Chapter 2-Revenue Recognition and matching principles

Question 1

Revenue Recognition Principles

Answer 1

Signed Contract
Risk and Rewards Transfer
No price contingencies
the product is delivered
Services are used and rendered

Question 2

Revenue from sales

Answer 2

Is recognized by Date of sale, delivery of goods or transfer of title. Use of assets as the time passes)Rent Royalty)

Question 3

Revenue Recognition IFRS

Answer 3

Sale of Goods
Revenue and cost incurred can be measured reliably.
IT is propable the economic transaction will flow to the entity
The entity has transformed the buyers risk and rewards of ownership
Not retain managerial ownership to the extent goods or product sold

Question 4

Construction contracts

Answer 4

transaction can be measured reliably
economic benefits to the transaction flow to the entity
Both the contract to complete the cost and the stage of completion at the end of completed period an be measured reliably.

Question 5

Multiple elements arrangements

Answer 5

USGAAP- Doing lots of stuff for customer like building a hardware installing a phone system, giving training to their people, and breaking these jobs into small pieces and thereby recognizing revenue when it is due.

Question 6

Special Accounting treatments

Answer 6

Deffered Credit/Deffered

liability

Question 7

Expired cost

Answer 7

Are expense of income statement EX
Insurance Cost
Cost of Goods Sold
Period Costs

Question 8

Unexpired Costs -

Answer 8

Stay on Balance sheet-Ex. Fixed Asset and Inventory

Question 9

Unearned Royalties

Answer 9

paid in advance-Balance Sheet only
J.E
Cash
Unearned Royalty

Unearned Royalty
Earned Royalty

Question 10

Classification of Intangible assets-Indefinability
Manner of Acquisition-Purchased Intangible assets
Internally developed tangible assets

Answer 10

Patents, copyrights ,franchise, trademarks, and goodwill are common intangible assets
purchased intangible asset are recorded at cost.
Internally developed intangible assets should be expensed again income becos us Gaap prohibits the capitalization of research and development costs.
Under IFRS intangible assets can be reported through cost or revaluation model

Question 11

Under IFRS how is research costs treated

Answer 11

Internally developed intangible asset must be expensed
but asset arising from development is recognized if the entity can demonstrate the following:
Technological feasibility has been obtained
The entity intend to complete the intangible asset
The entity has the ability to use the intangible asset
The intangible asset will generate future economic benefits

Question 12

Goodwill

Answer 12

Always Impairment Approach- No amortization

Question 13

Revaluation Losses and gains treatment

Answer 13

Revaluation Losses- Income Statement

Revaluation Gains- OCI

Question 14

Amortization of software cost

Answer 14

it is similar to percentage of completion formula is
Total capitalized amount*Current gross revenue for the period
——————————————————————————
Total cost projected for the rpoject

Question 15

Impairment-Intangibles with a finite life

Answer 15

Use undiscounted future net cash flows

Amount of impairment (FV)-If not discounted cash flow

Question 16

The things to which fair value option does not apply

Answer 16

pension plan, post retirement and post employment benefits, leases,financial instruments which are componenets of equity
Share based payments and stock options

Question 17

Cause and effect-product cost

SG and A

Answer 17

expense it when you sell the product

Question 18

period cost

Answer 18

immediate recog

Question 19

Revenue is recognized when

Answer 19

A binding agreement exists
services rendered or delivery has occurred
fixed or determinable price exists
collection is reasonably assured

Question 20

Cash to accrual conversion

Answer 20

The first thing to do is whether is the question is asking about revenue or expense:
If the question is asking about expense, we must determine accruals for the expense account not the cash account:
Whatever JE you determine for the account in question, the opposite entry is to an expense account (again, only if the question is asking about operating expenses)

Started year w/ $10,000 in prepaid expenses, & ended w/ $15,000 therefore it increased by $5,000. Prepaid expenses (asset) increase with a debit, therefore the JE for expense is a credit

DR Prepaid Expense 5,000

CR Expense 5,000

[If you want reasoning for above if prepaid asset increased, it means that cash basis expenses decreased by $5,000. We are taking the $5,000 we paid in cash (originally marked as expense), and instead accruing it using a prepaid expense account, to be expensed as it is used later]

Started the year w/ $5,000 accrued liabilities, and ended with $25,000  therefore it increased by $20,000. Accrued liabilities increase with a credit, therefore, the JE for expense is a debit

DR Expense 20,000

CR Accrued Liability 20,000

To find accrual expenses, use the expense JE’s to figure out answer:

Expense

150,000

5,000

20,000

165,000

The answer is $165,000

Q2)A company records items on the cash basis throughout the year and converts to an accrual basis for year-end reporting. Its cash-basis net income for the year is $70,000. The company has gathered the following comparative Balance Sheet information:

Beginning of year End of year

Accounts payable $ 3,000 $ 1,000

Unearned revenue 300 500

Wages payable 300 400

Prepaid rent 1,200 1,500

Accounts receivable 1,400 600

What amount should the company report as its accrual-based net income for the current year?

A. $68,800 B. $70,200 C. $71,200 D. $73,200

The question is asking about revenue, so must determine the accruals for the revenue account (not the cash account).

NOTE: Whatever JE you determine for the account in question, the opposite entry is to an revenue account (again, only if the question is asking about income/revenue)

A/P: Beginning $3,000 & ended with $1,000  A/P decreased by $2,000. Liabilities decrease with a debit, therefore the JE for revenue is a credit

U/R: Beginning $300 & ending $500  U/R increased by $200. Liabilities increase with a credit, therefore the JE for revenue is a debit

W/P: Beginning $300 & ending $400  W/P increased by $100. Liabilities increase with a credit, therefore the JE for revenue is a debit

P/R: Beginning $1,200 & ending $1,500  P/R increased by $300. Assets increase with a debit, therefore the JE for revenue is a credit

A/R: Beginning $1,400 & ending $600  A/R decreased by $800. Assets decrease with a credit, therefore the JE for revenue is a debit

To find accrual income, use the income JE’s to figure out answer:

Revenue

70,000

2,000

200

100

300

800

71,200

Therefore, the answer is $71,200

Question 21

If converting cash to accrual basis

Answer 21

Prepaid expenses deduct from Operating expenses Increase in accrued liabilities add

Question 22

Savor Co. had $100,000 in cash-basis pretax income for 20X2. At December 31, 20X2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 20X1, balances. Compared to the accrual basis method of accounting, Savor’s cash pretax income is:

Answer 22

D.
cash-basis income is $100,000. The journal entries for an increase and a decrease in accounts payable respectively are:
DR: Accounts receivable 10,000
CR: Sales 10,000
DR: Accounts payable 6,000
CR: Cash 6,000
The increase in accounts receivable should be added to the cash income as it was not considered and is recognized as earned for accrual income. The decrease in accounts payable was subtracted for cash-basis income. This is not a reduction in accrual income, and as a result, should be added back to the cash income. The computation is: 100,000+10,000+6,000 = 116,000, or a $16,000 increase from cash to accrual. In other words, the cash-basis income is $16,000 LOWER than accrual income.