Need A Tutor?    |   Need Homework Help?                                                                             Help and Support     | Join or Cancel

What account tracks the inflow of net assets that occurs when a business provides goods or services to its customers?

revenues
   
The core revenue recognition principle stipulates that companies recognize revenue when goods or services are

transferred to customers
 
Which of the following likely will lead to revenue recognition at a point in time? (Select all that apply.)

Buyer has accepted the asset
Buyer has legal title to the asset
 
Which of the following services are commonly performed over time? (Select all that apply.)

Consulting engagements
Financial statement audits
Lending of money
   
What method(s) can be used to estimate progress toward completion for the purpose of recognizing revenue over time?

(Select all that apply.)
Input method
Output method
   
The inflow of cash or other assets that a business receives when it provides goods or services to customers is referred to as

revenues
   
For a promise to provide a good or service to be accounted for as a separate performance obligation, the good or service must be

distinct from other goods and services in the contract.
   
The concept or principle that states that companies should recognize revenue when goods or services are transferred to customers for the
amount the company expects to be entitled to receive in exchange for goods and services is referred to as the:

Core revenue recognition principle
   
The transaction price is the amount the seller expects to ______ from the customer in exchange for providing goods and services.

be entitled to receive.
   
Which of the following are key indicators that control of goods or services has been transferred to the customer?
(Select all that apply.)

Customer has legal title to the asset
Customer has physical possession of the asset
Customer accepted asset.
   
The amount at which a good or service is sold separately under similar circumstances is referred to as the

stand-alone selling price.
   
Revenue recognition for services such as lending money and performing financial statement audits is typically ___.

over time
   
Arthur Inc. provides services to consulting clients. Arthur should recognize the related revenue when _____.

the related performance obligation is satisfied.
   
Methods that can be used to estimate progress toward completion are referred to as (1)-based and (2)-based methods.
(Enter one word per blank.)

output
input
   
A contract is an agreement that creates ____ enforceable rights and obligations.
(Enter only one word.)

legally
   
Which of the following support(s) the conceptual basis for separating contractual promises into several performance obligations?

Financial statements better reflect timing of transfer of goods and services
Promises that can be viewed on a stand-alone basis should be separated.
   
A prepayment from a customer typically creates a performance obligation.

False
   
The _____ price is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services. (Enter only one word.)

transaction
   
Which of the following are indicators that a company is a principal? (Select all that apply.)

it sets the sales price
It has primary responsibility for providing the product or service
it owns the inventory prior to delivery
   
For the purpose of allocating the transaction price to multiple performance obligations,
the stand-alone selling price of a specific good or service may be estimated if it

cannot be directly observed.
   
Which methods may be used to estimate the stand-alone prices of goods and services?
(Select all that apply.)

Expected cost plus margin approach
Adjusted market assessment approach
Residual approach
   
Revenue is recognized when the ____ obligation is satisfied. (Enter one word.)

performance
   
Commitment to performing an obligation and enforcing related rights represents a critical aspect of a(n) contract

contract
   
Licenses typically allow customers to use the seller's ____ property.

Intellectual
   
Jones Company receives a prepayment from a customer consistent with a promise to deliver 20 new office printers to Smith Inc.
The prepayment

should be recorded as deferred revenue
does not create a separate performance obligation.
   
Which of the following must a seller recognize as separate line items on the balance sheet? (Select all that apply.)

Contract liabilities
Accounts receivable
Contract assets
   
Principal

Has primary responsibility for delivering goods or services.
   
Agent

Acts as a facilitator for helping seller transact with buyers.
   
Third Party

Is not directly involved in a transaction.
   
Munch Inc. delivers various types of construction materials to a customer's building site. Over an 18-month period,
Munch's employees utilize Munch's machinery and tools to construct a new office.

building for the customer. Munch identifies only one performance obligation related to this contract because
Munch combines the materials, labor, and use of machinery and tools to construct a single complete building.
   
