Chapter 3 Test Flashcards
Quality Assurance Warranty
- Part of performance obligation to deliver products of acceptable quality
- Not a separate Performance Obligation
Extended Warranty
- Separate Performance Obligation
- Option to purchase separately
- Provides a service beyond quality assurance
- Example – Car Warranty
Principal - Performance Obligation
- To provide goods and services - Vulnerable to risks associated wit holding inventory
Principal - Recording Revenue
- Total sales price paid by customer
- Also recognizes cost of goods sold
Agent - Performance Obligation
- To facilitate a transaction between a principal and a customer.
Agent - Recording Revenue
- Only the commission it receives on the transaction
Revenue Recognition – Bill-and-Hold Sale
- Revenue recognized when the delivery to the customer occurs, not when the customer purchase the goods.
Revenue Recognition – Licenses
- Point in Time if the buyer isn’t dependant on seller for use and updates (Music Download)
- Over the License Period if the buyer is dependent on the seller for use and updates (virus protection software, brand names)
Revenue Recognition - Franchises
Both Point in Time and Over Time recognition - Point in Time for initial set up costs, over time for franchise license and sales
Consignment Arrangements
- Consignor transfers goods to consignee, but retains legal title. Once the item is sold, the consignee gets a cut.
Revenue Recognition - Consignment Arrangements
- Recognize Revenue once the item is sold to a third party.
Revenue Recognition - Gift Cards
- When a Gift Card is redeemed or the likelihood of redemption is viewed as remote
Variable Consideration
- Portion of a transaction price depends on the outcome of future events (Construction - Incentive payments ; Entertainment - Royalties ; Manufacturing - Volume Discounts/Product Returns)
Variable Consideration - Expected Value
- Use probabilities to determine the Expected Value.
- 75% chance you get paid 100,000 - 75K Value
- 25% chance you get paid 80,000 - 20K Value
- Expected Value is the Sum, 95K
Variable consideration - Most Likely Amount
- Choose which option you think is most likely to occur and record that.
- Make adjusting entries if it doesn’t happen
Compensating Balance
- An amount that compensates the bank for granting the loan
- Balance kept in account at the bank
- Borrower in effect is paying a higher interest rate
Effective Interest Rate
(Borrowed amount * Stated Interest Rate) / (Borrowed amount - Compensating Balance
- Borrowed amount - $10,000,000
- Compensating Balance - $2,000,000
- Stated Interest Rate - 12%
10,000,000 - 2,000,000 = 8,000,000
10,000,000 * .12 = 1,200,000
1,200,000 / 8,000000 = 15%
Trade Discount
- Percentage Reduction from the list price
- Quantity Discounts to Large Customers
Sales Discounts
- Reductions in the amount to be paid by a credit customer if paid within a specified period of time
- Intended to provide incentive for quick payment
Purchase Discounts - Gross Method
- Assumes Purchaser will not take advantage of discounts
- If paid early, Credit Accounts receivable full price and Debit Cash amount paid, then Debit Sales Discount for the difference
- If paid on time, Debit Cash for full price and Credit AR for full price
Purchase Discounts - Net Method
- Assumes Purchaser will take advantage of discounts
- If paid early, Debit Cash for discount price and Credit AR for discount price Credit Accounts receivable full price and Debit Cash amount paid, then Debit Sales Discount for the difference
- If paid on time, Debit Cash for full price and Credit AR for discount rate, then Credit Sales discounts forfeited for the difference
Setting up Allowance for Doubtful Accounts
AR Balance - Expected Collections = Bad Debt Expense
Debit Bad Debt expense, Credit Allowance for Doubtful Accounts
AR Balance - 240,000
Expected Collections - 200,000
240,000 - 200,000 = 40,000
Bad Debt Expense 40,000
Allowance for DA 40,000
Factor
- Financial Institution that purchased a receivable
Sale of Receivable without Recourse
- Sale of Receivable to Factor without penalty for Factor not recovering Receivable
sale of receivable with recourse
- Sale of Receivable to Factor with a set liability if Factor cannot recover receivable. Liability waived if Factor recovers
Bank Reconciliation - Step 1
- Adjust the Bank Balance
- Add deposits outstanding
- Deduct Checks outstanding
- Bank Errors (Either increases or Decreases depending on the error)
Bank Reconciliation - Step 2
- Adjustments to the Book Balance
- Add collections made by the bank
- Deduct service and other charges
- Deduct NSF checks
- Company errors (Either Increases or Decreases depending on the error)
FOB Shipping Point
- Title transfers at shipping point, when the goods leave the seller
FOB Destination
- Title transfers at destination, when the buy receives the goods
Inventory Cost Methods - Average Cost
- Sum of total costs for inventory, divided by the number of units gets the average cost per unit.
