligation to pay Customer has legal title to the asset Customer accepted the risks and rewards of ownership
Which of the following are key indicators that control of goods or services has been transferred to the customer?
Customer has legal title to the asset Customer accepted asset Customer has physical possession of the asset
What is the journal entry to recognize gross profit when revenue is recognized upon completion of a long-term construction project?
Debit Construction in Progress and Debit Cost of Construction; Credit Revenue from Long-Term Contracts
Place the five steps used to apply the core revenue recognition principle into the correct order.
Identify the contact with a customer Identify the performance obligations in the contract Determine transaction price Allocate the transaction price to each performance obligation. Recognize revenue when (or as) each performance obligation is satisfied
When is a loss recognized on a long-term contract?
In the first period in which the loss become evident.
The construction-in-progress account most closely relates to which type of account?
Inventory
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
Munch combines the materials, labor, and use of machinery and tools to construct a single complete building.
Consistent with ASU 2014-09, promises to transfer goods or services to customers are referred to as
Performance obligations
Which of the following support(s) the conceptual basis for separating contractual promises into several performance obligations?
Promises that can be viewed on a stand-alone basis should be separated Financial statements better reflect timing of transfer of goods and services
For many companies, which number is often the largest one reported in the financial statements?
Revenue
Which method provides a better measure of a company's economic activity each period?
Revenue recognition over time
What account tracks the inflow of net assets that occurs when a business provides goods or services to its customers?
Revenues
Which statements are true regarding revenue recognition over time and upon completion?
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 differs between revenue recognized over time and revenue recognized at completion?
The timing of recognition
Which of the following will not differ between revenue recognized over time and revenue recognized at completion?
Total profit Total expense Total revenue
The construction in progress account is equivalent to which account in a manufacturing environment?
Work-in-process
A contract liability is a term that refers to a __________ revenue account.
deferred
The account name "contract liability" is another name for
deferred revenue.
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.
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
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
The ________-________ selling price is the amount at which the good or service is sold separately under similar circumstance.
stand-alone
The amount at which a good or service is sold separately under similar circumstances is referred to as the
stand-alone selling price.
Consistent with the realization principle, historically, revenue was recognized if two conditions were satisfied. These were:
the earnings process was virtually complete collectability of related assets was reasonably assured
Arthur Inc. provides services to consulting clients. Arthur should recognize the related revenue when
the related performance obligation is satisfied.
