Topic 10 Revenue Recognition

Exercises: FM0100
On day 1, Clothes Co. sells clothing to Link Corp. for $40,000. Clothes ships the clothing on day 1 and Link is obligated to pay Clothes within six months. Link is given 12 months to return any of the clothing for a refund if it experiences low demand. Link is also given 18 months to exchange any clothing due to low demand. At the time of sale, Clothes cannot reasonably estimate returns, but estimates $5,000 in exchanged goods. Clothes should recognize revenue for the aforementioned transaction:
a. On the day of the sale.
b. Six months after the date of sale.
c. 12 months after the date of sale.
d. 18 months after the date of sale.
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Exercises: FM0100
On day 1, Clothes Co. sells clothing to Link Corp. for $40,000. Clothes ships the clothing on day 1 and Link is obligated to pay Clothes within six months. Link is given 12 months to return any of the clothing for a refund if it experiences low demand. Link is also given 18 months to exchange any clothing due to low demand. At the time of sale, Clothes cannot reasonably estimate returns, but estimates $5,000 in exchanged goods. Clothes should recognize revenue for the aforementioned transaction:
a. On the day of the sale.
b. Six months after the date of sale.
c. 12 months after the date of sale.
d. 18 months after the date of sale.
Choice "c" is correct. Clothes Co. cannot book revenue at the time of sale because it cannot reasonably estimate returns. Because Link is given 12 months to return any clothing for a refund, once the 12-month period has passed, Clothes can then recognize revenue because any future returns will result in exchanges rather than refunds.
Exercises: FM0101
How should unearned rent that has already been paid by tenants for the next eight months of occupancy be
reported in a landlord's financial statements?
a. Current asset.
b. Current liability.
c. Long-term asset.
d. Long-term liability
Image: Exercises: FM0101 How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord's financial statements? a. Current asset. b. Current liability. c. Long-term asset. d. Long-term liability
Exercises: FM0102
At the beginning of the current year, Hayworth Co. sold equipment with a two-year service contract for a single
payment of $20,000. The fair value of the equipment was $18,000. Hayworth recorded this transaction with a debit
of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the following statements is correct regarding
Hayworth's current-year financial statements?
a. The financial statements are correct.
b. Net income will be overstated.
c. Total assets will be overstated.
d. Total liabilities will be overstated.
Image: Exercises: FM0102 At the beginning of the current year, Hayworth Co. sold equipment with a two-year service contract for a single payment of $20,000. The fair value of the equipment was $18,000. Hayworth recorded this transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the following statements is correct regarding Hayworth's current-year financial statements? a. The financial statements are correct. b. Net income will be overstated. c. Total assets will be overstated. d. Total liabilities will be overstated.
Exercises: FM0103
On December 31, 2003, Moon, Inc. authorized Luna Co. to operate as a franchisee for an initial franchise fee of
$100,000. Luna paid $40,000 on signing the agreement and signed an interest-free note to pay the balance in
three annual installments of $20,000 each, beginning December 31, 2004. On December 31, 2003, the present
value of the note, appropriately discounted, is $48,000. Services for the initial fee will be performed in 2004.
In its December 31, 2003, balance sheet, what amount should Moon report as unearned franchise fees?
a. $0
b. $48,000
c. $88,000
d. $100,000
Choice "c" is correct. The franchise fee will not be earned until 2004 when the services for the initial fee will be performed Therefore, the total (discounted) amount of the fee must be reported as unearned franchise fees:
Unearned franchise fees =$40,000 cash payment + $48,000 PV of future payments - $88,000
Exercises: FM0104
Which of the following statements is correct regarding deferred revenues recorded by a company that provides
services to customers?
a. Deferred revenue is a liability until the service had been performed.
b. Deferred revenues represent revenues earned but not yet received in cash.
c. Deferred revenues result from services that have been performed but have not been billed.
d. A deferred revenue on the books of one company is an accrued expense on the books of another company
Choice "a" is correct.
Deferred revenue is a liability until the service has been p performed
Exercises: FM0105
A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after
they are issued. How would the deferred revenue account be affected by each of the following?