The stand-alone price of a good or service may be estimated using the adjusted market assessment approach,
the expected cost-plus margin approach, or the ____ approach.
(Enter only one word.)

residual
   
Which of the following are included in the journal entry required to record construction costs for a long-term construction contract?
(Select all that apply.)

debit construction in progress
credit raw materials
   
Which statements are true regarding revenue recognition over time and upon completion?
(Select all that apply.)

The same total amount of gross profit is recognized under both methods.
Revenue recognition over time provides a more realistic measure of a project's periodic performance.
   
Agreements that allow customers to use the seller's intellectual property are referred to as ____.
(Enter only one word.)

licenses
   
An estimated overall loss on a long-term contract is fully recognized in the first period the loss becomes evident,
regardless of the revenue recognition method used.

True
   
A seller recognizes contract liabilities, contract assets, and accounts receivable on separate lines of its ____ ____.
(Enter one word per blank.)

Balance, sheet
   
Long-term contracts require careful consideration in identifying performance obligations because these type of contracts…
typically include many products and services that _____.

could be viewed as separate performance obligations.
   
What journal entry should be made to recognize accounts receivable for long-term construction projects?
 
Debit Accounts Receivable
       Credit Billings on Construction Contract
   
The essential difference between revenue recognition over time and upon completion relates to the

pattern of recognition of the related gross profit.
   
Required information
Learning Objective 06-04 Allocate a contract’s transaction price to multiple performance obligations.
Skip to question
[The following information applies to the questions displayed below.]

A contract’s transaction price is allocated to its performance obligations.
The allocation is based on the stand-alone selling prices of the goods and services underlying those performance obligations.
The standalone selling price must be estimated if a good or service is not sold separately.
 
Which of the following is one of the steps used to apply the revenue recognizing principle?

Identify the performance obligation(s) in the contract?
   
Required information
Learning Objective 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts,
qualify as performance obligations.
Skip to question
[The following information applies to the questions displayed below.]

A contract exists when it has commercial substance and all parties to the contract are committed to performing the obligations
and enforcing the rights that it specifies.

Performance obligations are promises by the seller to transfer goods or services to a customer.
A promise to transfer a good or service is a separate performance obligation if it is distinct, which is the case if it is both capable of being distinct (meaning that the customer could use the good or service on its own or in combination with other goods and services it could obtain elsewhere), and it is separately identifiable (meaning that the good or service is not highly interrelated with other goods and services in the contract, so it is distinct in the context of the contract).

Prepayments, rights to return merchandise, and normal quality-assurance warranties do not qualify as performance obligations, because they don’t transfer a good or service to the customer. On the other hand, extended warranties and customer options to receive goods or services in some preferred manner (for example, at a discount) qualify as performance obligations.
 
Which of the following is a performance obligation?

Extended warranty on the electronics package of a car
   
Required information
Learning Objective 06-06 Understand how variable consideration and other aspects of contracts affect the calculation,
and allocation of the transaction price.
Skip to question
[The following information applies to the questions displayed below.]

When a contract includes consideration that depends on the outcome of future events, sellers estimate that variable consideration
and include it in the contract’s transaction price. The seller’s estimate is based either on the most likely outcome or the expected
value of the outcome.

However, a constraint applies—variable consideration only should be included in the transaction price to the
extent it is probable that a significant revenue reversal will not occur. The estimate of variable consideration is updated each period
to reflect changes in circumstances. A seller also needs to determine if it is a principal (and recognizes as revenue the amount received
from the customer) or an agent (and recognizes its commission as revenue), consider time value of money, and consider the effect of
any payments by the seller to the customer.

Once the transaction price is estimated, we allocate it to performance obligations according to their stand-alone selling prices,
which can be estimated using the adjusted market assessment approach, the expected cost plus margin approach,
or the residual approach.
 
Which of the following statements is true with regards to variable consideration?

Variable consideration means the transaction price is uncertain.
   
