Section 2J - Rev Rec

Question 1

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.

Answer 1

$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).

Question 2

Revenue for long-term contracts is recognized over time when any one of the following criteria is met:

1. The customer simultaneously receives and consumes the ___provided by the entity’s performance as the entity performs.
   
   1. Generally, this criteria applies to ____to deliver services, such as landscaping or cleaning services.
   2. The entity does not need to ____the work performed to date in order to fulfill the remaining performance obligation.
   3. Any remaining performance obligation may be transferred to a____ ___
2. The entity’s performance creates or ___an asset, such as work-in-process (WIP),
3. 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

Answer 2

benefits

contracts

re-perform

third party

enhances

alternative

Question 3

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.

Answer 3

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).

Question 4

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

Answer 4

$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:

1. 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.
2. 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.

Question 5

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.

Answer 5

Expected value method, a large number

Most likely amount method, only two

Question 6

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.

Answer 6

$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

Question 7

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:

1. ___(ownership) transfers to the lessee by the end of the lease term.
2. The lease contains a ____option that the lessee is reasonably certain to exercise.
3. 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.
4. 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.
5. The underlying asset is ___and is not expected to have an alternative use to the lessor at the end of the lease term.

Answer 7

Title

purchases

life

true

specialized

Question 8

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.

Answer 8

commencement, right-of-use

Subsequent . cost

Question 9

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.

Answer 9

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.

Question 10

____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.

Answer 10

Output

input

Question 11

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.

Answer 11

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:

1. 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
2. total income recognized in Years 1 and 2, leaving
3. income assigned to Year 3.

Question 12

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.

Answer 12

output

input

point in time

percentage

Question 13

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

Answer 13

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.

Question 14

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:

1. _____assessment approach: Uses competitors’ prices for similar goods or services and adjusts those prices to reflect the entity’s costs and margins
2. _____a margin approach: Forecasts expected costs of satisfying a performance obligation and adds an appropriate margin for those goods or services
3. ___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

Answer 14

market , entity, customer

Adjusted market assessment

expected cost plus

residual

Question 15

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.

Answer 15

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”).

Question 16

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

Answer 16

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.

Question 17

A good or service is distinct if it is both of the following:

1. ____ 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.
2. _____ 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:

1. ___intellectual property: The license has significant standalone functionality; revenue is recognized when access to the license is granted.
2. ____intellectual property: The license has no standalone functionality; revenue is recognized over the term of the license.

Answer 17

cacapable

separately

Functional

symbolic

Question 18

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

Answer 18

$149,000

Question 19

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

Answer 19

$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.

Question 20

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.

Answer 20

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.

Question 21

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).

Answer 21

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.

Question 22

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.

Answer 22

$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).

Question 23

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.

Answer 23

refund

consideration

Question 24

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.

Answer 24

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.

Question 25

On January 2, 20X1, Boulder Co. assigned its patent to Castle Co. for royalties of 10% of patent-related sales. The assignment is for the remaining four years of the patent’s life. Castle guaranteed Boulder a minimum royalty of $100,000 over the life of the patent and paid Boulder $50,000 against future royalties during 20X1. Patent-related sales for 20X1 were $300,000. In its 20X1 income statement, what amount should Boulder report as royalty revenue?

$100,000

$25,000

$50,000

$30,000

Answer 25

$30,000

Royalty income of $30,000 ($300,000 × 10%) was both earned and realized in 20X1. The remainder of the $50,000 deposit is unearned royalty revenue.

Question 26

How may an entity elect to treat sales and other similar taxes which it collects from customers from its revenue transactions?

1. An entity may elect to include sales taxes in its state of domicile as part of the transaction price but should record other such taxes on a net basi
2. An entity, on a transaction-by-transaction basis, may elect to record such taxes as either gross or net.
3. An entity may elect, as an accounting policy, to exclude all amounts collected from customers for sales and other similar taxes from the transaction price.
4. An entity must present revenue gross of all such taxes received, with the corresponding tax recorded as part of cost of goods sold.

Answer 26

An entity may elect, as an accounting policy, to exclude all amounts collected from customers for sales and other similar taxes from the transaction price.

The amendments in ASU 2016-12 permit an entity, as an accounting policy election, to exclude amounts collected from customers for all sales and similar taxes from the transaction price. Therefore, the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (e.g., sales taxes).

Question 27

Howard Co. had the following first-year amounts for a $7,000,000 construction contract:

1. Actual costs $2,000,000
2. Estimated costs to complete 6,000,000
3. Progress billings 1,800,000
4. Cash collected 1,500,000

What amount should Howard recognize as gross profit (loss) if revenue is recognized over time?

$800,000

($1,000,000)

$1,750,000

($200,000)

Answer 27

($1,000,000)

Howard should recognize a $1,000,000 loss for year 1. Generally, a portion of contract revenue is recognized on an estimated basis in each period covered by the contract. However, if there is an estimated loss, the total estimated loss on the contract is recognized in the period in which the loss becomes apparent and estimable.

Actual costs incurred to date $ 2,000,000
Estimated costs to complete 6,000,000
Total estimated cost $ 8,000,000
Less contract price 7,000,000
Estimated loss on contract $(1,000,000)

Question 28

On October 1, 20X6, EriK’s A/C, Inc. agrees to manufacture industrial air conditioning units for five Evergreen Apartment complexes. Under the terms of the contract, Evergreen Apartment will pay EriK’s A/C a total of $50,000; Evergreen can cancel the contract at any time but must pay EriK for work completed. EriK believes that they could sell the A/C units to another apartment complex and still make a profit even if Evergreen canceled the contract. The contract is expected to last five months, and as of December 31, 20X6, the job is 50% complete. How much revenue should EriK’s A/C recognize in 20X6 for this contract?

$25,000

$50,000

$30,000

$0

Answer 28

$0

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 does not qualify for revenue recognition over time, because the asset the seller is creating has an alternative use to it. Therefore, EriK must wait until completion of the contract before recognizing revenue.

Question 29

Falton Co. had the following first-year amounts related to its $9,000,000 construction contract:

1. Actual costs incurred and paid $2,000,000
2. Estimated additional costs to complete 6,000,000
3. Progress billings 1,800,000
4. Cash collected 1,500,000

What amount should Falton recognize as a current liability at year-end, if revenue is recognized over time?

$200,000

$250,000

$0

$300,000

Answer 29

$0

Zero. The company has billed the customer $1,800,000, which is less than the total
expenses incurred to date, $2,000,000.

• This will be an asset, similar to accountsreceivable. If the customer had billed more than the expenses incurred, it would be a liability, similar to unearned revenue.

Question 30

What is the “key” that should be used at contract inception to allocate the transaction price to the performance obligations in the contract?

Negotiated purchase price

Standalone purchase price

Negotiated selling price

Standalone selling price

Answer 30

Standalone selling price

The standalone selling price at contract inception of the goods or services underlying each performance obligation should be used to allocate the transaction price to each of those performance obligations.

The standalone selling price is the price at which the entity would sell the promised goods or services separately to a customer.

Question 31

On December 30, Devlin Co. sold goods to Jensen Co. for $10,000, under an arrangement in which (1) Jensen has an unlimited right of return and (2) Jensen’s obligation to pay Devlin is contingent upon Jensen’s reselling the goods. Past experience has shown that Jensen ordinarily resells 60% of goods and returns the other 40%. What amount should Devlin include in sales revenue for this transaction on its December 31 income statement?

$10,000

$4,000

$0

$6,000

Answer 31

$0

This arrangement is not substantially different from a consignment. Devlin does not meet the requirements for a sale until Jensen has sold the goods.

Unlimited right of return you don’t record any income - this is similar to a consignment

Question 32

Answer 32

$50,000

The expected cost estimates at the end of 20X4 indicate that the contract has become unprofitable because the total expected costs ($3,690,500 + $2,359,500 = $6,050,000) are greater than the total contract price.

The expected loss is equal to the amount by which the total expected costs exceed the total contract price, or $6,050,000 – $6,000,000 = $50,000.

