Chapter 118 - lets go cpa PDF

Preview

Summary

lets go cpa...

Description

CHAPTER 18 REVENUE RECOGNITION CHAPTER LEARNING OBJECTIVES 1.

Understand revenue recognition issues.

2.

Identify the five steps in the revenue recognition process.

3.

Identify the contract with customers.

4.

Identify the separate performance obligations in the contract.

5.

Determine the transaction price.

6.

Allocate the transaction price to the separate performance obligations.

7.

Recognize revenue when the company satisfies its performance obligation.

8.

Identify other revenue recognition issues.

9.

Describe presentation and disclosure regarding revenue.

*10.

Apply the percentage-of-completion method for long-term contracts.

*11.

Apply the cost-recovery method for long-term contracts.

*12.

Identify the proper accounting for losses on long-term contracts.

*13.

Explain revenue recognition for franchises.

18 - 2

Test Bank for Intermediate Accounting, IFRS Edition, 2e

TRUE-FALSE—Conceptual 1.

The new revenue recognition standard adopted a liability approach as the basis for revenue recognition.

2.

Revenue is recognized in the accounting period when the performance obligation is satisfied.

3.

The first step in the revenue recognition process is to identify the separate performance obligations in the contract.

4.

Revenue from a contract with a customer cannot be recognized until a contract exists.

5.

Whether a contract modification is treated as a separate performance obligation or prospectively, the same amount of revenue is recognized before and after the modification.

6.

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.

7.

A performance obligation is a written guarantee in a contract to provide a product or service to a customer.

8.

Companies always use the expected value, a probability-weighted amount, to estimate variable consideration.

9.

When a sales transaction involves a significant financing component, the fair value is determined either by measuring the consideration received or by discounting the payment using an imputed interest rate.

10.

Companies rarely have to allocate the transaction price to more than one performance obligation in a contract.

11.

When a company sells a bundle of goods at a discount, the discount should be allocated to the product that caused the discount and not to the entire bundle.

Revenue Recognition

18 - 3

12.

A company recognizes revenue from a performance obligation over time by measuring the progress toward completion.

13.

A company can only satisfy its performance obligations at a point in time.

14.

When a company sells a product but gives the buyer the right to return it, revenue should not be recognized until the sale is collected.

15.

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.

16.

A contract liability is a company’s obligation to transfer goods or services to a customer for which the company has received consideration from the customer.

*17.

The most popular input measure used to determine the progress toward completion in long-term contracts is the cost-to-cost basis.

*18.

If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset.

*19.

The Construction in Process account includes only construction costs under the percentage-of-completion method.

*20.

Under the cost-recovery method, companies recognize costs only when the contract is completed.

*21.

The principal advantage of the cost-recovery method is that reported revenue reflects final results rather than estimates.

*22.

Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the cost-recovery method.

*23.

A loss in the current period on a profitable contract must be recognized under both the percentage-of-completion and cost-recovery method.

*24.

Neither the Billings account balance nor the Construction in Process account balance can exceed the long-term contract price.

*25.

The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not cost-recovery.

True-False Answers— Conceptual Item 1. 2. 3. 4. 5.

Ans. F T F T T

Item 6. 7. 8. 9. 10.

Ans. T F F T F

Item 11. 12. 13. 14. 15.

Ans. T T F F T

Item 16. 17. 18. 19. 20.

Ans. T T T F F

Item 21. 22. 23. 24. 25.

Ans. T F F T F

18 - 4

Test Bank for Intermediate Accounting, IFRS Edition, 2e

MULTIPLE CHOICE—Conceptual 26.

To address inconsistencies and weaknesses, a comprehensive revenue recognition model was developed entitled the a. Revenue Recognition Principle. b. Principle-based Revenue Accounting. c. Rules-based Revenue Accounting. d. Revenue from Contracts with Customers.

27.

The converged standard on revenue recognition a. reduces the number of disclosures required for revenue reporting. b. increases the complexity of financial statement preparation. c. recognizes and measures revenue based on changes in assets and liabilities. d. simplifies revenue recognition practices across entities and industries.

28.

The first step in the process for revenue recognition is to a. determine the transaction price. b. identify the contract with the customer. c. allocate the transaction price to the separate performance obligations. d. identify the separate performance obligations in the contract.

29.

