5.1 Revenue from Contracts with Customers Flashcards
A department store sells gift certificates that may be redeemed for merchandise. Each certificate expires 3 years after issuance. The revenue from the gift certificates should be recognized
A. Evenly over 3 years from the date of issuance.
B. In the period the certificates are sold.
C. In the period the certificates expire.
D. In the period the certificates are redeemed or in the period they expire if they are allowed to lapse.
D. In the period the certificates are redeemed or in the period they expire if they are allowed to lapse.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service (an asset) to a customer. However, if an entity is relived of a performance obligation upon the passage of time (e.g., expiration date), then revenue also is recognized at such time. Accordingly, the performance obligation is satisfied when the certificates are redeemed or expire.
A hotel enters into a contract with a customer to provide 10 rooms for 10 nights for $200 per room per night. In addition to the room price per night, the hotel collects a city occupancy tax of $7 per room per night. According to the hotel’s promotion, each customer that purchases in total more than 50 room nights is entitled to a credit of $3,000 on the entire purchase. What is the total transaction price of the contract?
A. $20,000
B. $17,700
C. $17,000
D. $20,700
C. $17,000
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. It excludes amounts collected on behalf of third parties. Thus, the amount collected for city occupancy taxes must not be included in the transaction price. In addition, any consideration payable to the customer, such as coupons, credit, or vouchers, reduces the transaction price. Accordingly, the total transaction price of the contract is $17,000 [(10 x 10 x $200) - $3,000)].
ABC operates a catering service that specializes in business luncheons for large corporations. ABC requires customers to place their orders 2 weeks in advance of the scheduled events. ABC bills its customers on the 10th day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, ABC should recognize revenue from its catering services at the date when a
A. Customer places an order.
B. Luncheon is served.
C. Billing is mailed.
D. Customer’s payment is received.
B. Luncheon is served.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service (an asset) to a customer. Accordingly, ABC recognizes revenue when a luncheon is served.
An individual who recently founded a company that produces baseball bats and balls wants to determine their policy for revenue recognition. According to the revenue recognition principle, the most appropriate time to recognize revenue would be when
A. The sale occurs.
B. Cash is received.
C. Production is completed.
D. Quarterly financial statements are prepared.
A. The sale occurs.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service (an asset) to a customer. Because transfers ordinarily occur at the point of sale, the most appropriate time to recognize revenue is when the sale occurs.
On February 1, Year 1, a computer software firm agrees to program a software package. Twelve payments of $10,000 on the first of each month are to be made, with the first payment March 1, Year 1. The software is accepted by the client June 1, Year 2. How much Year 1 revenue should be recognized?
A. $110,000
B. $0
C. $100,000
D. $120,000
B. $0
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service (an asset) to a customer. A contract liability is recognized for an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer. Deposits and other advance payments by the customer are recognized as contract liabilities. Thus, no revenue is recognized in Year 1 because all performance occurred in Year 2. However, a contract liability for $100,000 is recognized in Year 1 because it represents consideration received from the customer in Year 1 for a promise the firm was still obligated to perform at the end of Year 1.
An airline should recognize revenue from airline tickets in the period when
A. Passenger reservations are confirmed.
B. Passenger reservations are booked.
C. Related flights occur.
D. Tickets are issued.
C. Related flights occur.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service (an asset) to a customer. An airline’s performance obligation regarding airline tickets is to ensure promised flights occur. Thus, an airline should recognize revenue from airline tickets when related flights occur.
A promised asset is transferred in full satisfaction of a performance obligation in a contract when the customer
A. Obtains control of the asset.
B. Can direct use of the product.
C. Has physical possession of the asset.
D. Pays for the asset in full.
A. Obtains control of the asset.
Revenue is recognized when a performance obligation is satisfied by transferring a promised good or service to a customer. It happens when the customer obtains control of the good or service (i.e., an asset). Control of an asset is transferred to the customer when the customer (1) has the ability to direct the use of the asset and (2) obtains substantially all of the remaining benefits (potential cash flows) from the asset.
