FAR SEC 2

Question 1

What is a functional currency?

Answer 1

The functional currency is the currency of the primary economic environment in which the entity operates. Normally, that environment is the one in which it primarily generates and expends cash.

Question 2

What is a foreign currency?

Answer 2

A foreign currency is any currency other than the entity’s functional currency.

Question 3

How are foreign currency transactions stated?

Answer 3

Foreign currency transaction terms are stated in a currency different from an entity’s functional currency.
-For example, if an entity whose functional currency is the U.S. dollar purchases inventory on credit from a German entity, payment is to be in euros.

Question 4

What causes a foreign currency transaction gain or loss?

Answer 4

A foreign currency transaction gain or loss results from a change in the exchange rate between the date the transaction was recognized, the date of the financial statements, and the date the transaction is settled.

Question 5

In what period is a gain or loss on a foreign currency transaction included in the income statement?

Answer 5

This gain or loss is included in the income statement in the period the exchange rate changes.

Question 6

If a foreign currency transaction results in an accrual such that the monetary aspect hasn’t yet been settled as of the end of the reporting period, how is the transaction measured?

Answer 6

If the monetary aspect of the transaction has not yet occurred at the end of the reporting period, monetary items (accounts payable and accounts receivable) are measured at the period-end exchange rate.

Question 7

What is earnings per share (EPS)?

Answer 7

Earnings per share (EPS) is the amount of current-period earnings that can be associated with a single share of a corporation’s common stock.

Question 8

For which entities must the guidance for reporting EPS be followed?

Answer 8

The guidance regarding calculation and presentation of EPS must be followed by public entities and by other entities that choose to report EPS.

Question 8

What is EPS calculated for?

Answer 8

EPS is calculated only for common stock.

Question 8

Is EPS calculated for preferred stock?

Answer 8

No.

Question 8

What is basic earnings per share?

Answer 8

All corporations must report two BEPS amounts on the face of the income statement. Their numerators are income from continuing operations and net income, respectively.

Question 8

What condition must apply in order for the entity to not have to report two BEPS amounts?

Answer 8

If an entity has no discontinued operations, the income from continuing operations equals net income. Thus, one amount of BEPS for net income available to common shareholders is presented on the face of the income statement.

Question 9

What is the BEPS equation?

Answer 9

BEPS = [Income Available to Common Shareholders]/[Weighted-average number of common shares outstanding]

Question 9

What is the BEPS numerator?

Answer 9

Income available to common shareholders is the BEPS numerator.

Question 9

What are the EPS reporting requirements if a discontinued operation is reported?

Answer 9

If a discontinued operation is reported, basic and diluted EPS amounts for the discontinued operation are presented on the face of the income statement or in the notes.

Question 9

What two BEPS amounts must be reported by all corporations on the face of the income statement.

Answer 9

1) Continuing Operations BEPS
2) Net Income BEPS

Question 10

For calculating the BEPS numerator, can the amount be calculated directly by using the amounts on the income statement for income from continuing operations or net income?

Answer 10

No. Income in the BEPS numerator is reduced by dividends, so the income statement amounts for income from continuing operations or net income must be adjusted for the effect of dividends.

Question 10

Which two adjustments are made to income statement amounts when calculating the BEPS numerator?

Answer 10

1) DECLARED NONCUMULATIVE PREFFERED DIVIDENDS. Dividends declared in the current period on preferred stock (whether or not paid) are deducted from income.
2) CUMULATIVE PREFERRED DIVIDENDS. Dividends accumulated for the current period on cumulative preferred stock (whether are not declared) are deducted from income.

Question 11

Are dividends on common stock ever deducted from the BEPS numerator?

Answer 11

No.

Question 12

Are dividends paid in the current period for undistributed accumulated preferred dividends from prior years deducted from income in the BEPS numerator?

Answer 12

No. Dividends paid in the current period for undistributed accumulated preferred dividends for prior years do not affect the calculation. They were included in BEPS of prior years.

Question 13

What is the equation for calculating Income Available to Common Shareholders, the BEPS numerator?

Answer 13

Income statement amount

– Dividends on preferred stock for the current period (cumulative or declared noncumulative)

= Income available to common shareholders

Question 14

What is another name for the BEPS numerator?

Answer 14

Income available to common shareholders.

Question 15

What is another name for the BEPS denominator?

Answer 15

The weighted-average number of common shares outstanding.

Question 16

Are preferred shares ever added to the BEPS denominator?

Answer 16

No, unless they are somehow converted to common shares, which could happen if there is preferred stock convertible to preferred shares.

Question 17

Why is a weighted average necessary for the BEPS denominator?

Answer 17

Weighting is necessary because some shares may have been issued or reacquired during the period.

Question 18

How is the BEPS denominator calculated?

Answer 18

The weighted-average number of common shares outstanding is determined by relating the portion of the period that the shares were outstanding to the total time in the period, i.e., a weighted-average of the number of common shares outstanding is taken across the time period, with increments of time being the weights.

Question 19

How do stock dividends and stock splits effect the calculation of the weighted-average of common shares outstanding, i.e., the BEPS denominator? (2 elements)

Answer 19

1) RETROACTIVE ADJUSTMENT TO CAPITAL STRUCTURE USED IN WEIGHTED-AVERAGE. EPS amounts for all periods presented are adjusted retroactively to reflect the change in capital structure as if it had occurred at the beginning of the first period presented.
3) MAKE ADJUSTMENT EVEN IF STOCK DIVIDEND/SPLIT OCCURS AFTER REPORTING PERIOD (BUT BEFORE STATEMENTS ISSUED).
Adjustments are made for such changes even if they occur after the end of the current reporting period but before issuance (or the availability for issuance) of the financial statements.

Question 20

What are contingently issuable shares? How do they effect calculation of the BEPS denominator?

Question 21

What kind of entity is exempt from reporting DEPS?

Answer 21

An entity with only common stock outstanding (a simple capital structure) must report only BEPS amounts but not DEPS.

Question 22

What is a simple capital structure?

Answer 22

A simple capital structure means an entity with only common stock outstanding - there can be no preferred shares or other potential common shares.

Question 23

Which entities must report DEPS?

Answer 23

An entity that does not have a simple capital structure must report DEPS as well as BEPS.

Question 24

What defines the calculation of diluted earnings per share (DEPS) and distinguishes it from BEPS?

Answer 24

The DEPS calculation includes the effects of dilutive potential common shares (PCS), whereas BEPS does not include the effects of PCS.

Question 25

What are potential common shares (PCS)?