The second step in the process for revenue recognition is to a. allocate transaction price to the separate performance obligations. b. determine the transaction price. c. identify the contract with customers. d. identify the separate performance obligations in the contract.

30.

The third step in the process for revenue recognition is to a. determine the transaction price. b. identify the separate performance obligations in the contract. c. allocate transaction price to the separate performance obligations. d. recognize revenue when each performance obligation is satisfied.

31.

The fourth step in the process for revenue recognition is to a. recognize revenue when each performance obligation is satisfied. b. identify the separate performance obligations in the contract. c. allocate transaction price to the separate performance obligations. d. determine the transaction price.

32.

The last step in the process for revenue recognition is to a. allocate transaction price to the separate performance obligations. b. recognize revenue when each performance obligation is satisfied. c. determine the transaction price. d. identify the contract with customers.

33.

A contract a. must be in writing to be an enforceable contract. b. is an agreement that creates enforceable rights and obligations. c. is enforceable if each party can unilaterally terminate the contract. d. does not need to have commercial substance.

Revenue Recognition

18 - 5

34.

Revenue from a contract with a customer a. is recognized when the customer receive the rights to receive consideration. b. is recognized even if the contract is still wholly unperformed. c. can be recognized even when a contract is still pending. d. cannot be recognized until a contract exists.

35.

Signing of the contract by the two parties is a. not recorded until one or both parties perform under the contract. b. recorded at the time the contract is approved by both parties. c. not recorded until both parties perform under the contract. d. recorded immediately after the contract is signed.

36.

On January 15, 2015, 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. This contract should be a. recorded on January 15, 2015. b. recorded on March 1, 2015. c. recorded on March 31, 2015. d. recorded on April 30, 2015.

37.

A company must account for a contract modification as a new contract if a. Goods or services are interdependent on each other. b. The promised goods or services are distinct. c. The company has the right to receive consideration equal to standalone price. d. Goods or services are distinct and company has right to receive the standalone price.

38.

When a contract modification does not result in a separate performance obligation, the additional products are priced at the a. standalone price of the product. b. blended price of original contract and contract modification. c. average selling price of original selling price and standalone price. d. selling price specified in contract modification

39.

A performance obligation exists when a. a company receives the right to receive consideration. b. a contract is approved and signed. c. a company provides a distinct product or service. d. a company provides interdependent product or service.

40.

When multiple performance obligations exists in a contract, they should be accounted for as a single performance obligation when a. each service is interdependent and interrelated. b. the performance obligations are distinct but interdependent. c. the product is distinct within the contract. d. determination cannot be made.

18 - 6

Test Bank for Intermediate Accounting, IFRS Edition, 2e

41.

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 $3,850 and an extended warranty for another $1,200. The journal entry to record this transaction would include a. a credit to Service Revenue of $5,050. b. a credit to Service Revenue of $1,200 c. a credit to Sales of $3,850 and a credit to Service Revenue of $1,200 d. a credit to Unearned Service Revenue of $1,200.

42.

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 smooth operation of the software. The total transaction price is $350,000. Based on standalone values, the company estimates the consulting services and support have a value of $100,000 and the software license has a value of $250,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes a. a credit to Sales Revenue for $250,000 and a credit to Unearned Service Revenue of $100,000. b. a credit to Service Revenue of $100,000. c. a credit to Unearned Service Revenue of $100,000. d. a credit to Sales Revenue of $350,000.

43.

The transaction price a. excludes discounts, volume rebates, coupons and free products, or services. b. is the amount of consideration that a company expects to receive from a customer c. excludes time value of money if the contract involves a significant financing component. d. does not consider noncash consideration such as donations, gifts, equipment or labor.

44.

Companies can use the expected value to estimate variable consideration when a. the contract has only two possible outcomes. b. a company has a small number of contracts with similar characteristics. c. a company can use the most likely amount in a range of possible outcomes. d. a company has a large number of contracts with similar characteristics.

45.

If a contract involves a significant financing component, a. the time value of money is used to determine the fair value of the transaction. b. the time value of money is not required to determine transaction price, if the payment is more than a year. c. the transaction amount should be based on the current sales price of goods or services. d. interest is not accrued as a result of the financing component.

46.

Noncash consideration should be a. recognized on the basis of fair value of what is given up. b. recognized on the basis of original cost paid by customer. c. recognized on the basis of fair value of what is received. d. recognized on the basis of fair value of equivalent goods or services.

