CH 6 Smartbook ACCT
Which of the following methods of estimating progress toward completion represent output-type measures?
Number of units produced or delivered Appraisal of performance completed to date Achievement of milestones
Goods or services that are not distinct are ____ and treated as a ____ performance obligation.
combined; single
When revenue is recognized upon completion of a long-term contract, gross profit is recognized upon completion in which account?
Construction in progress
What method(s) can be used to estimate progress toward completion for the purpose of recognizing revenue over time?
Input method Output method
When the time value of money is significant, the transaction price is allocated
between the merchandise and the financing component
On January 5, Merkel Inc. purchases office equipment for its new branch office from Norbert Company. Merkel requests that the equipment be delivered after the renovation of the branch location is completed. This agreement is referred as a:
bill-and-hold arrangement
The amount billed to customers on long-term construction project is recorded in the
billings on construction account.
In a bill-and-hold arrangement, the ____ requests that the ____ ship the products ______.
buyer; seller; at a later date
In a consignment, the entity who owns the goods, referred to as the ______, physically transfers the goods to another company, called the ______, who will attempt to sell the goods.
consignor; consignee
At the end of the period, if construction in progress is less than billings on construction contracts, it is recorded as a(n)
contract liability.
At the end of a long-term construction project, the amounts in the construction in progress account will be ______ the billings on construction contract.
equal to
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.
For estimating variable consideration, if there are several possible outcomes, the ______ method will tend to be most appropriate; if there are two possible outcomes, the ______ method will tend to be most appropriate
expected value; most likely amount
True or false: A prepayment from a customer typically creates a performance obligation.
false
True or false: A right of return represents a performance obligation.
false
Fuller contracted with the owners of "Healthy Bakeries" to open a bakery, sell its signature products and use its name and logo. This agreement refers to a
franchise
When one party to an agreement grants the right to sell its products and use its name to another party, we refer to the arrangement as a:
franchise
In a franchise agreement, the pays franchise fees to obtain the right to use a company's name and sell its products.
franchisee
In a franchise agreement, the _____ owns the company and gives an individual the right to use its name and sell its products.
franchisor
In a franchise arrangement, the _____ grants to the _____ the right to sell products and use its name.
franchisor, franchisee
A contract is said to have variable consideration if the price depends on the outcome of
future events
Estimated losses on the entire long-term project are recognized immediately because otherwise the CIP account would be valued at an amount ____ the amount the company expects to realize on the contract.
greater than
When recognizing revenue from a construction type long term contract over time, the balance in the CIP account includes
gross profit and losses costs of labor materials used
The construction in progress account represents the total construction costs
gross profit recognized to date.
The construction in progress account represents the total construction costs (labor, material, overhead) and
gross profit recognized to date.
For a particular contract, the timing of revenue recognition is determined
individually for each performance obligation.
Progress toward completion can be measured based on the proportion of effort expended thus far relative to the total effort expected to satisfy a performance obligation. This is referred to as a(n)
input method.
Methods that can be used to estimate progress toward completion are referred to as _____-based and _____-based methods.
input; output
Which of the following can be used as indicators of progress toward completion under the input method?
labor hours expended costs incurred machine hours used
Typical costs included in a construction project include
labor, materials, and overhead.
Deferred revenue from the sale of gift cards is classified as a(n) _____ on the balance sheet
liability
Agreements that allow customers to use the seller's intellectual property are referred to as
licenses
As a practical matter, a seller can assume the time value of money is not significant if the period between delivery and payment is less than
one year
Which of the following agreements may qualify as contracts?
oral agreements implicit agreements written documents
Proportion of total units produced or delivered to date, achievement of specific milestones, and appraisals reflect estimation methods referred to as:
output method
Revenue recognition for services such as lending money and performing financial statement audits is typically
over time.
The essential difference between revenue recognition over time and upon completion relates to the
pattern of recognition of the related gross profit.
Revenue is recognized when the _____ obligation is satisfied.
performance
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
Meissner sells merchandise for $50,000 on account. The company estimates that customers will return 5% of the merchandise. Meissner should debit sales returns and credit:
refund liability
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 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
What is the difference between journal entries to recognize gross profits when revenue is recognized over time and when revenue is recognized upon completion of a long-term project?
timing
The journal entries used to recognize the costs of long-term construction contracts are identical when revenue is recognized upon completion and when it is recognized over time; however the two methods differ with respect
to the timing of revenue recognition.
