Section 2J - Rev Rec Flashcards
Andrew signed up and paid $1,200 for a 12-month adult swimming course on February 1 with Angela’s Aquatics. As of September 1, Angela’s accounting records would indicate:
$700 of revenue, $500 of deferred revenue.
$1,200 of revenue, $0 of accounts receivable.
$1,200 of revenue, $1,200 of cash.
$700 of revenue, $500 of accounts receivable.
$700 of revenue, $500 of deferred revenue.
Revenue for long-term contracts is recognized over time when any one of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; the entity’s performance creates or enhances an asset, such as work-in-process (WIP), that the customer controls as the asset is created or enhanced; or the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.
This arrangement qualifies for revenue recognition over time because the customer consumes the benefit of the seller’s service as the seller provides it.
Therefore, Angela would recognize revenue of $700 ($1,200 × 7/12 of the contract duration) and deferred revenue of $500 ($1,200 contract price paid in advance – $700 revenue recognized to date).
Revenue for long-term contracts is recognized over time when any one of the following criteria is met:
- The customer simultaneously receives and consumes the ___provided by the entity’s performance as the entity performs.
- Generally, this criteria applies to ____to deliver services, such as landscaping or cleaning services.
- The entity does not need to ____the work performed to date in order to fulfill the remaining performance obligation.
- Any remaining performance obligation may be transferred to a____ ___
- The entity’s performance creates or ___an asset, such as work-in-process (WIP),
- The entity’s performance does not create an asset with an ___use to the entity, and the entity has an enforceable right to payment for performance completed to date
benefits
contracts
re-perform
third party
enhances
alternative
Which of the following statements is correct regarding deferred revenues recorded by a company that provides services to customers?
Deferred revenues represent revenues earned but not yet received in cash.
A deferred revenue on the books of one company is an accrued expense on the books of another company.
Deferred revenue is a liability until the service had been performed.
Deferred revenues result from services that have been performed but have not been billed.
Deferred revenue is a liability until the service had been performed.
Deferred revenues are generally for deposits received in advance of doing the required work. When one is paid in advance, one owes the work to the customer, and until doing the work (and earning the revenue), one owes the service (a liability).
Ralph entered into a contract offering variable consideration; the contract pays $600/month for six months of identity theft monitoring services. There is an 80% chance the contract will pay an additional $1,200 and a 50% chance the contract will pay an additional $1,800, depending on the outcome of the monitoring contract. Ralph recognizes the contract revenue over time. If Ralph estimates variable consideration as the most likely amount, what amount of revenue would Ralph recognize for the second month of the contract?
$760
$600
$800
$910
$800
The amount of consideration in a contract may vary due to discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items, or if an entity’s entitlement to the consideration is contingent on the occurrence (or nonoccurrence) of a future event. The amount of variable consideration should be estimated by using either of the following methods:
- a. Expected value method: The sum of probability-weighted amounts in a range of possible consideration amounts. This method is appropriate when an entity has a large number of contracts with similar characteristics.
- b. Most likely amount method: The single most likely amount in a range of possible consideration amounts; the single most likely outcome of the contract. This method is appropriate when the contract has only two possible outcomes: an entity either achieves a performance bonus or does not.
The most likely outcome is that Ralph receives the $1,200 bonus (likelihood = 80%), in which case Ralph would be paid a total of $3,600 ($600 × 6 months) + $1,200, or $4,800. Therefore, Ralph would recognize $4,800 ÷ 6 months ($800) each month.
The amount of consideration in a contract may vary due to discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items, or if an entity’s entitlement to the consideration is contingent on the occurrence (or nonoccurrence) of a future event. The amount of variable consideration should be estimated by using either of the following methods:
a. ___: Method The sum of probability-weighted amounts in a range of possible consideration amounts. This method is appropriate when an entity has ____of contracts with similar characteristics.
b____ method: The single most likely amount in a range of possible consideration amounts; the single most likely outcome of the contract. This method is appropriate when the contract has ___possible outcomes: an entity either achieves a performance bonus or does not.