Which is correct regarding changes in estimated variable consideration?

Changes in estimated variable consideration should be recognized as an adjustment to revenue in the
period the change in estimate is made.
   
Which of the following is true regarding an agent?

The agent's revenue is equal to the commission it is entitled to receive on each transaction.
   
Required information
Learning Objective 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and
over a period of time according to the percentage completed.
Skip to question
[The following information applies to the questions displayed below.]

Long-term contracts usually qualify for revenue recognition over time.
We recognize revenue over time by assigning a share of the project’s revenues and costs to each reporting period over the life of the project according to the percentage of the project completed to date.
If long-term contracts don’t qualify for revenue recognition over time, we recognize revenues and expenses at the point in time when the project is complete.
 
What is the relationship between Construction-in-progress (CIP) and the Billings on Construction Contract account?

Billings is contra to CIP and reduces the balance of the CIP account.
   
When revenues, costs and gross profit are recognized at the completion of the contract rather than periodically throughout the contract:

Either method results in the same revenues, costs and gross profits being recognized by the end of the project.
   
If a contract qualifies for revenue recognition over time, revenue is recognized based on progress toward:

Completion.
   
When is a loss recognized on a long-term contract?

In the first period in which the loss becomes evident.
   
Exercise 6-2 (Static) Service revenue [LO6-3]
 
Ski West, Inc., operates a downhill ski area near Lake Tahoe, California. An all-day adult lift ticket can be purchased for $85.
Adult customers also can purchase a season pass that entitles the pass holder to ski any day during the season, which typically runs from December 1, through April 30. Ski West expects its season pass holders to use their passes equally throughout the season.
The company’s fiscal year ends on December 31.
 
On November 6, 2021, Jake Lawson purchased a season pass for $450.
 
Required:
When should Ski West recognize revenue from the sale of its season passes?
Prepare the appropriate journal entries that Ski West would record on November 6 and December 31.
What will be included in the Ski West 2021 income statement and balance sheet related to the sale of the season pass to Jake Lawson?
 



   
Exercise 6-3 (Static) Allocating transaction price [LO6-4]

Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV,
a universal remote, and on-site installation by VP staff.
The installation includes programming the remote to have the TV interface with other parts of the customer’s home entertainment system.
VP concludes that the TV, remote, and installation service are separate performance obligations.
VP sells the 60-inch TV separately for $1,700, sells the remote separately for $100, and offers the installation service separately for $200. The entire package sells for $1,900.
 
Required:
How much revenue would be allocated to the TV, the remote, and the installation service?
(Do not round intermediate calculations.)
 

   
Exercise 6-5 (Static) Performance obligations [LO6-2, 6-4, 6-5]
On March 1, 2021, Gold Examiner receives $147,000 from a local bank and promises to deliver 100 units of certified 1-oz. gold bars on a future date.
The contract states that ownership passes to the bank when Gold Examiner delivers the products to Brink’s, a third-party carrier.
In addition, Gold Examiner has agreed to provide a replacement shipment at no additional cost if the product is lost in transit.
The stand-alone price of a gold bar is $1,440 per unit, and Gold Examiner estimates the stand-alone price of the replacement insurance service to be $60 per unit.
Brink’s picked up the gold bars from Gold Examiner on March 30, and delivery to the bank occurred on April 1.
 
Required:
1. How many performance obligations are in this contract?
2. to 4. Prepare the journal entry Gold Examiner would record on March 1, March 30 and April 1.
 


   
Problem 6-5 (Algo) Variable consideration [LO6-3, 6-6]
On January 1, Revis Consulting entered into a contract to complete a cost reduction program for Green Financial over a six-month period.
Revis will receive $27,200 from Green at the end of each month. If total cost savings reach a specific target, Revis will receive an additional $13,600
from Green at the end of the contract, but if total cost savings fall short, Revis will refund $13,600 to Green. Revis estimates an 80% chance that cost savings will reach the target and calculates the contract price based on the expected value of future payments to be received.