Which of the following are often provided by the franchisor at start-up of a new franchise?
training of franchisee's employees remodeling of franchisee's facilities
The _____ price is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services.
transaction
Gerhard Inc. sells merchandise to a customer with a long payment period. Gerhard determines that the time value of money related to this transaction is significant. Gerhard should allocate the
transaction price between the merchandise cash price and the financing component.
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
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
When revenue is recognized upon completion of a long-term contract, CIP is updated to include gross profit
upon completion.
Licenses typically allow customers to use the seller's ____ property.
intellectual
Revenue recognized each period is determined by multiplying total estimated revenue by
percentage completed to date and subtracting revenue recognized in prior periods
True or false: Most long-term contracts should be viewed as single performance obligations.
true
For the purpose of allocating the transaction price to multiple performance obligations, the stand-alone selling price of a specific good or service may be estimated if it
cannot be directly observed.
If a contract qualifies for revenue recognition over time, revenue is recognized based on progress toward
completion
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.
From a financial reporting perspective the "sales returns" account is a(n) _____-_____ account.
contra revenue
Commitment to performing an obligation and enforcing related rights represents a critical aspect of a(n)
contract
At the end of the period, if construction in progress exceeds billings on construction contracts, it is recorded as a(n)
contract asset.
The amount of revenue that is recognized each period for a long-term contract that qualifies for revenue recognition over time is determined based on
progress toward completion.
Mueller Company sold merchandise costing $120,000 for $240,000. Mueller estimates that merchandise costing $5,000 will be returned for a refund of $10,000. Mueller should report net sales of:
$230,000
Related to long-term construction contracts, at the end of the period which accounts are netted?
Construction in progress and billings on construction contracts.
Why are estimated losses on an entire long-term project fully recognized in the first period the loss is anticipated?
Construction in progress would be valued at an amount greater than the company expects to realize from the contract.
Which of the following must a seller recognize as separate line items on the balance sheet?
Contract assets Contract liabilities Accounts receivable
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
If delivery and payment related to the sale of goods occur relatively near each other, the time value of money
can be ignored.
In a consignment, the ______ owns the goods; the ______ holds the goods in order to sell them to a buyer.
consignor; consignee
A shortcoming of the output method for estimating progress toward completion is that it may
provide a distorted view of actual completion
The _____-_____ selling price is the amount at which the good or service is sold separately under similar circumstance.
stand alone
The billings on construction account represents
the amount billed to customers to date.
Cash received from the sale of gift cards is recognized as _____ revenue.
deferred
Jonathan is estimating the amount
best predicts the amount he will receive.
James Corporation is an agent of Alten Corporation. Their agreement specifies that James will receive a commission equal to 15% of the sales price. During May, James sells goods with a sales price of $200,000 for Alten. For the month ended May 31, James Corporation should recognize revenue of:
$30,000
Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the expected value of consideration, what transaction price will Guarder estimate for this contract?
$40,500
Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what transaction price will Guarder estimate for this contract?
$45,000
On January 1st, Guarder Consulting enters into a one-year contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. Smith pays Guarder an up-front fixed fee of $48,000 on January 1st. Guarder will also earn an additional $12,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 70% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what amount of revenue will be recorded at the end of the first month?
$5,000
Margery sells 100 TV top boxes to customers for $90 each. Margery estimates that 6% of the units will be returned for a full refund. Margery should debit sales returns for:
$540
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.
When revenue is recognized on long-term construction projects, a journal entry is recorded to recognize revenue and cost of goods sold. The difference between revenue and cost of goods sold (gross profit) is recognized in which account?
Construction in progress
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 accepted the risks and rewards of ownership Customer has legal title to the asset
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 journal entry should be made to recognize accounts receivable for long-term construction projects?