Answer 25

PCS are securities or other contracts that may entitle the holder to obtain common stock.

Question 26

What are the two types of PCS?

Answer 26

PCS can be either dilutive or antidilutive.

Question 27

What is the criterion for including PCS in DEPS calculations?

Answer 27

PCS are included in the DEPS calculation only if they are dilutive.

Question 28

What is dilution?

Answer 28

Dilution is a reduction in BEPS (or an increase in loss per share) resulting from the assumption that convertible securities (preferred stock or debt) were converted and/or stock options were exercised.

Question 29

What assumption is invoked to determine whether PCS are dilutive or antidilutive?

Answer 29

The assumption that convertible securities (preferred stock or debt) were converted and/or stock options were exercised.

Question 30

What circumstance indicates PCS are antidilutive?

Answer 30

If under the assumption that convertible securities (preferred stock or debt) were converted and/or stock options were exercised the resulting new common shares do not decrease EPS, the PCS being analyzed is deemed antidilutive.

Question 31

What is diluted earnings per share (DEPS)?

Answer 31

DEPS measures performance after considering the effect on the numerator and denominator of dilutive PCS.

Question 32

Does DEPS calculation involve adjustments to the BEPS denominator only?

Answer 32

No, DEPS can involve adjustments to both numerator and denominator.

Question 33

In DEPS calculation, how is the BEPS denominator adjusted?

Answer 33

The BEPS denominator is increased to include the weighted-average number of additional shares of common stock that would have been outstanding if dilutive PCS had been issued.

Question 34

In DEPS calculation, how is the BEPS numerator adjusted?

Answer 34

The BEPS numerator is adjusted to add back any dividends on convertible preferred stock and the after-tax interest expense (an amount that includes amortization of discount or premium) related to any convertible debt.

Question 35

In DEPS calculation, which two things are added back to the BEPS numerator?

Answer 35

1) Any dividends on convertible preferred stock.
2) The after-tax interest expense (an amount that includes amortization of discount or premium) related to any convertible debt.

Question 36

For DEPS calculations involving convertible debt PCS, what factors are important?

Answer 36

1) The interest expense must be deducted from the numerator.
2) The interest expense must be calculated as an after-tax amount.
3) The amortization of any discount or premium must be calculated and appropriately reflected in the numerator.

Question 37

What is the equation for calculating DEPS?

Answer 37

DEPs = [BEPS numerator + Effect of dilutive PCS]/[BEPS denominator + Effect of dilutive PCS]

Question 38

How does the effect of dilutive PCS influence an adjustment to the BEPS numerator?

Answer 38

Dilutive PCS may INCREASE the amount of income available to common shareholders by decreasing preferred dividends payable or interest expense payable.

Question 39

How does the effect of dilutive PCS influence an adjustment to the BEPS denominator?

Answer 39

Dilutive PCS always increases the weighted-average number of common shares outstanding during a period.

Question 40

When calculating the DEPS numerator, does the adding back of preferred dividends have to be adjusted for tax?

Answer 40

No.

Question 41

Could dividends ever be reported net of tax? Why or why not?

Answer 41

Dividends are calculated on after-tax income available to shareholders, so dividends could NEVER be reported net of tax.

Question 42

How must antidilutive PCS be treated during the calculation of DEPS?

Answer 42

The calculation of DEPS does not assume the conversion or exercise of antidilutive securities, i.e., securities that increase EPS or decrease loss per share. Thus, including antidilutive PCS in a DEPS calculation always results in a wrong answer.

Question 43

How are dilutive PCS issued (but not converted) during a period included in the DEPS calculation?

Answer 43

Dilutive PCS issued during a period are included in the DEPS denominator for the period they were outstanding.

Question 44

How are dilutive PCS that were actually converted during a period included in the DEPS calculation?

Answer 44

Dilutive convertible securities that were actually converted are included for the period before conversion. Common shares actually issued are included for the period after conversion.

Question 45

Is previously reported DEPS ever retroactively adjusted for subsequent conversions or changes in the market price of the common stock?

Answer 45

Previously reported DEPS is not retroactively adjusted for subsequent conversions or changes in the market price of the common stock. Other accounting errors unrelated to DEPS calculations could result in the retroactive restatement of BEPS and DEPS.

Question 46

How does treatment of dilutive PCS vary depending on whether the dilutive PCS are issued or actually converted/realized? (4 elements)

Answer 46

1) Dilutive PCS issued during a period are included in the DEPS denominator for the period they were outstanding. This would apply for convertible preferred stock, options/warrants, and contingently issuable common shares.
2) Dilutive convertible securities that were actually converted are included for the period before conversion.
3) Common shares actually issued are included for the period after conversion. This means contingently issuable common shares would go into the current period DEPS calculation unless they are actually issued, in which case they go in the after period’s DEPS calculation.
4) It is unclear how the before/during/after periodization applies for the exercise of options and warrants.

Question 47

What are the three methods used to determine the dilutive effect of PCS?

Answer 47

1) The if-converted method for convertible securities,
2) The treasury stock method for call options, and
3) The reverse treasury stock method for put options.

Question 48

What are the two basic assumption of the if-converted method for calculating DEPS?

Answer 48

1) The if-converted method calculates DEPS assuming the conversion of all dilutive convertible securities at the beginning of the period or at the time of issue, if later.

2) The conversion of antidilutive securities (those whose conversion increase EPS or decrease loss per share) is not assumed. Thus, convertible PCS are antidilutive if the current dividend or after-tax interest per common share issuable exceeds BEPS.

Question 49

What calculation determines whether a PCS is antidilutive?

Answer 49

Convertible PCS are antidilutive if the current dividend or after-tax interest per common share issuable exceeds BEPS.

