Module 9

A company granted its employees 100,000 stock options on January 1, Year 1. The stock options had a grant date fair value of $15 per option and a three-year vesting period. On January 1, Year 2, the company estimated the fair value of the stock options to be $18 per option. Assuming that the company did not grant any additional options or modify the terms of any existing option grants during Year 2, what amount of share-based compensation expense should the company report for the year ended December 31, Year 2? A. $500,000 B. $600,000 C. $700,000 D. $800,000

A

A defined benefit plan's projected benefit obligation totaled $20mn at the end of the current year. Plan assets at market value totaled $23mn. Choose the correct statement concerning balance sheet reporting for this plan. A. $3mn pension asset. B. $3mn pension liability. C. A pension asset of $23mn, and a $20mn pension liability. D. No pension-related value is reported in the balance sheet; all relevant amounts are reported in the footnotes.

A

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

On January 1, year 1, a company issued its employees 10,000 shares of restricted stock. On January 1, year 2, the company issued to its employees an additional 20,000 shares of restricted stock. Additional information about the company's stock is as follows: Date Fair value of stock (per share) January 1, year 1 $20 December 31, year 1 22 January 1, year 2 25 December 31, year 2 30 The shares vest at the end of a four-year period. There are no forfeitures. What amount should be recorded as compensation expense for the 12-month period ended December 31, year 2? A. $175,000 B. $205,000 C. $225,000 D. $500,000

A

Under the fair-value method of accounting for stock option plans, total compensation recognized: A. Is based on the value of the option at the grant date, adjusted for forfeitures. B. Equals the net increase in OE after all relevant journal entries are recorded. C. Is the difference between market price and option price at the grant date. D. Is unaffected by the option price.

A

At December 31, 2005, the following information was provided by the Kerr Corp. pension plan administrator: Fair value of plan assets $3.45mn Accumulated benefit obligation $4.3mn Projected benefit obligation $5.7mn What is the amount of the pension liability that should be shown on Kerr's December 31, 2005 balance sheet? A. $5.7mn B. $2.25mn C. $1.4mn D. $850,000

B

ClipClop Company sells horseshoes to customers at a discount of 4% if the customer orders more than 10,000 horseshoes in a year. The price per shoe is $2. In April, Oats Company orders 4,000 horseshoes from ClipClop. Based on past experience with Oats Company, ClipClop expects Oats to meet the volume threshold of 10,000 horseshoes by the end of the year. What amount of revenue should ClipClop record in connection with the April sale? A. $0 because ClipClop does not know if Oats will meet the volume discount threshold B. $7,680 C. $8,000 D. $20,000

B

For a good or service to be considered distinct and identified as a separate performance obligation, it must be: A. Sold separately in other contracts. B. Able to be used by the customer on its own or with resources readily available to the customer and able to be separately identified from other promises in the contract. C. Identified in the contract specifically as a performance obligation, and the transaction price attributable to the good or service must be distinctly identified. D. Must be used by the customer with other performance obligations in the contract and must be dependent on other performance obligations in the contract to support including each obligation in a single contract.

B

Kinnamont Company manufactures farming equipment that includes navigational systems as part of the standard equipment package and offers optional training on any navigational systems for an additional fee. Smith Company enters into a contract with Kinnamont that includes a combine, a navigational system, and training. Identify the performance obligations to which Smith should allocate the transaction price: A. The combine, the navigational system, and the training as three separate performance obligations. B. The combine including the navigational system and the training as two separate performance obligations. C. The combine, the navigational system, and the training account for one performance obligation because they are all part of the same contract. D. No performance obligations exist because the work on the contract, including the training, has not begun.

B

What method does a company use to determine the transaction price for a contract that includes variable consideration when the company has numerous other contracts with similar characteristics and there are more than two possible results? A. Expected outcome method B. Expected value method C. Most likely value method D. Most likely amount method

B

A new separate contract is created when: I. The additional products included in the contract modification are distinct from the products in the original contract. II. The blended price of the original and additional products is appropriately reflected in the recognition of revenue after the modification. III. The consideration for the additional products reflects an appropriate standalone selling price. A. I, II, and III. B. I and II. C. I and III. D. I and III.