Redemption of certificates. Lapse of certificates
Decrease. Decrease
Decrease. No effect
No effect. Decrease
No effect. No effect
Image: Exercises: FM0105 A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following? Redemption of certificates. Lapse of certificates Decrease. Decrease Decrease. No effect No effect. Decrease No effect. No effect
Exercises: FM0106
Howard Co. had the following first-year amounts for a $7,000,000 construction contract:
Actual costs $2,000,000
Estimated costs to complete 6,000,000
Progress billings. 1,800,000
Cash collected. 1,500,000
What amount should Howard recognize as gross profit (loss) using the percentage-of-completion method?
a. ($1,000,000)
b. ($200,000)
c. $800,000
d. $1,750,000
Image: Exercises: FM0106 Howard Co. had the following first-year amounts for a $7,000,000 construction contract: Actual costs $2,000,000 Estimated costs to complete 6,000,000 Progress billings. 1,800,000 Cash collected. 1,500,000 What amount should Howard recognize as gross profit (loss) using the percentage-of-completion method? a. ($1,000,000) b. ($200,000) c. $800,000 d. $1,750,000
Exercises: FM0107
Frame construction company's contract requires the construction of a bridge in three years. The expected total cost of the bridge is $2,000,000, and Frame will receive $2,500,000 for the project. The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively, during each of the three years. Progress payments received by Frame were $600,000, $1,200,000, and $700,000, respectively. Assuming that the percentage-of-completion method is used, what amount of gross profit would Frame report during the last year of the project?
a. $120,000
b. $125,000
c. $140,000
d. $150,000
Image: Exercises: FM0107 Frame construction company's contract requires the construction of a bridge in three years. The expected total cost of the bridge is $2,000,000, and Frame will receive $2,500,000 for the project. The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively, during each of the three years. Progress payments received by Frame were $600,000, $1,200,000, and $700,000, respectively. Assuming that the percentage-of-completion method is used, what amount of gross profit would Frame report during the last year of the project? a. $120,000 b. $125,000 c. $140,000 d. $150,000
Exercises: FM0108
Falton Co. had the following first-year amounts related to its $9,000,000 construction contract:
Actual costs incurred and paid. $2,000,000
Estimated costs to complete. 6,000,000
Progress billings. 1,800,000
Cash collected. 1,500,000
What amount should Falton recognize as a current liability at year end, using the percentage-of-completion method?
a. $0
b. $200,000
c. $250,000
d. $300,000
Image: Exercises: FM0108 Falton Co. had the following first-year amounts related to its $9,000,000 construction contract: Actual costs incurred and paid. $2,000,000 Estimated costs to complete. 6,000,000 Progress billings. 1,800,000 Cash collected. 1,500,000 What amount should Falton recognize as a current liability at year end, using the percentage-of-completion method? a. $0 b. $200,000 c. $250,000 d. $300,000
PJ's Paint & Body sells car parts and provides services. PJ's contracted to provide ten
replacement bumpers to Smyth New & Used Auto Mall. When should PJ's recognize
revenue?