[dividend OR after-tax interest]/[common shares issuable] > BEPS => ANTIDILUTIVE

Question 50

[dividend OR after-tax interest]/[common shares issuable] > BEPS => DILUTIVE OR ANTIDILUTIVE

Answer 50

=> ANTIDILUTIVE

Question 51

[dividend OR after-tax interest]/[common shares issuable] => DILUTIVE OR ANTIDILUTIVE

Answer 51

=> DILUTIVE

Question 52

What is the algorithm for computing DEPS under the If-converted method? (5 steps)

Answer 52

1) SEPARETELY TEST EACH PCS FOR DILUTIVENESS. In determining whether PCS are dilutive, each issue or series of issues of PCS are considered separately (rather than in the aggregate) and in sequence from the most dilutive to the least dilutive. The goal of this process is to maximize the dilution of BEPS (lowest possible DEPS).
2) CHOOSE INITIAL CONTROL #. The control number to establish whether PCS are dilutive or antidilutive is the BEPS for the period.
-If a discontinued operation is reported, the control number is BEPS from continuing operations.
3) 1ST TRIAL DEPS CALCULATION ON MOST HIGHLY DILUTIVE PCS. The issue with the lowest earnings per incremental share is included in DEPS before issues with higher earnings per incremental share. If the issue with the lowest earnings per incremental share is found to be dilutive with respect to BEPS, it is included in a trial calculation of DEPS.
4) ITERATIVE TRIAL DEPS CALCULATIONS ON EACH OF THE REMAINING PCS GOING IN ORDER OF DECREASIING DILUTIVENESS. If the issue with the next lowest earnings per incremental share is dilutive with respect to the first trial calculation of DEPS, it is included in a new DEPS calculation that adjusts the numerator and denominator from the prior calculation.
5) TERMINATION WHEN A TRIAL CALCULATION FAILS. This process continues until all issues of PCS have been tested. A failure of the test calculation is when the resulting earnings per incremental share is less than the current control number.

Question 53

In the If-converted method, what is the control number?

Answer 53

The control number to establish whether PCS are dilutive or antidilutive is the BEPS for the period.

Question 54

What is the control number if there are discontinued operations?

Answer 54

If a discontinued operation is reported, the control number is BEPS from continuing operations.

Question 55

For the If-converted method, how are control numbers updated?

Answer 55

The trial DEPS value from the previous iteration of the If-converted method becomes the control number for the subsequent trial DEPS calculation until the process terminates.

Question 56

How does the control number indicate termination of the If-converted method?

Answer 56

If the value of the current trial DEPS calculation is greater than the current control number, the process terminates, with the current control number being the value of DEPS to be reported. All remaining PCS groups are rejected as antidilutive.

Question 57

How does the existence of a discontinued operation effect the If-converted method?

Answer 57

If a discontinued operation is reported, the same number of shares used to adjust the denominator for income from continuing operations is used to adjust the DEPS denominator for income from discontinued operations. This rule applies even if the effect on the other amounts is antidilutive.

Question 58

What is a call option?

Answer 58

A call is an option contract giving the owner the right, but not the obligation, to buy an underlying security at a specific price within a specified time. The specified price is called the strike price, and the specified time during which the sale can be made is its expiration (expiry) or time to maturity. A call seller must sell the asset if the buyer exercises the call.

Question 59

What is the Treasury Stock Method?

Answer 59

The second method used to determine the dilutive effect of PCS is the treasury stock method. It is used to determine the dilutive effect of outstanding call options.

Question 60

Under what condition are call options dilutive?

Answer 60

Call options are dilutive only if the average market price for the period of the common shares is greater than the exercise price of the options (they are in the money).

Question 61

What are the three assumptions of the Treasury Stock Method?

Answer 61

1) The options are exercised at the beginning of the period (or time of issuance, if later),
2) Common shares are issued, and
3) The proceeds of exercise are used to purchase common stock at the period’s average market price.

Question 62

Is the BEPS numerator ever effected under the Treasury Stock Method?

Answer 62

No. If the options are dilutive, their exercise affects only the denominator in the computation of DEPS. Any additional number of common shares outstanding (incremental shares) is added as an adjustment of the BEPS denominator.

Question 63

What are the most dilutive PCS?

Answer 63

Because the numerator in the computation of DEPS is not affected, the earnings per incremental share is $0 for call options. Thus, options are generally the most dilutive PCS. They should be included first (before other series of PCS) in the trial calculation of DEPS.

Question 64

Which PCS should always be assumed to have zero earning per incremental share and be included first in the If-converted Method?

Answer 64

Call Options. Call options are the most dilutive PCS because they don’t result in adding to the BEPS numerator.

Question 65

How is the number of incremental shares from dilutive call options that must be included in the DEPS denominator computed? (3 steps)

Answer 65

The number of incremental shares from dilutive call options that must be included in the denominator of the DEPS computation is calculated as follows:

1) Proceeds from exercising the options (Number outstanding × Exercise price).
2)Number of shares assumed purchased (Proceeds from exercise ÷ Average market price for the period of common shares).
3) Number of incremental shares (Number of common shares assumed issued – Number of common shares assumed purchased).

-The number of common shares assumed issued is the amount of common shares that would have been issued assuming all the options were exercised.

Question 66

Under the Treasury Stock Method assumptions, what is the number of common shares assumed issued?

Answer 66

The number of common shares assumed issued is the amount of common shares that would have been issued assuming all the options were exercised.

Question 67

Treasury Stock Method:
Proceeds from Exercising the Options = ?

Answer 67

Number Outstanding * Exercise Price

Question 68

Treasury Stock Method:
Number of Shares Assumed Purchased = ?

Answer 68

[Proceeds from the Exercise]/[Average Market Price for the Period of Common Shares]

Question 69

What is the system of equations for the Treasury Stock Method?

Answer 69

Is = Ci – Cp
Cp = P/Ap
Is = Cs – P/Ap
P = NoEp
Is = Cs – (NoEp)/Ap
Where
Is = # incremental shares
Cs = # common shares assumed issued
Cp = # common shares assumed purchased
P = Proceeds from Exercise
Ap = Average Price of Common Shares
No = # call options outstanding
Ep = Exercise Price

Question 70

Treasury Stock Method:
Number of Incremental Shares = ?

Answer 70

Number of Common Shares Issued - Number of Common Shares Assumed Purchased

Question 71

What is the basic Treasury Stock Method equation? What are the 5 variables in the equation?

Answer 71

Is = Cs – (No*Ep)/Ap
Where
Is = # incremental shares
Cs = # common shares assumed issued
Cp = # common shares assumed purchased
P = Proceeds from Exercise
Ap = Average Price of Common Shares
No = # call options outstanding
Ep = Exercise Price

Question 72

What are the three Treasury Stock identities in words?

Answer 72

Incremental Shares = Common Shares Assumed Issued – Common Shares Assumed Purchased
Common Shares Assumed Purchased = [Proceeds from Exercise]/[Average Price of Common Shares]
Proceeds from Exercise = Call Options Outstanding*Exercise Price

Question 73

For the Treasury Stock Method, how does the number of common shares assumed issued relate to the number of common shares assumed purchased?

Answer 73

The number of common shares assumed purchased =

[#Call Options]*[Strike Price]/Average Price of Common Shares in Period

The Treasury Stock Method assumes all common shares will be issued for all call options, so for:

Is = Cs – (No*Ep)/Ap

Assume Cs = No to solve the equation.

