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CHAPTER 18
REVENUE RECOGNITION
CHAPTER LEARNING OBJECTIVES
1. Understand the fundamental concepts related to revenue recognition and measurement.
2. Understand and apply the five-step revenue recognition process.
3. Apply the five-step process to major revenue recognition issues.
4. Describe presentation and disclosure regarding revenue.
*5. Apply the percentage-of-completion method for long-term contracts.
*6. Apply the cost-recovery method for long-term contracts.
*7. Identify the proper accounting for losses on long-term contracts.
*8. Explain revenue recognition for franchises.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 2
Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
TRUE-FALSE STATEMENTS
1.
1
K
6.
1, 2
K
11.
2
K
16.
4
K
*21.
6
K
2.
1
K
7.
2
K
12.
2
K
*17.
5
K
*22.
7
K
3.
1
K
8.
2
K
13.
2
K
*18.
5
C
*23.
7
K
4.
2
K
9.
2
K
14.
3
K
*19.
5
C
*24.
7
K
5.
4
K
10.
2
K
15.
3
K
*20.
6
K
*25.
7
K
MULTIPLE CHOICE QUESTIONS
26.
1
C
47.
2
K
68.
5
K
89.
2
AP
110.
5
AP
27.
1
C
48.
2
K
69.
5
K
90.
2
AP
111.
5
AP
28.
1
C
49.
2
C
70.
5
K
91.
2
AP
112.
6
AP
29.
1
C
50.
2
K
71.
5
C
92.
2
AP
113.
5
AP
30.
1
K
51.
2
K
72.
5
AP
93.
3
AP
114.
6
AP
31.
1
C
52.
2
K
73.
6
C
94.
3
AP
115.
5
AP
32.
1
C
53.
3
K
74.
6
C
95.
3
AP
116.
6
AP
33.
2
K
54.
3
K
75.
7
AP
96.
3
AP
117.
5
AP
34.
2
K
55.
3
K
76.
7
K
97.
4
AP
118.
5
AP
35.
2
C
56.
3
K
77.
7
K
98.
4
AP
119.
5
AP
36.
2
C
57.
3
K
78.
8
K
99.
4
AP
120.
8
AP
37.
4
C
58.
3
K
79.
8
K
100.
5
AP
121.
8
AP
38.
4
K
59.
3
K
80.
8
AP
101.
5
AP
122.
8
AP
39.
2
K
60.
3
K
81.
8
K
102.
5
AP
123.
8
AP
40.
2
K
61.
3
C
82.
8
K
103.
5
AP
124.
5
AP
41.
3
C
62.
3
K
83.
8
K
104.
5
AP
125.
5
AP
42.
2
AP
63.
4
K
84.
8
K
105.
5
AP
126.
6
AP
43.
2
C
64.
4
K
85.
8
K
106.
5
AP
44.
2
C
65.
4
K
86.
2
AP
107.
5
AP
45.
2
C
66.
4
AP
87.
2
AP
108.
5
AP
46.
2
C
67.
4
K
88.
2
AP
109.
5
AP
EXERCISES
127.
1
AP
129.
1
AP
131.
3
C
133.
5
AP
135.
5, 6
AP
128.
1
AP
130.
3
AP
132.
5
AP
134.
5
AP
136.
8
AP
PROBLEMS
137.
1
AP
138.
5, 7
AP
139.
5–7
AP
140.
6
AP
Revenue Recognition
18 - 3
TRUE-FALSE—Conceptual
1. The new revenue recognition standard adopts a liability approach as the basis for revenue
recognition.
2. Revenue is recognized in the accounting period when the performance obligation is
satisfied.
3. The first step in the revenue recognition process is to identify the separate performance
obligations in the contract.
4. Revenue from a contract with a customer cannot be recognized until a contract exists.
5. When a contract modification is treated as a separate performance obligation or
prospectively, the same amount of revenue is recognized before and after the modification.
6. If the performance obligation is not highly dependent on, or interrelated with, other
promises in the contract, then each performance obligation should be accounted for
separately.
7. A performance obligation is a written guarantee in a contract to provide a product or
service to a customer.
8. Companies use the expected value, a probability-weighted amount to estimate variable
consideration.
9. When a sales transaction involves a significant financing component, the fair value is
determined either by measuring the consideration received or by discounting the payment
using an imputed interest rate.
10. Companies rarely have to allocate the transaction price to more than one performance
obligation in a contract.
11. When a company sells a bundle of goods at a discount, the discount should be allocated to
the product that caused the discount and not to the entire bundle.
12. A company recognizes revenue from a performance obligation over time by measuring the
progress toward completion.
13. A company can only satisfy its performance obligations at a point in time.
14. When a company sells a product but gives the buyer the right to return it, revenue should
not be recognized until the sale is collected.
15. Warranties that the product meets agreed-upon specifications in the contract at the time
the product is sold are referred to as assurance-type warranties.
16. A contract liability is a company’s obligation to transfer goods or services to a customer for
which the company has received consideration from the customer.
*17. The most popular input measure used to determine the progress toward completion in
long-term contracts is the cost-to-cost basis.
*18. If the difference between the Construction in Process and the Billings on Construction in
Process account balances is a debit, the difference is reported as a current asset.
*19. The Construction in Process account includes only construction costs under the
percentage-of-completion method.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 4
*20. Under the cost-recovery method, companies recognize costs only when the contract is
completed.
*21. The principal advantage of the cost-recovery method is that reported revenue reflects final
results rather than estimates.
*22. Companies must recognize the entire expected loss on an unprofitable contract in the
current period under the percentage-of-completion method but not the cost-recovery
method.
*23. A loss in the current period on a profitable contract must be recognized under both the
percentage-of-completion and cost-recovery method.
*24. Neither the Billings account balance nor the Construction in Process account balance can
exceed the long-term contract price.
*25. The provision for a loss on an unprofitable contract may be combined with the Construction
in Process account balance under percentage-of-completion but not cost-recovery.
True-False Answers—Conceptual
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
MULTIPLE CHOICE—Conceptual
26. To address inconsistencies and weaknesses in revenue recognition, a comprehensive
revenue recognition standard was developed entitled the
a. Revenue Recognition Principle.
b. Principle-based Revenue Accounting.
c. Rules-based Revenue Accounting.
d. Revenue from Contracts with Customers.
27. The converged standard on revenue recognition
a. reduces the number of disclosures required for revenue reporting.
b. increases the complexity of financial statement preparation.
c. recognizes and measures revenue based on changes in assets and liabilities.
d. simplify revenue recognition practices across entities and industries.
28. The first step in the process for revenue recognition is to
a. determine the transaction price.
b. identify the contract with customers.
c. allocate transaction price to the separate performance obligations.
d. identify the separate performance obligations in the contract.
Revenue Recognition
18 - 5
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 6
29. The second step in the process for revenue recognition is to
a. allocate transaction price to the separate performance obligations.
b. determine the transaction price.
c. identify the contract with customers.
d. identify the separate performance obligations in the contract.
30. The third step in the process for revenue recognition is to
a. determine the transaction price.
b. identify the separate performance obligations in the contract.
c. allocate transaction price to the separate performance obligations.
d. recognize revenue when each performance obligation is satisfied.
31. The fourth step in the process for revenue recognition is to
a. recognize revenue when each performance obligation is satisfied.
b. identify the separate performance obligations in the contract.
c. allocate transaction price to the separate performance obligations.
d. determine the transaction price.
32. The last step in the process for revenue recognition is to
a. allocate transaction price to the separate performance obligations.
b. recognize revenue when each performance obligation is satisfied.
c. determine the transaction price.
d. identify the contract with customers.
