Revenue Recognition

Question 1

List the steps associated with the five-step approach to revenue recognition

Answer 1

1. Identify the contract
2. Identify separate performance obligation
3. Determine transaction price
4. Allocate transaction price
5. Recognize revenue when satisfies performance obligation

Question 2

What criteria must be met in order to recognize revenue on a contract

Answer 2

Contract is approved
Payments terms can be identified
collection is probable

Question 3

Describe how revenue recognition differs when performance is satisfied over time vs at a point in time

Answer 3

Point in Time - Customer obtains control of the asset

Over time - measuring progress toward completion using either output or input method.

Question 4

Distinguish between the treatment of costs incurred in obtaining a contract as assets or a expense

Answer 4

If cost can be recovered its an asset

If cost would have been incurred regardless of the contract then its an expense

Question 5

How do control and revenue recognition differ when an entity acts as a principal vs agent

Answer 5

Agent only recognize revenue for the agent fee/commission and has no control
Principal has control prior to transfer and revenue = expected gross amount.

Question 6

What criteria must be met in order for a customer to obtain control in a bill and hold arrangement?

Answer 6

• Product separately identified as the customers
• Product is ready to be shipped
• Entity can’t sell product to anyone else
• Must have a good reason for the arrangement

Question 7

When is a warranty considered a separate performance obligation within a contract?

Answer 7

When customer can buy warranty separately or if warranty provides a service that’s needed incase product doesn’t perform agreed-upon specifications. A portion of the overall transaction price should then be allocated to warranty obligation

Question 8

Describe refund liabilities and when it is appropriate to book them?

Answer 8

Refund liability is the amount of money an entity does not expect to be receive. Recognize when customer has a right to return and entity anticipates having to return a portion of the money they already received

Question 9

When can revenue be recognized on long term construction contracts?

Answer 9

Revenue can be recognized at a point in time or over time

Question 10

For long-term construction-type contracts, when are losses recognized immediately?

Answer 10

Losses are recognized immediately when the loss represents an overall loss on the entire contract as of the completion of the contract