C

Data for a defined benefit pension plan for the current year are as follows: PBO, January 1, $200mn Assets, January 1, $160mn Pension expense, $60mn Funding contribution, $50mn The ending pension liability balance is: A. $40mn B. $10mn C. $50mn D. $200mn

C

FASB ASC 606, commonly referred to as the revenue recognition standard, includes all of the following in its five-step process to recognize revenue except: A. Identify the performance obligations in the contract. B. Allocate the transaction price to the performance obligations in the contract. C. Recognize revenue when (or as) the entity is paid for a performance obligation. D. Identify the contract with the customer.

C

Foghorn Company entered into a sales transaction in which it agreed to receive common stock from Leghorn Corporation as payment for services provided to Leghorn Corporation. The journal entry to record the receipt of payment for the sales transaction will include a: A. Debit to cash. B. Credit to Noncash Consideration. C. Debit to Leghorn Investment. D. Credit to Common Stock.

C

On January 1, 20X2, Dot Company sold a three-year, service-type extended warranty to Matrix Company for $36,000. The warranty took effect on the date of purchase (January 1, 20X2). What amount of Unearned Warranty Revenue should be reported on Dot's December 31, 20X3, Balance Sheet? A. $36,000 B. $24,000 C. $12,000 D. $6,000

C

On January 1, year 1, the board of directors of a corporation granted 10,000 stock options to the CEO. Each option permits the purchase of one share of stock at $25 per share, the current market price of the stock. The options are exercisable on December 31, year 4, as long as the CEO is still employed. The options expire on December 31, year 5. The grant date fair value of each option is $5. The corporation must recognize: A. $50,000 of compensation expense when the options are exercised. B. $50,000 of compensation expense in year 1. C. $12,500 of compensation expense per year for four years. D. $10,000 of compensation expense per year for five years.

C

Term for an agreement between two or more parties that creates enforceable rights and obligations

Contract

Term for a type of asset when an entity satisfies a performance obligation before a customer pays (Ex: A/R)

Contract Asset

Term for a type of liability when a customer pays in advance for a performance obligation (Ex: unearned revenue)

Contract Liability

A CPA has been asked by a client to describe revenue. Which of the following statements would be best for the CPA to use in his/her description? A. Revenue is equal to the cash received from a customer for goods. B. Revenue is equal to the difference between the amount charged to the customer and the cost of the goods sold that results from an enhancement of assets. C. Revenue is the inflows of assets or settlements of liabilities from the sale of assets such as property, plant, and equipment or long-term investments. D. Revenue is the inflows or other enhancements of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

D

A company enters into a contract to sell 50 products to a customer for $30 each. After the company transfers 30 of the 50 products, the customer wants an additional 25 products. The contract is modified and the additional 25 products are priced at $15 each, a price that is not reflective of the standalone selling price. What is the price per product for the remaining 45 products (20 products from the original contract and 25 products from the modification)? A. $30 for the remaining 20 products from the original contract and $15 for the additional 25 products from the modification. B. $22.50, the blended price for the remaining products. C. $15, the price for the products specified in the contract modification. D. $21.67, the blended price for the products from the original contract and the modification.

D

A company incurred costs to fulfill a contract that has a four-year life. The costs are a direct result of the contract and would not have been incurred had the contract not existed. How should the costs to fulfill the contract be accounted for? A. Expensed in the period incurred because the company paid for the costs in the current period B. Recorded as a liability and expensed in the period paid C. Recorded as a liability and amortized over four years D. Recorded as an asset and amortized over four years

D

Allocating a transaction price to multiple performance obligations includes which of the following steps: A. Obtain an independent appraisal of the value of services identified as a performance obligation. B. Complete each performance obligation before recognizing any revenue from the contract. C. Consolidate the components of the contract to two performance obligations because a contract should not have more than two performance obligations. D. Identify distinct goods and/or services as separate performance obligations.

D

An entity sponsors a defined-benefit pension plan that is underfunded by $800,000. A $500,000 increase in the fair value of plan assets would have which of the following effects on the financial statements of the entity? A. An increase in the assets of the entity. B. An increase in accumulated other comprehensive income of the entity for the full amount of the increase in the value of the assets. C. A decrease in accumulated other comprehensive income of the entity for the full amount of the increase in the value of the assets. D. A decrease in the liabilities of the entity.

D

For a contract that contains multiple performance obligations, revenue is allocated to each performance obligation by: A. Calculating the proportion of total cost of goods sold represented by each performance obligation and multiplying the proportion for each performance obligation by the total transaction price. B. Assigning the transaction price based on covering cost of goods sold first, then allocating the profit portion of the transaction price evenly between the performance obligations. C. Allocating the total contract transaction price evenly to the performance obligations to support representational fairness. D. Calculating the proportion of the total stand-alone price represented by each performance obligation and multiplying the proportion by the total transaction price to allocate the transaction price to the separate performance obligations.