Question 74

What is the Reverse Treasury Stock Method?

Answer 74

The third method used to determine the dilutive effect of PCS is the reverse treasury stock method. It is used when the entity has entered into contracts to repurchase its own stock, for example, when it has written put options held by other parties.

Question 75

What are the steps of the Reverse Treasury Stock Method? (4 elements)

Answer 75

1) When the contracts are in the money (the exercise price exceeds the average market price), the potential dilutive effect on EPS is calculated by
2) Assuming the issuance at the beginning of the period of sufficient shares to raise the proceeds needed to satisfy the contracts,
3) Assuming those proceeds are used to repurchase shares, and
4) Including the excess of shares assumed to be issued over those assumed to be repurchased in the calculation of the DEPS denominator.

Question 76

What kind of options contracts are associated with the Reverse Treasury Stock Method?

Answer 76

Put options.

Question 77

Do the put options have to be in the money to be dilutive and therefore eligible for calculation of DEPS via the Reverse Treasury Stock Method?

Answer 77

Yes. When the contracts are in the money (the exercise price exceeds the average market price), the potential dilutive effect on EPS is calculated by the Reverse Treasury Stock Method.

Question 78

When calculating the amount of the BEPS denominator, which is the weighted-average number of common shares outstanding during the period, when should a stock dividend be assumed to take effect in terms of defining the time period weights?

Answer 78

For the purpose of calculating BEPS, the stock dividend is assumed to have occurred at the beginning of the period.

Question 79

What is ASC 606?

Answer 79

The guidance for recognition of revenue from contracts with customers (ASC 606) provides a single, principles-based model for all contracts with customers regardless of the industry-specific or transaction-specific fact pattern.

Question 80

What is the core principle of ASC 606?

Answer 80

The core principle is that an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange.

Question 81

Which 4 categories of contracts with customers are EXCLUDED form coverage by ASC 606?

Answer 81

1) Leases
2) Financial instruments
3) Contractual rights and obligations within the scope of specific topics, such as receivables, derivatives and hedging, insurance, and guarantees (other than product or service warranties)
4) Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers

Question 82

What are those “specific topics” whose scope excludes them from ASC 606? (4 elements)

Answer 82

1) Receivables
2) Derivatives and hedging
3) Insurance
4) Guarantees (other than product or service warranties

Question 83

Which guarantees are included in ASC 606?

Answer 83

The only guarantees included in ASC 606 are product and service warrantees. All other guarantees are excluded.

Question 84

What are the 5 steps of the 5 Step Model for recognizing contracts with customers?

Answer 84

Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) a performance obligation is satisfied.

Question 85

What is a contract?

Answer 85

A contract is an agreement between two or more parties that creates enforceable rights and obligations.

Question 86

What are the 4 criteria for accounting for a contract under ASC 606?

Answer 86

A contract is accounted for under ASC 606 if all of the following criteria are met:
1) The contract was approved by the parties.
2) The contract has commercial substance.
3) Each party’s rights can be identified regarding
-Goods or services to be transferred and
-The payment terms.
4) It is probable that the entity will collect substantially all of the consideration to which it is entitled according to the contract.
-Probable means the future event is likely to occur.

Question 87

Must all of the 4 criteria for contract existence be satisfied for ASC 606 to be invoked to account for a contract with customers.

Answer 87

Yes, all 4 criteria must be satisfied.

Question 88

If a contract is covered by ASC 606, what is the result?

Answer 88

The result of invoking ASC 606 is that revenue is recognized.

Question 89

Which two rights must be identifiable for both parties for a contract to exist under ASC 606?

Answer 89

1) Rights regarding goods and services to be transferred.
2) Rights regarding payment terms.

Question 90

What is the outcome if any one of the four criteria for contract existence under ASC 606 fails to obtain?

Answer 90

If the criteria described above are not met (e.g., if collectibility cannot be reliably estimated), the consideration received is recognized as a liability, and no revenue is recognized until the criteria are met.

Question 91

Under any one of which three conditions can revenue be recognized under ASC 606 if the contract existence criteria are not fully satisfied?

Answer 91

1) The contract has been terminated.
2) Control over the goods or services was transferred to the customer and the entity has stopped transferring (and has no obligation to transfer) additional goods or services to the customer.
3) The entity (1) has no obligation to transfer goods or services and (2) has received substantially all consideration from the customer.

Question 92

How much revenue can be recognized in instances where contract existence criteria fail but at least one of the three criteria for partial revenue recognition obtain?

Answer 92

Revenue in the amount of nonrefundable consideration received from the customer is recognized.

Even when the four criteria for ASC 606 contract existence are not met, revenue in the amount of nonrefundable consideration received from the customer is recognized if at least one of the three conditions for partial revenue recognition is met.

Question 93

When does a contract modification exist?

Answer 93

A contract modification exists when the parties approve a change in the scope or price of a contract.

Question 94

Which two conditions must both be met in order to account for a contract modification as a separate contract?

Answer 94

1) DISTINCT GOODS/SERVICES ARE ADDED.
The scope of the contract increases because of the addition of promised goods or services that are distinct, and
2) PRICE CHANGES REFLECT STANDALONE SELLING PRICES FOR THE ADDITIONAL GOODS/SERVICES. The price of the contract increases by an amount of consideration that reflects the entity’s standalone selling prices of the additional promised goods or services.

Question 95

What is a performance obligation?

Answer 95

A performance obligation is a promise in a contract with a customer to transfer to the customer
-A good or service that is distinct or
-A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

Question 96

Which two categories of things could be promised to be transferred to a customer under a performance obligation?

Answer 96

1) A good or service that is distinct or
2) A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

Question 97

What are the two criteria that both must be met in order for promised good and services to be distinct?

Answer 97

1) CAPABLE OF BEING DISTINCT. The customer can benefit from them either on their own or together with other resources that are readily available (capable of being distinct) and
2) DISTINCT WITHIN THE CONTEXT OF THE CONTRACT. The entity’s promise to transfer them to the customer is separately identifiable from other promises in the contract (distinct within the context of the contract). A separately identifiable good or service
-Does not significantly modify or customize another good or service promised in the contract and
-Is not highly dependent on, or highly interrelated with, other goods or services promised in the contract.

Question 98

Which two criteria must both be met for a separately identifiable good or service?

Answer 98

A separately identifiable good or service
1) Does not significantly modify or customize another good or service promised in the contract and
2) Is not highly dependent on, or highly interrelated with, other goods or services promised in the contract.

Question 99

What are customer options to acquire additional goods or services for free or at a discount?