Expected value method, a large number
Most likely amount method, only two
On January 1 of the current year, Wren Co. leased a building to Brill under an operating lease for 10 years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder’s fee. The building is depreciated $12,000 per year. For the year, Wren incurred insurance and property tax expense totaling $9,000. Wren’s net rental income for the year should be:
$29,000.
$27,500.
$36,500.
$35,000.
$27,500.
The revenue under the lease is the $50,000 each year, and the expenses include the depreciation and the property tax for the year. The broker’s fee ($15,000) should be amortized equally based over the 10 years of the lease, or $1,500 a year.
Thus, the net rental income should be $27,500:
$50,000 – $12,000 – $9,000 – $1,500 = $27,500
The first set of criteria result in a finance lease for a lessee or sales-type lease for the lessor if the lease meets any of the following criteria at commencement:
- ___(ownership) transfers to the lessee by the end of the lease term.
- The lease contains a ____option that the lessee is reasonably certain to exercise.
- The lease term is for the major part of the remaining economic ___of the underlying asset. This criterion shall not be used if the lease commencement date is near the end of the asset’s economic life.
- The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
- The underlying asset is ___and is not expected to have an alternative use to the lessor at the end of the lease term.
Title
purchases
life
true
specialized
Operating leases: For most leases of property (e.g., land or building), a lessee would classify the lease as an “operating” lease if none of the five criteria listed in section 2341.07 are met and will recognize the following:
At ___: A ____(ROU) asset and a lease liability, initially measured at the present value of lease payments, using the interest rate implicit in the lease if known;rate.
___to commencement: A single lease ___, combining the unwinding of the discount on the lease liability (i.e., interest expense) with the amortization of the ROU asset, on a straight-line basis.
commencement, right-of-use
Subsequent . cost
For each performance obligation satisfied over time, appropriate methods of measuring progress include the:
single and combined methods.
cost and fair value methods.
output and input methods.
high and low methods.
output and input methods.
For each performance obligation satisfied over time, an entity should consistently apply a single method of measuring progress to similar performance obligations and in similar circumstances. Appropriate methods of measuring progress include output methods and input methods.
Output methods recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract, and include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units produced or units delivered.
Input methods recognize revenue on the basis of the entity’s efforts or inputs in satisfying a performance obligation; for example, costs incurred, relative to the total expected inputs to satisfy that performance obligation.
____methods recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract, and include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units produced or units delivered.
____methods recognize revenue on the basis of the entity’s efforts or inputs in satisfying a performance obligation; for example, costs incurred, relative to the total expected inputs to satisfy that performance obligation.
Output
input
The calculation of the income recognized in the third year of a 5-year construction contract where revenue is recognized over time includes the ratio of:
total costs incurred to date to total billings.
total costs incurred to date to total estimated costs.
costs incurred in Year 3 to total estimated costs.
costs incurred in Year 3 to total billings.
total costs incurred to date to total estimated costs.
Because total estimated costs can change over the life of a long-term contract, the computation of income for any year except the first must accommodate the possibility of a change in estimate. Therefore, the company must compute the income for Year 3 as the difference between the:
- total income earned in Years 1 to 3 (total costs incurred to date over total estimated costs) times estimated total income on the contract (total contract revenue less total estimated costs based on estimates at the end of Year 3) less
- total income recognized in Years 1 and 2, leaving
- income assigned to Year 3.
An entity must be able to reasonably estimate its progress. Appropriate measurement methods include:
___measures, such as work performed, units produced, or units delivered.
____-__-__ measures, such as resources consumed, labor hours expended, costs incurred, and time elapsed relative to the expected input needed to satisfy the performance obligation.
If progress cannot be estimated, the entity can:
use a “____” approach (i.e., based upon control passing).
recognize revenue based on the ___of costs incurred to date, assuming that the entity will be able to recover those costs.
output
input
point in time
percentage
Which of the following is an example of a suitable estimation method an entity may use if a standalone selling price is not directly observable?
