Revenue & Expense Recognition

Question 1

When do companies with ESOP plans recognize expense?

Answer 1

Companies with Employee Stock Ownership Plans (ESOPs) recognize expense when cash and/or stocks are contributed to the plan (stocks measured at FMV).

Question 2

ASC 250 Definition of Accounting Errors

Answer 2

ASC 250 defined accounting errors which qualify as prior period adjustments. Such errors should result in correction of the statements of prior years, if material. These errors usually result from mistake, oversight or misuse of facts.

Question 3

Name four key points of installment sales accounting

Answer 3

1) Each year’s accounts receivable are maintained separately. 2) Each year has separate gross profit and cost of sales percentage. 3) Unrealized gross profit is the gross profit percentage times the accounts receivable balance for that year. 4) Realized gross profit is the gross profit percentage times the collections of the A/R for a given year.

Question 4

Accounting for Franchise Fee Revenue (ASC 605)

Answer 4

Franchise fee revenue from an individual franchise sale is ordinarily recognized when all material services or conditions relating to the sale have been substantially performed or satisfied by the franchisor.

Question 5

Stock Appreciation Rights (SARS)

Answer 5

SARS are compensation awards given to employees for the difference between the market price of the stock at the exercise date and the market price at the date of the grant.

Question 6

AICPA position on installment accounting

Answer 6

Profit is deemed to be realized when a sale in the ordinary course of business is affected, unless the circumstances are such that the collection of the sale price is not reasonably assured.

Question 7

Completed Contract method of income measurement definition

Answer 7

Profit is measured when contract is complete.

Question 8

Short term obligations arising from normal course of business and are due in customary terms should be classified as? (ASC 405)

Answer 8

Short term obligations arising from transactions in the normal course of business that are due I customary terms shall be classified as current liabilities.

Question 9

Name four features of Personal Financial Statements.

Answer 9

1) A statement of financial position is required2) A statement of changes in net worth is optional3) Income statements and statements of cash flows are not usually disclosed4) In presenting Personal Financial Statement, assets and liabilities are reported at estimated current values

Question 10

Counterbalancing Errors

Answer 10

This type of error affects the net income of two or more periods, but has no effect on retained earnings for the years for which the statements are being corrected.

Question 11

How is a default on an installment contract accounted for?

Answer 11

Defaults on installment contract—loss on defaults would be the balance on the contract times the cost of sales percentage for that year

Question 12

Real Estate Sales (ASC 605)

Answer 12

Profit is recognized in full when real estate is sold, provide(a) the profit is determinable, (collectibility of the sales price is reasonably assured or the amount that will not be collectible can be estimated), and(b) the seller is not obliged to perform significant activities after the sale to earn the profit.Unless both conditions exist, recognition of all or part of the profit shall be postponed.

Question 13

ASC 718 treatment of Stock Appreciation Rights (SARS)

Answer 13

The FASB requires that the fair value of the SARS be calculated annually using the same type of option pricing model that was used for stock options.

Question 14

Cost-Recovery Method

Answer 14

Under the cost-recovery method, equal amounts of revenue and expense are recognized as collections are made until all costs have been recovered, postponing any recognition of profit until that time.

Question 15

Costs and Estimated Earnings in Excess of Billing (ASC 605) states:

Answer 15

“Current assets may include costs and recognized income not yet billed with respect to certain contracts; and may include billings in excess of costs and recognized income with respect to other contracts.

Question 16

Major difference between GAAP and IFRS regarding convertible bonds.

Answer 16

The major difference is that convertible bonds are split into an equity piece and a liability portion. The conversion feature is considered a part of equity.

Question 17

Recognizing Revenue When Right Of Return Exists — ASC 605 states:

Answer 17

If an enterprise sells its product but gives the buyer rights to return the product, revenue from the sales transaction shall be recognized at time of sale only if certain conditions are met.

Question 18

Noncounterbalancing Errors

Answer 18

Such errors require and adjustment to a balance sheet account at the end of the period for which corrections are being made.

Question 19

How are trade-ins accounted for?

Answer 19

Trade-ins should be placed on the books at estimated inventory market value. Gross profit is computed based on estimated value of trade-in.

Question 20

Percentage of Completion method of Income Measurement Definition

Answer 20

Income is recognized as work on a contract progresses based on a percentage of estimated total income.

Question 21

Major Difference in US GAAP and IFRS regarding the completed Contract Method.

Answer 21

The only difference between IFRS and US GAAP is that IFRS does not allow the use of the completed contract method.

Question 22

Restricted Stock Plans

Answer 22

Restricted Stock Plans are another way to reward employees with company stock but restrict the technical release of the stock until some future period of employment when the rights to the shares vest.

Question 23

If Installment sales contracts call for instance on uncollected balances, when should the interest be taken into income?

Answer 23

If installment sales contacts call for interest on uncollected balances, the interest should be taken into income during the period in which it accrues.

Question 24

Installment Sales Definition

Answer 24

Sales are made with payment to be received in the current and future accounting periods. Payments received are partly a return of cost and profit.

Question 25

In IFRS, how is the term “probable” defined?

Answer 25

Probable is defined as “more likely than not”, which usually defines as a probability of 50% or above.

Question 26

Recognizing Revenue When Right Of Return does not Exist (does not meet the conditions) — ASC 605 states:

Answer 26

Sales revenue and cost of sales that are not recognized at time of sale because the foregoing conditions are not met shall be recognized either when the return privilege has substantially expired or if those conditions subsequently are met, whichever occurs first.

Question 27

ASC 718 regarding the recording of Stock Options

Answer 27

ASC 718 eliminated the use of the Intrinsic Method and required that stock options be recorded using Fair Market Value Method.

Question 28

Is Matching cost and Revenues permissible?

Answer 28

Even though procedure of deferring income and not deferring expenses does not result in matching of costs and revenues, it is permissible because of the difficulty of matching costs with revenue.

Question 29

Percentage of Completion method is measured as a percentage of total income in which two ways?

Answer 29

1) A percentage of incurred costs to date to estimated total costs, or2) Any other measure of progress toward completion that may be appropriate having due regard for work performed.

Question 30

How should short-term obligation be classified? (ASC 405)

Answer 30

Short-term obligations such as trade accounts payable and normal accrued liabilities should always be classified as current.