Answer 99

Customer options to acquire additional goods or services for free or at a discount have many forms, such as sales incentives, coupons, customer award points, or other discounts on future goods or services.

Question 100

What is a material right?

Answer 100

A material right is an option that the customer would not receive without entering into that contract. An example is a discount in addition to the range of discounts typically given for those goods or services.

Question 101

Under what condition does an option to acquire additional goods or services in a contract create a separate performance obligation under that contract?

Answer 101

When there is a material right to the option under the contract. When the option to acquire additional goods or services (e.g., a coupon or discount voucher) provides a material right to the customer, it results in a separate performance obligation in the contract.

Question 102

What criterion determines whether an option to acquire additional goods or services in a contract provides a material right?

Answer 102

An option to acquire an additional good or service at a price that reflects its standalone selling price does not provide a material right.

Question 103

What is the transaction price?

Answer 103

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.

Question 104

Which 3 elements effect the transaction price?

Answer 104

1) It excludes amounts collected on behalf of third parties (e.g., sales taxes).
2) Any consideration payable to the customer, such as coupons, credits, or vouchers, reduces the transaction price.
3) To determine the transaction price, an entity should consider the effects of the time value of money and variable consideration.

Question 105

The transaction price must reflect what circumstances of payment amount and timing?

Answer 105

TRANSACTION PRICE/REVENUE RECOGNIZED SHOULD BE AT PRESENT VALUE. The revenue recognized must reflect the price that a customer would have paid for the promised goods or services if the cash payment had been made when they were transferred to the customer (i.e., the cash selling price).

Question 106

When is the transaction price adjusted for the effect of the time value of money?

Answer 106

The transaction price is adjusted for the effect of the time value of money when the contract includes a significant financing component. This is because the transaction price must reflect the cash value the customer would have paid had they paid in full at the time they acquired goods/services, which would be the PRESENT VALUE.

Question 107

Which two factors should be considered in assessing whether a contract includes a significant financing component?

Answer 107

1) The difference between
the cash selling price of the promised goods or services and the amount of consideration to be received.
2) The combined effect of
i) The expected time between the payment and the delivery of the promised goods or services and
ii) Market interest rates

Question 108

If any of which 3 conditions apply, the transaction price should not be adjusted for the effect of the time value of money:

Answer 108

1) The time between the payment and the delivery of the promised goods or services to the customer is 1 year or less
2) The customer paid in advance and the transfer of goods or services is at the discretion of the customer
-An example is a bill-and-hold contract in which the seller provides storage services for goods it sold to the buyer.
3) A substantial amount of the consideration promised is variable and its amount or timing varies with future circumstances that are not within the control of the entity or the customer
-An example is consideration in the form of a sales-based royalty.

Question 109

What is the practical consequence of including time value of money effects in revenue recognition?

Answer 109

The excess of the cash to be received in the future over the present value of goods/services is recognized separately on the income statement as interest income. Thus, revenue from customers is recognized at the present value, and the excess of payments is recognized as interest expense.

Question 110

For time value of money effects on contracts with customers revenue recognition, how is interest income recognized?

Answer 110

Interest income or expense is recognized using the effective interest method.
-It must be presented in the income statement separately from revenue from contracts with customers.

Question 111

How is interest income recognized on the income statement?

Answer 111

It must be presented in the income statement separately from revenue from contracts with customers.

Question 112

What must be done for contract with customers recognition if there is variable consideration?

Answer 112

If a contract includes a variable amount, an entity must estimate the consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer.

Question 113

What are 4 examples of circumstances that could cause variable consideration?

Answer 113

1) Refunds due to a right of return provided to customers (Study Unit 6, Subunit 1)
2) Prompt payment discounts (Study Unit 5, Subunit 1)
3) Volume discounts
4) Other uncertainties in contract price based on the occurrence or nonoccurrence of some future event

Question 114

What are the two available methods for estimating variable consideration?

Answer 114

Variable consideration is estimated using one of the following methods:
1) EXPECTED VALUE. The expected value is the sum of probability-weighted amounts in the range of possible consideration amounts. This method may provide an appropriate estimate if an entity has many contracts with similar characteristics.
2) MOST LIKELY AMOUNT. The most likely amount is the single most likely amount in a range of possible consideration amounts. This method may provide an appropriate estimate if the contract has only two possible outcomes. For example, a construction entity either will receive a performance bonus for finishing construction on time or will not.

Question 115

When is most likely amount likely to be an appropriate amount for estimating variable consideration?

Answer 115

This method may provide an appropriate estimate if the contract has only two possible outcomes. For example, a construction entity either will receive a performance bonus for finishing construction on time or will not.

Question 116

If there is variable consideration, when should the estimated transaction price be updated?

Answer 116

The estimated transaction price must be updated at the end of each reporting period.

Question 117

What is the constraint on recognizing revenue from contracts with variable consideration?

Answer 117

2.3 REVENUE FROM CONTRACTS WITH CUSTOMERS
The guidance for recognition of revenue from contracts with customers (ASC 606) provides a single, principles-based model for all contracts with customers regardless of the industry-specific or transaction-specific fact pattern.
The core principle is that an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange.
This guidance applies to all contracts with customers except the following:
Leases
Financial instruments
Contractual rights and obligations within the scope of specific topics, such as receivables, derivatives and hedging, insurance, and guarantees (other than product or service warranties)
Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers
Below is the five-step model for recognizing revenue from contracts with customers.
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) a performance obligation is satisfied.
Step 1: Identify the Contract with a Customer

A contract is an agreement between two or more parties that creates enforceable rights and obligations.
A contract is accounted for under ASC 606 if all of the following criteria are met:
The contract was approved by the parties.
The contract has commercial substance.
Each party’s rights can be identified regarding
Goods or services to be transferred and
The payment terms.
It is probable that the entity will collect substantially all of the consideration to which it is entitled according to the contract.
Probable means the future event is likely to occur.
If the criteria described above are not met (e.g., if collectibility cannot be reliably estimated), the consideration received is recognized as a liability, and no revenue is recognized until the criteria are met.
However, even when the criteria described above are not met, revenue in the amount of nonrefundable consideration received from the customer is recognized if at least one of the following has occurred:
The contract has been terminated.
Control over the goods or services was transferred to the customer and the entity has stopped transferring (and has no obligation to transfer) additional goods or services to the customer.
The entity (1) has no obligation to transfer goods or services and (2) has received substantially all consideration from the customer.
A contract modification exists when the parties approve a change in the scope or price of a contract.
It is accounted for as a separate contract if the following conditions are met:
The scope of the contract increases because of the addition of promised goods or services that are distinct, and
The price of the contract increases by an amount of consideration that reflects the entity’s standalone selling prices of the additional promised goods or services.
Step 2: Identify the Performance Obligations in the Contract

