Chapters 6 & 7 Flashcards
What are the five steps to revenue recognition?
Identify the contract
Identify performance obligations
Determine the transaction price
Allocate the transaction price
Recognize revenue when (or as) each obligation is satisfied
What qualifies as a performance obligation?
It must be distinct, meaning:
Capable of being distinct (can use alone or with other readily available resources).
Separately identifiable from other goods/services in the contract
How do you recognize revenue at a single point in time?
When control transfers, indicated by:
Customer obligation to pay
Customer has legal title
Physical possession transferred
Customer assumes risks/rewards of ownership
Customer has accepted the asset
When do you recognize revenue over time?
If any of these apply:
Customer consumes benefits as seller performs (e.g., cleaning).
Customer controls asset as it’s created (e.g., building construction).
Seller creates asset with no alternative use & has right to payment for progress (e.g., custom jets)
How do you account for multiple performance obligations?
Identify each distinct obligation.
Allocate transaction price based on relative stand-alone selling prices.
Recognize revenue separately for each obligation as it’s satisfied
Difference between quality-assurance and extended warranties?
Quality-assurance: Part of the product, not a separate obligation; accounted for with product sales.
Extended warranty: Separate service, distinct obligation, accounted for separately as deferred revenue initially
What are options providing a ‘material right’ and how are they accounted for?
Special discounts or future purchases customers only get through the current transaction (coupons, points).
Accounted for as separate performance obligations, with value allocated using incremental benefit (stand-alone value of the coupon)
How to determine the transaction price when there is variable consideration?
Two methods:
Most Likely Amount: Use single most likely outcome.
Expected Value: Probability-weighted average of possible outcomes
Difference between an agent and principal for revenue recognition?
Principal: Controls goods/services, recognizes gross revenue.
Agent: Facilitates sales (no control of goods/services), recognizes net revenue (commission)
Revenue recognition for consignment arrangements?
Recognized by consignor only when consignee sells goods to third parties, not at initial shipment
How are gift cards accounted for?
Recorded as deferred revenue initially; revenue recognized upon redemption or when redemption becomes unlikely
What’s the distinction between cash and cash equivalents?
Cash: Currency, coins, checking account balances.
Cash equivalents: Short-term, highly liquid investments (3 months or less to maturity)
Purpose and importance of internal controls?
Ensure policy adherence, operational efficiency, minimize errors/theft, reliability of financial reporting, compliance with laws/regulations
What is ‘separation of duties’?
Dividing responsibilities (e.g., opening mail, depositing cash, recording receipts) among employees to prevent fraud and errors
What is restricted cash, and how is it reported?
Cash set aside for a specific use (e.g., debt covenant); reported separately on balance sheet (current/noncurrent) based on timing/use
Purpose of a bank reconciliation?
Ensures company and bank records match by reconciling differences due to timing or errors, safeguarding cash control
What are trade discounts and how are they accounted for?
Percentage reductions off list price, recorded directly at discounted amount without a separate journal entry
How to account for sales discounts using gross vs. net methods?
Gross method: Initially record sales at full amount; recognize discounts taken as reduction later.
Net method: Initially record at discounted amount; additional payments recognized as interest revenue
How are sales returns and allowances accounted for?
Sales returns recorded at time of sale using an estimate.
Sales allowances recorded when reduction in price is given without returning merchandise
How to estimate and record bad debts using an aging schedule?
Aging schedule estimates allowance for doubtful accounts based on outstanding accounts’ age; adjusting entries made accordingly to reflect realistic receivable collections
When is a coupon considered a separate performance obligation?
When it provides a material right not available outside the contract (e.g., unique discount).
Allocate part of the transaction price to the coupon based on standalone value and expected redemption.
What is the journal entry when a customer pays for a subscription with a coupon included?
Debit: Cash
Credit: Deferred Revenue – Subscription
Credit: Deferred Revenue – Coupon
Amounts based on relative standalone prices and allocation method.
How is revenue recorded when a performance-based bonus is involved (expected value)?
Debit: Accounts Receivable (base fee)
Debit: Bonus Receivable (expected bonus)
Credit: Service Revenue (total expected revenue)
Used when payment depends on future performance or evaluation.
What’s the difference between Most Likely Amount and Expected Value methods?
Most Likely Amount: Use when only 2 possible outcomes (e.g., full bonus or no bonus).
Expected Value: Use when multiple outcomes with varying probabilities.
