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FAR 2 > M1 > Flashcards

M1 Flashcards

1
Q

When is revenue recognized?

A

When a performance obligation is met by transfer of good or service

Revenue should be recognized in the amount EXPECTED

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2
Q

What is the five step approach to recognizing revenue (ISTAR)

A
  1. IDENTIFY the contract
    2.SEPARATE the performance obligations
    3.Determine the TRANSACTION price
  2. ALLOCATE the transaction price to the separate performance obligations
  3. RECOGNIZE revenue as each performance obligation is met
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3
Q

What is the definition of a contract

A

An agreement that creates enforceable rights and obligations

*can be verbal, written or implied

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4
Q

When should contracts be combined?

A

-The contracts are negotiated as a package with a single objective
-They are tied to one another
-They represent a single performance obligation

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5
Q

When is a contract modification treated as a new contract?

A

-The scope increases due to the addition of distinct goods or services and
-The price increases

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6
Q

What criteria makes a performance obligation distinct?

A
  1. separately identifiable AND
  2. Customer can benefit from the good or service independently or with their available resources
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7
Q

What makes a transfer of goods or service separately identifiable?

A

-The separate goods or services do not integrate
-The good or services do not customize or modify one another
-They do not depend on or relate to each other

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8
Q

What makes a transfer of goods or service not separately identifiable?

A

Goods or services are highly interrelated or interdependent

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9
Q

What factors are considered when determining the transaction price?

A
  1. Variable consideration
  2. Significant financing
  3. Noncash considerations
  4. Consideration payable to customers
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10
Q

How is variable consideration estimated?

A

1 Using the weighted average probability of the expected values or
2 The most likely amount

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11
Q

How does financing effect transaction price?

A

Future values must be discounted to PV

PV = FV/(1+R)^N

*If time between transfer is less than 1 year then discounting is unnecessary

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12
Q

How is interest accrued after the present value is calculated?

A

year 1 PV * rate = yr 1 interest
(PV + yr 1 interest) * rate = yr 2 interest
(PV + yr 1 interest + yr 2 interest) * rate = yr 3 interest

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13
Q

How is transaction price allocated?

A

It is allocated in proportion to the standalone selling price of each item

*multi-year contracts are summed up to reflect total value

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14
Q

How is ongoing service revenue recognized in a JE

A

-Upon sale
DR Cash
CR Unearned Service Revenue

-Each year as the service is provided
DR Unearned service revenue
CR Service Revenue

*For partial years allocate on a per month basis

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15
Q

When is revenue recognized over time? Step 5

A

-The service enhances an asset within the customers control (annual service contract) or
-Customer simultaneously receives and consumes the benefits (subscription service) or
-Entity’s performance does not create an asset with alternative use (not basic inventory)

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16
Q

How does the Output method measure revenue over time?

A

Revenue is recognized based on its value relative to the remaining value of goods or services promised. Production or distribution related (milestones))

17
Q

How does the Input method measure revenue over time?

A

Revenue is recognized based on the entity’s efforts or inputs relative to total expected inputs.
ex CPA firm hours

18
Q

When is a contract asset created?

A

When the entity has performed prior to the customer paying

When only conditioned by the passage of time, the entity should present this as a receivable

19
Q

When is a contract liability created?

A

When the entity has a non-cancellable obligation to transfer goods or services

20
Q

What is the JE for a multi-step performance obligation (contract asset)

A

1st performance obligation is fulfilled

DR Contract Asset
CR Revenue

all performance obligations are satisfied
DR Receivables
CR Contract asset
CR Revenue

21
Q

What is the JE for a contract liability

A

Recognize the receivable
Dr Receivable
CR Contract liability

Receipt of cash
DR Cash
CR Receivable

Delivery of good or service
DR Contract liability
CR Revenue

22
Q

Which incremental costs are capitalized and amortized?

A

Incremental costs of obtaining a contract are recognized as an asset
ex Commissions, legal fees, ( not travel costs)

23
Q

What criteria must be met for a cost to fulfill a contract to be recognized as an asset

A

-Relate directly to a contract (not partially)
-enhances the resources of the entity
-Expected to be recovered

ex Raw material, direct labor, factory overhead

24
Q

What classifies an entity as an agent?

A

-Another party is responsible for fulfilling the contract
-The entity does not have inventory risk
-The entity does not have discretion in establishing prices

25
Q

What are the 3 main repurchase agreements?

A

-A forward (obligation to repurchase)
-A call option (right to repurchase)
-A put option (obligation to repurchase at customer request)

26
Q

If a forward or call option to repurchase is less than the original selling price, how is it treated?

A

As a lease

27
Q

If a forward or call option to repurchase is greater than or equal to the original selling price, how is it treated?

A

As a financing arrangement

28
Q

What are the 3 steps when accounting for a financing arrangement?

A
  1. Recognize the financial liability
    DR Cash
    CR Financial Liability
  2. Recognize interest expense for the difference between repurchase and cash received
    DR Interest Expense
    CR Financial liability
  3. If the option lapses, derecognize the liability and record revenue
    DR Financial liability
    CR Revenue
29
Q

If a Put option is less than the original selling price, how is it treated?

A

As a lease, if there is significant economic incentive
Otherwise, it is treated as a sale with a right to repurchase

30
Q

If a Put option is greater than the original selling price, how is it treated?

A

As a financing arrangement (if greater than or equal to market value)
or as a sale with a right of return (if repurchase price is less than or equal to expected market value and does not have a significant economic incentive to exercise the right)

31
Q

What is a bill & hold arrangement?

A

A Contract where the entity bills a customer for a product that has not yet been delivered

32
Q

What criteria must be met for a customer to have obtained control of a product in a bill-and-hold arrangement?

A

All must be met
1. There must be a substantive reason for the arrangement (customer request)
2. Product is separately identifiable as the customers
3.Product is ready for transfer
4. Product cannot be used by anyone other than the customer

33
Q

What is consignment?

A

An arrangement in which goods are left in the possession of an authorized third party to sell

34
Q

When is a warranty a separate performance obligation?

A

When it can be purchased separately.

*If a warranty is required by law, it is not a separate performance obligation

35
Q

What is the journal entry for a refund liability?

A

DR Cash
CR Refund liability

DR Refund liability
CR cash

FAR 2 (11 decks)

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