A performance obligation is a promise in a contract with a customer to transfer to the customer
A good or service that is distinct or
A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.
Promised goods or services are distinct if
The customer can benefit from them either on their own or together with other resources that are readily available (capable of being distinct) and
The entity’s promise to transfer them to the customer is separately identifiable from other promises in the contract (distinct within the context of the contract). A separately identifiable good or service
Does not significantly modify or customize another good or service promised in the contract and
Is not highly dependent on, or highly interrelated with, other goods or services promised in the contract.
Customer options to acquire additional goods or services for free or at a discount have many forms, such as sales incentives, coupons, customer award points, or other discounts on future goods or services.
When the option to acquire additional goods or services (e.g., a coupon or discount voucher) provides a material right to the customer, it results in a separate performance obligation in the contract.
A material right is an option that the customer would not receive without entering into that contract. An example is a discount in addition to the range of discounts typically given for those goods or services.
But an option to acquire an additional good or service at a price that reflects its standalone selling price does not provide a material right.
Step 3: Determine the Transaction Price

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.
It excludes amounts collected on behalf of third parties (e.g., sales taxes).
Any consideration payable to the customer, such as coupons, credits, or vouchers, reduces the transaction price.
To determine the transaction price, an entity should consider the effects of the time value of money and variable consideration.
The revenue recognized must reflect the price that a customer would have paid for the promised goods or services if the cash payment had been made when they were transferred to the customer (i.e., the cash selling price).
Thus, the transaction price is adjusted for the effect of the time value of money when the contract includes a significant financing component.
The following factors should be considered in assessing whether a contract includes a significant financing component:
The difference between
The cash selling price of the promised goods or services and
The amount of consideration to be received
The combined effect of
The expected time between the payment and the delivery of the promised goods or services and
Market interest rates
The transaction price should not be adjusted for the effect of the time value of money if
The time between the payment and the delivery of the promised goods or services to the customer is 1 year or less
The customer paid in advance and the transfer of goods or services is at the discretion of the customer
An example is a bill-and-hold contract in which the seller provides storage services for goods it sold to the buyer.
A substantial amount of the consideration promised is variable and its amount or timing varies with future circumstances that are not within the control of the entity or the customer
An example is consideration in the form of a sales-based royalty.
Interest income or expense is recognized using the effective interest method.
It must be presented in the income statement separately from revenue from contracts with customers.
Example 2-10Significant Financing Component
On January 1, Year 1, BIF Co. sold and transferred a machine to a customer for $583,200 that is payable on December 31, Year 2. Other customers pay $500,000 upon delivery of the same machine at contract inception. The cost of the machine to BIF is $400,000. BIF determined that the contract includes a significant financing component because of the difference between the consideration ($583,200) and the cash selling price ($500,000). The contract includes an implicit interest rate of 8%. The following entries are recorded by BIF:

January 1, Year 1
Accounts receivable $500,000 Cost of goods sold $400,000
Revenue $500,000 Machine inventory $400,000
December 31, Year 1
Accounts receivable ($500,000 × 8%) $40,000
Interest income $40,000
December 31, Year 2
Accounts receivable ($540,000 × 8%) $43,200 Cash $583,200
Interest income $43,200 Accounts receivable $583,200
Example 2-11Significant Financing Component – Advance Payment
On January 1, Year 1, Eva Co. received a payment of $100,000 for delivering a machine to a customer at the end of Year 2. The cost of the machine to Eva is $70,000. Eva determined that (1) the contract includes a significant financing component and (2) a financing rate of 10% is an appropriate discount rate. The following entries are recorded by Eva:

January 1, Year 1 December 31, Year 1
Cash $100,000 Interest expense ($100,000 × 10%) $10,000
Contract liability $100,000 Contract liability $10,000
December 31, Year 2
Interest expense ($110,000 × 10%) $11,000 Contract liability $121,000
Contract liability $11,000 Revenue $121,000
Cost of goods sold 70,000
Machine inventory 70,000
Variable Consideration

If a contract includes a variable amount, an entity must estimate the consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. For example, the contract price may vary because of the following:
Refunds due to a right of return provided to customers (Study Unit 6, Subunit 1)
Prompt payment discounts (Study Unit 5, Subunit 1)
Volume discounts
Other uncertainties in contract price based on the occurrence or nonoccurrence of some future event
Variable consideration is estimated using one of the following methods:
The expected value is the sum of probability-weighted amounts in the range of possible consideration amounts. This method may provide an appropriate estimate if an entity has many contracts with similar characteristics.
The most likely amount is the single most likely amount in a range of possible consideration amounts. This method may provide an appropriate estimate if the contract has only two possible outcomes. For example, a construction entity either will receive a performance bonus for finishing construction on time or will not.
The estimated transaction price must be updated at the end of each reporting period.
Constraint. Revenue from variable consideration is recognized only to the extent that it is probable that a significant reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Question 118

What is a volume discount?

Answer 118

A volume discount offered as an incentive to increase future sales requires the customer to purchase a specified quantity of goods or services to receive a discount. The discount may be applied (1) prospectively on additional goods purchased in the future or (2) retrospectively on all goods purchased to date.

Question 119

In what two ways may a volume discount be applied?

Answer 119

The discount may be applied (1) prospectively on additional goods purchased in the future or (2) retrospectively on all goods purchased to date.

Question 120

How are prospective volume discounts accounted for?

Answer 120

A prospective volume discount that provides a material right to the customer is accounted for as a separate performance obligation in the contract (Study Unit 9, Subunit 4).

Question 121

How are retrospective volume discounts accounted for?

Answer 121

Retrospective volume discounts are accounted for as variable consideration. The uncertainty of the contract price for current goods sold is based on the occurrence or nonoccurrence of some future event (i.e., whether the customer completes the specified volume of purchase).

Question 122

What distinguishes prospective volume discounts from retrospective volume discounts?

Answer 122

Prospective volume discounts impart a material right to the customer to invoke a volume discount option, whereas retrospective volume discounts impart no material right and are dependent on the occurrence or nonoccurrence of some uncertain future event.

Question 123

What is consideration payable to a customer?

Answer 123

Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity’s goods or services from the customer).

Question 124

How is consideration payable to a customer recognized?

Answer 124

Consideration payable to a customer is recognized as a reduction of the transaction price and therefore of revenue.

