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Exam 5: Revenue Recognition

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Question 71

Multiple Choice

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On July 15, 2018, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2018, and the calibration service commenced on that date. - Assume that the scales, software and calibration service are all separate performance obligations. How much revenue will Ortiz recognize in 2018 for this contract?

A) $0
B) $63,000
C) $74,250
D) $90,000

E) None of the above
F) B) and C)

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Question 72

Multiple Choice

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"VSOE" is necessary to separately recognize revenue in multiple-element contracts for:

A) All service contracts.
B) All product contracts.
C) All contracts that involve at least one non-software element.
D) Software contracts.

E) C) and D)
F) B) and C)

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Question 73

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On December 15, 2018, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2019, and December 15, 2020. Ignore interest charges. - Rigsby has a December 31 year-end. In 2019, Rigsby would recognize realized gross profit of:

What is the effect of bad debts on revenue recognition?

For contracts that include more than one separate performance obligation:

Which of the following is not true?

A contract exists for purposes of revenue recognition if either the seller or customer has performed an obligation specified by the contract.

Under which of the following circumstances is it most appropriate to use the residual method to estimate stand-alone selling prices?

Indiana Co. began a construction project in 2018 with a contract price of $150 million to be received when the project is completed in 2020. During 2018, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed. -In 2019, Indiana incurred additional costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Indiana:

Briefly explain the circumstances in which license revenue is recognized over time versus at a point in time. Provide an example of each.

Arizona Desert Homes (ADH) constructed a new subdivision during 2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized below: - ADH recognizes revenue upon completion of the contract. What is the journal entry in 2018 to record revenue?

Arizona Desert Homes (ADH) constructed a new subdivision during 2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized below: -ADH recognizes revenue over time with respect to these contracts. For 2018, what is the journal entry to record revenue?

Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness. • On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will earn the quarterly bonus. • On May 5, Portelli learned that, during March, there were two complaints from customers related to room cleanliness. Based on this new information, Portelli revised its estimate downward to 40% that it would earn the quarterly bonus. • On June 30, Silvia notified Portelli that, for the quarter ended, there were four complaints associated with room cleanliness, so Portelli would receive the bonus. Two days later, Portelli received all payments due for all services rendered in the second quarter, including the bonus. Portelli bases estimates of variable consideration on the most likely amount it expects to receive. -Prepare Portelli's May 31 journal entry to record the revenue earned in May, as well as any appropriate adjustments to the revenue earned in April.

Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2018, are presented below: Estimated cost to complete: - Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2017 would be (rounded to the nearest thousand) :

An option for a customer to purchase additional goods at a discount from list price is always a performance obligation, because it confers a material right.

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2017. Collections on this sale were $20,000 in 2017, $15,000 in 2018, and $20,000 in 2019. -In 2017, Reliable would recognize gross profit of:

Poseidon Corporation, based in Greece, specializes in painting cargo ships. On December 1, 2018 Poseidon received $300,000 in advance from Worldwide Shipping, Inc. to paint a 40,000-ton cargo vessel. The painting process is scheduled to begin on December 1, 2018, and the ship is to be returned to Worldwide in four months. Worldwide retains legal title to the ship during the contract period, and can sell the ship to another shipper during the contract period if it so chooses. Required: Assuming Poseidon uses "proportion of time" as its measure of progress toward completion, prepare any journal entry that Poseidon would record: (1) at inception of the contract (2) at the end of 2018 to recognize all revenue associated with this contract that should be recognized in 2018. Ignore any costs associated with providing the painting service.

In a bill-and-hold arrangement, revenue only can be recognized after the sale of the goods to the end user.

The transaction price should be allocated to the contract's performance obligations in proportion to the stand-alone selling prices of the performance obligations.

Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500. -Typically, Beaumont incurs $375 on compensation and other costs to provide the private lessons, and earns an average of 40% profit over cost on service offerings. Required: Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the certified lessons based on the expected cost plus margin approach.