Required:
Prepare the following journal entries for Revis:

1. to 3. Prepare the journal entry on January 31 to record the collection of cash and recognition of the first month’s revenue.
Also record the entry on June 30 for receipt of the bonus assuming total cost savings exceed target. And record the entry on June 30
for payment of the penalty assuming total cost savings fall short of target.
(If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
 

   
Problem 6-11 (Algo) Long-term contract; revenue recognition upon completion [LO6-9]
In 2021, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000.
The road was completed in 2023. Information related to the contract is as follows:
 

	2021				2022				2023
Cost incurred during the year	$	2,291,000			$	3,555,000			$	2,259,400
Estimated costs to complete as of year-end		5,609,000				2,054,000				0
Billings during the year		1,900,000				3,946,000				4,154,000
Cash collections during the year		1,700,000				3,500,000				4,800,000

 
Assume that Westgate Construction’s contract with Santa Clara County does not qualify for revenue recognition over time.

Required:
1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years.

2-a. In the journal below, complete the necessary journal entries for the year 2021 (credit "Various accounts" for construction costs incurred).
2-b. In the journal below, complete the necessary journal entries for the year 2022 (credit "Various accounts" for construction costs incurred).
2-c. In the journal below, complete the necessary journal entries for the year 2023 (credit "Various accounts" for construction costs incurred).

3. Complete the information required below to prepare a partial balance sheet for 2021 and 2022 showing any items related to the contract.

4. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information.
 

	2021				2022				2023
Cost incurred during the year	$	2,510,000			$	3,855,000			$	3,210,000
Estimated costs to complete as of year-end		5,710,000				3,210,000				0

 
5. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years assuming the
following costs incurred and costs to complete information.
 

	2021				2022				2023
Cost incurred during the year	$	2,510,000			$	3,855,000			$	4,065,000
Estimated costs to complete as of year-end		5,710,000				4,210,000				0

  TB MC Qu. 6-219 (Algo) Lake Power Sports sells jet skis and other powered...
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 2020, Lake began operations and sold jet skis with a total price of $1,080,000 that cost Lake $540,000.
Lake collected $360,000 in 2020, $360,000 in 2021, and $360,000 in 2022 associated with those sales. In 2021,
Lake sold jet skis with a total price of $2,010,000 that cost Lake $1,206,000. Lake collected $670,000 in 2021,
$480,000 in 2022, and $480,000 in 2023 associated with those sales. In 2023, Lake also repossessed $380,000 of jet skis
that were sold in 2021. Those jet skis had a fair value of $142,500 at the time they were repossessed.

Total cash collections on installment sales during 2021 would be:
 
$1,030,000
 
Explanation
$360,000 (2020 sales) + $670,000 (2021 sales) = $1,030,000
  TB TF Qu. 6-6 (Static) Revenue always is recognized once the...
Revenue always is recognized once the buyer has physical possession of goods.
 
False
   
TB TF Qu. 6-62 (Static) When recognizing revenue over time on a...
 
When recognizing revenue over time on a long-term contract, amounts billed and the cash actually received affect income recognition.
False  
TB TF Qu. 6-18 (Static) If the contract is not in writing, revenue...
If the contract is not in writing, revenue cannot be recognized,
even though goods have been transferred and payment is expected to be received in exchange.
False
   
TB TF Qu. 6-28 (Static) To account for variable consideration using...
 
To account for variable consideration using the most likely amount, the probability of each possible amount is
multiplied by the possible amount to get an expected contract price.
False  
TB TF Qu. 6-17 (Static) A contract between a seller and a buyer...
A contract between a seller and a buyer need not be in writing to be enforceable.
True  
TB MC Qu. 6-121 (Static)
 
Which of the following statement is most true? Calculate cost of goods sold for the year ended August
Variable consideration means that the transaction price is uncertain.