Revenue Recognition

Question 1

Contract Modification

Answer 1

change in the scope or price (or both) of a contract that is approved by the parties to the contract.

Question 2

Separate Contract

Answer 2

if BOTH of the following conditions are present:

a. Scope of contract increases due to promise of additional goods / services that are distinct.
b. Price of contract increases by an amount of consideration that reflects the entity’s standalone selling prices (less any adjustments / discounts) of the additional goods / services.

Question 3

Distinct Good or Service

Answer 3

if both of the following criteria are met:
• Capable of being distinct - Customer can benefit from the good / service either on its own or together with other resources that are readily available to the customer.
• Distinct within the context of the contract - The promise to transfer the good / service is separately identifiable from other promises in the contract.

Question 4

Milestone Method

Answer 4

an application of the proportional performance method.

Question 5

IFRS Completed Contract

Answer 5

not allowed under IFRS. IFRS requires the percentage of com¬pletion method for long-term construction projects. If the percentage cannot be reasonably estimated, then reve¬nue is recognized only to the extent of cost.

Question 6

Indicators of Consignment Arrangement

Answer 6

control by the vendor, vendor’s ability to require return or transfer and no unconditional obligation of consignee to pay

Question 7

Consignment Arrangement: Revenue Recognition

Answer 7

deferred until the subsequent sale to the end-consumer.

Question 8

Point in Time Revenue Recognition: Criteria

Answer 8

• Entity currently has a right to collect payment for the asset
• The legal title for the asset is with the customer
• Physical possession of the asset is transferred by the entity to the customer
• Significant risks and rewards of ownership of the asset are with the customer
• Asset has been accepted by the customer

Question 9

Benefits under Revenue Recognition Standard

Answer 9

• Eliminates inconsistencies and weaknesses of existing revenue requirements
• Provides a more robust revenue management framework
• Enhances the comparability of revenue recognition practices.
• Provides users of financial statements with more useful information through improved disclosure requirements
• Simplifies the preparation of financial statements by reducing the number of requirements referred to by an organization.

Question 10

Contract Liability

Answer 10

Upon receipt of a prepayment from a customer, an entity should recognize a contract liability. Thereafter, entity should derecognize that contract liability (and recognize revenue) when it transfers those goods or services and, therefore, satisfies its performance obligation.

Question 11

Gift Certificates Sold

Answer 11

The deferred revenue account is credited

Question 12

Gift Certificates Redeemed

Answer 12

sales revenues are recognized by debiting deferred revenues.

Question 13

Gift Certificates Lapse

Answer 13

deferred revenues are reduced as they are not a liability anymore.

Question 14

Cost Capitalization

Answer 14

• Relate directly to a contract (or a specific anticipated contract).
• Generate or enhance resources of the entity that will be used in satisfying performance obligations in the future.
• Are expected to be recovered.

Question 15

Incremental Costs

Answer 15

costs that the entity would not have incurred if the contract had not been obtained.

Question 16

Agent Criteria

Answer 16

a. Another party is primarily responsible for fulfilling the contract. b. The entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping, or on return. c. The entity does not have discretion in establishing prices for the other party’s goods or services and, thus, the benefit that the entity can receive from those goods or services is limited. d. The entity’s consideration is in the form of a commission. e. The entity is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services

Question 17

Over Time: Revenue Recognition

Answer 17

if one of the following criteria is met:
• Simultaneous receipt and consumption of customer benefits as and when the company performs.
• The performance of the entity creates or enhances an asset controlled by the customer.
• The performance of the entity does not create an asset with an alternative use of the entity and the entity has an enforceable right to payment for the completed performance to date.

Question 18

Point in Time vs. Over Time

Answer 18

• Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard.
• Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Question 19

Cash Collection

Answer 19

neither a critical event for income recognized at a “Point in Time” or “Over Time”

Question 20

Over Time: 2 Methods

Answer 20

• Output Method: Revenue shall be recognized by the value of the goods and services transferred to the customer to date.
• Input Method: The revenue is recognized on the basis of the efforts of the entity or its inputs.

Question 21

Troubled Debt Restructuring: Debtor

Answer 21

whether the sum of the cash payments under the new terms (not discounted to present value) equal or exceed the amount of the obligation.

Question 22

Recognition of Anticipated Loss

Answer 22

must be recognized immediately under both revenue recognition methods. cannot be deferred to future periods under either method.

Question 23

Costs Incurred in Fulfilling Contract

Answer 23

should be recognized as an asset only if they meet all the following criteria:
• The costs pertain directly to a contract or to an expected contract.
• The costs generate or enhance the entity’s resources to fulfill performance obligations in the future.
• The costs should be recovered.

Question 24

Bill and Hold Arrangement

Answer 24

a contract under which an entity bills a customer for a product but the entity retains (i.e., holds) physical possession of the product until it is transferred to the customer at a point in time in the future. Revenue should be recognized only when the customer obtains control of the product.

Question 25

Bill and Hold Arrangement: Customer Control

Answer 25

i. Substantive reason for the bill-and-hold arrangement (e.g., the customer has requested the arrangement).
ii. Product must be identified separately as belonging to the customer.
iii. Product currently must be ready for physical transfer to the customer.
iv. Entity cannot use the product or direct it to another customer.

Question 26

Unearned Revenue

Answer 26

accounted when the cash is received, but revenue is not earned as the entity has not yet satisfied its performance obligation. It is accounted as a liability until the entity satisfies the performance obligation.

Question 27

Share Based Compensation

Answer 27

measured based on the grant-date fair value of the options.

Question 28

Stock Options Outstanding Account

Answer 28

increased on the grant date.
The subsequent exercising, forfeiture, or lapsing of the stock options reduce this account.
increased on the grant date and reduced on the exercise date.