F1 M4

Question 1

Define incremental cost, and when they are not expensed?

Answer 1

Incremental costs: Costs of obtaining a K that would not have been incurred if the K had
not been obtained (they are recognized as an asset if the entity expects to recover them.
Costs that are incurred regardless of if the K was established or not are expensed)

Question 2

How is the cost to fulfill a K treated?

Answer 2

Costs to fulfill a K are typically treated as an asset

Question 3

Examples of ex of incremental cost

Answer 3

Ex of incremental costs: Commissions paid, legal fees, Selling, G&A, wasted labor and
material costs, and costs tied to satisfied performance obligations

Question 4

What needs to be determined if an entity provided goods or services to a customer

Answer 4

If an entity provides goods or services to a customer, it needs to be determined if they
are the principal or agent

Question 5

Define principle

Answer 5

Principal: Entity controls good or service before it is transferred to customer (ex: RIU
Palace and Delta Airlines; revenue recognized is equal to gross consideration they
expect to receive)

Question 6

Define Agent

Answer 6

Agent: Another party provides a good or service to customer (Ex: Expedia; revenue
recognized is equal to fee or commission provided)

Question 7

What is JE ex?

Answer 7

JE ex: Debit cash $10,000, Credit due to other company (9,000) and revenue (1,000)

Question 8

What are the three examples of when an entity is a principal?

Answer 8

An entity is a principal when (1) they are responsible for fulfilling K, (2) entity has
inventory risk, and (3) entity has discretion in establishing prices for their goods or
services

Question 9

What is repurchase agreement?

Answer 9

Repurchase agreement: Entity sells an asset and either promises to or has the option to
repurchase the asset

Question 10

What is forward option?

Answer 10

Forward option: an entity is obligated to buy back the asset (think of derivatives)

Question 11

What is Call option?

Answer 11

Call option: entity has the right to repurchase the asset (ex: bonds)

Question 12

What is Put option?

Answer 12

Put option: entity is required to repurchase asset at the customer’s request (think of
derivatives)

Question 13

Forward and put options can also be what?

Answer 13

Forward and put options can also be leases

Question 14

What is a Bill-and Hold Arrangement?

Answer 14

Bill-and Hold Arrangement: K’s in which the entity bills a customer for a product that is
net yet delivered to the customer

Question 15

Three examples of when revenue can be recorded in bill and hold arrangement?

Answer 15

Revenue can be recorded in this arrangement IF (1) there is a substantive reason (ex:
customer doesn't have space in their warehouse to hold the product), (2) product is
separately identified and belonging to customer, (3) product is ready for transfer, and (4)
entity can not use the product

Answer 16

Also, rev can be recognized ON THE DATE the inv is ready to be shipped (ex: a comp is
ready to ship goods to customers on Jan 1. The comp doesn’t receive $ from customers
until Feb 1. The comp can recognize rev on Jan 1)

Question 17

What is consignment?

Answer 17

Consignment: Dealer or distributor (third party - ex: a car dealer) has not obtained
control of the product from the principal

Question 18

When is Revenue recognized?

Answer 18

Revenue is only recognized when the dealer or distributor sells the product to a
customer or when the dealer or distributor obtains control of the product

Question 19

What are three indicators of consignment?

Answer 19

Three indicators of consignment: (1) entity controls the product until a specific event
occurs, (2) distributor does not have an obligation to pay the entity, and (3) the entity can
require the return of the product or transfer the product to another party

Question 20

Warranties are what?

Answer 20

Warranties can either be apart of the good being purchased or can be separate
performance obligations (ex: extended warranty - this is purchased separately from the
product itself)

Question 21

When is a warranty a separate PO?

Answer 21

If the law requires a warranty, it isn’t a separate PO

Question 22

If I need to find out how much is actually allocated to the warranty vs. the good being
bought, then I should use what equation?

Answer 22

If I need to find out how much is actually allocated to the warranty vs. the good being
bought, then I should use the equation from part 1 [(amt of good/total price of PO with all
original prices) x amt of K on the given discount]. This will tell me the TP of the product,
and the remainder will equal the amt allocated to the warranty

Question 23

The higher the coverage period, the higher likelihood that it is a what?

Answer 23

The longer the coverage period, the higher the likelihood that it is a PO

Question 24

If it is likely that a comp will not collect a certain % of rev, I must what?