D

The following information is available about a signed agreement between two entities: The entities have agreed to specific performance obligations. The entities have agreed on a price related to the performance obligations. No work has begun on the performance obligations, and the contract is cancelable without payment of penalty or other consideration. It is probable that the company completing the work will collect the agreed-upon consideration. Does a contract exist between the entities to which the revenue recognition criteria may be applied? A. A contract to which the revenue recognition criteria applies exists because it identifies specific performance obligations and collectibility of the consideration is probable. B. A contract to which the revenue recognition criteria applies exists because the contract includes important terms, such as the agreed-upon price and specific performance obligations. C. A contract to which the revenue recognition criteria applies does not exist because the transaction price has not yet been allocated to the specific performance obligations. D. A contract to which the revenue recognition criteria applies does not exist because it is cancelable without penalty and no work on the performance obligations has begun.

D

The following information pertains to Seda Co.'s pension plan: Actuarial estimate of projected benefit obligation at January 1, 2005 $72,000 Assumed discount rate 10% Service costs for 2005 $18,000 Pension benefits paid during 2005 $15,000 If no change in actuarial estimates occurred during 2005, Seda's projected benefit obligation at December 31, 2005 was: A. $64,200 B. $75,000 C. $79,200 D. $82,200

D

Type of pension plan where the benefits paid during retirement are based on a formula and are defined in a contract; employer bears the risk of fund performance and is liable for the payments to the retiree

Defined Benefit Plan

Type of pension plan where the amount of employer contributions is defined by contract; employee bears the risk of fund performance and benefits

Defined Contribution Plan

Term for a description of a performance obligation that may be used on its own or with readily available resources

Distinct

Term for calculating pension expense that is the expected growth in the pension fund for the current year

Expected Return on Plan Assets

True or False: If a contract has two performance obligations, then the transaction price should be split evenly between the two performance obligations to support fair presentation

False

True or False: When a company modifies a contract, a new separate contract is always created

False

True or False: A company signs a contract that includes a performance bonus. The company will either meet the conditions to receive the entire performance bonus or it will not. The company will measure the variable consideration using the expected value approach

False (Most likely amount approach)

Term in stock option plans for options that are not exercised by the employee (usually because they leave)

Forfeitures

Term for the day that a stock option is valued

Grant Date

Term for calculating pension expense that is the growth in PBO for the year due to the passage of time

Interest Cost

Term for funds set aside by a company to meet their future pension obligations (not on company books)

Pension Fund

Term that is a part of pension expense: an increase in service costs for services provided in the past due to changes made to the plan

Prior Service Costs

Term for the estimated present value of the remaining future payments an employer must make in a defined benefit pension plan

Projected Benefit Obligation

Term for calculating pension expense that is the estimated present value of benefits earned by employees in the current year; the increase in PBO for the year (calculated by actuary)

Service Cost

Term for the compensation plan that bases compensation off of the increase in stock price over a period of time; employee receives the amount equal to the increase in price from the grant date to the exercise date

Stock Appreciation Rights

Term for the compensation plan where stock is awarded for continuous employment but the employee does not receive the shares until they are fully vested

Stock Award Plan

True or False: A new separate contract is created when a contract modification includes additional distinct goods that are sold for consideration reflective of the stand-alone selling price of the goods

True

True or False: Accounting for a contract with multiple performance obligations includes allocating the transaction price among the separate performance obligations

True

True or False: Installation that requires specialized knowledge and is not considered distinct from the equipment being installed will be accounted for as one performance obligation

True

True or False: Proceeds received from customers purchasing gift cards are recorded as a liability until the gift cards are redeemed

True

True or False: The total compensation expense for a stock option plan must reflect an estimate of forfeitures if probable and estimable

True

True or False: When a contract includes variable consideration, a company should use either the expected value method or the most likely outcome method to measure revenue associated with the variable consideration

True

True or False: When standalone prices are available for the separate performance obligations in a contract, the transaction price should be allocated to the separate performance obligations based on the proportion of the total standalone prices represented by each performance obligation

True

Term for when an employee has met certain requirements and becomes eligible to receive pension benefits at retirement, regardless of whether or not the employee continues working for the employer

Vesting

Term for the day that an employee is able to exercise a stock option in a stock option plan

Vesting Date