33. A contract
a. must be in writing to be an enforceable contract.
b. is an agreement that creates enforceable rights and obligations.
c. is enforceable if each party can unilaterally terminate the contract.
d. does not need to have commercial substance.
34. Revenue from a contract with a customer
a. is recognized when the customer receives the rights to receive consideration.
b. is recognized even if the contract is still wholly unperformed.
c. can be recognized even when a contract is still pending.
d. cannot be recognized until a contract exists.
35. A contract between Boeing and Delta in which Boeing supplies planes to Delta
a. is an agreement that creates enforceable rights and obligations for both parties.
b. is an agreement that creates enforceable rights and obligations for Boeing only.
c. cannot create multiple performance obligations.
d. is considered wholly unperformed until Boeing receives payment from Delta.
36. On January 15, 2018, Bella Vista Company enters into a contract to build custom
equipment for ABC Carpet Company. The contract specified a delivery date of March 1.
The equipment was not delivered until March 31. The contract required full payment of
€75,000 30 days after delivery. The revenue for this contract should be
a. recorded on January 15, 2018.
b. recorded on March 1, 2018.
c. recorded on March 31, 2018.
d. recorded on April 30, 2018.
Revenue Recognition
18 - 7
37. A company must account for a contract modification as a new contract if the
a. goods or services are interdependent on each other.
b. promised goods or services are distinct.
c. company has the right to receive consideration equal to standalone price.
d. goods or services are distinct and company has right to receive the standalone price.
38. When a contract modification does not result in a separate performance obligation, the
additional products are priced at the
a. standalone price of the product.
b. blended price of original contract and contract modification.
c. average selling price of original selling price and standalone price.
d. selling price specified in contract modification
39. A performance obligation exists when
a. a company receives the right to receive consideration.
b. a contract is approved and signed.
c. a company provides a distinct product or service.
d. a company provides interdependent product or service.
40. When multiple performance obligations exist in a contract, they should be accounted for as
a single performance obligation when
a. each service is interdependent and interrelated.
b. both performance obligations are distinct but interdependent.
c. the product is distinct within the contract.
d. determination cannot be made.
41. New Age Computers manufactures and sells pagers and radio paging systems which
include a 180 day warranty on product defects. It also sells an extended warranty which
provides an additional two years of protection. On May 10, it sold a paging system for
€4,500 and an extended warranty for another €1,400. The journal entry to record this
transaction would include
a. a credit to Warranty Revenue of €5,900.
b. a credit to Warranty Revenue of €1,400
c. a credit to Sales of €4,500 and a credit to Warranty Revenue of €1,400
d. a credit to Unearned Warranty Revenue of €1,400.
42. Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to
providing the software, the company also provides consulting services and support to
ensure smooth operation of the software. The total transaction price is €420,000. Based on
standalone values, the company estimates the consulting services and support have a
value of €120,000 and the software license has a value of €300,000. Assuming the
performance obligations are not interdependent, the journal entry to record the transaction
includes
a. a credit to Sales Revenue for €300,000 and a credit to Unearned Service Revenue of
$120,000.
b. a credit to Service Revenue of €120,000.
c. a credit to Unearned Service Revenue of €120,000.
d. a credit to Sales Revenue of €420,000.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 8
43. The transaction price
a. excludes discounts, volume rebates, coupons and free products, or services.
b. is the amount of consideration that a company expects to receive from a customer
c. excludes time value of money if the contract involves a significant financing component.
d. does not consider noncash consideration such as donations, gifts, equipment or labor.
44. Companies can use the expected value to estimate variable consideration when
a. the contract has only two possible outcomes.
b. a company has a small number of contracts with similar characteristics.
c. a company can use the most likely amount in a range of possible outcomes.
d. a company has a large number of contracts with similar characteristics.
45. If a contract involves a significant financing component,
a. the time value of money is used to determine the fair value of the transaction.
b. the time value of money is not required to determine transaction price, if the payment is
scheduled to occur in more than a year.
c. the transaction amount should be based on the current sales price of goods or
services.
d. interest must be accrued on the current sales price of goods or services.
46. Noncash consideration should be
a. recognized on the basis of fair value of what is given up.
b. recognized on the basis of original cost paid by customer.
c. recognized on the basis of fair value of what is received.
d. recognized on the basis of fair value of equivalent goods or services.
47. Consideration paid or payable to customers
a. includes volume rebates which increases the cost to the customer.
b. includes discounts which reduces the cost of purchases to the company.
c. reduces the consideration received and the revenue to be recognized.
d. includes prompt settlement discount which increases revenues.
48. A transaction price for multiple performance obligations should be allocated
a. based on selling price from the company’s competitors.
b. based on what the company could sell the goods for on a standalone basis.
c. based on forecasted cost of satisfying performance obligation.
d. based on total transaction price less residual value.
49. When a customer is able to benefit from a good or service on its own or together with other
readily available resources, the good or service
a. is distinct.
b. is a contract.
c. is interdependent.
d. uses variable consideration.
Revenue Recognition
18 - 9
50. A company has satisfied its performance obligation when the
a. company has received payment for goods or services.
b. company has significant risks and rewards of ownership.
c. company has legal title to the asset.
d. company has transferred physical possession of the asset.
51. The most popular input measure used to determine the progress toward completion is
a. units-of-delivery method.
b. cost-to-cost basis.
c. labor hours worked.
d. tons produced.
52. The cost-to-cost basis measures progress towards completion by
a. comparing costs incurred to date with total costs to complete the contract.
b. tracking results of work completed to date; it is an output measure.
c. tracking floors of a building completed versus floors still to be completed.
d. tracking miles of a highway completed versus miles of highway still to be completed.
53. When sales are made with a right of return, the company
a. should not recognize any revenue.
b. should recognize revenue for the full sales price.
c. records the returned asset in a separate inventory account.
d. records the estimated returns in the Sales Returns account.
54. When a company has an obligation or right to repurchase an asset for an amount greater
than or equal to its selling price, the transaction should be treated as a
a. outright sale.
b. financing transaction.
c. repurchase transaction.
d. put option.
55. When a customer purchases a product but is not yet ready for delivery, this is referred to
as
a. a repurchase agreement.
b. a consignment.
c. a principal-agent relationship.
d. a bill-and-hold arrangement
56. The role of the agent in a Principal-Agent relationship is to
a. arrange for the principal to provide goods or services to a customer.
b. provide the goods or services for a customer.
c. market the principal goods and services to prospective customers.
d. develop and maintain goodwill of the principal’s customers.
57. The use of the net method of recognizing revenue by an agent
a. is appropriate as long as both revenue and costs are included.
b. is the correct method in a principal-agent relationship.
c. could result in an overstatement of the agent’s revenue.
d. could result in an understatement of the agent’s revenue.
58. Consignments are a specialized marketing method whereby the
a. consignee purchases goods for sale and sends payment when goods are sold.
b. consignee (agent) holds title to the product.
c. consignee pays for good up front and is paid when merchandise is sold.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 10
d. consignee takes possession of merchandise but title remains with manufacturer.
59. Consigned goods are recognized as revenues by the
a. consignor when a sale to a third party has occurred.
b. consignor when the merchandise has been shipped to a consignee.
c. consignee when a sale to a third party has occurred.
d. consignor when it receives payment from consignee for goods sold.
60. An option to purchase a warranty is recorded as
a. an expense in the period the goods or services are sold.
b. a warranty liability for all costs incurred after sale due to correction of defects.
c. revenue in the period that the service-type warranty is in effect.
d. an assurance type warranty which is included in the sales price of the product.
