F1 M3-M4 Revenue Recognition Flashcards
The franchisor should report revenue from initial franchise fees when ____.
All performance obligations of the sale have been satisfied.
Jersey, Inc. is a retailer of home appliances and offers a service contract on each appliance sold. Jersey sells appliances on installment contracts, but all service contracts must be paid in full at the time of sale. Collections received for service contracts should be recorded as an increase in a:
A. Sales contracts receivable valuation account
B. Service revenue account
C. Stockholders’ valuation account
D. Unearned service revenue account
D.
What is the acronym for revenue recognition? Go over each letter of the acronym.
ISTAR Identify Separate performance obligations Transaction price Allocate Recognize revenue
What is the rule of conservatism?
Revenue when job is done (earned)
When service contracts are sold _____ increases.
Deferred revenue, services haven’t been performed yet
On Dec 31, Year 1, Rice, Inc. authorized Graf to operated as a franchisee for an initial franchise fee of $150,000. Of this amount $60,000 was received upon signing this agreement and the balance, represented by a note, is due in three annual payments of $30,000 each beginning Dec 31 Year 2. The present value of Dc 31, Year 1, of the three annual payments appropriately discounted is $72,000. According to the agreement, the nonrefundable down payment represents a fair measure of services already performed by Rice; however, substantial future services are required of Rice. Collectibility of the note is reasonable certain. In Rice’s Dec 31, Year 1, balance sheet, unearned franchise fees from Graf’s franchise should be reported as:
$72,000
On Aug 1, Metro Inc. leased a luxury apartment unit to Klum. The parties signed a 1-year lease beginning September 1, for $1,000 monthly rent payable on the first day of the month. At the August 1 signing date, Metro collected $540 as a nonrefundable fee for allowing Klum to sign a 1-year lease (the normal lease term is three years) and $1,000 rent for September. Klum has made timely payments each month, but prepaid January’s rent on December 20. In Metro’s income statement for the year ended December 31, rent revenue should be reported as $___.
Sign-up fee [($540/12) x 4 months] = $180
Plus Monthly Rent ($1,000 x 4 months) = $4,000
= $4,180
Differentiate between the outputs and inputs methods of revenue recognition.
The outputs method recognizes revenue based on the value to the customer of the goods and services transferred to date relative to the remaining goods or services promised.
The inputs method recognizes revenue based on the entity’s efforts or inputs to the satisfaction of the performance obligation relative to the total expected inputs.
When the total consideration for a contract with multiple embedded obligations reflects a discount, the most appropriate way to assign that discount is to ____.
Allocate it proportionally to all obligations within the contract.
In a multiple-service related performance obligation, if the services are all very familiar in nature and can be provided to the byer in a similar manner ___.
This would indicate that the services can be combined into a single performance obligation.
For “percentage-of-completion” and “completed-contract”, an estimated loss is recorded when?
When the loss is found, immediately in their entirety
Under the completed contract method, revenue is recognized when?
When the contract is complete
The following data pertains to Pell Co.’s construction jobs, which commenced during Year 2:
Project 1 Project 2
Contract Price $420,000 $300,000
Costs incurred during Y2 $240,000 $280,000
Estimated costs to complete $120,000 $40,000
Billed to customers in Y2 $150,000 $270,000
Received from customers Y2 $90,000 $250,000
If Pell used the percentage-of-completion method, what amount of gross profit (loss) would Pell report in its Y2 income statement?
For project 1, $240,000 of the total costs of $360,000 has been incurred, or 2/3 of the total costs.
Project 1
$420 less estimated costs of $360 is an estimated profit of $60. Current profit is 2/3 times $60 = $40,000
Project 2
Estimates a $20,000 loss which is recognized immediately.