Answer 24

If it is likely that a comp will not collect a certain % of rev, I must recognize a refund
liability in order to not overstate rev (ex: I sell a product that is returned 50% of the time. I
will multiply the rev received by 50% and this will be a credit called refund liability. When
products are returned, I will debit refund liability and credit cash for the amt originally
received)

Question 25

Two methods for recognizing long-term rev:

Answer 25

Two methods for recognizing long-term rev: % of completion and completed contract
method

Question 26

How is rev recognized over time?

Answer 26

Percentage of completion method would recognize rev earned over time

Question 27

Percentage of completion method is appropriate to use in what two instances?

Answer 27

This method is appropriate to use if the entity can (1) reasonably estimate profitability
and (2) provide a reliable measure of progress toward completion

Question 28

Under this method what is accumulated in the CIP?

Answer 28

Under this method, construction costs and estimated gross profits earned are
accumulated in the CIP (construction in process account - an inv account)

Question 29

Billings on construction are accumulated in what?

Answer 29

Billings on construction are accumulated in the progress billings account (contra-inv
account)

Question 30

There are four calculations needed to be complete in this problem, what are they?

Answer 30

There are four calculations needed to be complete in this problem

Calculation 1: Total contract sales price - total estimated cost of K = Gross profit

Calculation 2: Total cost incurred to date/total estimated cost of K = % of completion (this
% will always be 100% IF there is a loss)

Calculation 3: Total K GP x % of completion = total GP earned to date

Calculation 4: Previously recognized GP on one line and CY GP (calculated by
subtracting GP earned to date in step 3 - previously recognized GP shown in step 4)
shows CY gross profit

Question 31

When can step 4 be negative?

Answer 31

If there’s ever a loss (total cost of K is more than the sales price of K), then the CY GP
calculated in step 4 will most definitely be negative

Question 32

f there’s a loss, pretend like everything is like normal, I will just have a loss in CY GP in
step 4 and the % of completion in step 2 will always be what?

Answer 32

If there’s a loss, pretend like everything is like normal, I will just have a loss in CY GP in
step 4 and the % of completion in step 2 will always be 100%

Question 33

in order to decrease the amount of losses in the years that had a loss what needs to happen?

Answer 33

For the final step, the losses will need to be subtracted from the gains in previous years
in order to decrease the amount of losses in the years that had a loss

Question 34

Completed contract method:

Answer 34

Completed contract method: Only US GAAP recognizes it, use this if the K is difficult to
estimate, it has many contracts, and it is for a short duration (ONLY recognize rev at the
last year)

Question 35

When is Completed contract method used

Answer 35

This method is used when a long-term K doesn’t meet the criteria for recognizing rev
over time

Question 36

At completion of K, GP or loss is recognized as:

Answer 36

At completion of K, GP or loss is recognized as: GP or loss = K price - total costs

Question 37

For both methods, loss is recognized immediately in…

Answer 37

For both methods, loss is recognized immediately in operating income on the IS

Question 38

If I need to calculate GP and I am given a # for actual costs incurred AND estimated costs to complete I…

Answer 38

If I need to calculate GP and I am given a # for actual costs incurred AND estimated
costs to complete, add those two #’s to get the TOTAL ESTIMATED COSTS TO
COMPLETE

Question 39

If I am given a problem where estimated cost of construction is given and there are #’s
for estimated cost to complete at “12/31 Year 2” and “cost incurred 1/10 in Year 1
through 12/31 Year 2,” then I should…

Answer 39

If I am given a problem where estimated cost of construction is given and there are #’s
for estimated cost to complete at “12/31 Year 2” and “cost incurred 1/10 in Year 1
through 12/31 Year 2,” then I should add the two costs in quotations because that is the
true estimated cost to complete the K

Question 40

If there are two long-term Ks, then I must…

Answer 40

If there are two long-term Ks, then I must find the CY GP for EACH of them (do not
combine #’s from both Ks)

Question 41

Completed Contract method will recognize loss immediately and % of completion
method will recognize net the GP and loss from the Ks (if I have a gain in one K, I must…

Answer 41

Completed Contract method will recognize loss immediately and % of completion
method will recognize net the GP and loss from the Ks (if I have a gain in one K, I must
subtract the loss from the other K to get the CY GP)

Question 42

Recognize a net asset if…

Answer 42

Recognize a net asset if CIP > Progress billings

Question 43

Recognize a net liability if…

Answer 43

Recognize a net liability if CIP < Progress billings

Question 44

What does CIP include?

Answer 44

CIP includes costs incurred to date (same logic as progress billings) and CY GP