Debit Accounts Receivable and Credit Billings on Construction Contract
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
On January 1st, Guarder Consulting enters into a one-year contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. Smith pays Guarder an up-front fixed fee of $48,000 on January 1st. Guarder will also earn an additional $12,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 70% chance that Smith will achieve $100,000 of cost savings. What journal entry will Guarder make on January 1st to recognize the up-front cash payment?
Debit cash $48,000, credit deferred revenue $48,000
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
Margery sells 100 TV top boxes to customers for $90 each and credited sales revenue for $9,000. Margery estimates that six of the units will be returned for a full refund of $540. What additional journal entry should Margery make?
Debit sales returns and credit refund liability
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:
Debit: CIP $500,000 Credit: Revenue $2 million Debit: Cost of construction $1.5 million
Which methods may be used to estimate the stand-alone prices of goods and services?
Expected cost plus margin approach Residual approach Adjusted market assessment approach
Which of the following methods are appropriate for estimating variable consideration?
Expected value Most likely amount that will be received
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
Virginia Corp. recognized deferred revenue for cash received on a multi-year contract that also provides for variable consideration (bonus) if certain targets are met by the end of the contract period. Which of the following statements are true if Virginia Corp revises its estimate of variable consideration in subsequent years?
It must reflect the adjustment in that year's revenue.
Which of the following services are commonly performed over time?
Lending of money Financial statement audits Consulting engagements
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.
Which of the following situations may make the contract price less apparent?
Payment by the seller to the customer The time value of money Variable consideration provisions
Based on past experience, a seller can usually estimate the returns on a given volume of sales. Once estimated, these returns will ____________.
Reduce reported revenue Increase liabilities
Which method provides a better measure of a company's economic activity each period?
Revenue recognition over time
Which of the following situations may make the contract price less apparent?
Sales with right of return Variable consideration provisions Determining whether the seller is acting as principal or agent
Peter Inc. recognized deferred revenue for variable consideration under a multi-year contract. Which of the following correctly describes the requirement in subsequent years related to the estimated variable consideration?
The estimate must be reassessed each period
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 revenue Total expense
The construction in progress account is equivalent to which account in a manufacturing environment?
Work-in-process
Sales commission revenue is recognized by the _____.
agent
Prepayments for future goods or services should be
allocated to the various performance obligations in the contract included in the transaction price
Star Inc. licenses use of its intellectual property to customers. The benefit the customer receives from the license is not affected by Star's ongoing activity. Star should recognize revenue:
at the beginning of the license period
For licenses of functional intellectual property, revenue is typically recognized
at the start of the license period.
A seller recognizes contract liabilities, contract assets, and accounts receivable on separate lines of its
balance sheet
The transaction price is the amount the seller expects to ______ from the customer in exchange for providing goods and services.
be entitled to receive
Gerhard Inc. sells airline tickets for New World Global Airlines. Gerhard Inc. receives a 8% commission on the sales price of the tickets. During July, Gerhard Inc. sells $1 million of tickets with a cost of $750,000 for New World Global Airlines. New World Global Airlines should record
cost of tickets sold for $750,000 sales revenue for $1 million
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 cost of construction debit construction in progress
Which of the following are included in the journal entry required to record the collection of cash from a customer related to a long-term construction contract?
debit cash credit accounts receivable
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
Malone Corp. properly recognizes revenue upon completion of a long-term construction project. Malone has the following information for a 3-year contract.
debit construction in progress $26,000. debit cost of construction $24,000. credit revenue from contracts $50,000.
A transaction price may be uncertain because the price
depends on the outcome of future events.
Which of the following costs are included in a long-term construction contract?
direct material direct labor overhead
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.
A right of return ____ a separate performance obligation for the seller.
does not create
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
The potential that a good does not satisfy the original performance obligation is addressed through a customer's:
right of return
In a principal-agent relationship, the agent recognizes revenue to the extent of the
sales commission
It is important to distinguish between a principal and an agent because the principal recognizes revenue to the extent of the
sales price
On a long-term construction project, the amount in the construction in progress account represents the costs of construction plus the gross profit recognized to date, and the billings on construction represents
the amounts billed to the customer.
Revenue is recognized upon completion of a long-term contract if:
the contract does not qualify for revenue recognition over time
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 seller's role is to combine those products and services prior to delivery or completion.