Losses on long-term contracts are fully recognized in the year the loss is anticipated. The full $50,000 will be recognized in 20X4.

Question 33

On August 1, 20X7, Remy signed a two-year contract to provide house painting services on an as-needed basis to Cox Homebuilding Inc., with the contract to start immediately. Cox agreed to pay Remy $2,400 for the two-year period. Payment is not scheduled to occur until completion of the contract, in 20X9. Remy should recognize revenue in 20X7 in the amount of:

$2,400.

$500.

$0.

$1,200.

Answer 33

$500.

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, Remy would recognize revenue of $500 ($2,400 × 5/24 of the contract duration) in 20X7.

Question 34

On July 1, Patios R Us entered into a two-month contract to build a patio for Paula. Patios R Us is guaranteed to receive a base fee of $4,000 for their services, and a bonus depending on when the project is completed. Paula would pay an additional 20% of the base fee if the project finished two weeks early and 10% if the project finished a week early.

The probability of finishing two weeks early is 40%, one week early is 30%, and on time 30%. What is the expected transaction price with variable consideration estimated as the expected value?

$4,000

$5,200

$4,360

$4,440

Answer 34

$4,440

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.

One method for estimating the amount of variable consideration is the 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. The expected value of the transaction price is $4,400, computed as follows:

$4,000 + (20% × $4,000 × 40%) + (10% × $4,000 × 30%) + (0% × $4,000 × 30%)= $4,000 + $320 + $120 + $0 = $4,440

Question 35

How would an entity account for an implicit promise made to a customer in a contract that meets the definition of a performance obligation?

1. The entity would allocate a portion of the contract price to the implicit promise, recognizing revenue and the related cost of the promise, as it is provided to the customer.
2. The entity would defer all revenue on the contract until all promises provided in the contract have been performed
3. The entity would combine the implicit promise with other promises made in the contract in all instances, as the implicit promise was not formally written into the contract, recognizing revenue over the term of the written promises.
4. The entity would recognize the entire amount of the contract revenue at the point of sale and record as an expense the cost of the implicit promise as it is provided to the customer.

Answer 35

the entity would allocate a portion of the contract price to the implicit promise, recognizing revenue and the related cost of the promise, as it is provided to the customer.

Performance obligations identified in a contract with a customer may not always be limited to the goods or services explicitly stated in that contract.

Promises implied by an entity’s customary business practices, published policies, or specific statements at the time of entering into the contract can also create a valid expectation by the customer that the entity will transfer goods or services to the customer.

As such, the entity identifies the implicit promise as a performance obligation to which it allocates a portion of the transaction price, recognizing revenue and the related cost of the promise, as it is provided to the customer.

Question 36

Jillian’s Jewelry sells gift cards redeemable for Jillian’s products either in-store or online. During 20X5, Jillian sold $300,000 of gift cards, and $270,000 of the gift cards were redeemed for products. As of December 31, 20X5, $10,000 of the remaining gift cards had passed the date at which Jillian concludes that the cards will never be redeemed. How much gift card revenue should Jillian recognize in 20X5?

$270,000

$290,000

$280,000

$300,000

Answer 36

$280,000

Breakage is the value of prepaid stored-value products that is not redeemed by consumers for goods, services, or cash. To prevent liabilities related to breakage from being recognized in perpetuity, Accounting Standards Update (ASU) 2016-04, Liabilities—Extinguishments of Liabilities, was issued, clarifying that prepaid stored-value product liabilities (both physical and digital forms) meet the definition of a financial liability. Under a two-party arrangement, the vendor records deferred revenue until such time as the card is redeemed (i.e., then revenue is recognized). Under a third-party arrangement, the vendor recognizes a financial liability to provide payment to the third-party vendor when the customer redeems the card.

The sale of a gift card created deferred revenue, as it is a prepayment by a customer for goods or services to be delivered at a future date. Revenue is recognized when goods or services are delivered or when the likelihood of redemption is remote. In this case, $270,000 was redeemed and another $10,000 was viewed as expired, yielding total revenue of $280,000.

Question 37

Which of the following best describes the guidance with regard to recognizing revenue related to license agreements?

1. All revenue related to licenses should be recognized over the term of the license.
2. If the license is distinct, revenue should be recognized when the license is granted; if the license is not distinct, revenue should be recognized over the term of the license.
3. Revenue related to licenses that provides functional intellectual property should generally be recognized when the license is granted, while revenue for symbolic intellectual property would generally be recognized over the term of the license.
4. Revenue related to licenses that provides symbolic intellectual property should generally be recognized when the license is granted, while revenue for functional intellectual property would generally be recognized over the term of the license.

Answer 37

Revenue related to licenses that provides functional intellectual property should generally be recognized when the license is granted, while revenue for symbolic intellectual property would generally be recognized over the term of the license.

1. Functional intellectual property has significant standalone functionality (for example, the ability to process a transaction, perform a function or task, or be played or aired); it derives a substantial portion of its utility from its significant standalone functionality.
2. Revenue for licenses of functional intellectual property would be recognized when access to the license is granted. Symbolic intellectual property does not have significant standalone functionality; substantially all of its utility is derived from its association with the entity’s past or ongoing activities, including its ordinary business activities.
3. Revenue for licenses of symbolic intellectual property is recognized over the period of the license.

Question 38

As an inducement to enter a lease, Graf Co. a lessor, granted Zep, Inc., a lessee, 12 months of free rent under a 5-year operating lease. The lease was effective on January 1, 20X1, and provides for monthly rental payments to begin January 1, 20X2. Zep made the first rental payment on December 30, 20X1. In its 20X1 income statement, Graf should report rental revenue in an amount equal to:

one-fourth of the total cash to be received over the life of the lease.

one-fifth of the total cash to be received over the life of the lease.

cash received during 20X1.

zero.

Answer 38

one-fifth of the total cash to be received over the life of the lease.

1. he timing of the cash payments is not relevant in the situation described. What is important is that Graf will collect four years of payments for a 5-year lease.
2. Each year Graf should recognize 1/5th (1/life of lease) of the total lease payment as rental revenue for that year.

Question 39

Moline Corp. enters into a contract with a customer to build an apartment complex for $1,013,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $162,000 to be paid if the building is ready for rental beginning August 1, 2X15. The bonus is reduced by $54,000 each week that completion is delayed. Moline commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by Probability
August 1, 2X15 70%
August 8, 2X15 20%
August 15, 2X15 5%
After August 15, 2X15 5%

Using the expected value method, compute the transaction price for this contract.

$1,150,700

$1,175,000

$1,121,000

$1,013,000

Answer 39

$1,150,700

Question 40

Answer 40

$350,000.

Because progress on the contract cannot be reasonably measured, Stewart would use the point-in-time approach and wait until 20X5 to recognize all of the gross profit on the contract.

At the end of the contract, total gross profit is equal to $350,000, computed as contract price less cost to complete as follows: $1,050,000 – ($450,000 + $250,000) = $350,000.

This is the amount Stewart should recognize as gross profit in 20X5. No gross profit would have been recognized in 20X4.

Question 41

Which of the following costs does not relate directly to a contract?

Costs of wasted materials, labor, or other resources to fulfill the contract that were not reflected in the price of the contract

Costs that are explicitly chargeable to the customer under the contract

Allocations of costs that relate directly to the contract or to contract activities

Direct labor

Answer 41

Costs of wasted materials, labor, or other resources to fulfill the contract that were not reflected in the price of the contract

Costs that relate directly to a contract or a specific anticipated contract include any of the following: direct materials, direct labor; allocations of costs that relate directly to the contract or to contract activities; costs that are explicitly chargeable to the customer under the contract; and other costs that are incurred only because an entity entered into the contract (for example, payments to subcontractors).

Costs of wasted materials, labor, or other resources to fulfill the contract that were not reflected in the price of the contract are expensed as incurred.

Question 42

Which of the following is one of the criteria that must be met in order to recognize revenue on a contract with a customer?

All terms of the contract must be agreed to in writing by both parties.

