Term
| Which of the following is not one of the steps for recognizing revenue? |
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Definition
| Estimate the total transaction price of the contract based on the sum of the stand-alone selling prices of the goods and services in the contract. The third step is "Determine the transaction price", which is not necessarily based on the sum of the stand-alone selling prices of goods and services in the contract. |
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Term
| Which of the following is true about revenue recognition under ASU 2014-09? |
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Definition
| The time value of money is considered when estimating all transaction prices. |
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Term
| Which of the following is an indicator that revenue for a service can be recognized over time? |
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Definition
| The seller can estimate the percent of work completed. |
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Term
| Which of the following is a separate performance obligation? |
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Definition
| An extended warranty. An extended warranty is capable of being distinct and separately identifiable, given that it is sold separately. |
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Term
| Which of the following is an acceptable way to estimate uncertain consideration? |
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Definition
| Most likely amount to be received. Expected value of the amount to be received. |
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Term
| Lewis is selling a product with some of the transaction price depending on the outcome of a future event. There is a 75% chance that the event will result in $100,000 of consideration to Lewis, and a 25% chance that the event will result in $40,000 of consideration to Lewis. Which of the following is not an appropriate estimate of the amount of uncertain consideration for purposes of Lewis estimating the transaction price? |
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Definition
| $85,000 = 75% × $100,000 + 25% × $40,000, which is answer b. The most likely amount is $100,000, which is answer a. $70,000, answer c, is not an acceptable estimate |
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Term
| Assume a prepayment is made six months in advance of delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract? |
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Definition
| Ignore the time value of money. Six months is less than one year, so the seller can assume that the financing component of the contract is not significant. |
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Term
| Winchell wrote a contract that involves two separate performance obligations. Winchell cannot estimate the stand-alone selling price of product A. Product B has a stand-alone selling price of $100. The price for the combined product is $120. How much of the transaction price would be allocated to the performance obligation for delivering product A? |
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Definition
| Winchell would use the residual method. $120 – 100 = $20 |
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Term
| Which of the following is not an indicator that the seller may need to constrain recognition of variable consideration? |
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Definition
| Based on much experience with the customer, the seller anticipates a more-than-remote chance that the receivable will prove uncollectible. |
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Term
| For profitable long-term contracts, income is recognized in each year when revenue is recognized: |
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Definition
| Revenue is only recognized each year if revenue qualifies for recognition over time. |
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Term
| When accounting for a long-term construction contract for which revenue is recognized over time according to the percentage of completion, gross profit is recognized in any year is debited to: |
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Definition
| Construction in progress. The entry is a debit to construction in progress (CIP) for gross profit, a debit to cost of construction for construction costs, and a credit to revenue. |
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Term
Sandlewood Construction Inc. recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2016, Sandlewood began work on a $10,000,000 construction contract, which was completed in 2017. The accounting records disclosed the following data at the end of 2016:
How much gross profit should Sandlewood have recognized in 2016? |
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Definition
| As of year-end 2016, revenue recognized to date is ($5,400,000 ÷ ($5,400,000 + 3,600,000)) × $10,000,000 = $6,000,000, and cost of construction recognized to date is $5,400,000, so gross profit recognized to date is $600,000. |
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Term
| Based on the same data in question 20, in addition to accounts receivable, what would appear in the 2016 balance sheet related to the construction accounts? |
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Definition
| Construction in progress (CIP) would include cost + gross profit, or $5,400,000 + 600,000 = $6,000,000. The balance sheet would show a current asset for CIP – progress billings, or $6,000,000 – $4,100,000 = $1,900,000. |
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Term
The Simpson Construction Company recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2016, Simpson began work on a construction contract. Information on this contract at the end of 2016 is as follows:
What is the contract price (total revenue) on this contract? |
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Definition
| Feedback: (progress complete × contract price = revenue) – cost = gross profit. Therefore (($1,500,000 ÷ ($1,500,000 + 6,000,000)) × contract price) - $1,500,000 = $250,000. Therefore, contract price = $8,750,000. |
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Term
| Smith Company earns a 12% return on assets. If net income is $720,000, average total assets must be: |
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Definition
| ROA = net income ÷ assets, so 12% = $720,000 ÷ assets, so assets = $6,000,000. |