Question 125

At what time is revenue reduced for consideration payable to a customer?

Answer 125

Revenue is reduced for consideration payable to a customer at the later of when the entity
i) Recognizes revenue for the transfer of the related goods or services to the customer or
ii) Promises to pay the consideration to the customer.

Question 126

What is the basis for allocating the transaction price to contract performance obligations?

Answer 126

The basis is relative standalone selling prices. After separate performance obligations are identified and the total transaction price is determined, the transaction price is allocated to performance obligations on the basis of relative standalone selling prices.

Question 127

What is a standalone selling price?

Answer 127

A standalone selling price is the price at which an entity would sell a promised good or service separately to a customer.

Question 128

What is the best evidence of standalone selling price? Which 3 attributes does the evidence have?

Answer 128

The best evidence of a standalone selling price is the observable price of a good or service when it is (1) sold separately (2) in similar circumstances and (3) to similar customers (e.g., the list price of a good or service).

Question 129

What is done when the standalone selling price is unobservable?

Answer 129

If the standalone price is not directly observable, it must be estimated.

Question 130

What are the three approaches to estimating an unobservable standalone selling price?

Answer 130

1) Adjusted market assessment. An entity evaluates the market in which it sells goods or services and estimates the price that a customer in that market would be willing to pay for them.
-For example, the prices of competitors for similar goods or services adjusted for the entity’s costs and margins are estimates of standalone selling prices.
2) Expected cost plus an appropriate margin. An entity forecasts its expected costs of satisfying a performance obligation and adds an appropriate margin for that cost.
3) Residual. An entity estimates the standalone selling price by reference to the total transaction price minus the sum of the observable standalone selling prices of other goods or services promised in the contract. The residual approach may be used only in limited circumstances.

Question 131

When does an entity recognize revenue for a performance obligation satisfied?

Answer 131

An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service (an asset) to a customer.

Question 132

How is an asset transferred to a customer?

Answer 132

An asset is transferred when (or as) the customer obtains control of that asset.

Question 133

Which two conditions must be met for a customer to gain control of an asset transferred to them?

Answer 133

Control of an asset is transferred when the customer
1) Has the ability to direct the use of the asset and
2) Obtains substantially all of the remaining benefits (potential cash flows) from the asset.

Question 134

In which two temporal modalities can a performance obligation be satisfied?

Answer 134

A performance obligation can be satisfied either
1) over time or
2) at a point in time.

Question 135

What is recognizing revenue over time?

Answer 135

Recognizing revenue over time requires transfer of the control of goods or services to a customer over time and therefore satisfaction of a performance obligation over time.

Question 136

Revenue is recognized over time if any one of the following three criteria are met:

Answer 136

The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs. -For example, cleaning services are provided to a customer’s offices every day throughout the accounting period.
2) The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. For example, a construction company erects a building on the customer’s land.
3) The asset created has no alternative use to the entity, and the entity has an enforceable right to payment for the performance completed to date. For example, an aerospace company contracts to build a satellite designed for the unique needs of a specific customer.
-An entity does not have an alternative use for an asset if the entity is restricted contractually or limited practically from directing the asset for another use.

Question 136

What condition applies when an entity has no alternative use for an asset?

Answer 136

An entity does not have an alternative use for an asset if the entity is restricted contractually or limited practically from directing the asset for another use.

Question 137

What does it mean for a contract to be satisfied at a point in time?

Answer 137

If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. Revenue is recognized at a point in time when the customer obtains control over the promised asset.

Question 138

Which 5 indicators of the transfer of control should be considered for recognizing revenue at a point in time?

Answer 138

1) The entity has a present right to payment for the asset.
2) The customer has legal title to the asset.
3) The entity has transferred physical possession of the asset.
4) The customer has the significant risks and rewards of ownership of the asset.
5) The customer has accepted the asset.

Question 139

When is a contract liability presented on the balance sheet?

Answer 139

A contract liability is recognized for an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer. Deposits and other advance payments by the customer, such as sales of gift certificates, are recognized as contract liabilities (Study Unit 9, Subunit 4).

Question 140

When is a contract asset recognized on the balance sheet?

Answer 140

A contract asset is recognized for an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. However, the entity must have an unconditional right to the consideration to recognize a receivable. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.

Question 141

Which condition must apply to recognize z contract asset on the balance sheet?

Answer 141

However, the entity must have an unconditional right to the consideration to recognize a receivable.

Question 142

When is a right to consideration unconditional?

Answer 142

A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.

Question 143

Can contract assets and contract liabilities resulting from DIFFERENT contracts be presented net in the statement of financial position?

Answer 143

No. Contract assets and contract liabilities resulting from different contracts must not be presented net in the statement of financial position.

Question 144

If the entity expects to recover the incremental costs of obtaining a contract, may it capitalize the costs?

Answer 144

Yes. The incremental costs of obtaining a contract with a customer must be capitalized (recognized as an asset) if the entity expects to recover them.

Question 145

What does it mean to capitalize a cost?

Answer 145

Capitalized costs are recognized as assets on some basis.

Question 146

What is the basis for recognizing the capitalized cost (asset) associated with incremental costs of obtaining contracts that are expected to be recovered?

Answer 146

The asset recognized must be amortized on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates.

Question 147

Under what condition can the cost of obtaining a contract be expensed as incurred?

Answer 147

The cost of obtaining a contract may be expensed as incurred if its amortization period is 1 year or less.

Question 148

Which costs of obtaining contracts must be expensed as incurred?

Answer 148

Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained must be expensed as incurred.
-But costs explicitly chargeable to the customer regardless of whether the contract is obtained are capitalized.

Question 149

For those costs of obtaining contracts that must be expensed as incurred, what portion are capitalized?

Answer 149

Costs explicitly chargeable to the customer regardless of whether the contract is obtained are capitalized.

Question 150

Under what 2 conditions are costs of obtaining contracts expensed as incurred?

Answer 150

1) The cost of obtaining a contract may be expensed as incurred if its amortization period is 1 year or less.
2) Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained must be expensed as incurred.

Question 151

Costs incurred to fulfill a contract must be capitalized (recognized as an asset) only if they meet all of the following criteria: (3 elements)

Answer 151

1) The costs relate directly to a current or anticipated contract.
2)The costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future.
3) The costs are expected to be recovered.

Question 152

What is the basis of recognizing assets for those costs incurred to fulfill a contract that must be capitalized?

Answer 152

The asset recognized for eligible costs incurred to fulfill a contract must be amortized on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates.