61. Nonrefundable upfront fees
a. should be recognized immediately upon receipt of payment.
b. such as activation fees for cable should be allocated over the term of the contract.
c. such as a one-time initiation fee in a health club should be recognized immediately.
d. should not be recorded as revenue if they are for future delivery of products and
services.
62. Entertainment Tonight, Inc. manufactures and sells stereo systems that include an
assurance-type warranty for the first 90 days. Entertainment Tonight also offers an optional
extended coverage plan under which it will repair or replace any defective part for 2 years
beyond the expiration of the assurance-type warranty. The total transaction price for the
sale of the stereo system and the extended warranty is €3,000. The standalone price of
each is €2,300 and €900, respectively. The estimated cost of the assurance-warranty is
€350. The accounting for warranty will include a
a. debit to Warranty Expense, €900.
b. debit to Warranty Liability, €350
c. credit to Warranty Liability, €900
d. credit to Unearned Warranty Revenue, €900
Revenue Recognition
18 - 11
66. On July 31, O’Malley Company contracted to have two products built by Taylor
Manufacturing for a total of €370,000. The contract specifies that payment will only occur
after both products have been transferred to O’Malley Company. Taylor determines that
the standalone prices are €200,000 for Product 1 and €170,000 for Product 2. On August
1, when Product 1 has been transferred, Taylor’s journal entry to record this event includes
a
a. debit to Accounts Receivable for €200,000.
b. debit to Accounts Receivable for €170,000.
c. debit to Contract Assets for €170,000.
d. debit to Contract Assets for €200,000.
67. Disclosure related to revenue
a. does not require capitalized costs to obtain and fulfill a contract.
b. does not require judgments that affect amount and timing of revenues from contracts.
c. requires disclosure of remaining performance obligations.
d. requires disaggregation of revenues by reportable segments.
*68. The percentage-of-completion method
a. recognizes revenue and gross profit each period based upon progress.
b. is used primarily for short-term contracts.
c. accumulates construction costs in the Billings on Construction in Progress account.
d. recognizes revenue and gross profits only when contract is completed.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 12
*69. In selecting an accounting method for a newly contracted long-term construction project,
the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of progress
toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term
construction contracts.
d. the inherent nature of the contractor's technical facilities used in construction.
*70. How should the balances of Progress Billings and Construction in Process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress Billings as deferred income, Construction in Progress as a deferred expense.
b. Progress Billings as income, Construction in Process as inventory.
c. Net balance, as a current asset if debit balance, and current liability if credit balance.
d. Net balance, as income from construction if credit balance, and loss from construction if
debit balance.
*71. In accounting for a long-term construction-type contract using the percentage-of-
completion method, the gross profit recognized during the first year would be the estimated
total gross profit from the contract, multiplied by the percentage of the costs incurred during
the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.
*72. The Billings on Construction in Progress account is a(n)
a. contract revenue account.
b. inventory account.
c. contra-inventory account.
d. construction expense account.
*73. The principal advantage of the cost-recovery method is that
a. reported revenue is based on final results rather than estimates of unperformed work.
b. it reflects current performance when the period of a contract extends into more than
one accounting period.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case when the
percentage-of-completion method is used.
*74. Under the cost-recovery method
a. revenue, cost, and gross profit are recognized during the production cycle.
b. revenue and cost are recognized during the production cycle, but gross profit
recognition is deferred until the contract is completed.
c. revenue, cost, and gross profit are recognized at the time the contract is completed.
d. None of these answers are correct.
*75. Cost estimates on a long-term contract may indicate that a loss will result on completion of
the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion or
cost-recovery method is employed.
Revenue Recognition
18 - 13
b. recognized in the current period under the percentage-of-completion method, but the
cost-recovery method defers recognition of the loss to the time when the contract is
completed.
c. recognized in the current period under the cost-recovery method, but the percentage-
of-completion method defers the loss until the contract is completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or cost-recovery method is employed.
*76. Cost estimates at the end of the second year indicate that a loss will result on completion
of the entire contract. Which of the following statements is correct?
a. Under the cost-recovery method, the loss is not recognized until the year the
construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first
year must not be changed.
c. Under the cost-recovery method, when the billings exceed the accumulated costs, the
amount of the estimated loss is reported as a current liability.
d. Under the cost-recovery method, when the Construction in Process balance exceeds
the billings, the estimated loss is added to the accumulated costs.
*77. When there is a significant increase in the estimated total contract costs but the increase
does not eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the cost-recovery methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase requires
a current period adjustment of excess gross profit recognized on the project in prior
periods.
c. Under the cost-recovery method only, the estimated cost increase requires a current
period adjustment of excess gross profit recognized on the project in prior periods.
d. No current period adjustment is required.
*78. Sources of revenue for franchise companies are
a. assistance for site selection and negotiating lease.
b. bookkeeping and advisory services.
c. sale of initial franchise and continuing fees.
d. advertising and promotion.
*79. Franchise fees should be recognized
a. on the date the contract was signed.
b. on the date the franchise is opened for business.
c. on the date the franchise fee is paid to franchisor.
d. when performance obligations are satisfied.
*80. Revenue for ongoing sales-based royalty payments should be recognized
a. when the amount of sales can be determined.
b. on the date payment is received by the franchisor.
c. on the date the performance obligation is satisfied.
d. on the date the contract was signed.
*81. Franchise revenue is recognized over time if
a. franchise rights are transferred at a point in time.
b. the franchisor is providing access to the right rather than transferring control.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 14
c. when performance obligations regarding franchise rights are completed.
d. franchisee fee is payable upon signing of contract.
*82. Types of franchising arrangements include all of the following except
a. service sponsor-retailer.
b. wholesaler-service sponsor.
c. manufacturer-wholesaler.
d. wholesaler-retailer.
*83. Continuing franchise fees should be recorded by the franchisor
a. as revenue when uncertainty related to the variable consideration is resolved.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.
*84. Franchise companies derive their revenues from the
a. the sale of initial franchises and related services only.
b. sale of initial franchises and related services and from continuing fees based on the
franchise operation.
c. continuing franchise fees based on the operation of the franchise only.
d. None of these answers are correct.
*85. The category of franchising that has given rise to accounting challenges is
a. manufacturer-wholesaler.
b. service sponsor-retailer.
c. manufacturer-retailer.
d. wholesaler-retailer.
Revenue Recognition
18 - 15
Multiple Choice Answers—Conceptual
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
MULTIPLE CHOICE—Computational
86. Marle Construction enters into a contract with a customer to build a warehouse for
€950,000 on March 30, 2018 with a performance bonus of €50,000 if the building is
completed by July 31, 2018. The bonus is reduced by €10,000 each week that completion
is delayed. Marle commonly includes these completion bonuses in its contracts and, based
on prior experience, estimates the following completion outcomes:
Completed by
Probability
July 31, 2018
65%
August 7, 2018
25%
August 14, 2018
5%
August 21, 2018
5%
The transaction price for this transaction is
a. €995,000
b. €950,000
c. €652,500
d. €685,000
87. On June 1, 2018, Johnson & Sons sold equipment to James Landscaping Service in
exchange for a zero-interest bearing note with a face value of €110,000, with payment due
in 12 months. The fair value of the equipment on the date of sale was €100,000. The
amount of revenue to be recognized on this transaction in 2018 is
a. €110,000.
b. €10,000
c. €100,000
d. €100,000 sales revenue and $5,833 interest revenue.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 16
88. P & G Auto Parts sells parts to AAA Car Repair during 2018. P&G offers rebates of 2% on
purchases up to £60,000 and 3% on purchases above $60,000 if the customer’s purchases
for the year exceed £200,000. In the past, AAA normally purchases £300,000 in parts
during a calendar year. On March 25, 2018, AAA Car Repair purchased £74,000 of parts.
