Ch.6A- Revenue Recognition And Profitability Analysis

Question 1

CC: Which of the following is not a key indicator used in deciding whether control has passed from the seller to the buyer?

a. Seller can identify the contract with a buyer
b. Buyer has an obligation to pay the seller
c. Buyer has legal title to the asset
d. Buyer has physical possession of the asset

Answer 1

A

The buyer is more likely to control a good or service if the buyer has:
• An obligation to pay the seller
• Legal title to the asset
• Physical possession of the asset
• Assumed the risks and rewards of ownership
• Accepted the asset

Question 2

CC: Which of the following is an indicator that revenue for a service should be recognized over time?

a. The seller is enhancing an asset that the buyer controls as the service is performed.
b. The seller is providing continuous effort to the buyer.
c. The seller can estimate the percent of work completed.
d. The sales price is fixed and determinable.

Answer 2

A

Revenue is recognized over a period of time if one of the following three conditions hold:
• The customer consumes the benefit of the seller’s work as it is performed
• The customer controls the asset as it is created
• The seller is creating an asset that has no alternative use to the seller and the seller has the legal right to receive payment for progress to date even if the contract is cancelled.

Question 3

CC: Which of the following is not a step used to apply the core principle of revenue recognition?

a. Determine the transaction price
b. Identify the performance obligations in the contract
c. Identify the contract with a customer
d. Ensure the sales price is fixed and determinable

Answer 3

D

The five steps used to apply the core principle of revenue recognition are:
• Identify the contract with a customer
• Identify the performance obligation(s) in the contract
• Determine the transaction price
• Allocate the transaction price to each performance obligation
• Recognize revenue when (or as) each performance obligation is satisfied

Question 4

CC: Apple Electronics sells computers and provides hardware maintenance services. On September 1st, Apple sold a package deal containing a computer and a 6-month unlimited maintenance/ repair service for the computer at a bundle price of $1,600. If sold separately, the computer costs $1500 and the 6-month unlimited maintenance/repair service costs $500. How much revenue does Apple Electronics recognize for the month ended September 30th, assuming that revenue is accrued monthly?

a. $1,600
b. $1,200
c. $1,267
d. $400

Answer 4

C

Product:
($1500 ÷ ($1500 + 500)) × $1600 = $1200
Service:
(($500 ÷ ($1500 + 500)) × $1600/6 = 67
Total: 1200+67=1,267

Question 5

CC: Scale Co. offers a promotional coupon with every product it sells. The coupon gives the Scale Co. customer an opportunity to buy an electric drill that normally sells for $50 for only $30 (a 40% discount). The coupon must be redeemed within one year of the purchase. Scale Co. estimates that 80% of customers will take advantage of the coupon. What is the stand-alone selling price of the coupon?

a. $20
b. $30
c. $50
d. $16

Answer 5

D

Because Scale Co. expects only 80% of the coupons to be used, it estimates the stand-alone selling price of a coupon to be $20 (40% of 50) × 80% = $16

Question 6

CC: Hooper Inc. offers a discount on an extended warranty on its Smartphone when the warranty is purchased at the time the Smartphone is purchased.
The warranty normally has a price of $300, but Hooper offers it for $240 when purchased along with a Smartphone. Hooper anticipates a 75% chance that a customer will purchase the extended warranty along with the Smartphone. Assume Hooper sells 1,000 Smartphones with the extended warranty discount offer. What is the total stand-alone selling price that Hooper would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 Smartphone contracts?

a. $240,000
b. $60,000
c. $45,000
d. $0

Answer 6

C

The $60 discount has a 75% chance of being taken by a customer, so the stand-alone selling price of options provided with 1,000 Smartphones is $45,000 (calculated as $60 × 75% × 1,000 phones).

Question 7

CC: Siddhi enters into a contract offering variable consideration. The contract pays Siddhi $2,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $4,000 and a 40% chance the contract will pay an additional $6,000, depending on the outcome of the consulting contract. Siddhi concludes that this contract qualifies for revenue recognition over time.
Assume Siddhi estimates variable consideration as the most likely amount.
What is the amount of revenue Siddhi would recognize for the first month of the contract?

a. $2,000
b. $2,667
c. $2,800
d. $2,400.