The parties to the contract have approved the contract and are committed to perform their respective obligations.

The entity’s legal counsel has approved the contract.

Contract consideration must be paid to the entity within six months of performance on the contract.

Answer 42

The parties to the contract have approved the contract and are committed to perform their respective obligations.

An entity can only recognize revenue related to a contract if all of the following criteria have been met:

1. The parties to the contract have approved the contract and are committed to perform their respective obligations.
2. The entity can identify each party’s rights regarding the goods or services to be transferred.
3. The entity can identify the payment terms for the goods or services to be transferred.
4. The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).
5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

Question 43

An entity can only recognize revenue related to a contract if all of the following criteria have been met:

1. The parties to the contract have approved the contract and are ___to perform their respective obligations.
2. The entity can identify each party’s ___regarding the goods or services to be transferred.
3. The entity can identify the payment ___for the goods or services to be transferred.
4. The contract has commercial ___(that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).
5. It is ___that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

Answer 43

committed

rights

terms

substance

probably

Question 44

During 20X1, Kam Co. began offering its goods to selected retailers on a consignment basis. The following information was derived from Kam’s 20X1 accounting records:

Beginning inventory $122,000
Purchases 540,000
Freight-in 10,000
Transportation to consignees 5,000
Freight-out 35,000
Ending inventory
Held by Kam 145,000
Held by consignees 20,000

In its 20X1 income statement, what amount should Kam report as cost of goods sold?

1. $527,000
2. $547,000
3. $507,000
4. $512,000

Answer 44

$512,000

Question 45

On October 10, Sally & Sons Nursery received an order for 100 landscaping shrubs. Sally delivered the shrubs to the customer on October 30. A $50 deposit was received on October 15 and the remaining $450 was paid on November 10. Sally likely would recognize revenue on:

October 10.

November 10.

October 30.

October 15.

Answer 45

October 30.

The performance obligation is satisfied and revenue is recognized when the customer obtains control of the goods or services. This usually occurs at the time of delivery. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from an asset, and prevent other entities from directing the use of and obtaining the benefits from an asset (“defensive control”).

Since contract revenue is recognized when control passes to the customer Sally would likely recognize revenue on October 30.

Question 46

Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as a franchisee of one of Baker’s restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year.

Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee, which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker.

What amount should Baker report as franchise revenue during the current year?

1. $25,000
2. $0
3. $59,000
4. $65,000

Answer 46

$59,000

Baker has earned the initial franchise fee and there is no indication that collectibility of the receivable is not reasonably assured. Therefore, Baker should recognize all the revenue for the initial franchise fee. The amount to be recognized is the cash received ($25,000) plus the present value of the future payments ($34,000).

The difference between the $40,000 of future payments and their present value will be recognized as interest revenue over the 4-year period.

Question 47

Pine Limited owns a 15% royalty interest in a natural gas well. Pine receives royalty payments on January 31 for the gas 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:

May 1, 20X7–October 31, 20X7 $650,000
November 1, 20X7–December 31, 20X7 124,000
November 1, 20X7–April 30, 20X8 730,000
May 1, 20X8–October 31, 20X8 718,000
November 1, 20X8–December 31, 20X8 137,000

What amount should Pine report as royalty revenue for 20X8?

1. $219,150
2. $237,750
3. $217,200
4. $198,600

Answer 47

$219,150

Question 48

Which of the following statements is not correct?

1. When determining the transaction price, an entity should consider the effects of variable consideration.
2. Performance obligations identified in a contract with a customer are limited to the goods or services explicitly stated in that contract
3. Promises implied by an entity’s customary business practices can create a valid expectation by the customer that the entity will transfer goods or services to the customer.
4. Transaction price does not include estimates of consideration from the future exercise of options for additional goods or services.

Answer 48

Performance obligations identified in a contract with a customer are limited to the goods or services explicitly stated in that contract.

1. Performance obligations are not limited to the goods or services explicitly stated in a contract. A performance obligation as a promise in a contract with a customer to transfer to the customer either a good or service that is distinct or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
2. That promise can be explicit, implicit, or based upon customary business practices. Implicit promises can create a valid expectation by the customer that the entity will transfer goods or services to the customer (e.g., free maintenance services).
3. A portion of the transaction price must be allocated to any implied promise identified as a performance obligation.

Question 49

An entity should estimate an amount of variable consideration in a contract by using either of the following methods, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled:

The exact value method or the least likely amount method

The expected value method or the most likely amount method

The true value method or the fair value method

The estimated value method or the cost value method

Answer 49

The expected value method or the most likely amount method

An entity should apply either the expected value method or the most likely amount method consistently throughout the contract, and should consider all of the historical, current, and forecasted information that is reasonably available to identify a reasonable number of possible consideration amounts.

The expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics.

The most likely amount is the single most likely amount in a range of possible consideration amounts, that is, the single most likely outcome of the contract. The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes; for example, an entity either achieves a performance bonus or does not.

Question 50

A transaction that is unusual in nature or infrequent in occurrence should be reported as:

a component of income from continuing operations, but not net of applicable income taxes.

a component of income from continuing operations, net of applicable income taxes.

nonoperating income or loss, but not net of applicable income taxes.

nonoperating income or loss, net of applicable income taxes.

Answer 50

a component of income from continuing operations, but not net of applicable income taxes.

These items should be included in the computation of net income from continuing operations prior to income tax expense.

Question 51

Which statement is correct regarding disclosures under ASU No. 2016-01?

The guidance includes disclosure requirements intended to help financial statement users understand the nature, amount, timing, and uncertainty of revenue from customer contracts.

The guidance does not include any private company exceptions.

The guidance only requires quantitative information about contracts, significant judgments, and assets recognized.

The guidance only requires qualitative information about contracts, significant judgments, and assets recognized.

Answer 51

The guidance includes disclosure requirements intended to help financial statement users understand the nature, amount, timing, and uncertainty of revenue from customer contracts.

Revenue recognition guidance includes various disclosure requirements intended to help financial statement users understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In this respect, an entity should disclose qualitative and quantitative information about its contracts with customers; the significant judgments (and changes in judgments) made in applying the guidance to those contracts; and any assets recognized from the costs to obtain or fulfill a contract with a customer. There are certain exceptions made available to private companies.

Question 52

Which of the following would represent an option with a material right offered to a customer?

1. A coupon offering 50% off of a customer’s next purchase if the customer spends over a specified amount, with customers not spending over that amount getting no such offer
2. An online advertisement that highlights an upcoming holiday sale
3. A coupon offering 20% off the next purchase that is given to all customers
4. An offer to accept a returned product for a full refund that is offered to all customer

Answer 52

A coupon offering 50% off of a customer’s next purchase if the customer spends over a specified amount, with customers not spending over that amount getting no such offer

Certain options that grant a material right to a customer are considered as separate performance obligations with a portion of the transaction price allocated to them and recognized when the option is exercised. If an option provides a material right to the customer that it would not have received without entering into the contract, it should be considered as a separate performance obligation. For example, offering a 50% discount on future purchases over and above one offered to all customers would be considered a material right. Offering a free item when a customer purchases other products would be another example of an option granting a material right.

A coupon offering 20% off the next purchase that is given to all customers, an offer to accept a returned product for a full refund that is offered to all customers, and an online advertisement that highlights an upcoming holiday sale are not examples of an option with a material right.

Question 53

Which of the following estimation methods best describes the residual approach?

1. Forecasts expected costs of satisfying a performance obligation and adds an appropriate margin for those goods or services
2. Uses competitors’ prices for similar goods or services and adjusts those prices to reflect the entity’s costs and margins
3. 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
4. Determines a standalone selling price based on vendor-specific objective evidence, third-party evidence, or a best estimate

Answer 53

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

The residual 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.

The adjusted market assessment approach 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 forecasts expected costs of satisfying a performance obligation and adds an appropriate margin for those goods or services. GAAP guidance prior to the issuance of ASU 2016-01 determined the standalone selling price based on vendor-specific objective evidence, third-party evidence, or a best estimate.

