FINAL EXAM

Question 1

Introduction

Question 2

The FASB and IASB issued a new standard on revenue recognition to improve the 1) re___g of re___e tr___ns.

This new standard provides a set of 2) gu___s to follow in determining when re___e should be re___d and how it should be m___d.

The new standard is 3) co___ve and applies to all 4) co___es

Answer 2

1) reporting of revenue transactions
2) guidelines to follow in determining when revenue should be reported and how it should be measured
3) comprehensive
4) companies

Question 3

The new standard, Revenue from 1) Co__s with C___s, adopts an a__t-li__y approach as the basis for revenue recognition.

The asset-liability approach 2) rec___s and m___es revenue based on ch__s in a___s and li___es.

Under the asset-liability approach, companies account for revenue based on the asset or liability arising from 3) co___s with cu___rs

Answer 3

1) Contracts with Customers, adopts an asset-liability
2) recognizes and measures revenue based on changes in assets and liabilities
3) contracts with customers

Question 4

Key Objective of Revenue Recognition

Question 5

Recognize revenue to depict the transfer of 1) g__s or se___es to customers in an amount that reflects the consideration that the company 2) re___s, or ex__s to re__e, in exchange for those g___s or se__es.

Answer 5

1) goods or services
2) receives, or expects to receive, in exchange for those goods or services.

Question 6

Five step process of revenue recognition:

1. I__y the c___ct with cu___rs.
2. Identify the se__e p__ce ob__s in the co___t.
3. De___e the tr___n pr__.
4. Allocate the tr___n p__e to the se___e p___ce ob___ns.
5. Re___e re___e when each pe___e ob___n is sa___d

Answer 6

1. Identify the contract with customers.
2. Identify the separate performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the separate performance obligations.
5. Recognize revenue when each performance obligation is satisfied

Question 7

Main Principle of Revenue Recognition:

Revenue is 1) rec__d in the accounting 2) pe__ when the 3) pe____e ob__on is s___ed

Answer 7

1) recognized
2) period
3) performance obligation is satisfied

Question 8

The Five-Step Process of Revenue Recognition

Question 9

Step 1 – Identify the Contract with the Customer

A contract is an 1) ag___nt between 2) t___ or more pa___s that creates 3) en___e ri___s or o___ns.

Contracts can be 4) w___n, o__l, or i__d from cu___y bu__s practice.

A company applies the 5) re__e gu__e to a contract.

Answer 9

1) agreement
2) two or more parties
3) enforceable rights or obligations
4) written, oral, or implied from customary business practice
5) revenue guidance

Question 10

Step 1 – Identify the Contract with the Customer

A valid contract has the following criteria:

a. The contract has c___al s___ce.

b. The parties have ap___d the contract and are c___ed to p__ their ob___s.

c. The company can i__y each party’s ri___s regarding the g___s or s__s to be provided.

d. The company can identify the p___t t___s for the goods and services to be t___d.

e. It is p__le that the consideration will be col___

Answer 10

a. The contract has commercial substance.

b. The parties have approved the contract and are committed to perform their obligations.

c. The company can identify each party’s rights regarding the goods or services to be provided.

d. The company can identify the payment terms for the goods and services to be transferred.

e. It is probable that the consideration will be collected

Question 11

Step 1 – Identify the Contract with the Customer

-Revenue is only recognized when a 1) v___d c__t e__s.

-If the contract is wholly 2) u____d and each party can 3) un___y t___te the contract without co____ion, then revenue should n__ be re___ed

Answer 11

1) valid contract exists
2) unperformed
3) unilaterally terminate the contract without compensation, then revenue should not be recognized

Question 12

Step 1 – Identify the Contract with the Customer

-The contract between the parties is 1) n__ re___ed (does not result in a jo___l e___) until o__ or b__ of the parties pe__m under the contract.

Answer 12

1) not recognized (does not result in a journal entry) until one or both of the parties perform under the contract.

Question 13

Step 1 – Identify the Contract with the Customer

A key feature of the revenue arrangement is that the contract between the 1) t__ parties is n___ recorded (d___ n__ result in a
journal entry) until o___ or b___ of the parties perform under the contract.

Until 2) pe____ce occurs, no net a___ or net li__y exists

Answer 13

1) two parties is not recorded (does not result in a journal entry) until one or both
2) performance occurs, no net asset or net liability

Question 14

Step 2 – Identify the Separate Performance Obligations in the Contract.

A performance obligation is a 1) pro___ to provide a 2) p___t or s__ce to a cu___

Answer 14

1) promise
2) product or service to a customer

Question 15

Step 2 – Identify the Separate Performance Obligations in the Contract

A company must provide a 1) d___t pr__ct or s___e for a pe___ce ob__on to e__t.

If a 2) s___ p___t or se___e is provided, there is only 3) o___ pe___e ob___n.

If multiple products/services are provided and they are 4) in___nt and int___d, they are co___d and re___d as a si__ pe___ce ob___n.

Answer 15

1) distinct product or service for a performance obligation to exist
2) single product or service
3) one performance obligation
4) interdependent and interrelated, they are combined and reported as a single performance obligation.

