Chapter 18- Revenue Recognition

Question 1

What approach is the new standard for revenue from contracts with customers?

Answer 1

An Asset -liability approach

Question 2

What does the asset-liability approach measure?

Answer 2

Recognizes and measures revenues based on changes in assets and liabilities

Companies account for revenue based on the asset and liability arising from contracts with customers

Question 3

What is the 5 step process?

Answer 3

1. Identify the contract with customers
2. Identify the separate performance obligations in the contract.
3. Determine the transaction price
4. Allocate the transaction price to the separate performance obligations
5. Recognize revenue when each performance obligation is satisfied

Question 4

What is the revenue recognition principle?

Answer 4

Recognize revenue in the accounting period when the performance obligation is satisfied

Question 5

Step 1? (Boeing example)

Answer 5

A contract is an agreement between two parties that create enforceable rights or obligations. In this case, Boeing has signed a contract to deliver airplanes to Delta.

Question 6

Step 2) Identify the separate performance obligations in the contract? (Boeing example)

Answer 6

Boeing has only one performance obligation -to deliver airplanes to Delta. If Boeing also agreed to maintain the planes, a separate performance obligation is recorded for this promise.

Question 7

Step 3) Determine the transaction price? (Boeing example)

Answer 7

Transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring a good or service. In this case, the transaction price is straightforward- it is $100 million

Question 8

Step 4) Allocate the transaction price to the separate performance obligations. (Boeing example)

Answer 8

In this case, Boeing has only one performance obligation-to deliver airplanes to Delta

Question 9

Step 5) Recognize Revenue when each performance obligation is satisfied. (Boeing example)

Answer 9

Boeing recognizes revenue of $100 million for the sale of the airplanes to Delta when it satisfies its performance obligation- the delivery of the airplanes to Delta

Question 10

If an allocation is needed the price is allocated to…

Answer 10

The various performance obligations based on their relative stand-alone selling price .Companies should use their best estimate of what the good or service might sell for as a stand-alone unit if that information is not available.

Question 11

Allocating table properties

Answer 11

Product, stand-alone selling price, percentage ( stand-alone selling price / total stand alone selling price), Allocated Amount (transaction price x percentage)

E.g) motor Moka $12 80% ($12/ $15) $10.40 ($13 x 80%)

Large cup of coffee $3. 20% ($3/ $15) $2.60 ($13 x 20%)

Total: $15. 100% $13

Recognize revenue of $13, compromised from revenue from Moka beans at $10.40 and sale of large cup of coffeee at $2.60.

Question 12

Indications that someone has obtained control? Step 5)

Answer 12

1. Has right to payment for the product
2. Has transferred legal title to the product
3. Has transferred physical possession of product
4. Has accepted significant risks and reward of ownership
5. Has accepted asset

Question 13

Percentage of completion method how would company recognize construction revenue?

Answer 13

Step 1) cost incurred in prior years + cost incurred to date + estimated cost to complete = estimated/actual cost to complete

Step 2) (cost incurred to date + estimated cost to complete + cost incurred in prior years) / estimated/actual cost to complete

Step 3) multiple number from step 2 by estimated/actual contract revenue and subtract year prior to next years!!

Question 14

Solve for contract profit (loss) percentage of completion method

Answer 14

Step 1) (Estimated/actual contract revenue) - (estimated/actual total cost) = Estimated/actual contract profit

Step 2) Multiply step 1 number by %complete at end of year (decimals) and subtract contract profit booked in prior years!