The journal entry to record the purchase includes a
a. debit to Accounts Receivable for £74,000.
b. debit to Accounts Receivable for £72,800.
c. credit to Sales Revenue for £72,380.
d. credit to Sales Revenue for £72,800.
89. Roche Pharmaceuticals entered into a licensing agreement with Zenith Lab for a new drug
under development. Roche will receive €8,100,000 if the new drug receives FDA approval.
Based on prior approval, Roche determines that it is 85% likely that the drug will gain
approval. The transaction price of this arrangement should be
a. €8,100,000.
b. €6,885,000.
c. €1,215,000.
d. €0 until approval is received.
90. Meyer & Smith is a full-service technology company. They provide equipment, installation
services as well as training. Customers can purchase any product or service separately or
as a bundled package. Container Corporation purchased computer equipment, installation
and training for a total cost of €144,000 on March 15, 2018. Estimated standalone fair
values of the equipment, installation, and training are €90,000, €60,000, and €30,000
respectively. The transaction price allocated to equipment, installation and training is
a. €90,000, €60,000, €30,000 respectively
b. €48,000, €48,000, €48,000 respectively
c. €144,000 for the entire bundle.
d. €72,000, €48,000 and €24,000 respectively.
91. Meyer & Smith is a full-service technology company. They provide equipment, installation
services as well as training. Customers can purchase any product or service separately or
as a bundled package. Container Corporation purchased computer equipment, installation
and training for a total cost of €144,000 on March 15, 2018. Estimated standalone fair
values of the equipment, installation and training are €90,000, €60,000 and €30,000
respectively. The journal entry to record the transaction on March 15, 2018 will include a
a. credit to Sales Revenue for €144,000.
b. debit to Unearned Service Revenue of €30,000.
c. credit to Unearned Service Revenue of €24,000.
d. credit to Service Revenue of €60,000.
Revenue Recognition
18 - 17
92. Bella Pool Company sells prefabricated pools that cost £80,000 to customers for £144,000.
The sales price includes an installation fee, which is valued at £20,000. The fair value of
the pool is £128,000. The installation is considered a separate performance obligation and
is expected to take 3 months to complete. The transaction price allocated to the pool and
the installation is
a. £124,541 and £19,459 respectively
b. £144,000 and £20,000 respectively
c. £128,000 and £20,000 respectively
d. £110,702 and £17,298 respectively
93. Botanic Choice sells natural supplements to customers with an unconditional sales return if
they are not satisfied. The sales returns extends 60 days. On February 10, 2018, a
customer purchases €4,000 of products (cost €2,000). Assuming that based on prior
experience, estimated returns are 20%. The journal entry to record the expected sales
return and cost of goods sold includes a
a. debit to Cash and a credit to Sales Revenue of €4,000.
b. debit to Allowance for Sales Returns of €800 and a credit to Cost of Goods sold of
€400.
c. debt to Cost of Goods Sold and credit to Inventory for €2,000.
d. credit to Estimated Inventory Returns of €400
94. Botanic Choice sells natural supplements to customers with an unconditional sales return if
they are not satisfied. The sales returns period extends 60 days. On February 10, 2018, a
customer purchases €4,000 of products (cost €2,000). Assuming that based on prior
experience, estimated returns are 20%. The journal entry to record the actual return of
€250 of merchandise includes a
a. credit to Allowance for Sales Returns for €250.
b. credit to Returned Inventory for €125.
c. debit to Returned Inventory for €125.
d. debit to Estimated Inventory Returns for €125.
95. On August 5, 2018, Famous Furniture shipped 40 dining sets on consignment to Furniture
Outlet, Inc. The cost of each dining set was €350 each. The cost of shipping the dining sets
amounted to €3,600 and was paid for by Famous Furniture. On December 30, 2018, the
consignee reported the sale of 30 dining sets at €850 each. The consignee remitted
payment for the amount due after deducting a 6% commission, advertising expense of
€600, and installation and setup costs of €780. The amount cash received by Famous
furniture is
a. €25,500
b. €23,970
c. €22,590
d. €23,370
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 18
96. On August 5, 2018, Famous Furniture shipped 40 dining sets on consignment to Furniture
Outlet, Inc. The cost of each dining set was €350 each. The cost of shipping the dining sets
amounted to €1,800 and was paid for by Famous Furniture. On December 30, 2018, the
consignee reported the sale of 30 dining sets at €850 each. The consignee remitted
payment for the amount due after deducting a 6% commission, advertising expense of
€600, and installation and setup costs of €780. The total profit on units sold for the
consignor is
a. €22,590
b. €10,290
c. €12,090
d. €19,890
97. On November 1, 2018, Green Valley Farm entered into a contract to buy a €150,000
harvester from John Deere. The contract required Green Valley Farm to pay €150,000 in
advance on November 1, 2018. The harvester (cost of €110,000) was delivered on
November 30, 2018. The journal entry to record the contract on November 1, 2018
includes a
a. credit to Accounts Receivable for €150,000.
b. credit to Sales Revenue for €150,000.
c. credit to Unearned Sales Revenue for €150,000.
d. debit to Unearned Sales Revenue for €150,000.
98. On November 1, 2018, Green Valley Farm entered into a contract to buy a €150,000
harvester from John Deere. The contract required Green Valley Farm to pay €150,000 in
advance on November 1, 2018. The harvester (cost of €110,000) was delivered on
November 30, 2018. The journal entry to record the delivery of the equipment includes a
a. debit to Unearned Sales Revenue for €150,000.
b. credit to Unearned Sales Revenue for €150,000.
c. credit to Cost of Goods Sold for €110,000.
d. debit to Inventory for €110,000.
Revenue Recognition
18 - 19
99. Arizona Communications contracted to set up a call center for the City of Phoenix. Under
the terms of the contract, Arizona Communications will design and set-up a call center with
the following costs:
Design of call center
£20,000
Computers, servers, telephone equipment
£550,000
Software
£170,000
Installation and testing of equipment
£30,000
Selling commission
£50,000
Annual service contract
£100,000
In addition, Arizona Communications will maintain and service the equipment and software
to ensure smooth operations of the call center for an annual fee of £180,000. Ownership of
equipment installed remains with the City of Phoenix. The contract costs that should be
capitalized is
a. £920,000
b. £820,000
c. £720,000
d. £740,000
Seasons Construction is constructing an office building under contract for Cannon Company and
uses the percentage-of-completion method. The contract calls for progress billings and payments
of €1,550,000 each quarter. The total contract price is €18,600,000 and Seasons estimates total
costs of €17,750,000. Seasons estimates that the building will take 3 years to complete, and
commences construction on January 2, 2018.
*100. At December 31, 2018, Seasons estimates that it is 30% complete with the construction,
based on costs incurred. What is the total amount of Revenue from Long-Term Contracts
recognized for 2018 and what is the balance in the Accounts Receivable account assuming
Cannon Company has not yet made its last quarterly payment?
Revenue Accounts Receivable
a. €6,200,000 €6,200,000
b. €5,325,000 €1,550,000
c. €5,580,000 €1,550,000
d. €5,325,000 €6,200,000
Seasons Construction is constructing an office building under contract for Cannon Company and
uses the percentage-of-completion method. The contract calls for progress billings and payments
of €1,550,000 each quarter. The total contract price is €18,600,000 and Seasons estimates total
costs of €17,750,000. Seasons estimates that the building will take 3 years to complete, and
commences construction on January 2, 2018.
