FAR-F1-M4-Revenue Recognition Part 2

Question 1

What is an incremental cost?

Answer 1

The incremental costs of obtaining a contract are costs incurred that would not have been incurred if the contract had not been obtained and are recognized as an asset (capitalized and amortized) if the company expects to recover these costs. An entity will recognize an expense if the costs would have been incurred regardless of whether the contract is obtained.

Question 2

What is a repurchase agreement and how is it treated?

Answer 2

A repurchase agreement is a contract by which an entity sells an asset and also either promises to or has the option to repurchase the asset.

Question 3

When is a repurchase agreement accounted for as a financing arrangement?

Answer 3

The repurchase of an asset is accounted for as a financing arrangement when the repurchase price is greater than the original selling price and the expected market value of the asset.

Question 4

What are bill and hold arrangements?

Answer 4

Bill and Hold arrangements are contracts in which the entity bills a customer for a product that it has not yet delivered to the customer.

Question 5

For a customer to have obtained full control over the product in a bill and hold arrangement, all of the following must be met:

Answer 5

1. There must be a substantive reason for the arrangement.
2. The product has been separately identified as belonging to the customer.
3. The product is currently ready for transfer to the customer.
4. The entity cannot use the product or direct it to another customer.

Question 6

What is inventory on consignment and what are the indicators of a consignment arrangement?

Answer 6

Consignment is when the dealer has not obtained full control of the product. Revenue is recognized when the dealer sells the product to the customer. Indicators of a consignment arrangement include:
1. The entity controls the product until a sale occurs or a period expires.
2. The dealer does not have an unconditional obligation to pay the entity for the product.
3. The entity can require the return of the product or transfer the product to another company.

Question 7

The formula to calculate the percentage of completion is:

Answer 7

Total costs to date / total estimated cost of contract