Revenue Recognition

Question 1

The core revenue recognition principle consists of what two components?

Answer 1

-Revenue is to be recognized upon transfer of
promised goods and services to customers
-The amount of revenue recognized represents the
consideration the entity expects to receive in
exchange for those goods and services

Question 2

What is the five step process for revenue recognition?

Answer 2

1. Identify contracts with customers
   -determine when an arrangement is considered a
   contract with customers and determine when multiple
   contracts with the same customer should be
   combined and accounted for as a single contract
2. Identify all separate performance obligations within
   each contract
3. Determine the total consideration for the contract
4. Allocate the total consideration among the separate
   performance obligations
5. Recognize revenue, either:
   -When the entity has satisfied its performance
   obligations, which is generally associated with
   revenue resulting from delivering products.
   -While the entity is satisfying its performance
   obligations, which is generally associated with
   revenues resulting from providing services.

Question 3

When should a contract be combined?

Answer 3

If one of more of the following:
-Contracts negotiated as a single package with a single
commercial objective
-Amount of consideration to be paid in one contract
depends on the price or performance of the other
contracts (multiple deliverables)
-Goods or services promised in the contracts are a
single performance obligation.

Question 4

What two criteria must be met to be considered a distinct performance obligation?

Answer 4

-The customer must be able to benefit from the good
or service on its own or together using other
resources that are readily available to the customer
(ie, a machine casing and internals need to be
bundled together and are not distinct from each
other.)
-The promise to transfer the good or service is
separately identified from other promises in the
contract

Question 5

What is a service type warranty?

Answer 5

Generally provides a customer with repairs in the form of parts and labor in addition to making certain that the product performs as was promised.
Separately stated identifiable promise in a contract
Distinct performance obligation

Question 6

What is an assurance type warranty?

Answer 6

Protects the customer from obtaining a product that is not capable of performing at the level that the seller indicated it would.
Labeled as a contingent liability.