Question 153

What is the distinction between costs incurred to obtain a contract and costs incurred to a fulfill a contract?

Answer 153

Costs incurred to obtain a contract are all of those costs leading up to the existence of a contract, whereas the costs incurred to fulfill a contract are those costs of keeping promises in the contract or delivering the promised obligations to the customer.

Question 154

What is the recognition of revenue over time?

Answer 154

For each performance obligation satisfied over time, an entity must recognize revenue over time. For this purpose, the entity measures the progress toward complete satisfaction using the output method or the input method.
-To determine the appropriate method, an entity must consider the nature of the good or service that it promised to transfer to the customer.
-The chosen method should describe the entity’s performance in transferring control of the promised asset to the customer.

Question 155

How does the entity determine the appropriate method for recognition of revenue over time? (2 elements)

Answer 155

1)To determine the appropriate method, an entity must consider the nature of the good or service that it promised to transfer to the customer.
2) The chosen method should describe the entity’s performance in transferring control of the promised asset to the customer.

Question 156

When is revenue recognition over time remeasured?

Answer 156

At the end of each reporting period, the progress toward complete satisfaction of the performance obligation must be remeasured and updated for any changes in the outcome of the performance obligation.

Question 157

How are periodic remeasurements of revenue recognized over time treated from an accounting standpoint?

Answer 157

Such changes must be accounted for prospectively as a change in accounting estimate.

Question 158

What are the three major methods for recognizing revenue over time?

Answer 158

1) Input Method
2) Cost-to-Cost Method (subset of input method)
3) Output Method

Question 159

What is the input method?

Answer 159

The input method recognizes revenue on the basis of (1) the entity’s inputs to the satisfaction of the performance obligation relative to (2) the total expected inputs to the satisfaction of that performance obligation.

Question 160

What are the two bases of revenue recognition for the input method?

Answer 160

(1) the entity’s inputs to the satisfaction of the performance obligation relative to
(2) the total expected inputs to the satisfaction of that performance obligation.

Question 161

What are 5 examples of inputs used in the input method?

Answer 161

1) Costs incurred,
2) Labor hours expended,
3) Resources consumed,
4) Time elapsed, or
5) Machine hours used.

Question 162

What is the Cost-to-Cost method of recognizing revenue over time?

Answer 162

In long-term construction contracts, costs incurred relative to total estimated costs often are used to measure the progress toward completion. This method is the cost-to-cost method.

Question 163

Which kind of costs are used in the Cost-to-Cost method?

Answer 163

Only costs that contribute to progress in satisfying the performance obligation are used in the cost-to-cost method.

Question 164

Only costs that contribute to progress in satisfying the performance obligation are used in the cost-to-cost method. Thus, the following costs must not be included in measuring the progress: (3 elements)

Answer 164

1) Costs incurred that relate to significant inefficiencies in the entity’s performance (e.g., abnormal amounts of wasted materials or labor) that were not chargeable to the customer under the contract
2) General and administrative costs not directly related to the contract
3) Selling and marketing costs

Question 165

When is the straight-line basis appropriate for the Input Method of recognizing revenue from contracts with customers?

Answer 165

When an entity’s inputs are incurred evenly over time, recognition of revenue on a straight-line basis may be appropriate.

Question 166

What is the output method of recognizing revenue from contracts with customers?

Answer 166

The output method recognizes revenue based on direct measurement of (1) the value of goods or services transferred to the customer to date relative to (2) the remaining goods or services promised under the contract.

Question 166

What are 4 examples of output methods?

Answer 166

Examples of output methods include (1) appraisals of results achieved, (2) milestones reached, (3) units produced, and (4) units delivered.

Question 166

What are the two possible bases for recognizing revenue over time that could be used by the Output Method?

Answer 166

(1) the value of goods or services transferred to the customer to date relative to
(2) the remaining goods or services promised under the contract.

Question 166

What is revenue recognition to the extent of cost incurred?

Answer 166

However, revenue can be recognized to the extent of the cost incurred (zero profit margin) when an entity
-Is not able to reasonably measure the outcome of a performance obligation or its progress toward satisfaction of that obligation but
-Expects to recover the costs incurred in satisfying the performance obligation.

Question 167

What is the right to invoice the customer?

Answer 167

An entity may have a right to consideration from a customer in an amount corresponding directly with the value to the customer of performance to date. Using a practical expedient, revenue may be recognized at the amounts to which the entity has a right to invoice the customer.

Question 167

Which two conditions must both apply in order for revenue to be recognized to the extent of cost incurred?

Answer 167

1) The entity is not able to reasonably measure the outcome of a performance obligation or its progress toward satisfaction of that obligation but
2) The entity expects to recover the costs incurred in satisfying the performance obligation.

Question 167

How must estimated losses be recognized for contracts with customers?

Answer 167

As soon as an estimated loss on any project becomes apparent, it must be recognized in full, regardless of the methods used.

Question 167

What condition must apply in order for an entity to recognize revenue for performance of an obligation satisfied over time?

Answer 167

The performance must be REASONABLY MEASURED. An entity recognizes revenue for a performance obligation satisfied over time only if progress toward complete satisfaction of the performance obligation can be reasonably measured.

Question 168

Does the method use effect criteria for recognizing losses on contracts with customers?

Answer 168

No. As soon as an estimated loss on any project becomes apparent, it must be recognized in full, regardless of the methods used.

Question 169

Under the Cost-to-Cost method, how does the ratio used to recognize revenue in a period contribute to calculating the revenue for the period?

Answer 169

The ratio used is [total cost incurred to date]/[total estimated costs]. This ratio is multiplied times the contract price to determine the total amount of revenue recognized up until a point in time. To get the period revenue, previously recognized revenue is deducted from the product of this ratio and the contract price.

Question 170

What is the Cost-to-Cost Method formula to compute revenue in a given period?

Answer 170

Revenue Recognized in Period = ([Total cost incurred to date]/[Total estimated costs])*[Contract Price] – [Previously Recognized Revenue]

Question 171

An entity recognizes revenue from a long-term contract over time. However, early in the performance of the contract, it cannot reasonably measure the outcome, but it expects to recover the costs incurred. Revenue should be recognized based on ________.

Answer 171

A zero profit margin. When the outcome of the contract is not reasonably measurable but the costs incurred in satisfying the performance obligation are expected to be recovered, revenue must be recognized only to the extent of the costs incurred. Revenue recognized is based on a zero profit margin until the entity can reasonably measure the outcome of the performance obligation.

Question 172

Net Expense Payable =

Answer 172

Accrued Expense - Prepaid Expense