Question 16

Step 2 – Identify the Separate Performance Obligations in the Contract

If the products/services are not highly 1) de__ or int_ with other promises (for example, each good or service could be purchased on a standalone basis), then each performance obligation should be accounted for 2) se___

Answer 16

1) dependent or interrelated
2) separately

Question 17

Step 2 – Identify the Separate Performance Obligations in the Contract

A product or service is 1) di___t when a customer is able to 2) b___t from a good or service on its o__ or to___r with other readily av___e re___s

Answer 17

1) distinct
2) benefit from a good or service on its own or together with other readily available resources

Question 18

Step 2 – Identify the Separate Performance Obligations in the Contract

The objective is to determine whether the 1) n___ of a company’s pr___e is to transfer in___al g___ and s___es to the 2) cu____r or to tra___r a co___ed it___(or items) for which individual goods and services are in___

Answer 18

1) nature of a company’s promise is to transfer individual goods and services
2) customer or to transfer a combined item (or items) for which individual goods and services are inputs

Question 19

Step 3 – Determine the Transaction Price.

The transaction price is the amount of consideration a company 0) e__s to 1) re____ from a customer in ex___ge for t____ng g___s/s___s, generally a fi__amount over a sh___ pe___of time

Answer 19

0) expects
1) receive from a customer in exchange for transferring goods/services, generally a fixed amount over a short period of time

Question 20

Step 3 – Determine the Transaction Price

However, in other contracts, 1) the pr___e of a good or service is n__ fi__ and may be d___nt on f___e events.

This is referred to as 2) va__e con___n.

Answer 20

1) the price of a good or service is not fixed and may be dependent on future events
2) variable consideration

Question 21

Step 3 – Determine the Transaction Price

Variable consideration includes such future events occurring as 1) p___e inc___s, vo___e d___ts, re___s, c__s, pe____e b___s, or ro__s

Answer 21

1) price increases, volume discounts, rebates, credits, performance bonuses, or royalties

Question 22

Step 3 – Determine the Transaction Price.

In cases of variable consideration, the company must 1) e___te the a___t of va___e co___ion it will receive
from a contract to determine the amount of re___ue to recognize

Answer 22

1) estimate the amount of variable consideration it will receive
from a contract to determine the amount of revenue to recognize

Question 23

Step 3 – Determine the Transaction Price.

What are the two methods to estimate the amount of consideration to be received:

1. E____ V___
2. M___t li__ a__t

Answer 23

1. Expected Value
2. Most likely amount

Question 24

Step 3 – Determine the Transaction Price

Expected value:

a 1) p____y-w___ed amount in a range of pr___le co___n outcomes.

This approach may be 2) ap___ate if the company has a number of co___ with si___r ch___s.

It can also be based on a 3) li___d number of di___e ou___es and pr___s

Answer 24

1) probability-weighted amount in a range of probable consideration outcomes
2) appropriate if the company has a number of contracts with similar characteristics
3) limited number of discrete outcomes and probabilities

Question 25

Step 3 – Determine the Transaction Price Most likely amount: is the 1) si___e most likely amount in a range of possible consideration outcomes. It may be 2) ap___e if there are only t__ possible outcomes.

Answer 25

1) single most likely amount in a range of possible consideration outcomes 2) appropriate if there are only two possible outcomes.

Question 26

Step 3 – Determine the Transaction Price A company only allocates variable consideration if it is reasonably assured that it will be entitled to that amount. Companies therefore may only recognize variable consideration if: a. They have ex____e with s__r co___ts and can rea___y e___te the amount of re___ b. Based on experience, they d__ n__ ex___ a significant re___l of pr___y recognized r__e. 1) If these criteria are not met, revenue recognition is c____ed

Answer 26

a. They have experience with similar contracts and can reasonably estimate the amount of revenue b. Based on experience, they do not expect a significant reversal of previously recognized revenue. 1) If these criteria are not met, revenue recognition is constrained

Question 27

Step 3 – Determine the Transaction Price Conditions such as one of the following would indicate that the revenue is constrained: 1. The amount of consideration is hi___ s___e to factors o___e the company’s c___l. 2. Un___y about the amount of co___n is not e____ed to be re___d for a l___g period of time. 3. The company’s e___ce with similar ty__s of per___e ob___ns is li___d. 4. The contract has a l___e n___er and br___ range of possible c___n amounts.

Answer 27

1. The amount of consideration is highly susceptible to factors outside the company’s control. 2. Uncertainty about the amount of consideration is not expected to be resolved for a long period of time. 3. The company’s experience with similar types of performance obligations is limited. 4. The contract has a large number and broad range of possible consideration amounts.

Question 28

Step 3 – Determine the Transaction Price Other factors to consider in variable consideration: If a company receives a form of 1) n___h consideration in exchange for the sale of their goods/services, revenue should be measured using the 2) f__ v___ of what was received. If that cannot be determined, the selling price of what was 3) gi__ u__should be e___d and used to measure the revenue.