Question 54

Briana’s Babysitting Service is a website that links experienced child-care providers with needy parents. The child-care providers post their qualifications and references on the website, and Briana receives 20% of the fee paid to the babysitters in exchange for identifying potential customers. Rosa Sanchez contacts Briana and arranges to pay a sitter $2,000 in exchange for one week of full-time care for her two children while she is out of town at a convention. Briana’s income statement would include the following with respect to this transaction:

Revenue of $400

Revenue of $400 and cost of services of $1,600

Revenue of $2,000 and cost of services of $1,600

Revenue of $2,000

Answer 54

Revenue of $400

For each performance obligation in the contract, it should be determined if the entity is a principal or an agent. Determination is based on control. If a principal, revenue is recognized on a gross basis. If an agent, revenue is recognized on a net basis.

Because Briana does not have primary responsibility for delivering the babysitting services, she would be considered an agent. Therefore, she would only recognize her commission as revenue, or $400 ($2,000 × 20%).

Question 55

Amar Farms produced 300,000 pounds of cotton during the Year 1 season. Amar sells all of its cotton to Brye Co., which has agreed to purchase Amar’s entire production at the prevailing market price. Recent legislation assures that the market price will not fall below $0.70 per pound during the next two years. Amar’s costs of selling and distributing the cotton are immaterial and can be reasonably estimated. Amar reports its inventory at expected exit value. During Year 1, Amar sold and delivered to Brye 200,000 pounds at the market price of $.70. Amar sold the remaining 100,000 pounds during Year 2 at the market price of $0.72. What amount of revenue should Amar recognize in Year 1?

$144,000

$210,000

$216,000

$140,000

Answer 55

$210,000

Here the available produced finished inventory has a buyer already under contract obligation to buy, and a guaranteed minimum price, so revenue recognition upon production is appropriate.

The inventory can be carried at net realizable value, and the sales price can be recognized as revenue in Year 1, upon production, of $210,000 (300,000 pounds × $0.70 a pound, the set minimum price for Year 1).

Question 56

Fenn Stores, Inc., had sales of $1,000,000 during December 20X1. Experience has shown that merchandise equaling 7% of sales will be returned within 30 days and an additional 3% will be returned within 90 days. Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value. What amount should Fenn report for net sales in its income statement for the month of December 20X1?

$850,000

$780,000

$900,000

$750,000

Answer 56

$900,000

Sales should be adjusted for the expected returns (7% + 3% = 10%) only (as an allowance reducing sales.) The sales related to expected exchanges for merchandise of equal or greater value are recognized as revenue in the period in which the original sale is made with no adjustment for the expected exchanges because the entire amount of the original sale is expected to result in an inflow of assets.

Question 57

During the current year, Fuqua Steel Co. had the following unusual financial events occur:

1. Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly.
2. A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location.
3. A segment of Fuqua’s operations, steel transportation, was sold at a net loss of $350,000. This was Fuqua’s first divestiture of one of its operating segments.

Before income taxes, what amount of gain (loss) should be reported separately as a component of income from continuing operations?

1. $(350,000)
2. $(255,000)
3. $5,000
4. $260,000

Answer 57

$5,000

The sale of a segment would be a discontinued operation since its disposition represents a strategic shift. The remaining two items would be reported as a net $5,000 gain component of income from continuing operations.

Question 58

The effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from ____operations when the transaction results in a:

neither a gain nor a loss.

loss.

either a gain or a loss.

gain.

Answer 58

continuing ,

either a gain or a loss.

FASB ASC 225-20-45-16 contains the following requirement: “A material event or transaction that an entity considers to be of an unusual nature or of a type that indicates infrequency of occurrence or both shall be reported as a separate component of income from continuing operations.”

This applies to both gains and losses.

Question 59

Garnett Co. shipped inventory on consignment to Hart Co. that originally cost $50,000. Hart paid $1,200 for advertising that was reimbursable from Garnett. At the end of the year, 40% of the inventory was sold for $32,000. The agreement stated that a commission of 10% will be provided to Hart for all sales. What amount should Garnett report as net income for the year?

$12,000

$7,600

$10,800

$0

Answer 59

$7,600

Question 60

FASB ASU 2016-10 enhanced the guidance on the concept of distinctiveness. Which of the following factors is not accurate related to this concept?

The goods or services are not interdependent or interrelated.

One or more of the goods or services significantly modifies one or more of the other goods or services promised in the contract.

An entity should consider whether the promise to transfer the good or service is separately identifiable.

The entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer.

Answer 60

The goods or services are not interdependent or interrelated.

The following factors address the concept of distinctiveness: (1) the entity provides a significant service of integrating the goods or services with other goods or services into a bundle that represents the combined output or outputs for which the customer has contracted (i.e., the entity is using the goods or services as inputs to produce or deliver the combined output(s) specified by the customer; (2) one or more of the goods or services significantly modifies or customizes one or more of the other goods or services promised in the contract; and (3) the goods or services are highly interdependent or highly interrelated.

Question 61

Answer 61

$26,000.

The royalty revenue should be based on the trademark sales during Year 2 (15% of them). The amount received on September 15 of Year 2, $17,000, was for the sales for the first 6 months of Year 2, and the estimated sales for the last 6 months of Year 2 were $60,000 in total.

The royalty revenue for Year 2 was the $17,000 plus 15% of the $60,000 for a total of $26,000 ($17,000 + (0.15 × $60,000)).

Question 62

In meeting the objectives of the FASB’s revenue recognition guidance for contracts, an entity:

does not have to identify the contract with a customer.

is required to determine the contract’s transaction price.

will not need to separate a contract’s performance obligations.

must recognize revenue under a contract at a single point in time.

Answer 62

is required to determine the contract’s transaction price.

The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration (that is, payment) to which the entity expects to be entitled in exchange for those goods or services.

To achieve this, an entity will have to identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation.

Question 63

Percentage Completed = ??

Percent Complete * ___ Price, Less Cost ___ = ___ Profit

Answer 63

% Completed = Incurred Costs / (Incurred Costs + Estimated Total Costs) = %

% Multiplied by Contract Price

Less Cost Incurred

Gross Profit

Percent Completed * Contract Price – Cost Incurred = Gross Profit

Question 64

A promise in a contract to transfer to the customer either a good or service (or a bundle of goods or services) that is distinct, or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer, is known as a:

performance expectation.

transfer liability.

transfer obligation.

performance obligation.

Answer 64

performance obligation.

A promise in a contract with a customer to transfer to the customer either a good or service (or a bundle of goods or services) that is distinct, or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer, is referred to as a performance obligation.

Question 65

Answer 65

$20,000

Question 66

On January 2, 20X1, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 non-interest-bearing note due January 2, 20X4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type on January 2, 20X1, was 10%. The present value of 1 at 10% for three periods is 0.75.

In Emme’s 20X1 income statement, what amount should be reported as interest income?

$9,000

$50,000

$60,000

$45,000

Answer 66

$45,000

Interest is revenue charged in relation to money lent. One must recognize it based on the amount lent and the agreed-upon rate.

1. Present value of note = 75 × $600,000 = $450,000
2. Interest income for 20X1 = 0.10 × $450,000 = $45,000

Question 67

For each performance obligation within each contract, the entity must determine whether it is a principal in the transaction or whether it is the agent. As a principal, the entity:

1. takes control of the good or service which it sells and records revenue gross, along with related cost of sales.
2. takes control of the good or service which it sells and records revenue at the gross amount.
3. would record only its agent fee as revenue in the transaction.
4. does not need to take control of the underlying good or service before recording revenue.

Answer 67

takes control of the good or service which it sells and records revenue gross, along with related cost of sales.

For each performance obligation within each contract, the entity must determine whether it is a principal in the transaction or whether it is the agent. As a principal, the entity takes control of the good or service which it sells and would record revenue gross, along with related cost of sales.

However, if the entity does not take control of the underlying good or service, it is essentially acting as an agent in the transaction. As such, it would record only its agent fee as revenue in the transaction.

