Chapter 18-Revenue Recognition

Question 1

Account sales

Answer 1

A document a consignor periodically receives from the
consignee that shows the merchandise received, merchandise sold, expenses chargeable to the consignment, and the cash remitted.

Question 2

Completion of production basis

Answer 2

The recognition of revenue at the completion of production even though no sale has been made (examples include precious metals or agricultural products with assured prices).

Question 3

Completed-contract method

Answer 3

The accounting for long-term construction contracts where revenues and gross profit are recognized only when the contract is completed.

Question 4

Consignment

Answer 4

A contractual arrangement whereby a consignor ships
merchandise to a consignee, who is to act as an agent for the consignor in selling the merchandise. The consignor retains title to the goods until the goods are sold.

Question 5

Consignor

Answer 5

The party (generally a manufacturer) that sends goods to a consignee under consignment.

Question 6

Consignee

Answer 6

The party (generally a dealer) that receives goods from a consignor under consignment.

Question 7

Continuing franchise fees

Answer 7

The payments made by a franchisee to a franchisor for the continuing rights granted by the franchise agreement and for providing such services as management training, advertising and promotion, legal assistance, and other support.

Question 8

Cost recovery method

Answer 8

Income is not recognized until cash payments by the buyer exceed the seller’s cost of the merchandise sold.

Question 9

Cost-to-cost basis

Answer 9

The method used under the percentage-of-completion method whereby the percentage of completion is measured by comparing costs incurred to date with the most recent estimate of the total costs to complete the contract.

Question 10

Deposit method

Answer 10

The seller reports cash received in advance as a deposit on the contract and classifies it as a liability (refundable deposit or customer advance).

Question 11

Earned

Answer 11

Revenues are earned when the entity has substantially
accomplished what it must do to be entitled to the benefits represented by the revenues, that is, when the earnings process is complete or virtually complete.

Question 12

Franchise

Answer 12

A contractual arrangement whereby a franchisor grants business rights and provides services to a franchisee who in return agrees to pay an initial franchise fee to operate a business and pay continuing fees based on the operations of the business.

Question 13

Franchisee

Answer 13

The party who operates the franchised business.

Question 14

Franchisor

Answer 14

The party who grants business rights under the franchise.

Question 15

Initial franchise fee

Answer 15

Consideration for establishing the franchise relationship and providing some initial services.

Question 16

Installment sales method

Answer 16

Income is recognized when it is collected rather than in the period of sale.

Question 17

Percentage-of-completion method

Answer 17

The accounting for long-term construction contracts where revenues and gross profit are recognized each period based upon the progress of the construction, that is, the percentage of completion.

Question 18

Realizable

Answer 18

Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash.

Question 19

Realized

Answer 19

Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables).

Question 20

Revenue recognition principle

Answer 20

The principle that provides that revenue is recognized when (1) it is realized or realizable and (2) it is earned.

Question 21

Substantial performance

Answer 21

When the franchisor has no remaining obligation to refund any cash received or excuse any nonpayment of a note and has performed all the initial services required under the contract.