*101. At December 31, 2019, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to €18,000,000 due
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 20
to unanticipated price increases. What is the total amount of Construction Expenses that
Seasons will recognize for the year ended December 31, 2019?
a. €13,500,000
b. €7,875,000
c. €7,987,500
d. €8,175,000
Seasons Construction is constructing an office building under contract for Cannon Company and
uses the percentage-of-completion method. The contract calls for progress billings and payments
of €1,550,000 each quarter. The total contract price is €18,600,000 and Seasons estimates total
costs of €17,750,000. Seasons estimates that the building will take 3 years to complete, and
commences construction on January 2, 2018.
*102. At December 31, 2019, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to €18,000,000 due
to unanticipated price increases. What is reported in the statement of financial position at
December 31, 2019 for Seasons as the difference between the Construction in Process
and the Billings on Construction in Process accounts, and is it a debit or a credit?
Difference between the accounts Debit/Credit
a. €4,225,000 Credit
b. €1,550,000 Debit
c. €1,100,000 Debit d. €1,550,000
Credit
Seasons Construction is constructing an office building under contract for Cannon Company and
uses the percentage-of-completion method. The contract calls for progress billings and payments
of €1,550,000 each quarter. The total contract price is €18,600,000 and Seasons estimates total
costs of $17,750,000. Seasons estimates that the building will take 3 years to complete, and
commences construction on January 2, 2018.
*103. Seasons Construction completes the remaining 25% of the building construction on
December 31, 2020, as scheduled. At that time the total costs of construction are
€18,750,000. What is the total amount of Revenue from Long-Term Contracts and
Construction Expenses that Seasons will recognize for the year ended December 31,
2020?
Revenue Expenses
a. €18,600,000 €18,750,000
b. €4,650,000 € 4,687,500
c. €4,650,000 € 5,250,000
d. €4,687,500 € 4,687,500
Cooper Construction Company had a contract starting April 2018, to construct a €24,000,000
building that is expected to be completed in September 2020, at an estimated cost of €22,000,000.
At the end of 2018, the costs to date were €10,120,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were €4,800,000 and the cash collected
during 2018 was €3,200,000. Cooper uses the percentage-of-completion method.
Revenue Recognition
18 - 21
*104. For the year ended December 31, 2018, Cooper would recognize gross profit on the
building of:
a. € 843,333
b. € 920,000
c. €1`,080,000
d. €0
Cooper Construction Company had a contract starting April 2018, to construct a €24,000,000
building that is expected to be completed in September 2020, at an estimated cost of €22,000,000.
At the end of 2018, the costs to date were €10,120,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were €4,800,000 and the cash collected
during 2018 was €3,200,000. Cooper uses the percentage-of-completion method.
*105. At December 31, 2018 Cooper would report Construction in Process in the amount of:
a. € 920,000
b. €10,120,000
c. €11,040,000
d. € 9,440,000
*106. Hayes Construction Corporation contracted to construct a building for £7,500,000.
Construction began in 2018 and was completed in 2019. Data relating to the contract are
summarized below:
Year ended
December 31,
2018 2019
Costs incurred £3,000,000 £2,250,000
Estimated costs to complete 2,000,000 —
Hayes uses the percentage-of-completion method as the basis for income recognition. For
the years ended December 31, 2018, and 2019, respectively, Hayes should report gross
profit of
a. £1,350,000 and £900,000.
b. £4,500,000 and £3,000,000.
c. £1,500,000 and £750,000.
d. £0 and £2,250,000.
*107. Monroe Construction Company uses the percentage-of-completion method of accounting.
In 2018, Monroe began work on a contract it had received which provided for a contract
price of €37,500,000. Other details follow:
2018
Costs incurred during the year €18,000,000
Estimated costs to complete as of December 31 12,000,000
Billings during the year 16,500,000
Collections during the year 9,500,000
What should be the gross profit recognized in 2018?
a. € 1,500,000
b. €19,500,000
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 22
c. € 4,500,000
d. € 7,500,000
In 2018, Fargo Corporation began construction work under a three-year contract. The contract
price is €7,200,000. Fargo uses the percentage-of-completion method for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred to
total estimated costs for completing the contract. The financial statement presentations relating to
this contract at December 31, 2018, follow:
Statement of Financial PositionAccounts receivable—construction contract billings
€300,000
Construction in progress €900,000
Less contract billings 720,000
Costs and recognized profit in excess of billings 180,000
Income Statement
Income (before tax) on the contract recognized in 2018 €180,000
*108. How much cash was collected in 2018 on this contract?
a. €300,000
b. €420,000
c. € 60,000
d. €720,000
In 2018, Fargo Corporation began construction work under a three-year contract. The contract
price is €7,200,000. Fargo uses the percentage-of-completion method for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred to
total estimated costs for completing the contract. The financial statement presentations relating to
this contract at December 31, 2018, follow:
Statement of Financial PositionAccounts receivable—construction contract billings
€300,000
Construction in progress €900,000
Less contract billings 720,000
Costs and recognized profit in excess of billings 180,000
Income Statement
Income (before tax) on the contract recognized in 2018 €180,000
*109. What was the initial estimated total income before tax on this contract?
a. €900,000
b. €960,000
c. €1,200,000
d. €1,440,000
*110. Adler Construction Co. uses the percentage-of-completion method. In 2018, Adler began
work on a contract for £11,000,000 and it was completed in 2019. Data on the costs are:
Year Ended December 31
2018 2019
Costs incurred £3,900,000 £2,800,000
Estimated costs to complete 2,600,000 —
Revenue Recognition
18 - 23
For the years 2018 and 2019, Adler should recognize gross profit of
2018 2019
a. £0 £4,300,000
b. £2,580,000 £1,720,000
c. £2,700,000 £1,600,000
d. £2,700,000 £4,300,000
Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of
€19,200,000. Other details follow:
2018 2019
Costs incurred during the year €3,200,000 €9,800,000
Estimated costs to complete, as of December 31 9,600,000 0
Billings during the year 3,600,000 14,400,000
Collections during the year 2,400,000 15,600,000
*111. Assume that Gomez uses the percentage-of-completion method of accounting. The portion
of the total gross profit to be recognized as income in 2018 is
a. €1,200,000.
b. €1,600,000.
c. €4,800,000.
d. €6,400,000.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 24
Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of
€19,200,000. Other details follow:
2018 2019
Costs incurred during the year €3,200,000 €9,800,000
Estimated costs to complete, as of December 31 9,600,000 0
Billings during the year 3,600,000 14,400,000
Collections during the year 2,400,000 15,600,000
*112. Assume that Gomez uses the cost-recovery method of accounting. The portion of the total
gross profit to be recognized as income in 2019 is
a. €2,400,000.
b. €3,600,000.
c. €6,200,000.
d. €19,200,000.
Kiner, Inc. began work in 2018 on a contract for €21,000,000. Other data are as follows:
2018 2019
Costs incurred to date €9,000,000 €14,000,000
Estimated costs to complete 6,000,000 —
Billings to date 7,000,000 21,000,000
Collections to date 5,000,000 18,000,000
*113. If Kiner uses the percentage-of-completion method, the gross profit to be recognized in
2018 is
a. €3,600,000.
b. €4,000,000.
c. €5,400,000.
d. €6,000,000.