Answer 7

B

The most likely outcome is that Siddhi receives the $4,000 bonus (likelihood = 60%), in which case Siddhi would be paid a total of ($2,000 × 6 months) + $4,000, or $16,000.
Therefore, Siddhi would recognize $16,000 ÷ 6 = $2,667 each month.

Question 8

CC: Siddhi enters into a contract offering variable consideration. The contract pays Siddhi $2,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $4,000 and a 40% chance the contract will pay an additional $6,000, depending on the outcome of the consulting contract. Siddhi concludes that this contract qualifies for revenue recognition over time.
Assume Siddhi estimates variable consideration as the expected value.
What is the amount of revenue Siddhi would recognize for the first month of the contract?

a. $2,000
b. $2,666
c. $2,800
d. $2,400.

Answer 8

C

The expected value of the transaction price is $16,800, computed as:
$2,000 × 6 months + (60% × $4,000) + (40% × $6,000).
Therefore, Siddhi would recognize $16,800/6 = $2,800 each month.

Question 9

CC: Braun Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Braun has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale.
Braun most likely should recognize revenue:

a. When Braun delivers a computer to a customer, ignoring potential returns.
b. When Braun delivers a computer to a customer, in an amount that is reduced by the expected returns.
c. When a customer returns a computer.
d. When Braun receives cash from the customer.

Answer 9

B

Braun can estimate returns reliably enough for the constraint on recognizing variable consideration to not apply, so Braun would adjust the transaction price for expected returns and recognize revenue in that amount upon delivery.

Question 10

CC: Clayton Consulting operates a website that links experienced statisticians with businesses that need data analyzed. Statisticians post their rates, qualifications, and references on the website, and Clayton receives 25% of the fee paid to the statisticians in exchange for identifying potential customers. Lovelace Associates contacts Clayton and arranges to pay a consultant $4,500 in exchange for analyzing some data. Clayton’s income statement would include the following with respect to this transaction:

a. Revenue of $4,500
b. Revenue of $4,500, and cost of services of $3,375
c. Revenue of $1,125
d. Revenue of $5,625 and cost of services of $4,500

Answer 10

C

Clayton is an agent. It doesn’t have primary responsibility for delivering the statistics services and doesn’t collect payment from the customer. Rather, Clayton’s primary performance obligation is to facilitate transactions between customers and statisticians. Therefore, Clayton would recognize as revenue only its commission of $1,125 (computed as 25% x $4,500).

Question 11

CC: Adam sells $100,000 of product to Bob, and also purchases $10,000 of cleaning services from Bob. The cleaning services have a fair value of $7,000. Adam should record revenue on its sale of product to Bob of:

a. $100,000.
b. $97,000.
c. $93,000.
d. $90,000.

Answer 11

B

Excess payment of $(10,000-7,000) is deducted from $100,000 original transaction price.

Question 12

CC: Allen Co. wrote a contract that involves two separate performance obligations. Allen cannot estimate the stand-alone selling price of product
A. Product B has a stand-alone selling price of $200. The price for the combined product is $240. How much of the transaction price would be allocated to the performance obligation for delivering product A?

a. $ 40.
b. $ 60.
c. $ 80.
d. $100.

Answer 12

A

Allen would use the residual method. $240 - 200 = $40

Question 13

Which of the following is not true?

a. License fees are recognized over time for any license that is viewed as providing a right of access
b. Licensing fees are recognized as revenue over time for licenses of symbolic IP, for which the seller expects its ongoing activities to affect the benefits that the buyer receives from IP
c. License fees are recognized as revenue at a point in time for licenses of functional IP, for which the buyer expects that the seller’s future activities will not affect the benefit the buyer derives from the IP
d. Licensing fees are recognized as revenue at the end of the license period, when the seller has completed its performance obligation to provide access to its IP

Answer 13

D

If the seller provides access to its intellectual property, revenue is recognized over the period of time for which access is provided, not deferred until the end of the license period.

