M1 Flashcards
When is revenue recognized?
When a performance obligation is met by transfer of good or service
Revenue should be recognized in the amount EXPECTED
What is the five step approach to recognizing revenue (ISTAR)
- IDENTIFY the contract
2.SEPARATE the performance obligations
3.Determine the TRANSACTION price - ALLOCATE the transaction price to the separate performance obligations
- RECOGNIZE revenue as each performance obligation is met
What is the definition of a contract
An agreement that creates enforceable rights and obligations
*can be verbal, written or implied
When should contracts be combined?
-The contracts are negotiated as a package with a single objective
-They are tied to one another
-They represent a single performance obligation
When is a contract modification treated as a new contract?
-The scope increases due to the addition of distinct goods or services and
-The price increases
What criteria makes a performance obligation distinct?
- separately identifiable AND
- Customer can benefit from the good or service independently or with their available resources
What makes a transfer of goods or service separately identifiable?
-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
What makes a transfer of goods or service not separately identifiable?
Goods or services are highly interrelated or interdependent
What factors are considered when determining the transaction price?
- Variable consideration
- Significant financing
- Noncash considerations
- Consideration payable to customers
How is variable consideration estimated?
1 Using the weighted average probability of the expected values or
2 The most likely amount
How does financing effect transaction price?
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
How is interest accrued after the present value is calculated?
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
How is transaction price allocated?
It is allocated in proportion to the standalone selling price of each item
*multi-year contracts are summed up to reflect total value
How is ongoing service revenue recognized in a JE
-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
When is revenue recognized over time? Step 5
-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)
How does the Output method measure revenue over time?
Revenue is recognized based on its value relative to the remaining value of goods or services promised. Production or distribution related (milestones))
How does the Input method measure revenue over time?
Revenue is recognized based on the entity’s efforts or inputs relative to total expected inputs.
ex CPA firm hours
When is a contract asset created?
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
When is a contract liability created?
When the entity has a non-cancellable obligation to transfer goods or services
What is the JE for a multi-step performance obligation (contract asset)
1st performance obligation is fulfilled
DR Contract Asset
CR Revenue
all performance obligations are satisfied
DR Receivables
CR Contract asset
CR Revenue
What is the JE for a contract liability
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
Which incremental costs are capitalized and amortized?
Incremental costs of obtaining a contract are recognized as an asset
ex Commissions, legal fees, ( not travel costs)
What criteria must be met for a cost to fulfill a contract to be recognized as an asset
-Relate directly to a contract (not partially)
-enhances the resources of the entity
-Expected to be recovered
ex Raw material, direct labor, factory overhead
What classifies an entity as an agent?
-Another party is responsible for fulfilling the contract
-The entity does not have inventory risk
-The entity does not have discretion in establishing prices
What are the 3 main repurchase agreements?
-A forward (obligation to repurchase)
-A call option (right to repurchase)
-A put option (obligation to repurchase at customer request)
If a forward or call option to repurchase is less than the original selling price, how is it treated?
As a lease
If a forward or call option to repurchase is greater than or equal to the original selling price, how is it treated?
As a financing arrangement
What are the 3 steps when accounting for a financing arrangement?
- Recognize the financial liability
DR Cash
CR Financial Liability - Recognize interest expense for the difference between repurchase and cash received
DR Interest Expense
CR Financial liability - If the option lapses, derecognize the liability and record revenue
DR Financial liability
CR Revenue
If a Put option is less than the original selling price, how is it treated?
As a lease, if there is significant economic incentive
Otherwise, it is treated as a sale with a right to repurchase
If a Put option is greater than the original selling price, how is it treated?
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)
What is a bill & hold arrangement?
A Contract where the entity bills a customer for a product that has not yet been delivered
What criteria must be met for a customer to have obtained control of a product in a bill-and-hold arrangement?
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
What is consignment?
An arrangement in which goods are left in the possession of an authorized third party to sell
When is a warranty a separate performance obligation?
When it can be purchased separately.
*If a warranty is required by law, it is not a separate performance obligation
What is the journal entry for a refund liability?
DR Cash
CR Refund liability
DR Refund liability
CR cash