Kiner, Inc. began work in 2018 on a contract for €21,000,000. Other data are as follows:
2018 2019
Costs incurred to date €9,000,000 €14,000,000
Estimated costs to complete 6,000,000 —
Billings to date 7,000,000 21,000,000
Collections to date 5,000,000 18,000,000
*114. If Kiner uses the cost-recovery method, the gross profit to be recognized in 2019 is
a. €3,400,000.
b. €7,000,000.
c. €3,500,000.
d. €14,000,000.
*115. Horner Construction Co. uses the percentage-of-completion method. In 2018, Horner
began work on a contract for €22,000,000; it was completed in 2019. The following cost
data pertain to this contract:
Year Ended December 31
2018 2019
Revenue Recognition
18 - 25
Cost incurred during the year €7,800,000 €5,600,000
Estimated costs to complete at the end of year 5,200,000 —
The amount of gross profit to be recognized on the income statement for the year ended
December 31, 2019 is
a. €3,200,000.
b. €3,440,000.
c. €3,600,000.
d. €8,600,000.
*116. Horner Construction Co. uses the percentage-of-completion method. In 2018, Horner
began work on a contract for €22,000,000; it was completed in 2019. The following cost
data pertain to this contract:
Year Ended December 31
2018 2019
Cost incurred during the year €7,800,000 €5,600,000
Estimated costs to complete at the end of year 5,200,000 —
If the completed-contract method of accounting was used, the amount of gross profit to be
recognized for years 2018 and 2019 would be
2018 2019
a. €9,000,000. €0.
b. €8,600,000. € (400,000).
c. €0. €8,600,000.
d. €0. €9,000,000.
*117. Remington Construction Company uses the percentage-of-completion method. During
2018, the company entered into a fixed-price contract to construct a building for Sherman
Company for £36,000,000. The following details pertain to the contract:
At December 31, 2018 At December 31, 2019
Percentage of completion 25% 60%
Estimated total cost of contract £27,000,000 £30,000,000
Gross profit recognized to date 2,250,000 3,600,000
The amount of construction costs incurred during 2019 was
a. £18,000,000.
b. £11,250,000.
c. £6,750,000.
d. £3,000,000.
Eilert Construction Company had a contract starting April 2018, to construct a €42,000,000
building that is expected to be completed in September 2019, at an estimated cost of €38,500,000.
At the end of 2018, the costs to date were €17,710,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were €8,400,000 and the cash collected
during 2018 was €5,600,000. Eilert uses the percentage-of-completion method.
*118. For the year ended December 31, 2018, Eilert would recognize gross profit on the building
of
a. €0.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 26
b. €1,475,833.
c. €1,610,000.
d. €1,890,000.
Eilert Construction Company had a contract starting April 2018, to construct a €42,000,000
building that is expected to be completed in September 2019, at an estimated cost of $38,500,000.
At the end of 2018, the costs to date were €17,710,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were €8,400,000 and the cash collected
during 2018 was €5,600,000. Eilert uses the percentage-of-completion method.
*119. At December 31, 2018, Eilert would report Construction in Process in the amount of
a. €19,320,000.
b. €17,710,000.
c. €16,520,000.
d. € 1,610,000.
*120. Douglas Diners Inc. charges an initial franchise fee of €180,000 broken down as follows:
Rights to trade name, market area, and proprietary know-how
€ 80,000
Training services
23,000
Equipment (cost of €21,600)
77,000
Total initial franchise fee
€180,000
Upon signing of the agreement, a payment of €80,000 is due. Thereafter, two annual
payments of €50,000 are required. The credit rating of the franchisee is such that it would
have to pay interest of 8% to borrow money. The franchise agreement is signed on August
1, 2018, and the franchise commences operation on November 1, 2018. Assuming that no
future services are required by the franchisor once the franchise begins operations, the
entry on November 1, 2018 would include
a. a credit to Unearned Franchise Revenue for €80,000.
b. a credit to Service Revenue for €23,000.
c. a credit to Sales Revenue for €77,000.
d. a debit to Unearned Franchise Revenue for €80,000.
*121. Douglas Diners Inc. charges an initial franchise fee of €180,000 broken down as follows:
Rights to trade name, market area, and proprietary know-how
€ 80,000
Training services
23,000
Equipment (cost of €21,600)
77,000
Total initial franchise fee
€180,000
Upon signing of the agreement, a payment of €80,000 is due. Thereafter, two annual
payments of €50,000 are required. The credit rating of the franchisee is such that it would
have to pay interest of 8% to borrow money. The franchise agreement is signed on August
1, 2018, and the franchise commences operation on November 1, 2018. Assume that the
total training fees includes training services for the period leading up to the franchise
Revenue Recognition
18 - 27
opening (€11,000 value) and for 3 months following opening. The journal entry on August
1, 2018 would include
a. a credit to Unearned Service Revenue for €23,000.
b. a credit to Unearned Service Revenue for €12,000.
c. a debit to Sales Revenue for €77,000.
d. a debit to Unearned Franchise Revenue for €80,000.
*122. On January 1, 2018 Dairy Treats, Inc. entered into a franchise agreement with a company
allowing the company to do business under Dairy Treats’ name. Dairy Treats had
performed substantially all required services by January 1, 2018, and the franchisee paid
the initial franchise fee of £980,000 in full on that date. The franchise agreement specifies
that the franchisee must pay a continuing franchise fee of £84,000 annually, of which 20%
must be spent on advertising by Dairy Treats. What entry should Dairy Treats make on
January 1, 2018 to record receipt of the initial franchise fee and the continuing franchise
fee for 2018?
a. Cash .................................................................................... 1,064,000
Franchise Fee Revenue ........................................... 980,000
Franchise Revenue .................................................. 84,000
b. Cash .................................................................................... 1,064,000
Unearned Franchise Revenue ................................. 1,064,000
c. Cash .................................................................................... 1,064,000
Franchise Fee Revenue ........................................... 980,000
Franchise Revenue .................................................. 67,200
Unearned Franchise Revenue ................................. 16,800
d. Prepaid Advertising .............................................................. 16,800
Cash .................................................................................... 1,064,000
Franchise Fee Revenue ........................................... 980,000
Franchise Revenue .................................................. 84,000
Unearned Franchise Revenue ................................. 16,800
*123. Wynne Inc. charges an initial franchise fee of €2,300,000, with €500,000 paid when the
agreement is signed and the balance in five annual payments. The present value of the
future payments, discounted at 10%, is €1,364,680. The franchisee has the option to
purchase €300,000 of equipment for €240,000. Wynne has substantially provided all initial
services required and collectibility of the payments is reasonably assured. The amount of
revenue from franchise fees is
a. € 500,000.
b. €1,804,680.
c. €1,864,680.
d. €2,300,000.
Multiple Choice Answers—Computational
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Test Bank for Intermediate Accounting, IFRS Edition, 3e
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MULTIPLE CHOICE—CPA Adapted
124. Green Construction Co. has consistently used the percentage-of-completion method of
recognizing revenue. During 2018, Green entered into a fixed-price contract to construct an
office building for €28,000,000. Information relating to the contract is as follows:
At December 31
2018 2019
Percentage of completion 15% 45%
Estimated total cost at completion €21,000,000 €22,400,000
Gross profit recognized (cumulative) 1,400,000 3,360,000
Contract costs incurred during 2019 were
a. €6,720,000.
b. €6,930,000.
c. €7,350,000.
d. €10,080,000.
