CH 17 exam study guide
How should the balances of Progress Billings and Construction in Process be shown at reporting dates before the completion of a long-term contract?
Net balance, as a current asset if debit balance, and current liability if credit balance
To address inconsistencies and weaknesses in revenue recognition, a comprehensive revenue recognition standard was developed entitled
Revenue from Contracts with Customers.
When a customer purchases a product but is not yet ready for delivery, this is referred to as
a bill-and-hold arrangement.
Companies can use the expected value to estimate variable consideration when
a company has a large number of contracts with similar characteristics
When dealing with contract modifications, one condition necessary for a separate performance obligation to exist is when
a company provides a distinct product or service.
an agreement that creates enforceable rights and obligations.
a contract
Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing the software, the company also provides consulting services and support to ensure the smooth operation of the software. The total transaction price is $420,000. Based on standalone values, the company estimates the consulting services and support have a value of $120,000 and the software license has a value of $300,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes
a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000.
New Age Computers manufactures and sells pagers and radio paging systems which include a 180-day warranty on product defects. It also sells an extended warranty which provides an additional two years of protection. On May 10, it sold a paging system for $4,500 and an extended warranty for another $1,400. The journal entry to record this transaction would include
a credit to Sales Revenue of $4,500 and a credit to Unearned Warranty Revenue of $1,400
When a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price, the transaction should be accounted for as
a financing transaction
The percentage-of-completion method
recognizes revenue and gross profit each period based upon progress
The fourth step in the process for revenue recognition is to
allocate the transaction price to the separate performance obligations
The role of the agent in a Principal-Agent relationship is to
arrange for the principal to provide goods or services to a customer
A transaction price for multiple performance obligations should be allocated
based on what the company could sell the goods for on a standalone basis.
Revenue from a contract with a customer
cannot be recognized until a contract exists
A company has satisfied its performance obligation when the
company has transferred physical possession of the asset
The cost-to-cost basis measures progress towards completion by
comparing costs incurred to date with total costs to complete the contract
Consignments are a specialized marketing method whereby the
consignee takes possession of merchandise but the title remains with the manufacturer
Consigned goods are recognized as revenues by the
consignor when it receives notification and payment from consignee for goods sold.
The Billings on Construction in Progress account is a(n)
contra inventory account
The most popular input measure used to determine the progress toward completion is
cost-to-cost basis
Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days. Entertainment Tonight also offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the extended warranty is $3,000. The standalone price of each is $2,100 and $900, respectively. The estimated cost of the assurance-type warranty is $350. The accounting for warranty will include a
credit to Unearned Warranty Revenue, $900
The third step in the process for revenue recognition is to
determine the transaction price.
When multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when
each service is interdependent and interrelated.
In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be
the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable
Nonrefundable upfront fees should not be recorded as revenue at the time of payment if they are for
future delivery of products and services
The first step in the process for revenue recognition is to
identify the contract with the customers
The second step in the process for revenue recognition is to
identify the separate performance obligations in the contract.
A contract between Boeing and Delta in which Boeing supplies planes to Delta
is an agreement that creates enforceable rights and obligations for both parties
When a customer can benefit from a good or service on its own or together with other readily available resources, the good or service
is distinct
The use of the net method of recognizing revenue by an agent
is the correct method in a principal-agent relationship
The last step in the process for revenue recognition is to
recognize revenue when each performance obligation is satisfied
Noncash consideration is
recognized on the basis of the fair value of what is received.
The converged standard on revenue recognition
recognizes and measures revenue based on changes in assets and liabilities
On January 15, 2024, Bella Vista Company enters into a contract to build custom equipment for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000, 30 days after delivery. The revenue for this contract should be
recorded on March 31, 2024.
When sales are made with a right of return, the company
records the returned asset in a separate inventory account
Consideration paid or payable to customers
reduces the consideration received and the revenue to be recognized
The sale of an extended warranty is recorded as
revenue in the period(s) in which the service-type warranty is in effect
If a contract involves a significant financing component
the time value of money is used to determine the fair value of the transaction
In accounting for a long-term construction-type contract using the percentage-of- completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract multiplied by the percentage of the costs incurred during the year to the
total estimated cost
the amount of consideration that a company expects to receive from a customer is the
transaction price
