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Exam 5: Revenue Recognition

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Question 131

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Imagine that the Ace Construction Company (ACC) concludes that it must switch from recognizing revenue on long-term contracts over time according to percentage of completion to recognizing revenue upon completion of each contract. Assume that none of their construction projects are going to produce a loss. Is it possible that, in a particular year, ACC will show higher gross profit under the new approach (recognizing revenue upon contract completion) than they did under the old approach (recognizing revenue over time according to percentage of completion)? Explain.

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Yes. Under the old approach (recognition...

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Question 132

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If the seller is an agent, the seller typically recognizes cost associated with the sale on its own line in the income statement.

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Question 133

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Revenue on a long-term contract should not be recognized according to the proportion of the performance obligation that has been completed if:

Consider the following three scenarios: I. ABC Lawncare performed lawn maintenance services for Drake Inc. On June 1^st, and received payment of $500 for those services. II. On June 1^st, Melly Corp received payment for 100 pounds of raw material To be delivered to Drake Inc. in 6 months. III. Lodo, LLC collected cash on June 1^st for services rendered on May 1^st. Given these scenarios, revenue cannot be recognized on June 1^st for:

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there) . Sweeney recently transferred a painting on consignment to a local barbershop. - Sweeney most likely should recognize revenue when:

Veras Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each month. In addition, Veras will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents. • On January 1, based on historical experience, Veras estimated that there is a 75% chance that it will remain free of accidents for the entire year. • On March 20, three of the most senior drivers at Veras abruptly left. As a result, Veras had to hire inexperienced drivers to fill the vacant positions. Consequently, Veras revised its estimate to a 30% chance that it would earn the semiannual bonus. • On June 30, Moose confirmed that there was no accident between January and June, so Veras would be entitled to the semiannual bonus. Veras bases estimates of variable consideration on the most likely amount it expects to receive. -Prepare Veras' January 31 journal entry to account for the revenue earned from January 1 - January 31.

Smith & Sons is a CPA firm that provides proprietary software to its clients. One of its software packages sells for $150 and contains pre-programmed tutorials on basic accounting concepts. Another product sells for $3,000 and contains Smith & Sons' archive of accounting standards and articles, which Smith & Sons updates on a weekly basis and downloads to archive users for the two years following purchase of the product. Required: If a customer purchases both software packages on June 1, 2018, how much revenue should Smith & Sons recognize for the year?

The adjusted market assessment approach can be used to estimate the stand-alone selling price of a good or service.

If the estimate of a transaction price is revised, the price change is allocated entirely to the remaining performance obligations that are yet to be satisfied.

Which of the following is a characteristic of a contract for purposes of revenue recognition?

Briefly explain how gross profit is recorded when revenue on long-term construction projects is recognized over time according to percentage of completion.

When accounting for revenue over time for a long-term contract, the percentage of completion used to recognize revenue in the first year usually is determined by measuring:

CompuLand Center sells a full assortment of computer parts, including motherboards, video cards, and cables, and also offers complementary computer assembly services. The assembly service is offered by other vendors for $100 on average, and CompuLand typically charges approximately 20% more than other vendors for similar services on a stand-alone basis. Required: Estimate the stand-alone selling price of the assembly service using the adjusted market assessment approach.

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2017, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2017, $300,000 in 2018, and $300,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2018, $400,000 in 2019, and $400,000 in 2020 associated with those sales. In 2020, Lake also repossessed $200,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $75,000 at the time they were repossessed. - In its December 31, 2018, balance sheet, Lake would report:

Which of the following is one of the steps for recognizing revenue?

Explodia.com sells fireworks over the Internet. Customers access Explodia's website and select particular products, and Explodia refers the customer order to a fireworks manufacturer who fulfills the order, ships to the customer, and pays Explodia a 20% commission. Which of the following is true about Explodia?

On January 1, 2018, Elite Advertising was contracted to run a marketing campaign for Pharm King's new dieting pills. In addition to getting a base fee of $150,000 for the 3-year campaign, Elite also may get an additional 5% of the base fee as a bonus if a targeted sales level is reached at the end of three years. Elite currently lacks sufficient information to make an estimate of the likelihood of the expected bonus, with the marketing director indicating that "If you forced me to make an estimate, I'd say we have a 50/50 chance. But don't quote me on that - it's really too early to tell." Elite concludes this contract qualifies for revenue recognition over time, and estimates variable consideration using the most likely amount. How much revenue should Elite recognize as of December 31, 2018?

When accounting for multiple-element arrangements, GAAP indicates that sellers can separately record revenue for part of an arrangement even if the part does not have value to the customer on a stand-alone basis.

In 2018, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions) : - What were the construction billings by CCC during 2018?

An option for a customer to purchase additional goods at a discount from list price is only a performance obligation if the discount is a material right that the customer would not receive otherwise.