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Term
| The Esquire Company reported sales of $1,600,000 and cost of goods sold of $1,122,000 for the year ended December 31, 2016. Ending inventory for 2015 and 2016 was $420,000 and $460,000, respectively. Esquire's inventory turnover for 2016 is: |
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Definition
| Inventory turnover = cost of goods sold ÷ average inventory balance, so inventory turnover = $1,122,000 ÷ ((420,000 + 460,000) ÷ 2) = 2.55. |
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Term
| The return on shareholders' equity for 2016 is: |
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Definition
| ROE = net income ÷ average shareholders' equity balance, so ROE = $200,000 ÷ ((900,000 + 700,000) ÷ 2) = 25%. |
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Term
| Under IFRS, revenue for the sale of goods is recognized when the seller has transferred to the buyer: |
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Definition
| The risks and rewards of ownership. |
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Term
| Western Appliance Company, which began business on January 1, 2016, appropriately uses the installment sales method of accounting. The following data are available for 2016: |
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Definition
| Gross profit realized is 40% × $150,000 = $60,000. Gross profit deferred is 40% × ($350,000 – $150,000) = $80,000. |
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Term
This question is based on the Appendix
The Pattison Company began operations on January 2, 2016, and appropriately uses the installment sales method of accounting. The following data are available for 2016 and 2017:
The deferred gross profit that would appear in the 2017 balance sheet is: |
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Definition
| Gross profit deferred is 30% × ($600,000 – ($200,000 + $250,000)) + 40% × ($750,000 – 300,000) = $225,000. |
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Term
| When accounting for a long-term construction contract under IFRS, if the percentage-of-completion method is not appropriate, the seller should account for revenue using: |
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Definition
| The cost recovery method. |
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Term
| When IFRS uses the cost recovery method to account for a long-term contract, |
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Definition
| Revenue equal to costs are typically recognized early in the life of the contract. |
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Term
| Which of the following statements is true with regards to variable consideration? |
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Definition
| Variable consideration means the transaction price is uncertain. |
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Term
| What is the relationship between Construction-in-progress (CIP) and the Billings on Construction Contract account? |
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Definition
| Billings is contra to CIP and reduces the balance of the CIP account. |
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Term
| When revenues, costs and gross profit are recognized at the completion of the contract rather than periodically throughout the contract |
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Definition
| Either method results in the same revenues, costs and gross profits being recognized by the end of the project. |
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Term
| Sarjit Systems sold software to a customer for $217,000. As part of the contract, Sarjit promises to provide “free” technical support over the next six months. Sarjit sells the same software without technical support for $189,000 and a stand-alone six-month technical support contract for $81,000, so these products would sell for $270,000 if sold separately. |
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Definition
| Based on relative stand-alone selling prices, the software comprises 70% of the total fair values ($189,000 ÷ [$81,000 + $189,000]), and the technical support comprises 30% ($81,000 ÷ [$81,000 + $189,000]). Therefore, Sarjit would recognize $151,900 ($217,000 × 70%) in revenue when the software is delivered and defer the remaining $65,100 ($217,000 × 30%) to be recognized evenly over the next six months as the technical support service is provided. |
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Term
| Tulane Tires wrote a contract for a $105,000 sale to the new Garden District Tour Company. Tulane only anticipates a slightly greater than fifty percent chance that Garden will be able to pay the amounts that Tulane is entitled to receive under the contract. Upon delivery of the tires, assuming no payment has yet been made by Garden, how much revenue should Tulane recognize under U.S. GAAP? |
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Definition
| $0. Under U.S. GAAP, “probable” is defined as “likely to occur” or as “reasonably expected or believed on the basis of available evidence or logic but is neither certain nor proved,” which implies a relatively high likelihood of occurrence. Therefore, this contract would not qualify for revenue recognition under U.S. GAAP. |
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Term
| Tulane Tires wrote a contract for a $113,000 sale to the new Garden District Tour Company. Tulane only anticipates a slightly greater than fifty percent chance that Garden will be able to pay the amounts that Tulane is entitled to receive under the contract. Upon delivery of the tires, assuming no payment has yet been made by Garden, how much revenue should Tulane recognize under U.S. IFRS? |
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Definition
| $113,000. Under IFRS “probable” is defined as a likelihood that is greater than 50%. Therefore, this contract would qualify for revenue recognition under IFRS. (However, Tulane also would recognize a large bad debt expense associated with the contract, given concern that it might not be paid |
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Term
Aria Perfume, Inc., sold 2,390 boxes of white musk soap during January of 2018 at the price of $140 per box. The company offers a full refund to unsatisfied customers for any product returned within 30 days from the date of purchase. Based on historical experience, Aria expects that 2% of sales will be returned.