125. Bruner Constructors, Inc. has consistently used the percentage-of-completion method of
recognizing income. In 2018, Bruner started work on a €49,000,000 construction contract
that was completed in 2019. The following information was taken from Bruner's 2018
accounting records:
Progress billings €15,400,000
Costs incurred 14,700,000
Collections 9,600,000
Estimated costs to complete 29,400,000
What amount of gross profit should Bruner have recognized in 2018 on this contract?
a. €4,900,000
b. €3,266,667
c. €2,450,000
d. €1,633,333
126. During 2018, Gates Corp. started a construction job with a total contract price of
£21,000,000. The job was completed on December 15, 2019. Additional data are as follows:
2018 2019
Actual costs incurred during the year £8,100,000 £9,150,000
Revenue Recognition
18 - 29
Estimated remaining costs 8,100,000 —
Billed to customer 7,200,000 13,800,000
Received from customer 6,000,000 14,400,000
Under the cost-recovery method, what amount should Gates recognize as gross profit for
2019?
a. £1,350,000
b. £1,875,000
c. £2,850,000
d. £3,750,000
Multiple Choice Answers—CPA Adapted
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DERIVATIONS — Computational
No. Answer Derivation
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 30
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Revenue Recognition
18 - 31
Test Bank for Intermediate Accounting, IFRS Edition, 3e
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DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Revenue Recognition
18 - 33
EXERCISES
Ex. 18-127—Allocate transaction price.
Windsor Windows manufactures and sells custom storm windows for enclosed porches. Windsor
also provides installation service for the windows. The installation process does not involve
changes in the windows, so this service can be provided by other vendors. Windsor enters into the
following contract on June 1, 2018, with a local homeowner. The customer purchases windows for
a price of £4,700 and chooses Windsor to do the installation. Windsor charges the same price for
the windows irrespective of whether it does the installation or not. The price of the installation
service is estimated to have a fair value of £1,200. The customer pays Windsor £4,000 (which
equals the fair value of the windows, which have a cost of £2,300) upon delivery and the
remaining balance upon installation of the windows. The windows are delivered on August 1,
2018, Windsor completes installation on September 15, 2018, and the customer pays the balance
due. Prepare the journal entries for Windsor in 2018. (Round amounts to nearest dollar.)
Solution 18-127
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 34
Solution 18-127 (cont.)
Ex. 18-128—Sales with returns and discounts.
On July 2, 2018, Lake Company sold to Sue Black merchandise having a sales price of €9,000
(cost €5,400) with terms of 2/10. n/30. f.o.b. shipping point. Lake estimates that merchandise with
a sales value of €900 will be returned. An invoice totaling €120, terms n/30, was received by Black
on July 6 from Pacific Delivery Service for the freight cost. Upon receipt of the goods, on July 3,
Black notified Lake that €350 of merchandise contained flaws. The same day, Lake issued a credit
memo covering the defective merchandise and asked that it be returned at Lake’s expense. Lake
estimates the returned items to have a fair value of €140. The freight on the returned merchandise
was €20 paid by Lake on July 7. On July 12, the company received a check for the balance due
from Black.
Instructions
(a) Prepare journal entries for Lake Company to record all the events noted above assuming sales
and receivables are entered at gross selling price.
(b) Prepare the journal entry assuming that Sue Black did not remit payment until August 5.
Solution 18-128
Revenue Recognition
18 - 35
Solution 18-128 (cont.)
Ex. 18-129—Allocate transaction price.
The Appliance Store is an experienced home appliance dealer. Appliance Store also offers a
number of services together with the home appliances that it sells. Assume that Appliance Store
sells dishwashers on a standalone basis. Appliance Store also sells installation services and
maintenance services for dishwashers. However, Appliance Store does not offer installation or
maintenance services to customers who buy dishwashers from other vendors. Pricing for
dishwashers is as follows.
Dishwasher only
€1,140
Dishwasher with Installation service
1,260
Dishwasher with maintenance services
1,380
Dishwasher with installation and maintenance services
1,450
In each instance in which maintenance services are provided, the maintenance service is
separately priced within the arrangement at €240. Additionally, the incremental amount charged by
Appliance Store for installation approximates the amount charged by independent third parties.
Dishwashers are sold subject to a general right of return. If a customer purchases a dishwasher
with installation and/or maintenance services, in the event Appliance Store does not complete the
service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds
€1,140.
Instructions
(a) Assume that a customer purchases a dishwasher with both installation and maintenance
services for €1,450. Based on its experience, Appliance Store believes that it is probable that
the installation of the equipment will be performed satisfactorily to the customer. Assume that
the maintenance services are priced separately. Identify the separate performance obligations
related to the Appliance Store revenue arrangement.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 36
Ex. 18-129 (cont.)
(b) Indicate the amount of revenue that should be allocated to the dishwasher the installation, and
to the maintenance contract.
(c) Prepare the necessary journal entry for the Appliance Store.
Solution 18-129
Ex. 18-130—Warranty arrangement.
On December 31, 2018, Dieker Company sells equipment to Tabor Inc. for $125,000. Dieker
includes a 1-year assurance warranty service with the sale of all its equipment. The customer
receives and pays for the equipment on December 31, 2018. Dieker estimates the prices to be
$122,000 for the equipment and $3,000 for the cost of the warranty.
Instructions
(a) Prepare the journal entry to record this transaction on December 31, 2018.
(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Dieker
sold an extended warranty (service type warranty) for an additional 2 years (2020–2021) for
$2,000.
Solution 18-130
Revenue Recognition
18 - 37
Ex. 18-131—Existence of a contract.
On July 1, 2018, Ellsbury Inc. entered into a contract to deliver one of its specialty machines to
Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of £3,000 in
advance on July 15, 2018. Kickapoo pays Ellsbury on July 15, 2018, and Ellsbury delivers the
machine (with cost of £1,900) on July 31, 2018.
Instructions
(a) Prepare the journal entry on July 1, 2018, for Ellsbury.
(b) Prepare the journal entry on July 15, 2018, for Ellsbury.
(c) Prepare the journal entry on July 31, 2018, for Ellsbury.
Solution 18-131
*Ex. 18-132—Journal entries—percentage-of-completion.
Dixon Construction Company was awarded a contract to construct an interchange at the junction
ofRoute. 94 and Highway 30 at a total contract price of €15,000,000. The estimated total costs to
complete the project were €12,000,000.
Instructions
(a) Make the entry to record construction costs of €7,200,000, on construction in process to date.
(b) Make the entry to record progress billings of €4,000,000.
(c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-
completion basis.
*Solution 18-132
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 38
*Solution 18-132 (cont.)
*Ex. 18-133—Percentage-of-completion method.
Dalton Construction Co. contracted to build a bridge for €10,000,000. Construction began in 2018
and was completed in 2019. Data relating to the construction are:
2018 2019
Costs incurred during the year €3,300,000 €2,750,000
Estimated costs to complete 2,700,000 —
Dalton uses the percentage-of-completion method.
Instructions
(a) How much revenue should be reported for 2018? Show your computation.
(b) Make the entry to record progress billings of $4,100,000 during 2018.
(c) Make the entry to record the revenue and gross profit for 2018.
(d) How much gross profit should be reported for 2019? Show your computation.
*Solution 18-133
Revenue Recognition
18 - 39
*Ex. 18-134—Percentage-of-completion method.
Penner Builders contracted to build a high-rise for €35,000,000. Construction began in 2018 and is
expected to be completed in 2020. Data for 2018 and 2019 are:
2018 2019
Costs incurred to date €4,500,000 €13,000,000
Estimated costs to complete 18,000,000 12,000,000
Penner uses the percentage-of-completion method.
