Rev Rec. (F1:M3-4)

Question 1

if there is a bill-and-hold agreement, should the seller recognize revenue?

Answer 1

yes, only if all of following criteria are met:
there is substantive reason for the arrangement
product has been separately identified as the customer’s
product is ready for transfer to customer
entity cannot use product or direct it to another customer

Question 2

what is the formula for allocating transaction price to performance obligations?

Answer 2

(stand-alone price/FV of contract) * contract amount

FV of contract = aggregate of stand-alone prices

Question 3

what are incremental costs of obtaining a contract?

Answer 3

costs incurred that would not have been incurred if the contract had not been obtained, and are recognized as an asset if the entity expects that it will recover these costs.

travel cost - expensed (not incremental)
legal fees for drawing up contract - asset (incremental)

Question 4

costs incurred to fulfill a contract are recognized as an asset when… (3 criteria must be met)

Answer 4

they relate directly to a contract
they generate or enhance the resources of the entity
they are expected to be recovered

Question 5

principal vs. agent

what are some indicators that an entity is an agent?

Answer 5

another party is primary responsible for fulfilling the contract
the entity does not have inventory risk
entity does not have discretion in establishing prices for the other party’s goods or services

Question 6

what are the journal entries to record a transaction as a financing arrangement?

Answer 6

Cash (dr)
Financial Liability (cr)
(parties enter into contract)

Interest Expense (dr)
Financial Liability (cr)
(recognize interest exp. repurchase price - cash received)

Financial Liability (dr)
Revenue (cr)
(when option lapses)

Question 7

T or F, revenue will be recognized for products that entities anticipate having to return.

Answer 7

F

Question 8

Under the installment sales method, how is earned gross profit calculated?

Answer 8

Gross profit × cash collected

*if cash collected in current year is from prior year, prior year GP must be calculated and multiplied by the cash collected on the sale from prior year