Revenue Recognition
principal
carries risks and rewards associated with collecting the contract price
Goods or services that are not distinct are______ and treated as (a)______ performance obligation(s).
combined, single
the billings on construction account is a contra account to
construction in progress
the billings on construction contract account is classified as an
contra asset
Commitment to performing an obligation and enforcing related rights represents a critical aspect of a(n)
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
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
Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer's home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $2,465, sells the remote separately for $145, and offers the installation service separately for $290. The entire package sells for $2,800. Required: How much revenue would be allocated to the TV, the remote, and the installation service?
first calculate the amount for whole thing TV + remote + installation 2,465 + 145 + 290 = 2,900 ALLOCATED TO TV 2465/2900 = 0.85 0.85 x 2800 = 2,380 ALLOCATED TO REMOTE 145/2900 = 0.05 0.05 x 2800 = 140 ALLOCATED TO INSTALLATION 290/2900 = .10 .10 x 2800 = 280 TOTAL REVENUE 2,800
A contract is said to have variable consideration if the price depends on the outcome of
future events
For a particular contract, the timing of revenue recognition is determined
individually for all performance obligations under the contract
Methods that can be used to estimate progress toward completion are referred to as _______-based and ___________-based methods.
input, output
Licenses typically allow customers to use the seller's ______ property.
intellectual
The construction-in-progress account most closely relates to which type of account?
inventory
third party
is not directly involved with the transaction
Typical costs included in a construction project include
labor materials overhead
Agreements that allow customers to use the seller's intellectual property are referred to as
license
Revenue recognition for services such as lending money and performing financial statement audits is typically
over time
Revenue related to a company providing cleaning services to a customer for a period of time should be recognized
over time
Xavier Inc. is adding two more floors to Tamara Company's existing office building. Revenue related to this service likely should be recognized
over time
The essential difference between revenue recognition over time and upon completion relates to the
pattern of recognition of the related gross profit
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 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
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 core revenue recognition principle stipulates that companies recognize revenue when goods or services are
transferred to customers
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
A contract is said to have _____________ consideration if the price depends on the outcome of future events
variable
The construction in progress account is equivalent to which account in a manufacturing environment?
work in process
Revenue recognized each period is determined by multiplying total estimated revenue by
% completed to date and subtracting revenue recognized in prior periods
Which of the following services are commonly performed over time?
- consulting engagements - lending money - financial statement audits
Which of the following must a seller recognize as separate line items on the balance sheet?
- contract assets - accounts receivable - contract liabilities
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:
- credit revenue 2 million - debit cost of construction 1.5 million - debit CIP 500,000
When revenue related to a long-term construction contract is recognized over time, the journal entry to recognize revenue includes which of the following?
- credit revenue from long term contracts - debit construction in progress - debit cost of construction
Which of the following conditions will cause revenue to be recognized over time?
- customer consumes the benefit of seller work as it is performed - customer controls the asset as it is created - seller creates an asset that has no alternative use and the seller has right to receive payment for progress to date
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 the risk and rewards of ownership - customer has obligation to pay
Which of the following are key indicators that control of goods or services has been transferred to the customer??
- customer has physical possession of the asset - customer accepted the asset - customer has legal title to the asset
Which of the following are included in the journal entry required to record construction costs for a long-term construction contract?
- debit construction in progress - credit raw materials
Prepayments by customers for future goods or services should initially be recorded as
- deferred revenue
Which of the following situations may make the contract price less apparent??
- determining whether the seller is acting as principle or agent - sales with right of return - variable considerations provisions
Which methods may be used to estimate the stand-alone prices of goods and services?
- expected cost plus margin approach - adjusted market assessment approach - residual approach
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
Which of the following agreements may qualify as contracts?
- oral agreements - written documents - implicit agreements
Which of the following costs are included in a long-term construction contract?
- overhead - direct labor - direct material
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.)
- should be recorded as a deferred revenue - does not create a separate performance obligation
Which of the following situations may make the contract price less apparent?
- the time value of money - variable consideration provisions - payment by the seller to the customer
Which of the following will not differ between revenue recognized over time and revenue recognized at completion?
- total revenue - total profit - total expense
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas's contract specifies that it will receive a flat fee of $55,000 and an additional $25,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 30% chance that Bran will achieve the cost-savings target. USING MOST LIKELY VALUE
55,000 because there is a greater chance of not qualifying for the bonus than of qualifying for the bonus, so that is the transaction price
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas's contract specifies that it will receive a flat fee of $55,000 and an additional $25,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 30% chance that Bran will achieve the cost-savings target. USING EXPECTED VALUE
55,000 x .70 = 38,500 (55,000 + 25,000) x.30 = 24,000 24,000 + 38,500 = 62,500
Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer's home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $1,990, sells the remote separately for $220, and offers the entire package for $2,380. VP does not sell the installation service separately. VP is aware that other similar vendors charge $270 for the installation service. VP also estimates that it incurs approximately $220 of compensation and other costs for VP staff to provide the installation service. VP typically charges 40% above cost on similar sales. Required: 1. to 3. Estimate the stand-alone selling price of the installation service using each of the following approaches.
ADJUSTED MARKET ASSESSMENT this is the price the competitors are charging so it is 270 EXPECTED COST PLUS MARGIN 220 x .40 = 88 88 + 220 = 308 RESIDUAL package - (tv alone + remote alone) 2,380 - (1,990 + 220) = 170 dont forget to do the PEMDAS
When is a loss recognized on a long-term contract?
In the first period in which the loss become evident.
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
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.
The transaction price is the amount the seller expects to _______ from the customer in exchange for providing goods and services.
be entitled to receive
A construction company entered into a fixed-price contract to build an office building for $38 million. Construction costs incurred during the first year were $12 million, and estimated costs to complete at the end of the year were $18 million. The building was completed during the second year. Construction costs incurred during the second year were $19 million. How much revenue and gross profit or loss will the company recognize in the first and second year if it recognizes revenue upon contract completion?
REVENUE YR 1 0 because they havent collected anything REVENUE YR 2 38,000,000 because this is how much money they collected and this is revenue upon contract completion (completed at the end of yr 2) GROSS PROFIT for the blank word GROSS PROFIT YR 1 0 because they havent collected anything or lost anything at this point GROSS PROFIT YR 2 $38,000,000 - $12,000,000 - $19,000,000 (the actual costs incurred 2nd yr) = $7,000,000
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas's contract specifies that it will receive a flat fee of $55,000 and an additional $25,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 30% chance that Bran will achieve the cost-savings target. USING EXPECTED VALUE BUT UNCERTAIN
Thomas can't argue that it is probable that it won't have to reverse (adjust downward) a significant amount of revenue in the future because of a change in returns. Therefore, Thomas would not include the bonus estimate in the transaction price, and the transaction price would be the flat fee of 55,000
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
A seller recognizes contract liabilities, contract assets, and accounts receivable on separate lines of its _______________ __________________
balance sheet
What journal entry should be made to recognize accounts receivable for long-term construction projects?
debit accounts receivable credit billings on construction contract
agent
earns a commission for helping seller transact with buyer
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 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
What account tracks the inflow of net assets that occurs when a business provides goods or services to its customers?
revenues
the ______-________ selling price is the amount at which the good or service is sold separately under similar circumstance
stand, alone
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 sellers role is to combine those products and services prior to delivery or completion
Which of the following differs between revenue recognized over time and revenue recognized at completion?
the timing of recognition