The wait and see approach
The average of inputs approach
The input/output approach
The adjusted market assessment approach
The adjusted market assessment approach
Examples of suitable estimation methods (which should be applied consistently for similar circumstances) include the adjusted market assessment approach, which uses competitors’ prices for similar goods or services and adjusts those prices to reflect the entity’s costs and margins; the expected cost plus a margin approach, which forecasts expected costs of satisfying a performance obligation and adds an appropriate margin for those goods or services; and the residual approach, which estimates a standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract.
If a standalone selling price is not directly observable, an entity should estimate it by considering all reasonably available information; for example, current ___conditions, __-specific factors, and information about the ___. Acceptable estimation methods include the following:
- _____assessment approach: Uses competitors’ prices for similar goods or services and adjusts those prices to reflect the entity’s costs and margins
- _____a margin approach: Forecasts expected costs of satisfying a performance obligation and adds an appropriate margin for those goods or services
- ___approach: Estimates a standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract
market , entity, customer
Adjusted market assessment
expected cost plus
residual
The transfer of promised goods or services occurs when (or as) the customer obtains control; in this context:
control does not include the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset (“defensive control”).
when evaluating whether a customer obtains control of an asset, an entity should consider any agreement to sell the asset.
control is defined as the ability to direct the use of, and obtain substantially all of, the remaining benefits from an asset.
an entity does not need to assess if an agreement to sell the asset would negate the passage of control necessary for the recognition of revenue.
control is defined as the ability to direct the use of, and obtain substantially all of, the remaining benefits from an asset.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring promised goods or services to a customer. T
ransfer occurs when or as the customer obtains control of the goods or services, either at a point in time or over time, as applicable. Control is defined as the ability to direct the use of, and obtain substantially all of, the remaining benefits from an asset.
Control also includes the ability to prevent other entities from directing the use of and obtaining the benefits from an asset (“defensive control”).
After determining that a valid contract exists, what would be the next step in determining the appropriate revenue recognition approach in accounting for revenue from licenses?
Classify the license as either one of functional intellectual property or symbolic intellectual property
Allocate the transaction value in the contract to the license agreement
Determine if Topic 606 or specialized industry guidance applies
Determine whether the license is distinct from the other promises in the contract
Determine whether the license is distinct from the other promises in the contract
A good or service is distinct if it is both of the following: the good or service is capable of being distinct (i.e., it can be used on its own or in combination with other goods or services that could be obtained elsewhere by the customer); and it is separately identifiable (i.e., each obligation is distinct in terms of the contract; the seller is providing individual goods or services as opposed to providing a combined good or service in which the individual goods or services function as an input).
If the good or service is not distinct, then combine the good or service with other goods or services until a distinct bundle is formed.
A good or service is distinct if it is both of the following:
- ____ of being distinct: The good or service can be used on its own or in combination with other goods or services that could be obtained elsewhere by the customer.
- _____ identifiable: Each obligation is distinct in terms of the contract (i.e., the seller is providing individual goods or services as opposed to providing a combined good or service in which the individual goods or services function as an input).
If the good or service is not distinct, then combine the good or service with other goods or services until a distinct bundle is formed.
Distinct licenses are classified as either of the following:
- ___intellectual property: The license has significant standalone functionality; revenue is recognized when access to the license is granted.
- ____intellectual property: The license has no standalone functionality; revenue is recognized over the term of the license.
cacapable
separately
Functional
symbolic
Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on January 31 for the oil sold between the previous June 1 and November 30, and on July 31 for oil sold between the previous December 1 and May 31. Production reports show the following oil sales:
June 1, 20X1 - November 30, 20X1 $300,000
December 1, 20X1 - December 31, 20X1 50,000
December 1, 20X1 - May 31, 20X2 400,000
June 1, 20X2 - November 30, 20X2 325,000
December 1, 20X2 - December 31, 20X2 70,000
What amount should Rill report as royalty revenue for 20X2?
