FAR 1.3 & 1.4 - Revenue Recognition

Question 1

In order to properly apply the revenue recognition standard, the 5 step approach should be implemented. What are the 5 steps?

Answer 1

1. Identify the contract
2. Identify the separate performance obligations
3. Determine the transaction price
4. Allocate the transaction price to separate performance obligations
5. Recognize revenue when or as the entity satisfies each performance obligation

Question 2

A modification to a contract is treated as a new contract when

Answer 2

Both the scope increases
And
The price increases

Question 3

No cash considerations in contracts should be measured at what?

Answer 3

Fair value at inception date (date signed)

Question 4

Revenue is recognized over time if any one of the criteria below is met:

Answer 4

1. Entity’s performance creates of enhances an asset that the customer controls
2. Customer receives and consumes the benefits of the entity’s performance as the entity peforms
3. Entity’s performance does not create an asset with alternative use

Question 5

Revenue should be recognized at a point in time when the below criteria are met:

Answer 5

1. Entity has right to payment
2. Customer has legal title to the asset
3. Entity has transferred physical possession of the asset
4. Customer has the significant rewards and risks of ownership
5. Customer has accepted the asset

Question 6

Costs incurred that would not have been incurred if the contract had not been obtained. These costs are recognized as an asset if the entity expects that it will recover these costs.

Answer 6

Incremental costs

Question 7

If the entity controls the good or service before it is transferred to the customer, is it an agent or principal?

Answer 7

Principal

Question 8

If the entity arranges fir the other party to provide the good or service to the customer, is it an agent or principal?

Answer 8

Agent

Question 9

The 3 main forms of repurchase agreements include

Answer 9

1. An entity’s obligation to repurchase the asset (forward)
2. An entity’s right to repurchase the asset (call)
3. And an entity’s obligation to repurchase the asset at the customers request (put)

Question 10

Under a forward or call option, the entity had the right or obligation to repurchase the asset, the entity’s accounting for the contract can be what 2 options?

Answer 10

1. Lease - if purchased for LESS than the selling price
2. Financing arrangement - if purchased for MORE than the selling price

Question 11

Under a put option, the entity’s obligation to repurchase the asset at the customers request, the entity’s accounting for the contract can be what 3 options?

Answer 11

If repurchased for less than the original selling price:
1. Lease - customer has economic incentive
2. Sale with right of return - customer does not have economic incentive
If purchased for more than the original selling price:
3. Financing arrangement - repurchase price more than market value
4. Sale with right of return - repurchase price less than market value

Question 12

It is appropriate to use the percentage of completion method if the entity’s accounting system can:

Answer 12

1. Reasonably estimate profitability
   And
2. Provide a reliable measure of progress toward completion

Question 13

Under the percentage of completion method, construction costs and estimated gross profit earned are accumulated in what account?

Answer 13

Construction in progress (an inventory account)

Question 14

Under the percentage of completion method, billings on construction are accumulated in what account?

Answer 14

Progress billings account (a contra-inventory account)