Question 68

On December 31, Year 1, Moon, Inc., authorized Luna Co. to operate as a franchisee for an initial franchise fee of $100,000. Luna paid $40,000 on signing the agreement and signed an interest-free note to pay the balance in three annual installments of $20,000 each, beginning December 31, Year 2. On December 31, Year 1, the present value of the note, appropriately discounted, is $48,000. Services for the initial fee will be performed in Year 2. In its December 31, Year 1, balance sheet, what amount should Moon report as unearned franchise fees?

$88,000

$48,000

$100,000

$0

Answer 68

$88,000

Franchise fee revenue is recognized when all material services or conditions relating to the sale have been substantially performed or satisfied by the franchisor. In this case, the services have not been performed. Consequently, the initial fee is still unearned.
Paid at signing $40,000
Present value of note 48,000
Initial and unearned franchise fee $88,000

Question 69

Answer 69

$3,300,000.

At the end of Year 1, the company was 20% finished with a project costing $7,500,000 total, so they must have already expended $1,500,000 (0.20 × 7,500,000). By the end of Year 2, the company was 60% done with a total estimate of $8,000,000 cost, so by the end of the year, the total costs expended so far must have been $4,800,000 (0.60 × $8,000,000).

During Year 2, the additional costs to go from $1,500,000 total cost to $4,800,000 total cost must have been expended, for a total year 2 cost of $3,300,000 ($4,800,000 – $1,500,000).

Question 70

Which of the following is used in calculating the income recognized in the fourth and final year of a contract accounted for over time?

Neither actual total costs nor income previously recognized

Actual total costs

Income previously recognized

Both actual total costs and income previously recognized

Answer 70

Both actual total costs and income previously recognized

Question 71

On December 7, 20X5, Pecan Restaurants granted permission to BF Enterprises to operate a Pecan restaurant. The initial franchise fee is $75,000 and BF Enterprises paid $30,000 on the date permission was granted. The remaining three payments of $15,000 have a present value of $36,000.

The services to be provided by Pecan Restaurants will begin in 20X6 and their performance obligation will be completed in 20X6, when the restaurant is expected to open.

In Pecan’s December 31, 20X5, balance sheet, how much unearned franchise revenue should be reported in relation to its agreement with BF Enterprises?

$75,000

$36,000

$0

$66,000

Answer 71

$66,000

Because a portion of the franchise fee will be paid over time, the value for that portion of the franchise fee is the present value of the payments, or $36,000. Because Pecan will not begin or complete their performance obligations until 20X6, all of the franchise fee, both the down payment and the future payments represent unearned franchise revenue for Pecan.

Thus, the total unearned franchise revenue at December 31, 20X5, is $30,000 + $36,000 = $66,000.

Question 72

When determining the transaction price, an entity should:

1. not include any noncash consideration in the transaction price.
2. not be updated after the initial transaction price is determined.
3. only include amounts to which the entity has rights under the current contract.
4. include estimates of consideration from the future exercise of options for additional goods or services.

Answer 72

only include amounts to which the entity has rights under the current contract.

The transaction price should only include amounts to which the entity has rights under the current contract; which is to say, the transaction price does not include estimates of consideration from the future exercise of options for additional goods or services or from future change orders.

Until the customer exercises the option or agrees to the change order, the entity does not have a right to consideration. Note that the amounts to which the entity has rights under the current contract can be paid by any party (that is, not only by the customer).

Question 73

An entity should recognize an impairment loss in profit or loss to the extent that the carrying amount of an asset recognized exceeds:

1. the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates.
2. the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates, less the costs that relate directly to providing those goods or services that have not been recognized as expenses.
3. costs that are explicitly chargeable to the customer under the contract.
4. the costs that relate directly to providing those goods or services that have not been recognized as expenses.

Answer 73

the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates, less the costs that relate directly to providing those goods or services that have not been recognized as expenses

An entity should recognize an impairment loss in profit or loss to the extent that the carrying amount of an asset recognized exceeds the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates, less the costs that relate directly to providing those goods or services that have not been recognized as expenses.

Question 74

Imez Industries received a $30,000 prepayment from Aztec Associates for the sale of new equipment. Imez will bill Aztec an additional $100,000 upon delivery of the equipment. Upon receipt of the $30,000 prepayment, how much should Imez recognize for a contract asset, a contract liability, and accounts receivable (A/R)?

Contract asset: $0; contract liability: $30,000, A/R: $0

Contract asset: $0; contract liability: $30,000, A/R: $70,000

Contract asset: $30,000; contract liability: $0, A/R: $70,000

Contract asset: $30,000; contract liability: $0, A/R: $0

Answer 74

Contract asset: $0; contract liability: $30,000, A/R: $0

A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer.

If the contract asset represents an unconditional right to receive consideration (no future performance obligation), the asset should be presented as a receivable separately from contract assets.

A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer. The $30,000 is a prepayment and is a contract liability.

The $70,000 owed upon delivery is neither a contract asset nor an account receivable, because Imez has not fulfilled its performance obligation and therefore has no right to receive payment.

Question 75

A contract ___is an entity’s right to ___in exchange for goods or services that the entity has transferred to a customer.

If the contract asset represents an unconditional right to receive consideration (no future performance obligation), the asset should be presented as a ___separately from contract assets.

A contract ___is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer.

Answer 75

asset , consideration

receivable

liability

Question 76

At the beginning of the current year, Hayworth Co. sold equipment with a 2-year service contract for a single payment of $20,000. The fair value of the equipment was $18,000. Hayworth recorded this transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the following statements is correct regarding Hayworth’s current-year financial statements?

The financial statements are correct.

Total assets will be overstated.

Net income will be overstated.

Total liabilities will be overstated.

Answer 76

Net income will be overstated.

Revenue has been received in advance of earning the revenue. Revenue from the second year of the service contract cannot be recognized until the second year. Consequently, revenue and net income have been overstated in the first year.

Question 77

An entity should combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if:

1. the determination was based upon quantitative information and no judgment was applied in making that determination.
2. the amount of consideration to be paid in one contract does not depend on the price or performance of the other contract
3. the contracts are negotiated as a package with a single commercial objective.
4. the goods or services promised in the contracts (or some of the goods or services promised in each of the contracts) are multiple performance obligations.

Answer 77

the contracts are negotiated as a package with a single commercial objective.

An entity should combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met:

1. The contracts are negotiated as a package with a single commercial objective.
2. The amount of consideration to be paid in one contract depends on the price or performance of the other contract.
3. The goods or services promised in the contracts (or some of the goods or services promised in each of the contracts) are a single performance obligation.

In determining whether contracts have been entered into “at or near the same time,” an entity should apply judgment, keeping in mind that the longer the period between the commitments of the parties to the contracts, the more likely it is that the economic circumstances affecting the negotiations have changed.

Question 78

An entity should combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met:

1. The ___are negotiated as a package with a single commercial objective.
2. The amount of consideration to be paid in one contract depends on the _ or ___of the other contract.
3. The goods or services __in the contracts (or some of the goods or services promised in each of the contracts) are a single performance obligation.

Answer 78

contracts

price or performance

promised

Question 79

WaterWorks Inc. sells water softeners along with monthly maintenance services. On May 1, WaterWorks sold a package deal containing a water softener and a one-year maintenance service at a bundled price of $1,400.

The water softener was installed May 15 and costs $1,200 separately; the one-year maintenance service costs $400 if sold separately (for a combined total of $1,600). How much revenue would WaterWorks have recognized for the three months ended July 31, assuming that revenue is accrued monthly (round to the nearest whole dollar)?

$1,138

$1,300

$1,200

$350

Answer 79

$1,138

The softener and maintenance services are both capable of being distinct and separately identifiable, and are therefore treated as as two performance obligations. The total bundle price of $1,400 would be allocated to each of them:

$1,050 = $1,400 × ($1,200 ÷ $1,600) water softener

$350 = $1,400 × ($400 ÷ $1,600) maintenance contract

WaterWorks would recognize $1,050 from the softener installation in May and three months of maintenance revenue totaling $87.50 ($350 × 3/12), for a total of $1,138, rounded.

