Select Transactions

Question 1

Lis the 5 steps of revenue recognition.

Answer 1

1. Identity the contract w/a customer.
2. Identity the performance obligation (s) in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contracts.
5. Recognize revenue when the entity satisfies the performance obligations.

Question 2

What are revenues?

Answer 2

Inflows are other enhancements of assets of an entity or settlements of its liabilities )or a combination of the 2) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

Question 3

Describe the criteria used to identify separate performance obligations.

Answer 3

A contract may include more than one performance obligation. For a performance obligation to be separate, the good or service must be distinct from other goods or services in the contract. A good or service is distinct if a customer can benefit from the goods or service on its own.

Question 4

What methods may be used to recognize revenue when the performance obligation is satisfied over time?

Answer 4

1. Input method

2. Output method

Question 5

How is a transaction price allocated across multiple performance obligations?

Answer 5

The transactions price should be allocated to the separate performance obligations proportionately based on the stand alone pricing of the goods or services identified as separate performance obligations.

Question 6

What are the 2 methods of determining transaction price when a contract includes variable consideration?

Answer 6

1. Expected value approach

2. Most likely amount approach

Question 7

Provide an example of a constraint on estimating revenue based on variable consideration.

Answer 7

If earning the variable consideration is based on an uncertainty that is out of the company’s control, such as weather or the volatility os the stock mkt, then variable consideration is constrained.

Also, if it is probable that a significant reversal of revenue would occur, then variable consideration is constrained.

Question 8

Describe the JE to record sales revenue when noncash consideration is rec’d.

Answer 8

The company will debit and asset account consistent with the noncash consideration rec’d and credit sales revenue. The amount will reflect the FV of the noncash consideration.

Question 9

What type of account is sales discounts forfeited and what is its natural balance?

Answer 9

Revenue account presented as “other income”

Natural credit balance

Question 10

When a significant financing component is present in a sales contract, what revenue in addition to sales revenue does the company record?

Answer 10

Interest revenue.

Question 11

Describe how a single total transaction price is allocated to multiple separate performance obligations.

Answer 11

The total transaction price is allocated based on the proportion of the total standalone selling price represented by each performance obligation. The proportion is found by dividing the standalone price for the performance obligation by the total of the standalone prices for the performance obligations. The proportion for each performance obligation is then multiplied by the total transaction price to determine the amount of the total transaction price that will be allocated to each performance obligation.

Question 12

List the 2 criteria required for a performance obligation to be considered distinct.

Answer 12

1. The customer must be able to benefit from the good or service on its own or with resources readily available.
2. The good or services must be able to be separately identified from other promises in the contract.

Question 13

How is the transaction price allocated for a contract with performance obligations that are not distinct from each other?

Answer 13

If a contract contains promises that are not distinct form each other, then the goods or service promised in the contract represent a single performance obligation. The total contract price is allocated to the single performance obligation.

Question 14

If the standalone selling prices for performance obligations are not directly observable, what steps should a company take?

Answer 14

When the standalone selling prices are not directly observable, then a company should estimate the standalone selling price.

Question 15

What type of account is sales returns and allowances?

What is its natural balance?

Answer 15

Sales returns and allowances is a contra revenue account.

SR&A has a natural debit balance.

Question 16

When a consignee sells goods on consignment from a consignor, what type of revenue will the consignee most likely record?

Answer 16

Commission revenue.

Question 17

How are nonrefundable upfront fees accounted for?

Answer 17

Revenue from nonrefundable up front fees should be recognized over the period that the goods or services are expected to be delivered. If the customer is expected to use the services for 2 years, then the revenue from the nonrefundable upfront fees is recognized evenly over the 2 year period.

Question 18

List the criteria that must be met for an arrangement to qualify as a bill and hold arrangement.

Answer 18

1. Substantive reason for the arrangement (e.g., customer’s facility is not ready to receive the goods)
2. Seller separates the goods from other inventory and identifies them as belonging to the customer.
3. Goods are currently ready for transfer.
4. Goods cannot be used by or directed to another customer.

Question 19

In a principal agent consideration, what service does the agent provide?