$20,000 is the answer
A company used the percentage-of-completion method of accounting for a 5 year construction contract. Which of the following items will the company use to calculate the income recognized in the third year? Progress billings to date Income previously recognized Both Neither
Income previously recognized
Y2 calculation
In the calculation you would take:
Contract sales price less total estimate cost of contract times the % of completion to equal the gross profit earned to date less the INCOME PREVIOUSLY RECOGNIZED to get the income recognized in this year alone.
A company uses the completed-contract method to account for a long-term construction contract under US GAAP. Revenue is recognized when recorded progress billings: Are collected Exceed recorded costs Both Neither
Neither, revenue is recognized when the project is completed
Which of the following is used in calculating the income recognized in the fourth and final year of a contract accounted for by the percentage-of-completion method? Actual total costs Income previously recognized Both Neither
Both
The calculation of the income recognized in the third year of a 5 year construction contract accounted for using the percentage-of-completion method includes the ratio of:
A. Costs incurred in Y3 to total billings
B. Costs incurred in year 3 to total estimated costs.
C. Total costs incurred to date to total estimated costs
D. Total costs incurred to date to total billings
C
Falton Co. had the following first-year amounts related to its $9,000,000 construction contract:
Actual costs incurred and paid $2,000,000
Estimated costs to complete $6,000,000
Progress billings $1,800,000
Cash collected $1,500,000
What amount should Falton recognize as a current liability at year end, using the percentage-of-completion method?
A. $250,000
B. $200,000
C. $0
D. $300,000
A liability exists when progress billings exceed costs and estimated earnings.
$1.8 mill progress billings < estimated earnings
Gross profit earned to date = $250,000
A current asset would be created of $250,000 + accumulated costs of $2,000,000 less $1,800,000 progress billings = $450,000
So C is the answer.
Sonex Construction Co. incurred the following costs and made the following estimates in the first two years of a three-year construction project.
Y1 Y2
Actual current year costs incurred $1.2 mil $1 mil
Estimated costs to complete $1.8 mil $550k
Contract price $5 mil $5 mil
Billings and collections $2.5 mil $1.5 mil
Using the percentage-of-completion method of accounting, how much gross profit would Sonex recognize in Year 2? A. $1,000,000 B. $650,000 C. $800,000 D. $562,500
Calculate the current year profit for Year 1 = $800,000
Calculate the cumulative gross profit recognized in Year 2 to be $1,800,000. Remember that you’ll need to take the actual current year costs in Y1 to use in calculating the percentage ($1.2+$1+$550k = $2,750,000 take $2.2/$2.75 = 80%)
Subtract Year 1’s current year profit to get $1,000,000
Under the percentage-of-completion method, construction costs and estimated gross profit earned are accumulated in the _____ account.
Construction in progress account (an inventory account)
Under the percentage-of-completion method, billings on construction are accumulated in the _____ account.
Progress billings account (a contra-inventory account).
Where are the construction in progress and progress billings accounts on the balance sheet?
They are netted together. They’re either a current asset or current liability.
Sonex Construction Co. incurred the following costs and made the following estimates in the first two years of a three-year construction project.
Y1 Y2
Actual current year costs incurred $1.2 mil $1 mil
Estimated costs to complete $1.8 mil $550k
Contract price $5 mil $5 mil
Billings and collections $2.5 mil $1.5 mil
Using the percentage of completion method of accounting, what amount would Sonex show as either a net current asset or a net current liability as of the end of Year 2 due to its construction activity?
A. $0
B. $4,000,000 asset
C. $1,800,000 asset
D. $1,500,000 liability
A is the answer
Cumulative costs incurred Y1 $1,200,000
Add cumulative gross profit recognized $800,000
Less cumulative billings ($2,500,000)
Equals $500,000 for year 1
For Year 2 Cumulative costs incurred Y2 $2,200,000 Add cumulative gross profit recognized $1,800,000 Less cumulative billings ($4,000,000) Equals $0
A company used the percentage-of-completion method of accounting for a four-year construction contract. Which of the following items would be used to calculate the income recognized in the second year? Income previously recognized Progress billings to date Both Neither
Income previously recognized
