Revenue Recognition Flashcards

(16 cards)

1
Q

Formula for recognizing revenue over Long-term contracts

A

Find total contract profit = Total contract price-Total estimated costs
Find percentage complete = Costs incurred to date/Total estimated costs

Total contract profit * Percentage complete = Total profit recognized to date

Total profit recognized to date - Profit previously recognized = Profit recognized in current period

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2
Q

On January 1, Year 1, a furniture wholesale company agreed to sell 10 identical couches to a customer at a price of $1,000 per couch. The entity transfers control of each couch at the point in time it is delivered to the customer. By July 1, Year 1, 6 couches had been provided to the customer. On that date, the customer offered to purchase 2 additional couches of the same model at a price of $950 per couch. The company agreed to accommodate the customer’s request and provided 6 additional couches to the customer on October 1, Year 1.

How much revenue, if any, should be allocated to each agreement in the December 31, Year 1, financial statements?

Jan 1 agreement July 1 agreement
A. $5,950 $5,950
B. $6,000 $5,900
C. $10,000 $1,900
D. $11,900 $0

A

C. $10,000 $1,900

It asks for income at the end of the year and it is a separate contract since the price or scope changed.

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3
Q

Mod Cons Appliances entered into a contract to provide Reilly Clean Laundromat with 10 premium washer-dryer packages at $2,150 per package. The premium washer-dryer package includes a washing machine, a dryer, and a 5-year repair plan for each appliance.

Mod Cons offers a washer package with a washer and a washer repair plan for $1,350 and a dryer package with a dryer and a dryer repair plan for $950. Mod Cons regularly sells individual washing machines at $1,200 each and individual dryers at $900 each. It sells 5-year repair plans at $300 for washing machines and $100 for dryers. Rounding to the nearest $100, how much of the Reilly contract revenue should be allocated to washing machines?

A. $10,100
B. $10,800
C. $10,300
D. $12,000

A

A. $10,100

Make the table, you need to find the cost of the separate wash and dryer packages first and then apply that to the total price of 2,150. The table consists of the following:

Item in first column
Standalone price in second column
% of standalone price in third column
Smaller bundle discount allocation in fourth column
adjusted standalone price in fifth column

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4
Q

Green Co. has two long-term construction contracts. One contract, with Blue Co., qualifies for revenue recognition while the performance obligation is being satisfied. The other contract, with Red Co., does not qualify for revenue recognition until the performance obligation is fully satisfied. For either of these two contracts, what account would be debited when preparing the journal entry to record billings?

Blue co Red co.
A. Billings Cash
B. Construction receivable Construction receivable
C. Cash Billings
D. Construction in progress Construction in progress

A

B. Construction receivable Construction receivable

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5
Q

Red Builders agrees to construct a new building for Blue Co. for a total contract price of $6,000,000 on January 1, Year 1. The estimated construction costs at inception are $4,000,000. The construction project is completed after two years. The actual costs and collections for December 31, Year 1 and Year 2, are as follows:

Year 1 Year 2
Cost incurred to date $1,200,000 $4,600,000
Estimated costs to complete 3,600,000 0
Billings 1,050,000 2,300,000
Cash collections 1,000,000 1,900,000
Red has determined that this contract qualifies for revenue recognition while the performance obligation is being met. Red will use costs incurred as the measure of progress toward completion of the project. What amount of profit should Red recognize on December 31, Year 1?

A. $300,000
B. $600,000
C. $1,050,000
D. $1,100,000

A

A. $300,000

Use the formula for recognized contracts over time.

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6
Q

The following data pertains to Pell Co.’s construction jobs, which commenced during Year 2:

Project 1 Project 2
Contract price $420,000 $300,000
Costs incurred during Year 2 240,000 280,000
Estimated costs to complete 120,000 40,000
Billed to customers during Year 2 150,000 270,000
Received from customers during Year 2 90,000 250,000
Progress on the contract is measured based on costs incurred, and revenue is recognized as the performance obligation is being satisfied. What amount of gross profit (loss) would Pell report in its Year 2 income statement?

A. ($20,000)
B. $0
C. $20,000
D. $40,000

A

C. $20,000

Use the formula to recognize contracts over time. Remember, when a loss is incurred you take the loss immediately.

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7
Q

A company accounts for a long-term construction contract by recognizing income and expenses at a point in time. Revenue is recognized when

Cash Progress billings
Collected exceed recorded costs
A. Yes Yes
B. Yes No
C. No Yes
D. No No

A

D. No No

Neither of these affect the recognizing of revenue.

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8
Q

An auto repair company has agreed to provide a customer with a package of standard car maintenance services for $100. The package consists of an oil change, for which the company normally charges $75, and a tire rotation, for which the company normally charges $50. What amount of revenue should be recognized from the tire rotation?