Question 80

Which of the following terms best describes the standalone selling price?

The price at which an entity would sell a promised good or service to a customer

The amount of noncash consideration, measured at fair value

The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, adjusted for the effects of the time value of money

The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer

Answer 80

The price at which an entity would sell a promised good or service to a customer

Standalone selling price is the price at which an entity would sell a promised good or service to a customer.

Transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price might be adjusted for the effects of the time value of money, not the standalone selling price. The amount of noncash consideration, measured at fair value, is an example of a transaction price.

Question 81

Which of the following revenue recognition items is not required to be disclosed?

Contract balances, including the opening and closing balances of receivables, contract assets, and contract liabilities

Entity disclosure of its profit margin on contracts for each significant class of customers

Quantitative and/or qualitative information about assets recognized from the costs to obtain or fulfill a contract

Significant judgments made in applying the revenue recognition requirements to contracts

Answer 81

Entity disclosure of its profit margin on contracts for each significant class of customers

Entities do not need to disclose profit margin information on contracts.

Question 82

Topic 606 includes a cohesive set of disclosure requirements intended to provide financial statement users with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s ___with customers. This requires an entity to provide information about:

1. ____recognized from contracts with customers, including the disaggregation of revenue into appropriate categories;
2. contract ____, including the opening and closing balances of receivables, contract assets, and contract liabilities;
3. performance ____, including when the entity typically satisfies its performance obligations and the transaction price that is allocated to the remaining performance obligations in a contract; and
4. significant ____(and changes in judgments) made in applying the requirements to those contracts.

Answer 82

contracts

Revenue

Balances

obligations

judgments

Question 83

Contract balances: An entity should disclose all of the following:

1. The opening and closing balances of ___, contract ___, and contract ___from contracts with customers, if not otherwise separately presented or disclosed
2. ___recognized in the reporting period that was included in the contract liability balance at the beginning of the period
3. Revenue recognized in the reporting period from performance ___satisfied or partially satisfied in previous periods; for example, changes in transaction price

Answer 83

receivables, asset, liabilities

revenue

obligations

Question 84

On January 2, 20X5, Teak Inc. assigned its trademark to Ebony Limited for royalties of 15% of trademark-related sales. The assignment is for the remaining five years of the trademark’s life. Ebony guaranteed Teak a minimum royalty of $250,000 over the life of the trademark and paid Teak $125,000 against future royalties during 20X5. This amount was recorded as unearned trademark revenue. Trademark-related sales for 20X5 were $420,000. In its 20X5 financial statements, what amount should Teak report as royalty revenue and unearned trademark revenue at December 31, 20X5?

1. Royalty revenue, $125,000; Unearned trademark revenue, $62,000
2. 3. Royalty revenue, $125,000; Unearned trademark revenue, $0
3. 5. Royalty revenue, $63,000; Unearned trademark revenue, $0
4. 7. Royalty revenue, $63,000; Unearned trademark revenue, $62,000

Answer 84

Royalty revenue, $63,000; Unearned trademark revenue, $62,000

Royalty income of $63,000 ($420,000 × 15%) should be reported in the income statement for 20X5. Unearned trademark revenue had a beginning balance of $125,000 when the cash was received and was reduced by the amount of royalty revenue earned, $63,000.

The ending balance to be reported in the balance sheet at December 31, 20X5, is $125,000 – $63,000 = $62,000.

Question 85

Which of the following is correct regarding contract modifications under the revenue recognition guidance provided in ASU 2016-01?

1. A contract modification cannot exist if the parties to the contract have a dispute about the scope or price (or both) of the modification.
2. A contract modification must be approved in writing, by all parties to the contract, in order for the modification to be effective.
3. A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract that changes the performance period of the contract by at least one year.
4. A contract modification exists when the parties to a contract approve a modification that either creates new, or changes existing, enforceable rights and obligations of the parties to the contract.

Answer 85

A contract modification exists when the parties to a contract approve a modification that either creates new, or changes existing, enforceable rights and obligations of the parties to the contract.

A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract (often described as a change order, variation, or amendment to the contract).

A contract modification exists when the parties to a contract approve a modification that either creates new, or changes existing, enforceable rights and obligations of the parties to the contract, and can be approved in writing, by oral agreement, or implied by customary business practices.

Question 86

In February, Colt Corp. sold merchandise to Sink Co. for $10,000. Colt is using the cost recovery method to account for this sale, which had cost of goods sold of $2,500. Colt received the following payments from Sink during the year:

Date Amount
June $1,000
August 1,500
October 200
December 700
$3,400

What amounts of gross profit should Colt recognize in its June 30 and December 31 income statements?

June 30: $1,000; December 31: $2,400

June 30: $0; December 31: $900

June 30: $1,000; December 31: $3,400

June 30: $0; December 31: $0

Answer 86

June 30: $0; December 31: $900

Under the CRM, the early payments are considered entirely a recovery of cost, and not until the cost is completely recovered is any gross profit recognized.

Accordingly, Colt should classify the first two payments as recovery of cost ($2,500) and the second two payments ($900) as gross profit on the December 31 income statement.

Question 87

An entity offers customers a mail-in rebate when the customer purchases the product of the entity. Which of the following statements is not correct?

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.

The refund liability and the contract liability should be updated annually.

The refund liability and corresponding change in the transaction price should be updated at the end of each reporting period.

The entity would estimate the amount of rebate it expects to pay related to the rebate, reduce revenue recognized by that amount, and record a liability for the amount it expects to pay for the rebate.

Answer 87

The refund liability and the contract liability should be updated annually.

1. 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.
2. 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.
3. 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. The refund liability and the contract liability are not updated annually.

Question 88

The following data pertain to Cowl, Inc., for the year ending December 31, 20X1:

1. Net sales $ 600,000
2. Net income 150,000
3. Total assets (January 1, 20X1) 2,000,000
4. Total assets (December 31, 20X1) 3,000,000

What was Cowl’s rate of return on assets for 20X1?

24%

20%

6%

5%

Answer 88

6%

The return on assets ratio relates net income to average total assets.

Rate of Return on Assets = Net income / Average assets
= $150,000 / .5 ($2,000,000 + $3,000,000)
= $150,000 / .5 ($5,000,000)
= $150,000 / $2,500,000
= .06
= 6%

Question 89

Juniper Corporation, which began operations on January 1, 20X8, appropriately uses the installment method of accounting. The following information pertains to Juniper’s operations for the year 20X8:

1. Installment sales $600,000
2. Cost of installment sales 400,000
3. Selling & administrative expenses 50,000
4. Collections on installment sales 180,000

In its December 31, 20X8, balance sheet, what amount of deferred gross profit should Juniper report related to the installment sales?

$60,000

$140,000

$10,000

$200,000

Answer 89

$140,000

Gross profit is calculated as net sales revenues less cost of goods sold. The amount of deferred gross profit to be reported is equal to total gross profit less the gross profit realized through cash collections. Total gross profit for the installment sale is computed as follows: $600,000 – $400,000 = $200,000. Selling and administrative expenses are period costs and are not considered when assessing the gross profit reported by Juniper.

The amount of gross profit realized is based on the gross profit percentage and the total cash collections. The gross profit percentage on the installment sales is computed as follows: ($600,000 – $400,000) ÷ $600,000 = 33%.

Cash collections of $180,000 are multiplied by the gross profit percentage to arrive at the total gross profit realized of $60,000 ($180,000 × .33). Total gross profit of $200,000 less realized gross profit of $60,000 equals $140,000 of deferred gross profit to be reported at the end of the year.

Question 90

Answer 90

The contract has become unprofitable because the total expected costs are greater than the total contract price.

The expected cost estimates at the end of 20X4 indicate that the contract has become unprofitable because the total expected costs ($3,690,500 + $2,359,500 = $6,050,000) are greater than the total contract price. The expected loss should be recognized in full at the end of 20X4.

