Upgrade to remove ads
Only $35.99/year

Chapter 6 Smartbook Intermediate I

Terms in this set (97)

What account tracks the inflows of net assets that occur when a business provides goods or services to its customers?
Revenue
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:
Cost revenue recognition principle
Principal
Has primary responsibility for delivering goods or services
which of the following will lead to revenue recognition at a point in time?
Buyer has legal title to asset
Buyer has accepted the asset
Which of the following services are commonly performed over time?
Lending of money
Financial statement audits
Consulting engagements
Methods that can be used to estimate progress toward completion are referred to as
input-based
output-based
inflows or other enhancements of assets or settlements of an entity's liabilities from delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations are
revenues
goods or services that are NOT distinct are combined and treated as a
single performance obligation
The core revenue recognition principle stipulates that companies recognize revenue when goods or services are
transferred to customers
Which of the following are key indicators that the goods or services have been transferred to the customer?
Physical possession of asset
Legal title to asset
Accepted asset
The amount the seller expects to be entitled to receive from the customer in exchange for providing goods or services is referred to as
transaction price
Revenue recognition for services such as lending money and performing financial statement audits is typically
over time
for the purpose of allocating the transaction price to multiple performance obligations, if a stand-alone price cannot be directly observed the seller should
estimate it
For a particular contract, the timing of revenue recognition is determined
Individually for each performance obligation
For a promise to provide a good or service to be accounted as a separate performance obligation, the good or service must be
Distinct from other goods and services in the contract
Commitment to performing an obligation and enforcing related rights represents a critical aspect of a
contract
jones company receives a prepayment from a customer consistent with promise to deliver 20 new office printers to Smith Inc. The prepayment
Should be recognized as deferred revenue
Does NOT create a separate performance obligation
which of the following situations may make the contract price less apparent?
Determining whether the seller is acting as the principal or the agent
Variable consideration provisions
Sales with right to return
the ______ selling price is the amount at which the good or service is sold separately under similar circumstances
standalone
The contract is said to have variable consideration if the price is dependent on the outcome of
future events
revenue is recognized when the
performance obligation is satisfied
Jonathan is estimating the amount of variable consideration for a specific contract. In deciding which estimation method to use, Jonathan should choose the one that
Best predicts the amount he will receive
an essential characteristic of a contract is that all parties to the contract are committed to
Performing their obligation and enforcing their rights
Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the expected value of consideration, what transaction price will Guarder estimate for this contract?
40,500
10,000 x .55 = 5,500 + 35,000 = 40,500
prepayments by customers for future goods or services should initially be recorded as
Deferred revenue
Which of the following situations may make the contract price less apparent?
Variable consideration provision
Time value of money
Payment by the seller to the customer
a transaction price may be uncertain because the price
Depends on the outcomes of future events
True or False: a right of return represents a performance obligation
FALSE
Which of the following methods are appropriate for estimating variable consideration?
Most likely amount to be received
Expected value
from a financial reporting perspective, the sale return account is a
contra revenue
Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what transaction price will Guarder estimate for this contract?
45,000
35,000 + 10,000
Prepayments for future goods or services should be
Allocated to the various performance obligations in the contract
Included in the transaction price
Margery sells 100 TVs to customers for $90 each. She estimated that 6% of the units will be returned for full refund. Margery should report net of sales at:
8,460
100*0.06 = 6
100 - 6 = 94
94 x $90 = $8,460
Based on past experience, a seller can usually estimate the returns on a given volume of sales. Once estimated these returns will
Increase liabilities
Reduce reported revenue
The potential that a good does not satisfy the original performance obligation is addressed through a customer's
right of return
Sales commission revenue is recognized by the
agent
James Corp. is an agent of Alten Corp. The agreement specified that James will receive a commission equal to 15% of the sales price. During May, James sells goods with a sales price of $200,000 for Alten. For the month ended, James should recognize revenue of
30,000
200,000 x .15 = 30,000
Margery sells 100 TVs to customers for $90 each. She estimated that 6% of the units will be returned for full refund. Margery should debit sales returns for:
100 x 0.6 = 6
6 x $90 = $540
Gerhard Inc. sells merchandise to a customer with a long payment period. Gerhard determines that the time value of money related to this transaction is significant. Gerhard should allocate the
transaction price between the merchandise cash price and the financing component
Meissner sells merchandise for $50,000 on account. The company estimates that customers will return 5% of the merchandise. Meissner should debit sales returns and credit:
Refund liability
As a practical matter, a seller can assume the time value of money is not significant if the period between delivery and payment is less than
one year
It is important to distinguish between a principal and an agent because the principal recognizes revenue to the extent of the
sales price
the stand alone price of a good or service may be estimated using the adjusted market approach, expected cost plus margin approach, or the _______ approach
residual
Agent
Acts as a facilitator for helping seller transact with buyers
Gerhard Inc. sells airline tickets for New World Global Airlines. Gerhard Inc. receives a 8% commission on the sales price of the tickets. During July,• Gerhard Inc. sells $1 million of tickets for New World Global Airlines. Gerhard Inc. should record sales commission revenue for
80,000
0.8 x 1,000,000
Agreements that allow customers to use the seller's intellectual property is referred to as
Licenses
when the time value of money is significant, the transaction. price is allocated
Between the merchandise and the financing component
In a franchise agreement, the ______ pays franchise fees to obtain the right to use a company's name and sell its products
franchisee
If delivery and payment released to the sale of goods occurs relatively near each other, the time value of money can be
