FAR 1.05 - REVENUE AND EXPENSE RECOGNITION Flashcards
FAR 1.05 - REVENUE AND EXPENSE RECOGNITION
On day 1, Clothes Co., sells clothing to Link Corp. for $40,000. Clothes ships the clothing on day 1 and Link is obligated to pay Clothes within six months. Link is given 12 months to return any of the clothing for a refund if they experience low demand. Link is also given 18 months to exchange any clothing due to low demand. At the time of sale, Clothes cannot reasonably estimate returns, but estimates $5,000 in exchanged goods. Clothes should recognize revenue for the aforementioned transaction…
On the day of the sale.
12 months after the date of sale.
18 months after the date of sale.
Six months after the date of sale
12 months after the date of sale.
EXPLANATION:
When a buyer has a right to return goods it is unable to sell, it is referred to as a sale with a right of return.
If the amount of returns can be reasonably estimated, the sale is recorded when it is originally made with an allowance for estimated returns.
When returns cannot be estimated, however, the sale is not recorded until the buyer’s right to return the goods has expired. In this case, that would be 12 months after the date of the original sale.
The right to exchange goods is not a consideration because an exchange simply replaces certain items from inventory for other items without affecting the amount of the sale.
FAR 1.05 - REVENUE AND EXPENSE RECOGNITION
On September 25, 2014 Colson Corp. sold 200,000 widgetrons to Cavanaugh Corp at $5 per unit. Half of the units were delivered on November 15, 2014, and the remaining 100,000 units were delivered on January 20, 2015. At the time of sale Cavanaugh paid 40% of the contract price and agreed to pay the rest in equal installments on the two delivery dates. What amount of revenue should Colson recognize from this sale in 2014?
$700,000
$1,000,000
$500,000
$0
$500,000
EXPLANATION:
Revenue is recognized when the earnings process is substantially complete and when the revenue is either realized or realizable.
The earnings process is complete in regard to the first 100,000 units that were delivered in 2014. In addition, a portion of the money has been received and the remainder is receivable.
Unless Colson has no basis for determining if the remainder of the sales price is collectible, the sales price is partially realized with the remainder realizable.
As a result, Colson would recognize revenues on the 100,000 units delivered at $5 per unit for a total of $500,000.
While $700,000 of the payments
have been received, the earning process is substantially complete with regard to only half the order, so only half the revenue of the order is recognized.
FAR 1.05 - REVENUE AND EXPENSE RECOGNITION
Gil is a Baxley Co. salesman desperate to make quota by the end of 2015. On the afternoon of December 31, 2015, he convinces a longtime customer with excellent credit to sign a contract to accept delivery of Baxley Co.’s Widgetron Deluxe. Gil promises the customer a deep discount off the list price that they can ‘hash out later’ if the customer is 100% happy with the product. Gil does not tell the customer that the company’s policy in such cases is to offer the maximum discount of 30%. The customer states he will have to consult an astrologer and a groundhog to determine if he is happy with the product. Gil oversees the delivery that evening of the Widgetron Deluxe. Should the revenue from this sale be recognized in 2015? Why or why not?
The revenue should be recognized because there is a binding contract to accept delivery of the goods.
The revenue should be recognized because the product shipped and the customer has excellent credit.
The revenue should not be recognized because of the unusual and subjective terms under which the buyer has the right to return the product.
The revenue should not be recognized because the price is unknown.
The revenue should not be recognized because of the unusual and subjective terms under which the buyer has the right to return the product.
EXPLANATION:
When a buyer of goods has the right to return products, the transaction is considered a sale with a right of return.
When an entity makes regular sales under these terms and has a reasonable basis for estimating returns, revenue from the sale
will be recognized and an allowance for returns will be established.
When the rate of returns cannot be reasonably estimated, however, revenue is not recognized until the right of return expires.
Even though the goods were shipped in 2015, until the buyer accepts the goods or the right to return them expires, revenue would not be recognized.
FAR 1.05 - REVENUE AND EXPENSE RECOGNITION
Which of the following is most likely to be considered revenue, according to the Financial Accounting Standards
Board’s definition?
A clothing reseller recognizes a gain from early extinguishment of long-term debt.
A company in the business of manufacturing scientific devices recognizes a gain from the sale of agricultural land from the fringes of its corporate campus.
A pharmaceutical firm receives an anonymous donation to settle a liability owed to a municipality.
A web streaming company fulfills a 12-month service term paid by customers in advance.
A web streaming company fulfills a 12-month service term paid by customers in advance.
EXPLANATION:
Revenue results from the sale of goods or services in an entity’s normal course of business.
When a web streaming company fulfills a 12 month service term paid by customers in advance, it is completing its obligation to provide services and would recognize the amounts previously received as revenue.
A company in the business of manufacturing scientific devices
would recognize revenue when those devices are sold but when other assets, such as agricultural land, is old, it is a peripheral transaction and any gain or loss would be a nonoperating item.
A donation received by an entity that is not a not-for-profit that receives a substantial portion of its funds from donations would not be considered proceeds from providing goods or service in the ordinary course of business and would, as a result, be reported as nonoperating income.
Early extinguishment of a note does
not provide proceeds, especially not from the delivery of goods or services in the ordinary course of business, and any gain or loss would be reported as a nonoperating item
FAR 1.05 - REVENUE AND EXPENSE RECOGNITION
The FASB amends the Accounting Standards Codification through the issuance of…
Staff Accounting Bulletins
Accounting Standards Updates
Technical Bulletins
Statements of Financial Accounting Standards
Accounting Standards Updates
EXPLANATION:
The FASB amends the Accounting Standards Codification through the issuance of Accounting Standards Updates.
FAR 1.05 - REVENUE AND EXPENSE RECOGNITION
The FASB’s due process for setting accounting standards includes which of the following procedures…
The FASB obtains approval from the International Accounting Standards Board in setting its agenda.
The FASB’s Emerging Issues Task Force ratifies amendments to the Accounting Standards Codication.
The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft.
The FASB delegates topics to the Financial Accounting Foundation for research and reporting
The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft.
EXPLANATION:
The FASB is responsible for setting accounting standards using a process under which potential standards are issued in exposure draft form and feedback is solicited by a variety of means, which might include public forums.
The FASB is established by the Financial Accounting Foundation, which has oversight responsibility over the FASB.
The Emerging Issues Task Force is a group established by the FASB that deliberates on matters and makes proposals to the FASB, which the FASB
ratifies and incorporates into the Accounting Standards Codification.
The International Accounting Standards Board is independent from the FASB and is responsible for International Financial Reporting Standards.