Question 91

Which of the following is one of the criteria an entity must meet in order to recognize an asset for the costs incurred to fulfill a contract?

1. The costs have been approved for asset recognition by the entity’s independent accountants.
2. The costs relate directly to a contract or to an anticipated contract that the entity can specifically identify, and include direct labor, materials, overhead, and general and administrative-type costs.
3. The costs generate or enhance resources of the entity that will be used in satisfying or in continuing to satisfy performance obligations in the future.
4. The costs are expected to be recovered within one year of the transaction date.

Answer 91

The costs generate or enhance resources of the entity that will be used in satisfying or in continuing to satisfy performance obligations in the future.

An entity should recognize an asset for the costs incurred to fulfill a contract only if those costs meet all of the following criteria: the costs relate directly to a contract that the entity can specifically identify (e.g., costs relating to services to be provided under renewal of an existing contract or costs of designing an asset to be transferred under a specific contract that has not yet been approved); the costs generate or enhance resources of the entity that will be used in satisfying or in continuing to satisfy performance obligations in the future; and the costs are expected to be recovered.

Question 92

An entity should recognize an asset for the costs incurred to fulfill a contract only if those costs meet all of the following criteria:

the costs relate directly to a contract that the entity can specifically ____(e.g., costs relating to services to be provided under renewal of an existing contract or costs of designing an asset to be transferred under a specific contract that has not yet been approved);

the costs ___or ___resources of the entity that will be used in satisfying or in continuing to satisfy performance obligations in the future;

and the costs are expected to be ___.

Answer 92

identify

Generate or enhance

recovered

Question 93

In accounting for a long-term construction contract, assuming revenue is recognized over time, the progress billings on contracts account is a:

1. contra current asset account.
2. noncurrent liability account.
3. contra noncurrent asset account.
4. revenue account.

Answer 93

contra current asset account.

The current asset account maintaining an inventory value for the costs and profits recognized so far on the contract has a contra account of progress billings, lowering its carrying value. If the billings exceed the construction in process, then a current liability can exist instead.

Question 94

Upon the death of an officer, Jung Co. received the proceeds of a life insurance policy held by Jung on the officer. The proceeds were not taxable. The policy’s cash surrender value had been recorded on Jung’s books at the time of payment. What amount of revenue should Jung report in its statements?

Proceeds received less cash surrender value

None

Proceeds received

Proceeds received plus cash surrender value

Answer 94

Proceeds received less cash surrender value

The cash surrender value of the policy was carried in Jung Co.’s accounts as an asset. The proceeds received less the carrying amount (i.e., the cash surrender value) should be reported by Jung as a gain (revenue).

Question 95

Answer 95

$1,680,000

Because Magnolia will recognize revenue over time, the amount of revenue recognized in 20X3 is based on the costs incurred to-date relative to the total expected costs.

The computation of revenue to be recognized is as follows: $1,456,000 ÷ ($1,456,000 + $3,744,000) = 0.28. This is the estimated progress toward completion.

The estimated progress toward completion is multiplied by the total contract price to compute the amount of revenue to be recognized: $6,000,000 × 0.28 = $1,680,000.

Question 96

The current asset account maintaining an inventory value for the costs and profits recognized so far on the contract has a contra account of ___, lowering its carrying value.

If the billings exceed the construction in process, then a current ___can exist instead.

Answer 96

progress billings

liability

Question 97

Answer 97

$170,000.

Because progress on the contract can be reasonably measured, Stewart would recognize gross profit over time in 20X4 of $180,000, calculated as follows:

• $450,000 ÷ ($450,000 + $300,000) = 60% complete
• Total estimated gross profit on the contract at the end of 20X4 equals $300,000 ($1,050,000 Contract price – Total costs to complete ($450,000 + $300,000))
• $300,000 × .60 = $180,000

At the end of the contract, total gross profit has increased by $50,000 because costs turned out to be less than estimated. The gross profit recognized in 20X5 is computed as follows:

• [$1,050,000 – ($450,000 + $250,000)] – $180,000 = $170,000.

Question 98

Aqua Aquarium offers a discount on its extended warranty over the aquarium provided the warranty is purchased at the same time as the aquarium tank. The warranty costs $200, but Aqua offers it for $150 when purchased with a tank. Aqua expects an 80% chance that a customer will purchase the extended warranty with the tank. Aqua sells 500 tanks along with the extended warranty discount offer. What is the total standalone selling price that Aqua would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those contracts?

$80,000

$60,000

$20,000

$25,000

Answer 98

$20,000

If the sum of the standalone selling prices of the promised goods or services in the contract exceeds the transaction price (that is, the customer receives a discount for purchasing a bundle of goods or services), an entity should allocate the discount to all of the performance obligations on a relative standalone selling price basis.

The warranty costs $200, but Aqua offers it for $150 when purchased with a tank. Aqua expects an 80% chance. Aqua sells 500 tanks along with the extended warranty discount offer. The $50 discount has an 80% chance of being taken by a customer, so the standalone selling price associated with 500 tanks is $20,000 (computed as $50 × 80% × 500).

Question 99

To determine the point in time when a customer obtains control of a promised asset (i.e., satisfies a performance obligation), which of the following is not an indicator of control that an entity considers?

The entity has a present right to payment for the asset.

The customer has the significant risks and rewards of ownership of the asset.

The entity has transferred physical possession of the asset.

The customer has not accepted the asset but has legal title to the asset.

Answer 99

The customer has not accepted the asset but has legal title to the asset.

Transfer occurs when the customer obtains control of the goods or services, either at a point in time or over time, as applicable. Control in this context is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from an asset, including the ability to prevent other entities from directing the use of and obtaining the benefits from an asset (“defensive control”).

Additional indicators of control include the entity has a present right to payment for the asset; the customer has legal title to the asset; the entity has transferred physical possession of the asset; the customer has the significant risks and rewards of ownership of the asset; and the customer has accepted the asset.

Question 100

Bella Pool Company sells prefabricated swimming pools to customers for a price of $180,000. The cost of the pools is $100,000. The sales price includes an installation fee, which is valued at $25,000. The fair value of the pool alone is $160,000. The installation is considered a separate performance obligation and is expected to take three months to complete. The transaction price allocated to the pool and the installation is:

$138,378 and $21,622, respectively.

$160,000 and $25,000, respectively.

$155,676 and $24,324, respectively.

$180,000 and $25,000, respectively.

Answer 100

$155,676 and $24,324, respectively.

Because the installation is considered a separate performance obligation from delivery of the pool, and because there is only one price quoted for the swimming pool and installation together, the transaction price must be allocated between the two performance obligations, the pool and the installation. The computation for the allocation of the transaction price is as follows:

• Swimming pool: [$160,000 ÷ ($160,000 + $25,000)] × $180,000 = $155,676
• Installation: [$25,000 ÷ ($160,000 + $25,000)] × $180,000 = $24,324

Question 101

An entity should disaggregate revenue from contracts with customers into the primary categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Which of the following is a category that might not be appropriate?

Type of goods or services (major product lines)

Geography (region or country)

Sales channels (directly to consumers and through intermediaries)

Type and amount of sales commission

Answer 101

Type and amount of sales commission

Type and amount of sales commission is not an acceptable disaggregation category. Revenue from contracts should be disaggregated into primary categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, including the following:

1. Type of goods or services (major product lines)
2. Geography (region or country)
3. Market or type of customer (government and nongovernment customers)
4. Type of contract (fixed-price and time-and-materials contracts)
5. Contract duration (short-term and long-term contracts)
6. Timing of transfer of goods or services (at a point in time and over time)
7. Sales channels (directly to consumers and through intermediaries)

Question 102

Type and amount of sales commission is not an acceptable disaggregation category. Revenue from contracts should be disaggregated into primary categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, including the following:

1. Type of ___or services (major product lines)
2. ___(region or country)
3. Market or type of ___(government and nongovernment customers)
4. Type of ___(fixed-price and time-and-materials contracts)
5. Contract ___(short-term and long-term contracts)
6. ___of transfer of goods or services (at a point in time and over time)
7. Sales ___(directly to consumers and through intermediaries)

Answer 102

goods

geography

customer

contract

duration

timing

channels

Question 103

Answer 103

Cash collections, $600,000; Realized gross profit, $210,000.