ignored
When one party to an agreement grants the right to sell its products and use its name to another party, we refer to the arrangement as a
franchise
Third Party
Is not directly involved in a transaction.
On January 5, Merkel Inc. purchases office equipment for its new branch office from Norbert Company. Merkel requests that the equipment be delivered after the renovation of the branch location is completed. This agreement is referred as a:
bill-and-hold arrangement
Which methods may be used to estimate the stand-alone prices of goods and services? (Select all that apply.)
Adjusted market assessment approach
Residual approach
Expected cost plus margin approach
In a consignment, the ______ owns the goods; the ______ holds the goods in order to sell them to a buyer.
consignor; consignee
Licenses typically allow customers to use the seller's ____ property.
intellectual
A seller recognizes contract liabilities, contract assets, and accounts receivable on separate lines of its
balance sheet
In a franchise arrangement, the _____ grants the ______ the rights to sell products and use its name
franchisee; franchisor
True or false: Most long-term contracts should be viewed as single performance obligations.
TRUE
Fuller contracted with the owners of "Healthy Bakeries" to open a bakery, sell its signature products and use its name and logo. This agreement refers to a
franchise
Which of the following will not differ between revenue recognized over time and revenue recognized at completion? (Select all that apply.)
Total revenue
Total profit
Total expense
In a bill-and-hold arrangement, the ____ requests that the ____ ship the products ______.
buyer; seller; at a later date
Which of the following costs are included in a long-term construction contract? (Select all that apply.)
direct labor
direct material
overhead
In a consignment, the entity who owns the goods, referred to as the ______, physically transfers the goods to another company, called the ______, who will attempt to sell the goods.
consignor; consignee
Which of the following are included in the journal entry required to record the collection of cash from a customer related to a long-term construction contract? (Select all that apply.)
credit accounts receivable
debit cash
Which of the following must a seller recognize as separate line items on the balance sheet? (Select all that apply.)
Accounts receivable
Contract assets
Contract liabilities
The construction in progress account is equivalent to which account in a manufacturing environment?
work-in-process
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.
Which of the following differs between revenue recognized over time and revenue recognized at completion?
The timing of recognition
At the end of the period, if construction in progress exceeds billings on construction contracts, it is recorded as a(n)
contract asset.
Typical costs included in a construction project include
labor, materials, and overhead.
The billings on construction contract account is classified as a(n)
contra asset.
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
The construction-in-progress account most closely relates to which type of account?
inventory
The construction in progress account represents the total construction costs (labor, material, overhead) and
gross profit recognized to date
The billings on construction account represents
The billings on construction account represents
Related to long-term construction contracts, at the end of the period which accounts are netted?
Construction in progress and billings on construction contracts.
The billings on construction account is a contra account to
construction in progress
What is the difference between journal entries to recognize gross profits when revenue is recognized over time and when revenue is recognized upon completion of a long-term project?
Timing
At the end of a long-term construction project, the amounts in the construction in progress account will be ______ the billings on construction contract.
equal to
When revenue is recognized on long-term construction projects, a journal entry is recorded to recognize revenue and cost of goods sold. The difference between revenue and cost of goods sold (gross profit) is recognized in which account?
Construction in progress
When revenue is recognized upon completion of a long-term contract, gross profit is recognized upon completion in which account?
Construction in progress
The amount billed to customers on long-term construction project is recorded in the
billings on construction account.
When is gross profit recorded in the construction in progress account for a long-term contract accounted for upon completion?
At the completion of the contract.
Revenue is recognized upon completion of a long-term contract if:
Revenue is recognized upon completion of a long-term contract if:
On a long-term construction project, the amount in the construction in progress account represents the costs of construction plus the gross profit recognized to date, and the billings on construction represents
the amounts billed to the customer.
The amount of revenue that is recognized each period for a long-term contract that qualifies for revenue recognition over time is determined based on
progress toward completion.
When revenue is recognized upon completion of a long-term contract, CIP is updated to include gross profit
upon completion.
Revenue recognized each period is determined by multiplying total estimated revenue by
percentage completed to date and subtracting revenue recognized in prior periods
What is the journal entry to recognize gross profit when revenue is recognized upon completion of a long-term construction project?
Debit Construction in Progress
Debit Cost of Construction; Credit Revenue from Long-Term Contracts
When revenue related to a long-term construction contract is recognized over time, the journal entry to recognize revenue includes which of the following? (Select all that apply.)
debit construction in progress
debit cost of construction
credit revenue from long-term contracts
If a long-term contract doesn't qualify for revenue recognition over time, revenue is recognized ____.
upon completion
As compared to revenue recognition over time, the total amount of gross profit recognized related to revenue upon completion is:
the same
When is a loss recognized on a long-term contract?
In the first period in which the loss becomes evident.
The formula: total estimated revenue times percentage completed to date less revenue recognized in prior periods is used to measure:
revenue recognized for the current period
Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million, total construction costs are $3.75 million, actual costs incurred during the first year are $1.5 million, and the revenue recognized is $2 million. The journal entry to record revenue during year 1 is: (Select all that apply.)
Debit: CIP $500,000
Reason:
revenue of $2 mill - cost of $1.5 million
Debit: Cost of construction $1.5 million
Credit: Revenue $2 million
Which method provides a better measure of a company's economic activity each period?
Revenue recognition over time
True or false: 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
Other sets by this creator