Revenue Recognition

Question 1

Which condition must be present in order for the contract modification to be accounted for as a separate contract?

Answer 1

The SCOPE of the original contract increases through the addition of distinct goods or services.

Question 2

What has not been paid would be left accrued?

Answer 2

Unpaid would be accrued in the same year

Question 3

Notes payable is a ________________ liability unless duration provided in the question

Answer 3

LONG TERM

Question 4

Accounts payable are typically due within _______ (CL unless different duration is provided in the question)

Answer 4

30 to 60 days

Question 5

Which account would be debited when preparing the JE to record billings in both the methods?

Answer 5

CONSTRUCTION RECEIVABLE

Question 6

To record capitalized construction costs

Answer 6

Construction In Progress XX
Cash XX

Question 7

To record billings (i.e. Invoices) sent to customers (Billings are a contra-asset account to CIP and relate specifically to the balance sheet). Billings do not trigger revenue recognition because they can occur throughout the contract including before and after the performance obligation has been satisfied.

Answer 7

Construction receivable XX
Billings on Construction Contracts XX

Question 8

To record cash collected from customers

Answer 8

Cash XX
Construction Receivable XX

Question 9

To close contract-related accounts upon completion of the contract

Answer 9

Billings on construction contracts XX
CIP XX

Question 10

Gross profit / Total Cost

Answer 10

Gross profit % for point over time (total cost includes cost icurred to date + estimated costs)

Question 11

Input method - Cost to cost approach

Answer 11

Cost incurred to work completed, % complete

Question 12

The completed contract method for LT contracts is preferable over the percentage of completion method when lack of dependable estimates or inherent hazards cause _____

Answer 12

forecasts to be doubtful (ASC topic 605)

Question 13

Calculation of cost incurred to date

Answer 13

1st step, = % completion * estimated cost at completion

second step(subtract previous year cost to calculate current year cost incurred)

Question 14

Completed contract method, profit =

Answer 14

Revenue - Actual cumulative Cost of Yr 1 and Yr 2

Question 15

JE when first payment of first product depends on the delivery of second product

2 steps involved when performance has been satisfied, then it will convert to AR

Answer 15

(1) Contract Asset with conditional rights should be debited
(2) Once performance has been satisfied, it will convert to AR

*Contract Asset with conditional rights
*Account receivable to be debited (AR reflects an unconditional right to payment)

Question 16

When using % of completion method, the amount of income recognized in any year would be added to _______

Answer 16

CIP

JE when Revenue is recognized

CIP XX
Income on LT contract XX

Question 17

When payment depends on condition to be fulfilled by e.g. June, one product deliverd in March 25, second to be delivered in June.

March 31 Balance sheet would show $6,000 of product A as CONTRACT ASSET

Answer 17

Contract asset to be reported to reflect the conditional nature of the asset

Question 18

Gross Sales Revenue
Less: Sales Returns
Less: Sales Discounts
_________________________
Net Sales Revenue

Answer 18

Calc royalty income at Net Sales Revenue

Question 19

Steps involved in Revenue Recognition (ISTAR mnemonic to remember)

Answer 19

1. Identify the contract
2. (Separate) Performance Obligation
3. Transaction Price
4. Allocate Transaction Price
5. Recognize Revenue

Question 20

EXPECTED VALUE to be used for e.g. Daily penalty wherever there a LARGE NUMBER OF POSSIBLE OUTCOMES. The expected value is the sum of probablity weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large no. of contracts with similar charateristics.

Answer 20

The MOST LIKELY AMOUNT to be used for SINGLE MOST LIKELY Amount in a range of possible consideration amounts. E.G. INCENTIVE BONUS

Question 21

DO NOT RECOGNIZE REVENUE IN CASES where revenue is contingent (or there is a condition) upon reselling the goods

Answer 21

True

Question 22

Non-cancellable contract

Answer 22

record as liability on the DATE when payment is DUE e.g. March 1

Question 23

Cancellable contract

Answer 23

record as liability on the DATE when payment is advance is PAID e.g. March 31

Question 24

The amount of VARIABLE CONSIDERATION that can be included in the transaction price is limited to only those amounts for which it is PROBABLE that a SIGNIFICANT REVERSAL of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variability is resolved.

Answer 24

In assessing whether it is porbable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty related to the variable consideration is subsequently resolved, the vendor will consider both the likelihood and the magnitude of the revenue reversal.

Question 25

CONSIGNMENT

Answer 25

1. Entity controls the product until a specified event occurs, such as the sale of the product to a customer of the dealer or until a sepcified period expires
2. Entity is able to require the return of the product or transfer the product to a third party (such as another dealer)
3. Dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit).

Question 26

BILL AND HOLD

Answer 26

1. Product must be identified separately as belonging to the customer.
2. Product currently must be ready for physical transfer to the customer.
3. Entity cannot use the product or to direct it to another customer.
4. Susbtantive reason for the bill and hold arrangement (e.g. the customer has requested the arrangement)

Question 27

Variable Consideration (NEW CHANGE IN AICPA)

Answer 27

Report as REFUNDABLE LIABILITY when Cash receipts exceed expected amount. E.g. $87,000 received when total cost (fixed+variable) was $85,000.

Std establishes constraint on amount of variable consideration that can be recognize because constraint designed to prevent an entity from recognizing revenues in one period only to reverse in subsequent period.

When applying constraint, entity should consider likelihood and magnitude of potential reversal.

Variable consideration is required to be reassessed each period such that the transaction price at the end of any given period reflects the circumstances at that time.

Question 28

Nonrefundable payments (maybe income). Generally prepayments are _____________________

Answer 28

Recorded as a contract liability.

When the amounts require remittance to a third party, record as a liability.

When the likelihood that the customer will exercise the rights becomes remote if breakage is not expected or in proportion to the pattern of rights exercised by customers if breakage is expected (report as revenue).