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Exam 5: Revenue Recognition

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Question 81

Multiple Choice

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Which of the following is not one of the five steps for recognizing revenue?

A) Recognize revenue when (or as) each performance obligation is satisfied.
B) Determine the transaction price.
C) Allocate the transaction price to each performance obligation.
D) Estimate variable consideration.

E) A) and C)
F) All of the above

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Question 82

Multiple Choice

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In which of the following is the option described not a performance obligation?

A) Customers accumulate points for every dollar spent at Madeline's Book Store. The points can be redeemed for books once certain levels are met.
B) Customers can get 5% cash back for every $100 spent on eco-friendly products.
C) Customers can "buy two, get one free" at a menswear store.
D) Upon purchase of any name-brand TV, customers can purchase a 5-year extended warranty at a 25% discount.

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

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Question 83

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The following information applies to the questions displayed below. Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products. -Estimate the stand-alone selling price of the software using the adjusted market assessment approach.

Revenue typically should not be recognized when payment is received but the goods are warehoused at the seller's facility.

Goods or services are capable of being distinct if:

A rationale for recognizing revenue over the life of a contract rather than at a single point in time is that:

Bria Furniture sells bed frames and mattresses. One of its products is a premium therapeutic bed set produced by OmniSleep, which comes with a mattress and a bed frame. Bria offers a package consisting of the mattress, the frame, and on-site installation by its staff. All of these components can be sold separately, as often done by other vendors, so Bria concludes that these are separate performance obligations. Bria sells the OmniSleep package for $3,000. The mattress and the frame are sold separately for $2,000 and $900, respectively. Other vendors in the same area typically charge $200 for on-site installation. Bria does not sell on-site installation separately. On average, the prices charged by Bria are 10% higher than those of its competitors. Bria estimates that it incurs about $100 of compensation and other costs to provide the installation service. The profit margin over cost is estimated to be approximately 35%. Required: Estimate the stand-alone selling price of the installation service using (a) the adjusted market assessment approach, (b) the expected cost plus margin approach, and (c) the residual approach.

JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion. -In 2017, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:

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 is the fixed contract price for CCC's project?

Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti's contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio's new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus. -Assuming Brunetti uses the most likely value to estimate the variable consideration, calculate the transaction price.

Explain two approaches a seller can use to estimate variable consideration, and when each approach is likely to be more appropriate.

On June 1, 2018, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2018. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract. - Assume Emmet estimates variable consideration as the most likely amount. How much revenue should Emmet recognize on this contract in 2018?

Which of the following is considered a performance obligation?

Pita Pal sells fast-food franchises. Pita Pal receives $75,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of $75,000. Pita Pal also receives $36,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased) . Rachel became a Pita Pal franchisee on March 1, 2018, and on May 1, 2018 Rachel had completed training and was open for business. How much revenue in 2018 will Pita Pal recognize for its arrangement with Rachel?

In franchise arrangements, the franchisor's performance obligations are not separately identifiable, so revenue must be recognized over time.

Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. 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 Romano 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, Romano estimated that there is a 75% chance that it will earn the quarterly bonus. • On May 5, Romano learned that, during March, there were two complaints from customers related to room cleanliness. Based on this new information, Romano revised its estimate downward to 40% that it would earn the quarterly bonus. • On June 30, Silvia notified Romano that, for the quarter ended, there were four complaints associated with room cleanliness, so Romano would receive the bonus. Two days later, Romano received all payments due for all services rendered in the second quarter, including the bonus. Romano bases estimates of variable consideration on the expected value of the consideration it expects to -Prepare Romano's June 30 and July 2 journal entries to record additional service revenue earned, as well as any necessary adjustments to revenue and receipt of payment from Silvia.

Companies always recognize revenue when goods or services are transferred to customers for the amount the company expects to receive in exchange for those goods or services.

Accounting for quality-assurance warranties includes a credit to warranty expense and a debit to contingent liability.

Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2017 and completed in 2018. Cost and other data are presented below: -Assume that Beavis recognizes revenue upon completion of the project. Required: Prepare all journal entries to record costs, billings, collections, and profit recognition.

Which of the following is least likely to be a reason why a long-term construction contract would qualify for revenue recognition over time?