Revenue Recognition

Question 1

True or False; In a principal-agent consideration, the principal is primarily responsible for fulfilling the promise of goods or services to the customer.

Answer 1

True

Question 2

if a company offers a right to return product for any reason what type of adjusting entry should happen if based on past sales it is expected the customer will return 5 items sold at $10 each?

Answer 2

Sales Returns and Allowances 50dr

     Allowance for Sales REturns
      and allowances                                         50cr

Question 3

When is the effect of estimated returns recognized?

Answer 3

in the month of sale

Question 4

How do you calculate the sales revenue when there is a 90 day return period policy?

Answer 4

take the net sales reported for the current month less the calculated amount of the percentage or returns on those sales. example: if it’s estimated that 5% of sales will be returned and monthly sales were $200,000 then 200k x 5% = 10,000.00 and the amount recorded should be $190,000

Question 5

If a gym collects an up front fee for membership of $192.00 and has a monthly fee of $32.00 how much revenue should be recorded the date the contract is signed?

Answer 5

$0 zero because no services have been provided.

Question 6

True or False: If a contract has two performance obligations, then the transaction price should be split evenly between the two performance obligations to support fair presentation.

Answer 6

False

Question 7

The expected value approach is a method used to allocate transaction price to separate performance obligations.

Answer 7

False

Question 8

True or False: Installation that requires specialized knowledge and is not considered distinct from the equipment being installed will be accounted for as one performance obligation.

Answer 8

True

Question 9

How do you allocate the total contract price when there is installation?

Answer 9

Find the fair value of the product and installation. ex: equipment is $850,000 and installation is $50,000 so $900,000. Then find the percentage which is equipment an installation. So, 850,000/ 900,000=.94 and 50,000/900,000=.0556 then allocate the transaction price to the installation, multiply the total contract price by the proportion of the fair value of installation ($850,000x.0556) so allocation to installation is $47,260

Question 10

Allocating a transaction price to multiple performance obligations includes which of the following steps?
A. Complete each performance obligation before recognizing any revenue from the contract?
B. obtain an independent appraisal of the value of services identified as a performance obligation.
C. Identify distinct goods and/or services as separate performance obligations

Answer 10

c. identify destinct goods and/or services as separate performance obligations.

Question 11

For a good or service to be considered distinct and identified as a separate performance obligation, it must be what?

Answer 11

Able to be used by the customer on its own or with resources readily available to the customer and able to be separately identified from other promises in the contract.

Question 12

True or false: The computation of the percentage of completion, at the end of any year, considers the cost incurred through the end of that year in both the numerator and denominator.

Answer 12

True

Question 13

Billings on contract is a liability account; true or false

Answer 13

False

Question 14

How do you calculate the recognition of gross profit on a construction project that is at a percentage of completion?

Answer 14

figure our the percentage of completion; ex. 2m in construction costs expended of the 16m estimated=12.5% then subtract the estimated costs, 16m from the contracted price, 20m=4m then multiply by the percentage of completion. 4m x .125=500,000