A. When the contract is signed.
B. When PJ's places orders for the ten bumpers with PJ's suppliers
C. As the bumpers are delivered to Smyth
D. When the bumpers are delivered to Smyth and the purchase price is collected
Image: PJ's Paint & Body sells car parts and provides services. PJ's contracted to provide ten replacement bumpers to Smyth New & Used Auto Mall. When should PJ's recognize revenue? A. When the contract is signed. B. When PJ's places orders for the ten bumpers with PJ's suppliers C. As the bumpers are delivered to Smyth D. When the bumpers are delivered to Smyth and the purchase price is collected
Which of the following is a part of the core principle of the revenue recognition standard? A. The amount of revenue recognized represents the consideration the entity expects to receive in exchange for goods or services B. If the expected cost of satisfying a performance obligation is greater than the amount of revenue allocated to it, the loss will be recognized when the cost is incurred. C. Recoverable incremental costs of obtaining a contract are capitalized and reported on the income statement in the same period in which the related revenue is recognized. D. To recognize revenues while the performance obligation is being satisfied, there must be some means for measuring progress toward completion of the obligation(MCQ) Exercises: FM0683 Shipley Clothiers, LLC, specializes in custom-made clothing. Which of the following Shipley contracts most likely has separately identifiable promises resulting in distinct performance obligations for the recognition of revenue? A. contract to make three matching bridesmaid dresses for a wedding, identical except for size. B. contract to make a gold lame evening gown and a cream velvet evening wrap for the customer to wear to the opening night of an art gallery's exhibition C. A contract to make a wool suit with a silk lining and two silk blouses in the same silk as the suit lining D. A contract to make a floral cotton dress and trim a hat with the same fabric for a garden party.Acorn Software provides subscribers with access to web-based software for 365 days for a single payment, regardless of how often the customer uses the software. Acorn developed the software and updates it (to accommodate changes to off-theshelf operating systems or to provide new functionality) for the entire subscription period, so customers continually have the most recent version. In considering revenue recognition of the subscriptions, what base is Acorn most likely to use for measuring progress that faithfully reflects the entity's performance toward completion? A. Appraisals of results achieved B. Milestones reached C. Time elapsed D. Units produced or deliveredPaw Gallery has an extensive collection of animal photographs that may be downloaded and reproduced by its subscribers. Subscribers pay an annual fee for an access code allowing the user to download images from the site. Shell Portraits takes photographs in its studio or at the customer's location. Shell qives each customer an good for yn to £o , ation. shell gives access code good for up to four weeks so each customer may download only his or her own photographs from Shel's website. Shell will print and deliver photos for a separate printing fee or the customer may arrange for an independent printer. Both Paw and Shell allow unlimited reproduction of their images. When should Paw and Shell recognize revenue for these image sales? A. Paw Gallery At access code delivery Shell Portraits At access code delivery B. Paw Gallery At access code delivery Shell Portraits Over access duration C. Paw Gallery Over access duration Shell Portraits At access code delivery D. Paw Gallery Over access duration Shell Portraits Over access durationOn March 1, Bunyan Lumber entered into a contract to provide 20,000 board feet of type A Brazilian cherry to Happy Homes, LLC, for $15 per board foot for delivery as called for from July to October. At the time, Bunyan could purchase type A Brazilian cherry at $10 per board foot and deliver it to Happy Homes for less than $1 per board foot. In April, foresters identified a new disease affecting Brazilian cherry. Strict regulations were implemented in May, including requiring pre-transport inspections of Brazilian cherry. Due to the cost of inspections and the decreased supply, prices increased. In May, the price fluctuated wildly between $13 and $21 per board foot. With prices continuing to fluctuate wildly in June, Bunyan purchased 20,000 board feet of type A Brazilian cherry at $16 per board foot. Bunyan delivered 10% of the lumber in August and 90% in September. When should Bunyan recognize a loss relating to this contract? A. May B. June C. August D. August and SeptemberMod Cons Appliances entered into a contract to provide Reilly Clean Laundromat with 10 premium washer-dryer packages at $2,1 50 for each package. The premium washer- dryer package includes a washing machine, a dryer, and a 5-year repair plan for each appliance. Mod Cons offers a washer package with a washer and a washer repair plan for $1,350 and a dryer package with a dryer and a dryer repair plan for $950. Mod Cons regularly sells individual washing machines at $1,200 each and individual dryers at $900 each. It sells 5-year repair plans at $300 for washing machines and $100 for dryers. Rounding to the nearest whole dollar, how much of the Reilly contract revenue should be allocated to the washing machines? $10,100 $10,800 $10,320 $12000A company used the percentage-of-completion method of accounting for a five- year construction contract. Which of the following items wil the company use to calculate the income recognized in the third year? A Progress billings to date Yes Income previously recognized No B Progress billings to date No Income previously recognized Yes C. Progress billings to date No Income previously recognized No D. Progress billings to date Yes Income previously recognized No