Answer 19

The agent facilitates the sales of goods or serves to the customer. Good or services are provided by the principal directly to the customer, and the agent facilitates the sales and connection between the customer and the principal. The agent will likely recognize commission revenue for facilitating sale.

Question 20

Describe the JE to record a customer’s purchase of a service type warranty at its inception and the JE to record warranty revenue.

Answer 20

The JE at the inception of a service type warranty typically includes a debit to cash or AR and a credit to unearned warrant revenue (a liability account). As the time covered by the service type warranty passes, the entity recognized warranty revenue by debiting the unearned warranty revenue account (this decreased the liability account) and crediting warranty revenue.

Question 21

For a contract modification to result in a new separate contract, 2 criteria must be met. describe the 2.

Answer 21

1. The goods or services covered in the modification must be distinct from the original goods or services
2. The consideration for the additional goods or services must reflect stand along pricing.

Question 22

When a contract modification does not result in a new contract, describe how an entity should calculate the price to recognize as revenue for the remaining goods to be transferred to the customer.

Answer 22

And entity may use a blended price approach. To calculate the blended price per product the entity should multiply the remaining quantity of products from the original contract by the price from the original contract. Then the entity should Multiply the additional quantity by the new price. The two resulting amounts are added together to calculate the total revenue left from the original contract and the contract modification. The total is divided by the total remaining quantity of product to be transferred.

Question 23

When are costs to for fill a contract record it as an asset and amortized over the contact period (i.e., the period that benefits from those cost)?

Answer 23

Cost to fulfill a contract are recorded as an asset that is amortized over the contract period when the costs are directly traceable to the contract and are incremental (i.e., The cost would not have been incurred if the contract has not occurred).

Question 24

If a customer never uses a gift card, what happens to the value?

Answer 24

A company may recognize forfeited card revenue when the gift card has expired or when based on past experience, the company deems that the customer has E affectively forfeited the gift card.

Question 25

In most cases, when will an initial franchise fee be recognized as revenue?

Answer 25

In most cases, the initial franchise fee is recognize over the time period when the material services and conditions are provided by the franchise there. The fee is recorded as an unearned Revenue until the franchisor meets the condition under the franchise agreement and recognizes the revenue.

Question 26

What is the contra account to construction in progress?

Answer 26

The contra account is billings on contracts.

Question 27

List the methods of revenue recognition for long term contracts.

Answer 27

• % or completion

- completed contract

Question 28

Describe revenue recognition under the completed contract method.

Answer 28

No revenue is recognized until the contract is completed.

Question 29

Describe the revenue recognition for the % of completion method.

Answer 29

Recognize profit in proportion to the degree of completion. This method is required if estimates of the degree of completion at interim points can be made and reasonable estimates of the total project cast can be made.

Question 30

Describe the nature of the construction in progress account.

Answer 30

It is an inventory account - a current asset.

Question 31

Describe the revenue recognized under the % of completion method for the 2nd year of a contract.

Answer 31

Total revenue through year 2 based on the % of completion through year 2, less revenue recognized for year 1.

Question 32

What is the effect on net assets of billing a customer?

Answer 32

There is no effect.

Question 33

Why are billings on construction treated as as a contra to construction in progress?

Answer 33

To avoid double counting of assets.

Question 34

What is the accounting effect when a single period loss occurs on a contract expected to be profitable?

Answer 34

Total gross profit through the period is less than the gross profit recognized in earlier periods and the current period profit is negative.

Question 35

What is the amount of loss recognized in a period under the completed contract method when estimated total project cost exceeds the contract price?

Answer 35

Overall loss, which is the total project cost less the contract price.

Question 36

What is the amount of loss recognized in a period under the % of completion method when the estimated total project cost exceeds the contract price and gross profit was recognized in previous years?

Answer 36

Total project cost less contract price, plus gross profit recognized in previous years.

Question 37

When is the balance in construction in progress the same for the % of completion method and the completed contract method?

Answer 37

When an overall loss is expected on the contract.

Question 38

What is the % of completion of a project when an overall loss on the contract is expected?

Answer 38

Same as usual total cost to date divided by total estimated project cost