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On June 1, 2021, Johnson & Sons sold equipment to James Landscaping Service in exchange for a zero-interest bearing note with a face value of $110,000, with payment due in 12 months. The fair value of the equipment on the date of sale was $100,000. The amount of revenue to be recognized on this transaction in 2021 is
$100,000 sales revenue and $5,833 interest revenue
Bella Pool Company sells prefabricated pools that cost $80,000 to customers for $144,000. The sales price includes an installation fee, which is valued at $20,000. The fair value of the pool is $128,000. The installation is considered a separate performance obligation and is expected to take 3 months to complete. The transaction price allocated to the pool and the installation is
$124,541 and $19,459 respectively
To address inconsistencies and weaknesses in revenue recognition, a comprehensive revenue recognition standard was developed entitled the
Revenue from Contracts with Customers
On August 5, 2021, Famous Furniture shipped 40 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was $350 each. The cost of shipping the dining sets amounted to $3,600 and was paid for by Famous Furniture. On December 30, 2021, the consignee reported the sale of 30 dining sets at $850 each. The consignee remitted payment for the amount due after deducting a 6% commission, advertising expense of $600, and installation and setup costs of $780. The amount cash received by Famous furniture is
$22,590
Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144,000 on March 15, 2021. Estimated standalone fair values of the equipment, installation, and training are $90,000, $60,000, and $30,000 respectively. The transaction price allocated to equipment, installation and training is
$72,000, $48,000 and $24,000 respectively.
Cooper Construction Company had a contract starting April 2021, to construct a $24,000,000 building that is expected to be completed in September 2023, at an estimated cost of $22,000,000. At the end of 2021, the costs to date were $10,120,000 and the estimated total costs to complete had not changed. The progress billings during 2021 were $4,800,000 and the cash collected during 2021 was 3,200,000. Cooper uses the percentage-of-completion method. For the year ended December 31, 2021, Cooper would recognize gross profit on the building of:
$920,000
A contract liability is a company's obligations to transfer goods or services to a customer for which the company has received consideration from the customer. An example of a contract liability is
Unearned magazine subscription
When a customer purchases a product but is not yet ready for delivery, this is referred to as
a bill-and-hold arrangement
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 Unearned Warranty Revenue of $1,400
The fourth step in the process for revenue recognition is to
allocate 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
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 title remains with manufacturer
The Billings on Construction in Progress account is a
contra-inventory account
The most popular input measure used to determine the progress toward completion is
cost-to-cost basis
On November 1, 2021, Green Valley Farm entered into a contract to buy a $150,000 harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2021. The harvester (cost of $110,000) was delivered on November 30, 2021. The journal entry to record the contract on November 1, 2021 includes a
credit to Unearned Sales Revenue for $150,000
Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144,000 on March 15, 2021. Estimated standalone fair values of the equipment, installation and training are $90,000, $60,000 and $30,000 respectively. The journal entry to record the transaction on March 15, 2021 will include a
credit to Unearned Service Revenue of $24000
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-warranty is $350. The accounting for warranty will include a
credit to Unearned Warranty Revenue, $900
Sources of revenue for franchise companies are
sale of initial franchise and continuing fees
Botanic Choice sells natural supplements to customers with an unconditional sales return if they are not satisfied. The sales returns period extends 60 days. On February 10, 2021, a customer purchases $4,000 of products (cost $2,000). Assuming that based on prior experience, estimated returns are 20%. The journal entry to record the actual return of $250 of merchandise includes a
debit to Returned Inventory for $125
On November 1, 2021, Green Valley Farm entered into a contract to buy a $150,000 harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2021. The harvester (cost of $110,000) was delivered on November 30, 2021. The journal entry to record the delivery of the equipment includes a
debit to Unearned Sales Revenue for $150,000
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
T/F: Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the completed-contract method.
false
T/F: Companies rarely have to allocate the transaction price to more than one performance obligation in a contract.
false
T/F: The first step in the revenue recognition process is to identify the separate performance obligations in the contract.
false
T/F: Under the completed-contract method, companies recognize costs only when the contract is completed.
false
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 treated as a
financing transaction
The first step in the process for revenue recognition is to
identify the contract with customers
The second step in the process for revenue recognition is to
identify the separate performance obligations in the contract
a contract
is an agreement that creates enforceable rights and obligations
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
The transaction price
is the amount of consideration that a company expects to receive from a customer
The last step in the process for revenue recognition is to
recognize revenue when each performance obligation is satisfied
Noncash consideration should be
recognized on the basis of fair value of what is received
The percentage-of-completion method
recognizes revenue and gross profit each period based upon progress
On January 15, 2021, 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, 2021
When sales are made with a right of return, the company
records the returned asset in a separate inventory account
Unconditional rights to receive consideration because a performance obligation has been satisfied are
reported as a receivable on the balance sheet
The principal advantage of the completed-contract method is that
reported revenue is based on final results rather than estimates of unperformed work
Disclosure related to revenue
requires disclosure of remaining performance obligations
An option to purchase a warranty is recorded as
revenue in the period that the service-type warranty is in effect
Under the completed-contract method
revenue, cost, and gross profit are recognized at the time the contract is completed
Nonrefundable upfront fees
should not be recorded as revenue if they are for future delivery of products and services
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.
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
T/F: A company recognizes revenue from a performance obligation over time by measuring the progress toward completion.
true
T/F: If the performance obligation is not highly dependent on, or interrelated with, other promises in the contract, then each performance obligation should be accounted for separately.
true
T/F: Revenue from a contract with a customer cannot be recognized until a contract exists.
true
T/F: Revenue is recognized in the accounting period when the performance obligation is satisfied.
true
T/F: The principal advantage of the completed-contract method is that reported revenue reflects final results rather than estimates.
true
T/F: Warranties that the product meets agreed-upon specifications in the contract at the time the product is sold are referred to as assurance-type warranties.
true
Franchise fees should be recognized
when performance obligations are satisfied
Revenue for ongoing sales-based royalty payments should be recognized
when the amount of sales can be determined