How many performance obligations are there in each sale of a box of soap? How much revenue should Aria recognize in January? |
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Definition
A right of return is not a performance obligation. Instead, the right of return represents a potential failure to satisfy the original performance obligation to deliver goods to the customer. Because the total amount of cash received from the customer depends on the amount of returns, a right of return is a type of variable consideration.
Aria should estimate sales returns and reduce revenue by that amount in order to arrive at “net revenue,” which would be the transaction price (the amount to be recorded as revenue on the seller’s books). The total net revenue in this situation is $327,908: |
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Term
Leo Consulting enters into a contract with Highgate University to restructure Highgate’s processes for purchasing goods from suppliers. The contract states that Leo will earn a fixed fee of $52,000 and earn an additional $10,000 if Highgate achieves $100,000 of cost savings. Leo estimates a 55% chance that Highgate will achieve $100,000 of cost savings.
Assuming that Leo determines the transaction price as the expected value of expected consideration, what transaction price will Leo estimate for this contract? |
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Definition
Possible Amounts:
$52,000 fixed fee + 10,000 bonus = $62,000 *55%
$52,000 fixed fee + 0 bonus = $52,000 * 45% |
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Term
Item18
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In January 2018, Continental Fund Services, Inc., enters into a one-year contract with a client to provide investment advisory services. The company will receive a management fee, prepaid at the beginning of the contract, that is calculated as 1.5% of the client’s $370 million total assets being managed. In addition, the contract specifies that Continental will receive a performance bonus of 15% of any returns in excess of the return on the Dow Jones Industrial Average market index. Continental estimates that it will earn a $2 million performance bonus, but is very uncertain of that estimate, given that the bonus depends on a highly volatile stock market. |
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Definition
| When a contract includes variable consideration, sellers are constrained to recognize only the amount of revenue they believe is probable that they won’t have to reverse (adjust downward) in the future if the variable consideration changes. In this case, factors outside the seller’s control (stock market volatility) make the seller’s estimate of variable consideration very uncertain, so the amount of revenue that Continental will recognize during the year is limited to the fixed annual management fee, which is $5.55 million (1.5% of the client’s $370 million total assets under management). Therefore, Continental would use $5.55 million as its estimate of the transaction price. Any performance bonus earned by Continental will be recognized as revenue if and when it is earned. |
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Term
Finerly Corporation sells cosmetics through a network of independent distributors. Finerly shipped cosmetics to its distributors and is considering whether it should record $800,000 of revenue upon shipment of a new line of cosmetics. Finerly expects the distributors to be able to sell the cosmetics, but is uncertain because it has little experience with selling cosmetics of this type. Finerly is committed to accepting the cosmetics back from the distributors if the cosmetics are not sold.
How much revenue should Finerly recognize upon delivery to its distributors? |
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Definition
| Finerly should recognize $0 of revenue upon delivery to distributors. Given the uncertainty about estimated returns, Finerly 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, Finerly won’t recognize revenue until it either can better estimate returns or sales to end consumers occur. Essentially, because Finerly can’t estimate returns, it treats this transaction as if it is placing those goods on consignment with independent distributors. |
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Term
Assume that Amazon.com sells the MacBook Pro, a computer brand produced by Apple, for a retail price of $1,570. Amazon arranges its operations such that customers receive products directly from Apple Stores rather than Amazon. Customers purchase from Amazon using credit cards, and Amazon forwards cash to Apple equal to the retail price minus a $157 commission that Amazon keeps.