Revenue Recognition

18 - 7

47.

Consideration paid or payable to customers a. includes volume rebates which increases the cost to the customer. b. includes discounts which reduces the cost of purchases to the company. c. reduces the consideration received and the revenue to be recognized. d. includes prompt settlement discount which increases revenues.

48.

The transaction price for multiple performance obligations should be allocated a. based on selling price from the company’s competitors. b. based on what the company could sell the goods for on a standalone basis. c. based on forecasted cost of satisfying performance obligation. d. based on total transaction price less residual value.

49.

When the bundle price is less than the sum of the standalone prices, the discount should be allocated to a. the product (or products) associated with the discount. b. the entire bundle of products or services. c. the product cost, thereby increasing product margin. d. the selling price of product or services provided.

50.

A company has satisfied its performance obligation when the a. company has received payment for goods or services. b. company has significant risks and rewards of ownership. c. company has legal title to the asset. d. company has transferred physical possession of the asset.

51.

The most popular input measure used to determine the progress toward completion is a. units-of-delivery method. b. cost-to-cost basis. c. labor hours worked. d. tons produced.

52.

The cost-to-cost basis measures progress towards completion by a. comparing costs incurred to date with total costs to complete the contract. b. tracking results of work completed to date; it is an output measure. c. tracking floors of a building completed versus floors still to be completed. d. tracking miles of a highway completed versus miles of highway still to be completed.

53.

When sales are made with a right of return, the company a. should not recognize any revenue. b. should recognize revenue for the full sales price. c. records the returned asset in a separate inventory account. d. record the estimated returns in the Sales Returns account.

54.

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 a. outright sale. b. financing transaction. c. repurchase transaction. d. put option.

18 - 8

Test Bank for Intermediate Accounting, IFRS Edition, 2e

55.

When a customer purchases a product but is not yet ready to accept delivery, this is referred to as a. a repurchase agreement. b. a consignment. c. a principal-agent relationship. d. a bill-and-hold arrangement

56.

The role of the agent in a Principal-Agent relationship is to a. arrange for the principal to provide goods or services to a customer. b. provide the goods or services for a customer. c. market the principal goods and services to prospective customers. d. develop and maintain goodwill of the principal’s customers.

57.

The use of the net method of recognizing revenue by an agent a. is appropriate as long as both revenue and costs are included. b. is the correct method in a principal-agent relationship. c. could result in an overstatement of the agent’s revenue. d. could result in an understatement of the agent’s revenue.

58.

Consignments are a specialized marketing method whereby the a. Consignee purchases goods for sale and sends payment when goods are sold. b. Consignee (agent) holds title to the product. c. Consignee pays for good up front and is paid when merchandise is sold. d. Consignee takes possession of merchandise but title remains with manufacturer.

59.

Consigned goods are recognized as revenues by the a. consignor when a sale to a third party has occurred. b. consignor when the merchandise has been shipped to a consignee. c. consignee when a sale to a third party has occurred. d. consignor when it receives payment from consignee for goods sold.

60.

A warranty provided when a customer exercises an option to purchase a warranty is recorded as a. an expense in the period the goods or services are sold. b. a warranty liability for all costs incurred after sale due to correction of defects. c. revenue in the period that the service-type warranty is in effect. d. an assurance type warranty which is included in the sales price of the product.

61.

Nonrefundable upfront fees a. should be recognized immediately upon receipt of payment. b. such as activation fees for cable should be recognized as revenue immediately. c. such as a one-time initiation fee in a health club should be recognized immediately. d. should not be recorded as revenue at the time of payment if they are for future delivery of products and services.

Revenue Recognition

18 - 9

62.

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 $2,300 and $800, respectively. The estimated cost of the assurance-warranty is $350. The accounting for warranty will include a a. debit to Warranty Expense, $800. b. debit to Warranty Liability, $350 c. credit to Warranty Liability, $800 d. credit to Unearned Warranty Revenue, $800

63.

Unconditional rights to receive consideration because a performance obligation has been satisfied are a. reported as a receivable on the statement of financial position. b. reported as a contract asset on the statement of financial position. c. reported as a contract liability on the statement of financial position. d. are not reported on the balance sheet.

64.

Partial satisfaction of a multiple performance obligation is reported on the statement of financia...