Chapter 5

Question 1

When do companies recognize revenue under ASU No. 2014-09?

Answer 1

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

Question 2

How much revenue do companies recognize under ASU No.2014-09?

Answer 2

For the amount the company expects to be entitled to receive in exchange for those goods and services.

Question 3

What are the five steps to Revenue Recognition?

Answer 3

1. Identify the contract
2. Identify the performance obligation(s)
3. Determine the transaction price
4. Allocate the transaction price
5. Recognize revenue when (or as) each performance obligation is satisfied

Question 4

What is an indicator of recognizing revenue at a single point in time?

Answer 4

Control

Question 5

What does control mean?

Answer 5

Control means the customer has direct influence over the use of the good or service it benefits.

Question 6

A customer is more likely to control a good or service if the customer has:

Answer 6

1. An obligation to pay the seller
2. Legal title to the asset
3. Physical possession of the asset
4. Assumed the risk and rewards of ownership
5. Accepted the asset

Question 7

Revenue is recognized over a period of time if one of the following three conditions hold:

Answer 7

1. The customer consumes the benefit of the seller’s work as it is performed
2. The customer controls the asset as it is created
3. The seller is creating an asset that has no alternative use to the seller and the seller has the legal right to receive payment for progress to date even if the contract is cancelled

Question 8

What are the two methods of estimating progress towards completion?

Answer 8

1. Out-put based

2. In-put based

Question 9

How is the out-put based estimation method measured?

Answer 9

Measured as the proportion of the goods or services transferred to date

Question 10

How is the in-put based estimation method measured?

Answer 10

Measured as the proportion of effort expended thus far relative to the total effort expected to satisfy the performance obligation

Question 11

When are goods and services viewed as separate performance obligations?

Answer 11

When they are distinct.

Question 12

Under what conditions is a good or service distinct?

Answer 12

1. If it is capable of being distinct

2. Separately identifiable from other goods and services

Question 13

A contract exists under what conditions?

Answer 13

1. Has commercial substance
2. Has been approved by the seller and buyer
3. Specifies the rights of the seller and buyer
4. Specifies payment terms
5. Is probable that the seller will collect the amount it is entitled to receive under the contract

Question 14

A contract does not exist if:

Answer 14

1. Neither the seller nor the buyer has performed any obligations under the contract, and
2. Both the seller and the buyer can terminate the contract without penalty

Question 15

Three nonperformance obligations are

Answer 15

1. Prepayment
2. Quality-assurance warranty
3. Right of return

Question 16

A warranty is an extended warranty if either:

Answer 16

1. The customer has the option to purchase the warranty separately, or
2. The warranty provides a service to the customer beyond quality assurance

Question 17

How do you determine the transaction price?

Answer 17

1. Estimate variable consideration and determine whether it is constrained
2. Identify whether the seller is acting as a principal or an agent
3. Consider the TVM
   4 Account for payment by the seller to the customer

Question 18

What is variable consideration?

Answer 18

A part of the transaction price that is dependent on some future event such as royalties, reimbursements, volume discounts and product returns, incentive payments and rebates

Question 19

How do you estimate variable consideration?

Answer 19

Through expected value or most likely amount

Question 20

What are indicators for revenue reversal?

Answer 20

1. Poor or limited evidence to base an estimate
2. Dependance of the estimate on factor’s outside of the sellers control
3. A broad range of outcomes that could occur
4. A long delay before uncertainty resolves

Question 21

What is the right of return?

Answer 21

When the customer can return the good if not satisfied or unable to resell it

Question 22

How does a seller account for a return?

Answer 22

1. Records a liability for cash the seller anticipates refunding to customers, or
2. Reduces accounts receivable if the seller has not yet paid

Question 23

What is an agents performance obligation?

Answer 23

An agents performance obligation is to facilitate a transaction between a buyer and seller

Question 24

What is the principals performance obligation?

Answer 24

A principals performance obligation is to deliver goods and services

Question 25

How does a principal record revenue?

Answer 25

The principal records revenue as the total sales price. The principal also accounts for cost of goods sold.

Question 26

How does an agent record revenue?

Answer 26

An agent records revenue as the commission received.

Question 27

When should you record Time Value of Money?

Answer 27

When the contract contains a significant financing component.

Question 28

When can sellers assume the financing component is not significant?

Answer 28

If the period between delivery and payment is less than one year.

Question 29

What are the three methods of estimating the stand-alone selling price?

Answer 29

1. Adjust market assessment approach 2. Expected cost plus margin approach 3. Residual Approach

Question 30

What is the adjusted market assessment approach?

Answer 30

Price if the product were sold in the market.

Question 31

What is the expected cost plus margin approach?

Answer 31

Estimate the cost of satisfying a performance obligation and then add on an appropriate profit margin.

Question 32

What is the residual approach?

Answer 32

Subtract the sum of the known or estimated stand-alone prices of other goods and services in the contract from the stand-alone price.