In this arrangement, how much revenue will Amazon recognize for the sale of one MacBook Pro? |
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Definition
| Amazon will recognize revenue of $157, its commission on the sale. In this transaction, Amazon never has primary responsibility for delivering a product or service, and it is not vulnerable to risks associated with holding inventory or delivering the product or service. Therefore, Amazon serves as an agent, and will only recognize revenue on the transaction equal to the amount of the commission it receives. |
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Term
| Future Value of present amount equation |
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Definition
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Term
| Present Value of future amount equation |
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Definition
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Term
| Sandra wants to calculate how much money she needs to deposit today into a savings account which earns 5% in order to be able to withdraw $3,000 at the end of each of the next 6 years. She should use which present value concept? |
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Definition
| Present value of an ordinary annuity of $1 for 6 periods. The calculation is how much needs to be deposited today, the present value, so that equal amounts can be withdrawn over the next six years at the end of the year (ordinary annuity). |
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Term
| The Richards Company purchased a machine for $5,000 down and $300 a month payable at the end of each of the next 36 months. How would the cash price of the machine be calculated, assuming the annual interest rate is given? |
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Definition
| $5,000 plus the present value of an ordinary annuity of $300 for 36 periods. |
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Term
| Wellman Company is considering investing in a two-year project. Wellman's required rate of return is 10%. The present value of $1 for one period at 10% is .909 and for two periods at 10% is .826. The project is expected to create cash flows, net of taxes, of $80,000 in the first year, and $100,000 in the second year. Wellman should invest in the project if the project's cost is less than or equal to: |
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Definition
| $155,320: ($80,000 x 0.909) + ($100,000 x 0.826). |
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Term
| The Bello Corporation wishes to accumulate $2,000,000 for plant expansion. The funds are required on January 1, 2021. Bello intends to make five equal annual deposits in a fund that will earn interest at 7% compounded annually. The first deposit is made on January 1, 2016.What is the amount of the required annual deposit? |
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Definition
| $2,000,000 ÷ 6.15 (Future value of an annuity due of $1 at 7% for 5 periods). |
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Term
| The Jamison Corporation agrees to pay an employee $10,000 a year for five years beginning three years from today and decides to fund the payments by depositing one lump sum in a savings account today. The company should use which present value concept to determine the required deposit? |
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Definition
| Present value of a deferred annuity. |
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Term
| Harry Morgan plans to make 30 quarterly deposits of $200 into a savings account. The first deposit will be made immediately. The savings account pays interest at an annual rate of 8%, compounded quarterly. How much will Harry have accumulated in the savings account at the end of the seven and a half-year period? (Use the appropriate table in the text.) |
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Definition
| $8,276: $200 x 41.3794 (future value of an annuity due for 30 periods at 2%). |
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Term
| Assume the same data as in question 8, except that Harry will make the quarterly deposits at the end of the quarter. How much will Harry have accumulated in the savings account at the end of the seven and a half-year period? (Use the appropriate table in the text.) |
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Definition
| $8,114: $200 x 40.5681 (future value of an ordinary annuity for 30 periods at 2%). |
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Term
| The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning one year from today. The installment payments include interest at 8%. What is the required annual installment payment? (Use the appropriate table in the text.) |
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Definition
| $2,154: $8,600 ÷ 3.99271 (present value of an ordinary annuity for 5 periods at 8%). |
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Term
| Assume the same data as in question 10, except that the installment payments begin immediately. What is the required annual installment payment? (Use the appropriate table in the text.) |
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Definition
| $1,994: $8,600 ÷ 4.31213 (present value of an annuity due for 5 periods at 8%). |
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Term
| On March 31, 2016, the Freeman Company leased a machine. The lease agreement requires Freeman to pay 10 annual payments of $6,000 on each March 31, with the first payment due on March 31, 2016. Assuming an interest rate of 10% and that this lease is treated as an installment sale, Freeman will initially value the machine by multiplying $6,000 by which of the following factors? |
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Definition
| Present value of an annuity due of $1 at 10% for 10 periods. |
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Term
| The Stacey Mack Corporation used the expected cash flow approach to determine the present value of a future obligation to be paid in four years. Estimated future payment possibilities were as follows: |
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Definition
| $60.880 million. 0.82270 (present value of $1 in 4 periods at 5%) x $74 million [($50 million x 0.20) + ($70 million x 0.40) + ($90 million x 0.40)]. |
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