Instructions
(a) How much gross profit should be reported for 2018? Show your computation.
(b) How much gross profit should be reported for 2019?
(c) Make the journal entry to record the revenue and gross profit for 2019.
*Ex. 18-135—Percentage-of-completion and cost-recovery methods.
On February 1, 2017, Marsh Contractors agreed to construct a building at a contract price of
€17,400,000. Marsh estimated total construction costs would be $12,000,000 and the project
would be finished in 2019. Information relating to the costs and billings for this contract is as
follows:
2017 2018 2019
Total costs incurred to date €4,500,000 €7,920,000 €13,800,000
Estimated costs to complete 7,500,000 5,280,000 -0-
Customer billings to date 6,600,000 12,000,000 16,800,000
Collections to date 6,000,000 10,500,000 16,500,000
Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting
and for cost-recovery accounting, show the gross profit that should be recorded for 2017, 2018,
and 2019.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 40
*Ex. 18-135 (cont.)
Percentage-of-Completion Cost-Recovery
Gross Profit Gross Profit
2017 __________ 2017 __________
2018 __________ 2018 __________
2019 __________ 2019 __________
*Solution 18-135
Revenue Recognition
18 - 41
*Ex. 18-136—Franchises.
Pasta Inn charges an initial fee of €2,400,000 for a franchise, with $480,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the annual
payments, discounted at 10%, is €1,521,000. The franchisee has the right to purchase €90,000 of
kitchen equipment and supplies for €75,000. An additional part of the initial fee is for advertising to
be provided by Pasta Inn during the next five years. The value of the advertising is €1,000 a
month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the
initial services required by the contract.
Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in good form.
*Solution 18-136
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 42
PROBLEMS
Pr. 18-137—Allocate Transaction Price, Discounts, Time Value.
Master Grill Company sells outdoor grilling products, providing gas and charcoal grills,
accessories, and installation services for custom patio grilling stations.
Instructions
Respond to the requirements related to the following independent revenue arrangements for
Master Grill products and services.
(a) Master Grill offers contract MG100 which is comprised of a free-standing gas grill for small
patio use plus installation to a customer’s gas line for a total price £950. On a standalone
basis, the grill sells for £800 (cost £470), and Master Grill estimates that the fair value of the
installation service (based on cost-plus estimation) is £200. Master Grill signed 15 MG100
contracts on May 30, 2018, and customers paid the contract price in cash. The grills were
delivered and installed on June 15, 2018. Prepare journal entries for Master Grill for MG100
in May and June 2018.
(b) Master Grill sells its specialty combination gas/wood-fired grills to local restaurants. Each grill
is sold for £1,200 (cost £670) on credit with terms 2/20, net/60. Prepare the journal entries for
the sale of 20 grills on August 1, 2018, and upon payment, assuming the customer paid on
(1) August 20, 2018, and (2) September 29, 2018. Assume the company records sales net.
Solution 18-137
Solution 18-137 (cont.)
Revenue Recognition
18 - 43
Pr. 18-138—Long-term construction project accounting.
Dobson Construction specializes in the construction of commercial and industrial buildings. The
contractor is experienced in bidding long-term construction projects of this type, with the typical
project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion
method of revenue recognition since, given the characteristics of the contractor's business and
contracts, it is the most appropriate method. Progress toward completion is measured on a cost-
to-cost basis. Dobson began work on a lump-sum contract at the beginning of 2018. As bid, the
statistics were as follows:
Lump-sum price (contract price) €8,000,000
Estimated costs
Labor €1,700,000
Materials and subcontractor 3,500,000
Indirect costs 800,000 6,000,000
€2,000,000
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 44
Pr. 18-138 (cont.)
At the end of the first year, the following was the status of the contract:
Billings to date €4,500,000
Costs incurred to date
Labor € 928,000
Materials and subcontractor 1,296,000
Indirect costs 386,000 2,610,000
Latest forecast total cost 6,000,000
It should be noted that included in the above costs incurred to date were standard electrical and
mechanical materials stored on the job site, but not yet installed, costing €210,000. These costs
should not be considered in the costs incurred to date.
Instructions
(a) Compute the percentage of completion on the contract at the end of 2018.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2018.
(c) Make the journal entry to record the income (loss) for 2018 on Dobson's books.
(d) Indicate the account(s) and the amount(s) that would be shown on the statement of financial
position of Dobson Construction at the end of 2018 related to its construction accounts. Also
indicate where these items would be classified on the statement of financial position.Billings
collected during the year amounted to $3,800,000.
(e) Assume the latest forecast on total costs at the end of 2018 was €8,120,000. How much
income (loss) would Dobson report for the year 2018?
Solution 18-138
Revenue Recognition
18 - 45
Solution 18-138 (cont.)
Pr. 18-139—Accounting for long-term construction contracts.
The board of directors of Ogle Construction Company is meeting to choose between the cost-
recovery method and the percentage-of-completion method of accounting for long-term contracts
in the company's financial statements. You have been engaged to assist Ogle's controller in the
preparation of a presentation to be given at the board meeting. The controller provides you with
the following information:
1. Ogle commenced doing business on January 1, 2018.
2. Construction activities for the year ended December 31, 2018, were as follows:
Total Contract Billings Through Cash Collections
Project Price 12/31/18 Through 12/31/18
A € 500,000 € 340,000 € 310,000
B 720,000 210,000 210,000
C 475,000 475,000 390,000
D 200,000 100,000 65,000
E 450,000 400,000 400,000
€2,345,000 €1,525,000 €1,375,000
Contract Costs Estimated
Incurred Through Additional Costs to
Project 12/31/18 Complete Contracts
A € 424,000 €101,000
B 195,000 455,000
C 350,000 -0-
D 123,000 97,000
E 320,000 80,000
€1,412,000 €733,000
3. Each contract is with a different customer.
4. Any work remaining to be done on the contracts is expected to be completed in 2019.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 46
Pr. 18-139 (cont.)
Instructions
(a) Prepare a schedule by project, computing the amount of income (or loss) before selling,
general, and administrative expenses for the year ended December 31, 2018, which would
be reported under:
(1) The cost-recovery method.
(2) The percentage-of-completion method (based on estimated costs).
(b) Prepare the general journal entry(ies) to record revenue and gross profit on project B (second
project) for 2018, assuming that the percentage-of-completion method is used.
(c) Indicate the balances that would appear in the statement of financial position at December
31, 2018 for the following accounts for Project D (fourth project), assuming that the
percentage-of-completion method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process
(d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D
(fourth project), if the completed-contract method is used?
Solution 18-139
Revenue Recognition
18 - 47
Solution 18-139 (cont.)
Pr. 18-140—Long-term contract accounting (cost-recovery).
Evans Construction, Inc. experienced the following construction activity in 2018, the first year of
operations.
Cash Cost Estimated
Total Billings Collections Incurred Additional
Contract through through through Costs to
Contract Price 12/31/18 12/31/18 12/31/18 Complete
X €260,000 €170,000 €155,000 €182,000 € 63,000
Y 330,000 125,000 125,000 105,000 252,000
Z 233,000 233,000 198,000 158,000 -0-
€823,000 €528,000 €478,000 €445,000 €315,000
Each of the above contracts is with a different customer, and any work remaining at December 31,
2018 is expected to be completed in 2019.
Instructions
Prepare a partial income statement and a partial statement of financial to indicate how the above
contract information would be reported. Evans uses the cost-recovery method.
Solution 18-140 Evans Construction, Inc.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
18 - 48
Solution 18-140 (cont.) Evans Construction, Inc.
