F1 M4 Flashcards
(44 cards)
Define incremental cost, and when they are not expensed?
Incremental costs: Costs of obtaining a K that would not have been incurred if the K had
not been obtained (they are recognized as an asset if the entity expects to recover them.
Costs that are incurred regardless of if the K was established or not are expensed)
How is the cost to fulfill a K treated?
Costs to fulfill a K are typically treated as an asset
Examples of ex of incremental cost
Ex of incremental costs: Commissions paid, legal fees, Selling, G&A, wasted labor and
material costs, and costs tied to satisfied performance obligations
What needs to be determined if an entity provided goods or services to a customer
If an entity provides goods or services to a customer, it needs to be determined if they
are the principal or agent
Define principle
Principal: Entity controls good or service before it is transferred to customer (ex: RIU
Palace and Delta Airlines; revenue recognized is equal to gross consideration they
expect to receive)
Define Agent
Agent: Another party provides a good or service to customer (Ex: Expedia; revenue
recognized is equal to fee or commission provided)
What is JE ex?
JE ex: Debit cash $10,000, Credit due to other company (9,000) and revenue (1,000)
What are the three examples of when an entity is a principal?
An entity is a principal when (1) they are responsible for fulfilling K, (2) entity has
inventory risk, and (3) entity has discretion in establishing prices for their goods or
services
What is repurchase agreement?
Repurchase agreement: Entity sells an asset and either promises to or has the option to
repurchase the asset
What is forward option?
Forward option: an entity is obligated to buy back the asset (think of derivatives)
What is Call option?
Call option: entity has the right to repurchase the asset (ex: bonds)
What is Put option?
Put option: entity is required to repurchase asset at the customer’s request (think of
derivatives)
Forward and put options can also be what?
Forward and put options can also be leases
What is a Bill-and Hold Arrangement?
Bill-and Hold Arrangement: K’s in which the entity bills a customer for a product that is
net yet delivered to the customer
Three examples of when revenue can be recorded in bill and hold arrangement?
Revenue can be recorded in this arrangement IF (1) there is a substantive reason (ex:
customer doesn't have space in their warehouse to hold the product), (2) product is
separately identified and belonging to customer, (3) product is ready for transfer, and (4)
entity can not use the product
Also, rev can be recognized ON THE DATE the inv is ready to be shipped (ex: a comp is
ready to ship goods to customers on Jan 1. The comp doesn’t receive $ from customers
until Feb 1. The comp can recognize rev on Jan 1)
What is consignment?
Consignment: Dealer or distributor (third party - ex: a car dealer) has not obtained
control of the product from the principal
When is Revenue recognized?
Revenue is only recognized when the dealer or distributor sells the product to a
customer or when the dealer or distributor obtains control of the product
What are three indicators of consignment?
Three indicators of consignment: (1) entity controls the product until a specific event
occurs, (2) distributor does not have an obligation to pay the entity, and (3) the entity can
require the return of the product or transfer the product to another party
Warranties are what?
Warranties can either be apart of the good being purchased or can be separate
performance obligations (ex: extended warranty - this is purchased separately from the
product itself)
When is a warranty a separate PO?
If the law requires a warranty, it isn’t a separate PO
If I need to find out how much is actually allocated to the warranty vs. the good being
bought, then I should use what equation?
If I need to find out how much is actually allocated to the warranty vs. the good being
bought, then I should use the equation from part 1 [(amt of good/total price of PO with all
original prices) x amt of K on the given discount]. This will tell me the TP of the product,
and the remainder will equal the amt allocated to the warranty
The higher the coverage period, the higher likelihood that it is a what?
The longer the coverage period, the higher the likelihood that it is a PO
If it is likely that a comp will not collect a certain % of rev, I must what?
If it is likely that a comp will not collect a certain % of rev, I must recognize a refund
liability in order to not overstate rev (ex: I sell a product that is returned 50% of the time. I
will multiply the rev received by 50% and this will be a credit called refund liability. When
products are returned, I will debit refund liability and credit cash for the amt originally
received)