$159,000
$149,000
$140,000
$144,000
$149,000
Macklin Co. entered into a franchise agreement with Heath Co. for an initial fee of $50,000. Macklin received $10,000 when the agreement was signed. The balance was to be paid at a rate of $10,000 per year, starting the next year. All services were performed by Macklin and the refund period had expired. Operations started in the current year. What amount should Macklin recognize as revenue in the current year?
$0
$50,000
$10,000
$20,000
$50,000
Because Macklin had performed all services required to earn the initial franchise fee, the refund period had passed, and operations were started in the current year, it should recognize all of the initial franchise fee as revenues unless collectibility of the $40,000 receivable is not reasonably assured.
The question does not raise any concerns about collectibility of the receivable.
Must an entity identify immaterial performance obligations and allocate a portion of the transaction price to them?
No. Entities can combine all performance obligations into one for revenue recognition purposes if the contract period is for greater than one year.
No. An entity only needs to identify material performance obligations in a contract and allocate transaction price to those.
No. An entity needs to identify all performance obligations related to contracts accounted for in a foreign currency but not those accounted for in U.S. dollars.
Yes. All performance obligations in a contract must be identified, with transaction price allocated to each identified performance obligation.
No. An entity only needs to identify material performance obligations in a contract and allocate transaction price to those.
The FASB decided that, for purposes of identifying performance obligation in a contract, an entity would not be required to identify goods or services promised in a contract that are immaterial in the context of the contract.
Regarding the existence of a significant financing component in the contract:
a contract with a customer would have a significant financing component if the customer paid for the goods or services in advance, and the timing of the transfer of those goods or services is at the discretion of the customer.
in determining the transaction price, an entity should never adjust the promised amount of consideration for the effects of the time value of money.
an entity should use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception.
after contract inception, an entity should update the discount rate for changes in interest rates or other circumstances (such as a change in the assessment of the customer’s credit risk).
an entity should use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception.
If a contract does include a significant financing component, an entity should use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. That rate would reflect the credit characteristics of the party receiving financing in the contract, as well as any collateral or security provided by the customer or the entity, including assets transferred in the contract.
Jorge sells $150,000 of product to Wilson, and also purchases $25,000 of advertising services from Wilson. The advertising services have a fair value of $20,000. Jorge should record revenue on its sale of product to Wilson of:
$150,000.
$130,000.
$145,000.
$125,000.
$145,000.
An entity should recognize a refund liability if it receives consideration from a customer and expects to refund some or all of that consideration to the customer. A refund liability is measured at the amount of consideration received or receivable for which the entity does not expect to be entitled; that is, amounts not included in the transaction price.
The refund liability and corresponding change in the transaction price, and therefore the contract liability, should be updated at the end of each reporting period for changes in circumstances.
Jorge is paying more for advertising services than the fair value of those services, so the excess of $5,000 ($25,000 price paid – $20,000 fair value) is a refund of part of the $150,000 sale. Therefore, Jorge records revenue of $145,000 ($150,000 – $5,000).
An entity should recognize a ___liability if it receives consideration from a customer and expects to refund some or all of that consideration to the customer.
A refund liability is measured at the amount of ___received or receivable for which the entity does not expect to be entitled; that is, amounts not included in the transaction price.
refund
consideration
The FASB’s revenue recognition guidance for contracts is intended to improve U.S. GAAP by:
providing more useful information to financial statement users through improved ___requirements.
providing a more robust framework for addressing ___issues.
removing ___from existing requirements.
All of the answer choices are correct.
disclosure
revenue recognition
inconsistencies
All of the answer choices are correct.
All of the answer choices are correct. The overall objectives of FASB ASC Topic 606 are to remove inconsistencies in revenue requirements; provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; provide more useful information to financial statement users; and simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.