The amount of deferred gross profit to be realized is related to the amount of installment accounts receivable. If installment accounts receivable is $1,200,000, then 35% of that amount is the amount of deferred gross profit remaining. $1,200,000 × 0.35 = $420,000 is the deferred gross profit yet to be realized, so the realized gross profit for the year is the difference between $630,000 and $420,000, or $210,000.

Cash collections are computed by dividing the realized gross profit by the gross profit percentage, or $210,000 ÷ 0.35 = $600,000.

Question 104

How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord’s financial statements?

Long-term asset

Long-term liability

Current asset

Current liability

Answer 104

Current liability

Unearned rent is classified as a current liability because the landlord has received cash for the rent prior to the period in which the rent is earned (i.e., rental income is earned over the eight-month period that the tenant occupies the rented property). It is all current since the rent will be earned within the next year.

Question 105

North Co. entered into a franchise agreement with South Co. for an initial fee of $50,000. North received $10,000 at the agreement’s signing. The remaining balance was to be paid at a rate of $10,000 per year, beginning the following year. North’s services per the agreement were not complete in the current year. Operating activities will commence next year. What amount should North report as franchise revenue in the current year?

$50,000

$20,000

$10,000

$0

Answer 105

$0

Because North did not perform, in the current year, substantially all of the required services covered by the initial franchise fee, North cannot recognize any of the revenue from the initial franchise fee in the current year.

Question 106

Spruce Corporation shipped inventory on consignment to Aspen Inc. that originally cost $175,000. The freight costs (that were paid by Spruce) amounted to $1,400. Aspen paid $3,600 for advertising that was reimbursable from Spruce. At the end of the year, 80% of the inventory was sold for $196,000. The agreement stated that a commission of 15% will be provided to Aspen for all sales. Ignoring income taxes, what amount should Spruce report as net income for the year?

$25,200

$26,600

$21,880

$23,000

Answer 106

$21,880

Question 107

How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the seller’s financial statements before the performance?

Revenue for the entire proceeds

Unearned revenue to the extent of related costs expended

Revenue to the extent of related costs expended

Unearned revenue for the entire proceeds

Answer 107

Unearned revenue for the entire proceeds

Revenue is normally considered to be earned and recognizable when an exchange occurs.

In this case, the exchange will occur when the performance is presented. Until that occurs, the entire proceeds from advance ticket sales should be treated as unearned revenue because before the performance the theatrical group has not earned the revenue.

Question 108

Answer 108

$90,800

This is a case of converting from cash-basis rent revenue to accrual-basis revenue. Rent received in cash plus the increase in rental receivables, plus the decrease in unearned rent would be rent revenue on an accrual basis. (Cash plus increase in assets and decreases in related liabilities is revenue.)

Thus, the revenue for the year is $80,000 cash received, plus the increase in receivables of $2,800 (from $9,600 to $12,400), adding the decrease in unearned rent of $8,000 (down from $32,000 to $24,000), which adds up to $90,800:

$80,000 + $2,800 + $8,000 = $90,800

Question 109

On January 2, 20X3, Fir Corporation sold real estate with a carrying amount of $630,000 in exchange for a $900,000 noninterest-bearing note due January 2, 20X9. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type on January 2, 20X3, was 6%. The present value of $1 at 6% for six periods is 0.70.

In Fir’s 20X3 and 20X4 income statement, what amount should be reported as interest income?

20X3, $42,472; 20X4, $45,020

20X3, $37,800; 20X4, $40,068

20X3, $0; 20X4, $37,800

20X3, $40,068; 20X4, $42,472

Answer 109

20X3, $37,800; 20X4, $40,068

Notes receivable represent a right to receive a fixed amount of money at a future date. Noninterest-bearing notes typically include a portion of interest in the face amount ($900,000) of the note even though actual interest payments will not be made.

On issuance, the note would be recorded at its present value of $630,000 ($900,000 × 0.70). The difference between the face value and the present value would represent a discount on the note receivable (a contra asset).

At the end of 20X3, interest would be recorded on the book value of the note receivable ($900,000 − $270,000 discount = book value $630,000; $630,000 × .06 = $37,800). In 20X4, the book value of the note is now $667,800 ($630,000 + $37,800) so interest revenue would be $40,068 ($667,800 × .06).

Question 110

Debt instruments representing contractual rights or obligations to receive or pay money on fixed or determinable dates are generally recorded at the ___value of the instrument at the issuance date.

The difference between the face and present value is recognized as ___income or expensed over the life of the instrument in such a way as to result in a constant rate of interest.

Answer 110

present

interest

Question 111

Which of the following is a practical expedient for recognizing revenue on an individual contract with a customer?

Combined approach

Simplified approach

Aggregate approach

Portfolio approach

Answer 111

Portfolio approach

FASB ASC 606 includes a practical expedient that allows an entity to use a “portfolio approach” to apply the revenue recognition guidance. An entity may apply revenue recognition guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

Question 112

FASB ASC 606 includes a practical expedient that allows an entity to use a “___approach” to apply the revenue recognition guidance. An entity may apply revenue recognition guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

Answer 112

portfolio

Question 113

Frame Construction Company’s contract requires the construction of a bridge in 3 years. The expected total cost of the bridge is $2,000,000, and Frame will receive $2,500,000 for the project. The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively, during each of the 3 years. Progress payments received by Frame were $600,000, $1,200,000, and $700,000, respectively. Assuming revenue is recognized over time, what amount of gross profit would Frame report during the last year of the project?

$150,000

$125,000

$140,000

$120,000

Answer 113

$150,000///300587

Question 114

In evaluating whether collectibility of an amount of consideration is probable, an entity should:

only consider the customer’s ability and intention to pay that amount of consideration when it is due related to goods or services it expects to deliver under the contract.

An entity only needs to consider if collectibility is possible, not probable.

only consider if the contract has commercial substance.

only consider all available leading economic indicators applicable to the customer.

Answer 114

only consider the customer’s ability and intention to pay that amount of consideration when it is due related to goods or services it expects to deliver under the contract.

An entity must determine if the contract is valid and represents a substantive transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services.

The objective of this assessment (referred to as a collectibility threshold) is to prevent revenue from being recognized on contracts that lack true substance.

An entity only recognizes any consideration it receives as revenue when either: the entity has no remaining obligations to transfer goods or services to the customer, and substantially all of the consideration has been received by the entity and it is nonrefundable, OR the agreement has been terminated, and the consideration is nonrefundable.

Question 115

An entity must determine if the contract is valid and represents a substantive transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services. The objective of this assessment (referred to as a collectibility threshold) is to prevent revenue from being recognized on contracts that lack true substance. An entity only recognizes any consideration it receives as revenue when either: the entity has no remaining obligations to transfer goods or services to the customer, and substantially all of the consideration has been received by the entity and it is nonrefundable, OR the agreement has been terminated, and the consideration is nonrefundable.

Answer 115

the seller has transferred the physical possession of the goods

A seller’s performance obligation is satisfied when it has transferred controls of the asset to the customer. Evidence that control has been transferred includes:

the seller has accepted the asset,

the seller no longer has the significant risks and rewards of ownership of the asset,

the seller has transferred physical possession of the asset to the customer,

the seller has a present right to payment for the asset, and

the customer has legal title to the asset.

Question 116

A seller’s performance obligation is satisfied when it has transferred controls of the asset to the customer. Evidence that control has been transferred includes:

1. the seller has ___the asset,
2. the seller no longer has the significant ___and rewards of ownership of the asset,
3. the seller has transferred physical ___of the asset to the customer,
4. the seller has a present right to ___for the asset, and
5. the customer has legal ___to the asset.

Answer 116

accepted

risk

possession

payment

title