Question 14

CC: Zack developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectiveness of irrigation. Spurlock paid a licensing fee of $60,000 for a copy of the software. Although Spurlock can use the software as long as it wants, Zack expects that Spurlock will use the software for approximately 5 years. Zack does not anticipate any further interaction with Spurlock following transfer of the license. How much revenue should Zack recognize in the first year of the contract?

a. $0
b. $12,000
c. $15,000
d. $60,000

Answer 14

D

Because Zack will have no continuing involvement, the license transfers a right of use, and all license revenue can be recognized upon transfer of control of the software to the customer.

Question 15

CC: Pita Pal sells fast-food franchises. Pita Pal receives $84,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of $84,000. Pita Pal also receives $38,700 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 2024, and on May 1, 2024 Rachel had completed training and was open for business. How much revenue in 2024 will Pita Pal recognize for its arrangement with Rachel?

a. $0
b. $122,700
c. $84,000
d. $116,250

Answer 15

D

Because Rachel had completed training and was open for business on May 1, 2024 and would recognize $84,000 of revenue in 2024. In addition, since Rachel was a franchisee and using the Pita Pal name and consulting services for the last ten months of 2024, Pita Pal should recognize 10 ÷ 12 of a yearly fee of $38,700, or $32,250. In total, Pita Pal recognizes revenue from Rachel
of $84,000 + $32,250 = $116,250 in 2024.

Question 16

CC: Which of the following is typically true for a bill-and-hold arrangement?

a. Revenue is recognized when goods are manufactured.
b. Revenue is recognized when the arrangement is made.
Revenue is recognized when the delivery of goods is made.
d. Revenue is recognized at the point in time at which payment from the customer is received.

Answer 16

C

Bill-and-hold arrangements normally do not qualify for revenue recognition until delivery is made to the customer. Prior to that point, control of goods usually is not viewed as having passed to the customer.

Question 17

CC: Alex Guerin is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there).
Guerin recently transferred a painting on consignment to a local barbershop. After Guerin has transferred a painting to a barbershop, the painting:
a. Should be counted in the barbershop’s inventory, as the barbershop now possesses it.
b. Should be counted in Guerin’s inventory until the barbershop sells it.
c. We lack sufficient information to know who should carry the painting in inventory.
d. Should be counted in either Guerin’s or the barbershop’s inventory, depending on which incurred the cost of preparing the painting for display.

Answer 17

B

Consignment arrangements normally do not qualify for revenue recognition until delivery is made to the end customer. Prior to that point, control of goods is viewed as having been retained by the consignor, not by the consignee, so the consignor retains the goods in the consignor’s inventory. In this case, that means that Guerin will retain the painting in its inventory until the painting is sold to an end customer.

Question 18

CC: Noah sells gift cards redeemable for Noah products either in-store or online. During 2024, Noah sold $6,000,000 of gift cards, and $5,400,000 of the gift cards were redeemed for products. As of December 31, 2024, $450,000 of the remaining gift cards had passed the date at which Noah concludes that the cards will never be redeemed. How much gift card revenue should Noah recognize in 2024?

a. $5,400,000
b. $5,550,000
c. $5,850,000
d. $6,000,000

Answer 18

C

The sale of a gift card creates deferred revenue, as it is a prepayment by a customer for goods or services to be delivered at a future date. Revenue is recognized when goods or services are delivered or when the likelihood of redemption is remote. In this case, $5,400,000 were redeemed and another $450,000 were viewed as broken, yielding total revenue of $5,850,000.

Question 19

Which of the following is not an indicator that control of a good has passed from the seller to the buyer?

a. Buyer has an unconditional obligation to pay.
b. Buyer has assumed the risk and rewards of ownership.
c. Buyer has scheduled delivery.
d. Buyer has legal title.

Answer 19

C

Whether the buyer has scheduled delivery is not an indicator of passage of control. Delivery, such that the customer has physical possession, is a control indicator.

