FAR 2 Timing Issues

Question 1

Revenue recognition

Answer 1

1. Evidence of an arrangement exists
2. Delivery has occurred or service have been rendered
3. The price is fixed and determinable
4. Collection is reasonable assured

Question 2

Multiple Element Arrangements

Answer 2

When a sales contract includes multiple products or services, the fair value of the contract must be allocated to the separate contract elements. Revenue is then recognized separately for each element based on the revenue recognition criteria appropriate for each element.

Question 3

Royalty revenue - JE

Answer 3

Cash
Unearned royalty

Unearned royalty
Earned royalty

Question 4

Calculate royalty income for year 2

Answer 4

Royalty collections in Y2
Plus: Reduction in unearned royalties (Y1-Y2)
Less: Reduction in royalties receivable (Y1-Y2)
Year 2 royalty income

Question 5

Franchises include fees:

Answer 5

1. Initial franchise fees - revenue when substantially performed
2. Continuing franchise fees - revenue when earned

Question 6

Franchise accounting

Answer 6

a. Unearned revenue - revenue when substantial performance on service has occurred (initial franchise fee)
b. Earned revenue - substantial performance:
- no obligation to refund any payment
- initial services performed
- all other conditions of sale met

Question 7

Franchisee accounting

Answer 7

Franchise 62908
Discount on notes payable 12092
Notes payable 50000
Cash 25000

Question 8

Franchisor accounting

Answer 8

Cash
Notes rec
Discount
Unearned franchise fee revenue