Chapter 8

Question 1

The fundamental principle of revenue recognition is:

Answer 1

Recognize revenue when control of good or service is transfered to the customer

Question 2

5 Steps of Revenue Recognition (MEMORIZE)

Answer 2

1. Identify contracts
2. Identify performance obligations
3. Determine the transaction price
4. Allocate transaction price
5. Recognize revenue

Question 3

Contract definition:

Answer 3

An agreement between two or more parties that creates enforceable rights and obligations

Question 4

Five Criteria to Identify Contracts (MEMORIZE)

Answer 4

1. All partys agree to the contract
2. Each partys rights are identifiable
3. Payment terms are identifiable
4. Contract has commercial substance
5. Collection of consideration is probable

Question 5

What should sellers do if not all of the Criteria are met:

Answer 5

Recognize revenue when cash is recieved and when one or more of these happen:
1. Seller has no remaining obligations and most of the consideration has been recieved
2. Contract has been terminated and/or consideration from customer is non-refundable
3. Seller has transferred control of goods and services

Question 6

When to combine multiple individual contracts into a single contract:

Answer 6

1. Contracts are negotiated as a package
2. Amount of consideration to be received related to one contract depends on performance of another contract
3. Goods or services in separate contracts are part of one performance obligation

Question 7

Two conditions for goods and services to be “Distinct”: (MEMORIZE)

Answer 7

1. Customer can benefit from good or service on its own
2. Promise of seller to deliver is separately identifiable from other promises in the contract

Question 8

Readily available resource definition:

Answer 8

when a resource is sold separately by anyone or if the customer has already obtained it from the seller

Question 9

How should free goods and services be treated:

Answer 9

They should be considered as possible performance obligations even though they are free

Question 10

Transaction price does not include what:

Answer 10

Taxes

Question 11

Variable Consideration definition:

Answer 11

When the payment received for providing a good or service is not a fixed amount

Question 12

Elements of variable consideration can be stated:

Answer 12

explicitly or implicitly in the contract

Question 13

Expected Value Approach to Variable Consideration:

Answer 13

Computing expected transaction amount by using probabilities (best suited when there are a large number of contracts)

Question 14

Most Likely Amount Approach to Variable Consideration:

Answer 14

The single most likely amount in a range of possible consideration amounts as the estimate (best used when there are only two possible outcomes)

Question 15

Transaction Price should be measured at what when noncash consideration is received?

Answer 15

Fair Value

Question 16

What should happen if fair value can’t be estimated when noncash consideration is received?

Answer 16

Transaction Price should be put as the stand-alone selling price of the goods and services

Question 17

3 Types of Selling Price Estimation Methods:

Answer 17

Adjusted Market Assessment
Expected Cost Plus a Margin
Residual Approach

Question 18

Which approach is most commonly used for selling price estimation:

Answer 18

Residual Approach

Question 19

Residual Approach definition:

Answer 19

Estimating one or more, but not all, of the standalone selling prices and then allocating the remainder of the transaction price to the goods or services that don’t have a standalone selling price estimate

Question 20

When does a customer gain control of an asset:

Answer 20

When it has the ability to direct the use of the asset and receives all of the remaining benefits of owning the asset

Question 21

3 Criteria for revenue recognition over time

Answer 21

1. The customer receives and consumes the benefits of the goods or services simultaneously (subscriptions)
2. Customer controls the asset as the seller creates it
3. Asset that is being created is custom or only useable by one specific customer

Question 22

5 Indicators of control:

Answer 22

1. Seller has right to payment for the asset
2. Seller has transferred possession
3. Customer has the legal title
4. Customer has the significant risk and reward of ownership
5. Customer has accepted the asset

Question 23

Is right-to-return a performance obligation?

Answer 23

No

Question 24

Consignment Sale Definition:

Answer 24

When a seller (consignor) delivers goods to a third party (consignee) who sells the goods for the seller

Question 25

Two accounting methods for revenue recognition for long term contracts:

Answer 25

Percentage of Completion
Completed Contract

Question 26

Difference between Long Term Contract Revenue Recognition Methods:

Answer 26

Percentage recognizes gross profit over the production period
vs
Completed recognizes gross profit at the end of the contract

Question 27

Cumulative Percentage Complete Formula:

Answer 27

Total Costs incurred by date/Estimated total cost of project