Question 20

Rothbart Manufacturing agrees to manufacture bumper cars for Banners Amusement Parks. Under the terms of the contract, Banners will pay Rothbart a total of $68,000, and Banners can cancel the contract if it so chooses but must pay Rothbart for work completed. Rothbart believes that, if Banners cancelled the contract, Rothbart could sell the bumper cars to another amusement park and still make a profit. The manufacturing contract is expected to last six months, and as of December 31, 2024, the job is 50% complete. How much revenue should Rothbart recognize in 2024 for this contract?

a. $34,500
b. $34,000
c. $68,000
d. $0

Answer 20

D

This arrangement does not qualify for revenue recognition over time, because the asset the seller is creating has an alternative use to it. Therefore, Rothbart must wait until completion of the contract before recognizing revenue.

Question 21

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?

a. $100,000
b. $85,000
c. $70,000
d. All of the choices are appropriate estimates

Answer 21

C

75% × $100,000+ 25% × $40,000= $85k.
The most likely amount is $100,000. $70,000, is not an acceptable estimate.

Question 22

Which of the following is an indicator that revenue for a service can be recognized over time?

a. The seller can estimate the percent of work completed.
b. The seller is providing continuous effort to the buyer.
c. The seller is enhancing an asset that the buyer controls as the service is performed.
d. The sales price is fixed and determinable.

Answer 22

C

The seller enhancing an asset that the buyer controls as work is performed, such as a seller performing work on a buyer’s building, is one of the indicators that revenue can be recognized over time.

Question 23

Bull’sEye sells gift cards redeemable for Bullshre products either in-store or online. During 2024, BullsEye sold $1950,000 of gift cards, and $1750,000 of the gift cards were redeemed for products. As of December 31, 2024, $149,000 of the remaining gift cards had passed the date at which Bull’sEve concludes that the cards will never be redeemed. How much gift card
evgnue shodld BulsEye recogrize in 2024?

a. $1,801,000
b. $1,750,000
c. $1,950,000
d. $1,899,000

Answer 23

D

Sale of a gift card created deferred revenue, as it is a prepayment by a customer for goods or services to be delivered at a future date. Revenue is recognized when goods or services are delivered or when the likelihood of redemption is remote. In this case, $1,750,000 were redeemed and another $149,000 were viewed as expired, yielding total revenue of $1,899,000.

Question 24

Orange Incorporated offers a discount on an extended warranty on its Phone when the warranty is purchased at the time the Phone is purchased. The warranty normally has a price of $142, but Orange offers it for $116 when purchased along with an Phone. Orange anticipates a 70% chance that a customer will purchase the extended warranty along with the Phone. Assume Orange sells to 1,000 Phones with the extended warranty discount offer.
What is the total stand-alone selling price that Orange would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 Phone contracts?

a. $26,000
b. $0
c. $116,000
d. $18,200

Answer 24

D

The $26 discount has a 70% chance of being taken by a customer, so the stand-alone selling price associated with 1,000 Phones is $18,200 (computed as $26 × 70% × 1,000 phones).

Question 25

Which of the following is not one of the five steps for recognizing revenue?

a. Estimate variable consideration.
b. Determine the transaction price.
c. Recognize revenue when (or as) each performance obligation is satisfied.
d. Allocate the transaction price to each performance obligation.

Answer 25

A

Estimating variable consideration is part of determining the transaction price.

Question 26

Fung wrote a contract that involves two performance obligations. Product A has a stand-alone selling price of $50, and 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?
Note: Do not round intermediate calculation.

a. $40
b. $50
c. $30
d. $20

Answer 26

A

($50 ÷ ($100 + 50)) × $120 = $40.

Question 27

Niwot Co. sells products and service plans both separately and bundled together. Willy Loman, a Niwot Co. salesman, sold a Widgetron in year 5 for $1,000, its normal price, and told the customer he’d “throw in the 3-year service plan for free,” which the company normally sells for an additional $150. The product shipped, the customer paid, and $1,000 in revenue was recognized in year 5. Is this correct? Why or why not?

a. This is correct because the understanding between the seller and customer was that the product price was $1,000 and the service plan was free, which is in accordance with the principle of faithful representation.
b. This is incorrect because services must be rendered before any revenue can be recognized.
c. This is correct because the product shipped and the customer paid.
d. This is incorrect because the service revenue must be treated as a separate performance obligation, allocated a portion of the $1,000 sales price, and have revenue for it recognized over the three years of the service plan.