A. $25
B. $40
C. $50
D. $60

A

B. $40

Read the question carefully, it asks for the tire rotation and lists the amounts after the description.

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9
Q

The calculation of income in Year 3 of a five-year construction contract accounted for using the cost-to-cost method includes the ratio of

A. Costs incurred in Year 3 to total billings.
B. Costs incurred in Year 3 to total estimated costs.
C. Total costs incurred to date to total billings.
D. Total costs incurred to date to total estimated costs.

A

D. Total costs incurred to date to total estimated costs.

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10
Q

A company enters into a contract to sell 70 products to a customer for $80 each. After the company transfers 30 of the 70 products, the customer orders an additional 25 products. The contract is modified, and the additional 25 products are priced at $40 each. $40 is not reflective of the product’s standalone selling price. What is the price per product for the remaining 65 products (40 products from the original contract and 25 products from the modification)?

A. $80 for the remaining 40 from the original contract and $40 for the additional 25products from the modification
B. $60, the average of the prices for the remaining products
C. $40, the new price for the products specified in the contract modification
D. $64.62, the blended price for the products from the original contract and the modification

A

D. $64.62, the blended price for the products from the original contract and the modification

Correct! The price for the additional products does not reflect standalone pricing, the company should calculate a blended price for the contract modification. To calculate the blended price, 40 remaining products at $80 each represent revenue of $3,200 plus 25 additional products at $40 each represent revenue of $1,000. Total revenue left to be recognized over the remaining 65 products is $4,200. $4,200 divided by 65 products yields a blended price of $64.62 per product.

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11
Q

On April 1, year 1, Pine Construction Company entered into a fixed-price contract to construct an apartment building for $6,000,000. Pine appropriately accounts for this contract under the percentage-of-completion method. Information relating to the contract is as follows:

At December 31, year 1 At December 31, year 2
Percentage of completion 20% 60%
Estimated costs at completion $4,500,000 $4,800,000
Income recognized (cumulative) $ 300,000 $ 720,000
What is the amount of contract costs incurred during the year ended December 31, year 2?

A. $1,200,000
B. $1,920,000
C. $1,980,000
D. $2,880,000

A

C. $1,980,000

Remember to subtract the previous year costs.

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12
Q

During year 1, Mitchell Corp. started a construction job with a total contract price of $600,000. The job was completed on December 15, year 2. Additional data are as follows:

Year 1 Year 2
Actual costs incurred $225,000 $255,000
Estimated remaining costs 225,000
Billed to customer 240,000 360,000
Received from customer 200,000 400,000
Under the completed-contract method, what amount should Mitchell recognize as gross profit for year 2?

A. $ 45,000
B. $ 72,000
C. $ 80,000
D. $120,000

A

D. $120,000

completed-contract method recognizes revenue at the end of the contract. Take total costs incurred between both years and subtract from contract price.

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13
Q

In accounting for a long-term construction contract using the percentage-of-completion method, the amount of income recognized in any year would be added to

A. Deferred revenues.
B. Progress billings on contracts.
C. Construction in progress.
D. Property, plant, and equipment.

A

C. Construction in progress.

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14
Q

Which of the following conditions must be met for a good or service in a contract to be considered distinct and identified as a separate performance obligation?

A. A separate contract is made for each good or service.
B. The contract lists a stand-alone price for each good or service.
C. The customer can use the good or service on its own or together with resources that are readily available.
D. The goods or services in the contract are highly interdependent.

A

C. The customer can use the good or service on its own or together with resources that are readily available.

Revenue recognition occurs through a 5-step process. Step 2 of this process involves identifying which individual goods or services, or a combination thereof, are separate (ie, distinct) performance obligations. A performance obligation is an enforceable promise to transfer goods or services to a customer. A good or service is considered a distinct performance obligation only if two criteria are met:

The customer must be able to benefit from the good or service on its own or together with other resources that are readily available to the customer.
The promise to transfer the good or service is identified separately from other promises in the contract.

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15
Q

Foghorn Company entered into a sales transaction in which it agreed to receive common stock from Leghorn Corporation as payment for services provided to Leghorn Corporation. The journal entry to record the receipt of payment for the sales transaction will include a

A. Debit to cash.
B. Credit to Noncash Consideration.
C. Debit to Leghorn Investment.
D. Credit to Common Stock.

A

C. Debit to Leghorn Investment.

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16
Q

On January 1, 20X2, Dot Company sold a three-year, service-type extended warranty to Matrix Company for $36,000. The warranty took effect on the date of purchase (January 1, 20X2). What amount of Unearned Warranty Revenue should be reported on Dot’s December 31, 20X3, Balance Sheet?

A. $36,000
B. $24,000
C. $12,000
D. $6,000

A

C. $12,000

Read the question thoroughly