F2 M1: Revenue Recognition

Question 1

GAAP cash basis of accounting

Answer 1

Recognize revenue when the cash is collected/received

Question 2

GAAP accrual basis of accounting

Answer 2

Fees are paid in advance, recognize revenue over the contract years as services are performed

Question 3

The Criteria of a Distinct service obligation (3)

Answer 3

1. Buyer can benefit from each service when combined with other available resources
2. Buyer is able to benefit from each service independently
3. The promise to deliver each service is separately identifiable from the other services

Question 4

Contract modification represents a…

Answer 4

change in the price or scope (or both) of a contract approved by both parties

Question 5

Performance obligation

Answer 5

A promise to transfer a good or service to a customer

Question 6

Collections received for service contracts should be recorded as

Answer 6

An increase (Cr.??) to Unearned Service Revenue

Question 7

When service contracts are sold

Answer 7

Deferred Revenue (unearned liability) increases
Service Revenue (earned income) does not increase until service are performed

Question 8

How should discounts that exist in a contract be allocated?

Answer 8

Any discount that exists in a contract should be allocated proportionately across all obligations within the contract

Question 9

Deferred revenue is a liability until

Answer 9

The service has been performed
(Remember deferred revenue is an unearned liability)

Question 10

Revenues have been received in cash but not yet earned

Answer 10

Deferred revenue

Question 11

Deferred revenue represents

Answer 11

Billing for services that have not yet been performed

Question 12

A deferred revenue of one company is a ________ on the books of another

Answer 12

Prepaid expense

Question 13

?? What is the Revenue Recognition Rule??

Answer 13

Revenue cannot be recognized until the performance obligation is satisfied

Question 14

Input and Output methods are used to measure what

Answer 14

Progress towards completion

Question 15

In order to recognize revenue and entity must,

Answer 15

Must be able to measure progress towards completion

Question 16

When using an Output Method to recognize revenue/measure completion, the revenue recognized is based on

Answer 16

The value of the goods/services transferred (to date) to the customer relative to the remaining goods/services promised

Question 17

Examples of output method of revenue recognition

Answer 17

Units produced or delivered
Milestones achieved
Appraisals of results achieved
Surveys of performance toward complete satisfaction

Question 18

What is revenue recognized based on when using the Input method

Answer 18

The entity’s efforts(inputs) to the satisfaction of the performance obligation relative to the total expected inputs

Question 19

Examples of input methods

Answer 19

1. Resource consumption
2. Labor hours expended
3. Time elapsed
4. Costs incurred relative to total expected costs

Question 20

Disadvantage of input methods

Answer 20

May not be a direct relationship between an entity’s inputs and the transfer of control of goods/services to a customer

Question 21

If benefits are received by the buyer as the seller performs, revenue is recognized

Answer 21

Over time

Question 22

If a buyer has legal title to an asset, the seller would recognize revenue

Answer 22

At a point in time, the buyer having legal title indicates control

Question 23

If the buyer is benefiting as the seller performs the terms of the contract, revenue is recognized by the seller

Answer 23

Over time

Question 24

If Physical possession transfers to the buyer, the seller will recognize revenue

Answer 24

At a point in time, transfer of possession indications control

Question 25

Revenue is recognized over time when any of the 3 criteria is met. What are the 3 criteria

Answer 25

1. Entity’s performance creates or enhances the asset (WIP) that the customer controls
2. Customer simultaneously receives and consumes the benefits of the entity’s performs
3. Entity’s performance does not create an asset with alternative use to the entity, and the entity has enforceable right to receive payment or performance completed to date

Question 26

Revenue should be recognized at a point in time when the customer

Answer 26

Obtains control over the asset

Question 27

Control over an asset would require:

Answer 27

1. Entity has right to payment and customer has an obligation to pay for an asset
2. Entity has transferred physical possession
3. Customer has legal title to the asset
4. Customer has significant reward and risks of ownership
5. Customer has accepted the ownership

Question 28

A contract asset/liability should be presented where and when?

Answer 28

Where: in the statement of financial position
When: when either party has performed in a contract

Question 29

reflects an entity’s right to consideration in exchange for goods or services that the entity has transferred to the customer

Answer 29

Contract asset

(Entity has performed prior to customer paying or prior to payment due date)

Question 30

Must be booked when an entity has an obligation to transfer goods or services to a customer

Answer 30

Contract liability

Customer pays or owes payment before the entity performs
(Entity has either already received consideration from the customer or customer owes consideration and it’s unconditional)