Answer 28

1) noncash 2) fair value 3) given up should be estimated

Question 29

Step 4 – Allocating the Transaction Price to Separate Performance Obligations If more than one performance obligation exists in a contract, an 1) al____ of the tr___n pr___ is needed. The allocation should be based on the relative 2) f___ va___ of the various pe___e ob___ns.

Answer 29

1) allocation of the transaction price 2) fair values of the various performance obligations

Question 30

Step 4 – Allocating the Transaction Price to Separate Performance Obligations Relative fair values can refer to as the 1) st____e se__g p__e of each performance obligation. If this information is 1.1) n__ av___e, companies should use their 2) b___t es___e of what the goods/services might sell for as a standalone unit using one of the following: a. Ad___d M___t As___nt Ap___ch b. Exp___ co__ pl__ a m___n ap__ch c. R___l ap__ch

Answer 30

1) standalone selling 1.1) not available 2) best estimate a. Adjusted Market Assessment Approach b. Expected cost plus a margin approach c. Residual approach

Question 31

Step 4 – Allocating the Transaction Price to Separate Performance Obligations Adjusted market assessment approach: Ev___e the m___t in which it s___s goods/services and es___e the p___e that customers in that are market would be w__g to p__ for those goods/services.

Answer 31

Evaluate the market in which it sells goods/services and estimate the price that customers in that are market would be willing to pay for those goods/services.

Question 32

Step 4 – Allocating the Transaction Price to Separate Performance Obligations Residual approach: If the standalone selling price of a good/service is h____ v___le or un___n, then e___te the st___e s___g p__e by re___e to the total tr___n p__e le___ the sum of the ob___e standalone selling prices of other goods/services in the contract.

Answer 32

If the standalone selling price of a good/service is highly variable or uncertain, then estimate the standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods/services in the contract.

Question 32

Step 4 – Allocating the Transaction Price to Separate Performance Obligations Expected cost plus a margin approach: F___t ex___d c___s of sa___g a pe___ce o___n and then add an ap__ate m__n for that good/service.

Answer 32

Forecast expected costs of satisfying a performance obligation and then add an appropriate margin for that good/service.

Question 33

Step 4 – Allocating the Transaction Price to Separate Performance Obligations When a bundle of goods/services is sold, the bundle’s selling price may be 1) l___s than the s__ of the in___al st___e prices. If so, and if appropriate, the 2) di__t should be all___d to the p___t(s) c___g the di___nt, n__ to the e__e bundle. Otherwise, the discount should be allocated 3) pr___ly to the e___re bundle

Answer 33

1) less than the sum of the individual standalone prices 2) discount should be allocated to the product(s) causing the discount, not to the entire bundle 3) proportionately to the entire bundle

Question 34

Step 5 – Recognizing Revenue When (or as) Each Performance Obligation is Satisfied Revenue is recognized when the performance obligation is 1) s__d

Answer 34

1) satisfied

Question 35

Step 5 – Recognizing Revenue When (or as) Each Performance Obligation is Satisfied The customer controls the product or service when it has the 1) a__y to d__t the u__ of and o___n substantially all the remaining b___s from the a__t or se___e

Answer 35

1) ability to direct the use of and obtain substantially all the remaining benefits from the asset or service

Question 36

Step 5 – Recognizing Revenue When (or as) Each Performance Obligation is Satisfied A company 1) sa___s its p___ce o___n when the customer ob___s c___l of the go__ or s___ The concept of 2) ch__e of c__l is the d___ng fa__r in de___g when a performance obligation is s___ed.

Answer 36

1) satisfies its performance obligation when the customer obtains control of the good or service 2) change of control is the deciding factor in determining when a performance obligation is satisfied.

Question 37

Step 5 – Recognizing Revenue When (or as) Each Performance Obligation is Satisfied Following are indicators that the customer has obtained control: 1. The c__y has a right to p__nt for the as___t. 2. The c___y has tra___d le__l ti___ to the as___. 3. The co___ny has transferred ph___l po___n of the a___t. 4. The cu___er has si___nt ri___s and r___ds of o___ip. 5. The customer has ac___d the as___t

Answer 37

1. The company has a right to payment for the asset. 2. The company has transferred legal title to the asset. 3. The company has transferred physical possession of the asset. 4. The customer has significant risks and rewards of ownership. 5. The customer has accepted the asset

Question 38

Step 5 – Recognizing Revenue When (or as) Each Performance Obligation is Satisfied Performance obligations may be 1) sa___ at a po__ in ti__ or over a pe___ of t___

Answer 38

1) satisfied at a point in time or over a period of time

Question 38

Step 5 – Recognizing Revenue When (or as) Each Performance Obligation is Satisfied These are 1) in___rs, not r___ts. 2) N___all ind___rs need to be met to c___e that c___l has been tr___ed. 3) Ma____nt must use j___t to determine whether the fa__ col___y indicate that the c___er has ob___d c__l.

Answer 38

1) indicators, not requirements 2) Not all indicators need to be met to conclude that control has been transferre 3) Management must use judgment to determine whether the factors collectively indicate that the customer has obtained control.