Answer 27

D

When two or more performance obligations are included in the same contract, the total revenue is allocated to them in proportion to their separate sales prices. As a result, the Widgetron will be allocated ($1,000/$1,150) × $1,000 in revenue and the service plan will be allocated ($150/$1,150) × $1,000 in revenue. Since the performance obligation related to the Widgetron was satisfied by the delivery of the item, that revenue would appropriately be recognized in the period of sale. The revenue allocated to the service plan, however, will be allocated over the 3-year contract term.

Question 28

On September 25, year 8 Colson Corp. sold 200,000 widgetrons to Cavanaugh Corp at $5 per unit. Half of the units were delivered on November 15, year 8, and the remaining 100,000 units were delivered on January 20, year 9. At the time of sale Cavanaugh paid 40% of the contract price and agreed to pay the rest in equal installments on the two delivery dates. What amount of revenue should Colson recognize from this sale in year 8?

a. $0
b. $500,000
c. $700,000
d. $1,000,000

Answer 28

B

Colson has satisfied its performance obligation with regard to the first 100,000 units that were delivered in year 8. A portion of the money has been received and the remainder is receivable. Unless Colson has no basis for determining if the remainder of the sales price is collectible,
Colson would recognize revenues on the 100,000 units delivered at $5 per unit for a total of $500,000.

Question 29

On April 1St, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $4,400 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 20% of the base fee if the project finished 2 weeks early and 15% if the project finished a week early. The probability of finishing 2 weeks early is 20% and the probability of finishing a week early is 65%.

What is the expected transaction price if Bob estimates variable consideration as the expected value?

a. $4,400
b. $4,180
c. $5,005
d. $5,862

Answer 29

C

[$4,400 plus (20% × $4,400 × 20%) + (15% × $4,400 × 65%) + (0% × $4,400 × 15%)],

or $4,400 + $176 + $429 + $0.

Question 30

Clement Corp., a pharmaceutical manufacturer, licensed a drug patent to Global Corp. for royalties of 5% of drug sales. Royalties are payable twice yearly on April 15 for sales from July through December of the previous year and on October 15 for January - June same-year sales. In year 8, Global paid royalties of $20,000 and $25,000 on April 15 and October 15, respectively. In response to Global’s estimate of July - December sales of the drug, Clement correctly recognized $43,000 in royalty revenue in its financial statements dated December 31, year 8. What was Global’s sales estimate for the second half of year 8?

a. $500,000
b. $400,000
c. $360,000
d. Cannot be determined from information given.

Answer 30

C

If Clement properly recognized royalty revenue of $43,000 in year 8, at a 5% royalty rate, total sales must have been $43,000/5% or $860,000. Royalties for the first half of the year, paid in October, were $25,000, indicating sales for that period of $25,000/5% or $500,000. As a result, sales for the second half of the year would have been for the difference of $860,000 - $500,000 or $360,000.

Question 31

Which of the following is not one of the steps for recognizing revenue?

a. Identify the performance obligations of the contract.
b. Identify the contract with the customer.
c. 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.
d. Allocate the transaction price to the performance obligations.

Answer 31

C

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.

Question 32

Which of the following is a separate performance obligation?

a. An option for the customer to purchase additional products under the same terms enjoyed by other new customers.
b. An extended warranty.
c. A prepayment.
d. A right of return.

Answer 32

B

An extended warranty is capable of being distinct and separately identifiable, given that it is sold separately.

Question 33

Mary signed up and paid $1,680 for a 6-month ceramics course on June 1st with Choplet Ceramics. As of August 1St, Choplet’s accounting records would indicate:

a. $1,680 of revenue, $1,680 of cash
b. $560 of revenue, $1,120 of accounts receivable
c. $560 of revenue, $1,120 of deferred revenue
d. $1,120 of revenue, $560 of accounts receivable

Answer 33

C

This arrangement qualifies for revenue recognition over time because the customer consumes the benefit of the seller’s service as the seller provides it. Therefore, Choplet would recognize revenue of $560 ($1,680 × 2/6 of the contract duration) and deferred revenue of $1,120 ($1,680 contract price paid in advance - $560 revenue recognized to date).