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86. Which of the following statements is not true regarding the software developer
example provided in ASC Topic 606 guidance for revenue recognition?
a. The example deals with the license of software.
b. Software installation, software updates, and technical support are not addressed.
c. The example covers four distinct performance obligations.
d. All the performance obligations can be separately identified.
87. Which of the following statements is not true regarding the treatment of warranties
under the new revenue recognition guidance in ASC Topic 606?
a. A warranty that assures the product is free of defects is not a distinct performance
obligation.
b. Warranties that provide services beyond assuring the product is defect-free at the time
of sale are separate performance obligations.
c. A warranty that covers services that are normally considered routine maintenance is an
assurance warranty.
d. The length of the warranty period should be considered.
88. Under the new revenue recognition guidance in ASC Topic 606, which of the
following statements is true regarding contracts with customer options?
a. In some cases where customers have an option to acquire additional goods or services,
an evaluation is required to determine if the option creates an additional performance
obligation.
b. An additional performance obligation is created if the customer could obtain the same
rights to additional goods or services without entering the contract.
c. An additional performance obligation is created if the option provides the customer a
right to purchase the goods or services at the stand-alone selling price for those goods or
services.
d. It is generally not considered a performance obligation when a retailer grants a
“customer appreciation dividend” to a customer.
89. Under ASC Topic 606 guidance for revenue recognition, which of the following
factors is not a consideration when determining the transaction price of a contract?
a. Variable consideration.
b. Shipping terms.
c. Significant financing components.
d. Whether the firm is a principal or an agent.
90. Under the new revenue recognition guidelines in ASC Topic 606, which of the
following statements is not true regarding performance obligations satisfied over time?
a. The firm must determine at each reporting date the extent to which the performance
obligation has been satisfied.
b. Output and input methods may be used for measurement purposes.
c. To obtain quality measurement, input methods must always be closely related to the
transfer of the goods or services to the customer.
d. Usable input measures include labor hours, costs incurred, and time elapsed.
91. Which of the following statements is not true regarding transactions involving
intellectual property?
a. A transaction involving intellectual property can represent a sale or a license.
b. The revenue recognition approach depends on whether the transaction is considered a
sale or a license.
c. If a contract is considered a license, the firm must determine if the license is a distinct
performance obligation.
d. If the customer’s right to use the intellectual property is not limited, the contract is
considered a license.
92. Which of the following statements is not true regarding revenue recognition
regarding gift cards?
a. “Breakage” refers to the unused portion of gift card balances.
b. “Breakage” can only be recognized as revenue to the extent that it is probable a
reversal will not be necessary.
c. The amount received from the sale of gift cards is required to be recognized as revenue
when the gift cards are sold.
d. It is typical that a portion of gift card sales will go unused by customers.
93. Under ASC Topic 606, which of the following statements is not true regarding the
use of practical expedients in applying the revenue recognition model?
a. A firm can file an application to use a practical expedient on a large contract if it is
under severe time pressure.
b. One expedient is to use a portfolio approach to numerous contracts with similar
characteristics.
c. Determining the use of an expedient is dependent on whether there would not be a
material difference in the financial statements from a more vigorous application of the
standard.
d. A firm is not required to adjust the transaction price for a significant financing
component if at the contract inception, the period between the payment and the transfer
of goods or services is expected to be a year or less.
94. Which of the following statements is not true regarding the adoption of ASC Topic
606 guidance for revenue recognition?
a. Upon adoption, entities can choose between the retrospective approach or the
cumulative effect approach.
b. When using the cumulative approach, the prior three years of financial statements need
to be restated.
c. Under the cumulative effect, the firm determines how the balance sheet would differ as
of the first day of the year of adoption.
d. Under the retrospective approach, each period presented is restated to what the
financial statements would have been had the new standard always been in place.
95. Under IFRS in accounting for revenue recognition, for collection to be probable in
order for revenue to be recognized on a contract, “probable” means
a. Likely to occur.
b. More likely to occur.
c. Most likely than not to occur.
d. More likely than not to occur.
96. In accounting for revenue recognition under ASC Topic 606, a contract modification
is considered a new, separate contract when
a. The modification adds distinct goods or services to the agreement.
b. The revised contract price reflects the original contract price cost of the additional
goods or services.
c. The revised contract adds distinct goods or services and the revised contract price
reflects the allocated transaction price for the additional goods or services.
d. The revised contract adds distinct goods or services and the revised contract price
reflects the stand-alone selling price of the additional goods or services.
97. In accounting for revenue recognition under ASC Topic 606, when there is a
modification of a contract, which of the following is correct?
a. If the modification adds distinct goods or services to the original contract, then a new
contract must be created.
b. If the new contract price does not reflect the stand-alone selling price of the additional
goods or services to be exchanged, then a new contract must be created.
c. If the modification adds distinct goods or services to the original contract and the
change in the original contract price reflects the stand-alone price of the additional goods
or services to be exchanged, then a new contract need not be created.
d. If the modification adds distinct goods or services to the original contract and the
change in the original contract price reflects the stand-alone price of the additional goods
or services to be exchanged, then a new contract must be created.
98. In accounting for revenue recognition under ASC Topic 606, revenue can be
recognized before a contract exists when cash has been received and
a. Goods have already been delivered to a customer, and there is no further obligation for
the seller to deliver goods or services.
b. The cash has been received for goods identified to be delivered and the cash is
refundable.
c. The cash has been received for goods or services to be delivered and the cash is
nonrefundable.
d. Revenue should never be recognized before a contract exists.
99. According to ASC Topic 606 guidance for revenue recognition, which of the
following statements is true regarding customer options when identifying performance
obligations in a contract?
a. There is an additional performance obligation for additional goods or services if the
customer could obtain the same rights to additional goods or services without entering
into the current contract agreement.
b. There is an additional performance obligation for additional goods or services if the
option in the contract provides for the additional goods or services at their stand-alone
selling price.
c. There is an additional performance obligation for additional goods or services if the
customer could obtain the same rights to additional goods or services elsewhere but the
additional good or services are provided for free or at a discount in the current contract.
d. There is no additional performance obligation for additional goods or services if they
will be received for free or at a discount, as long as the goods or services are similar to
the other goods in the current contract.
100. Sew & More sells sewing machines and sewing supplies. The company recently ran
a sales promotion on sewing machines that allowed customers to purchase a new sewing
machine using store credit. The terms of the contract stated that customers would make
12 monthly payments that included a 6% annual interest rate. On the date of each sale,
Sew & More should record
Required:
a. No revenue until the contract is paid in full.
b. Sales revenue equal to the sales price of the sewing machine, interest revenue equal to
the total amount of interest for the contract, and a receivable for the total of the sales
price plus the interest.
c. revenue equal to the sales price of the sewing machine plus the total interest to be
collected and a receivable for the same amount.
d. revenue equal to the sales price of the sewing machine and a receivable for the same
amount.
101. CPA Now sells print materials and an app to help its customers prepare for the CPA
exam. Along with these products, the company also provides updates to the app and
coaching services. The stand-alone prices for these goods and services are:
Good/Service
Price
Print materials
$100 per exam section (4 exam sections total)
App
$100 (contains questions for all 4 sections)
App updates
Not sold separately
Coaching services
Not sold separately
CPA Now provides a package deal for Accounting students that includes the print
materials for all four exam sections, the app, and free updates and coaching until the
student passes the exam. The cost of the package is $1,000. Customers download an
average of two updates to the app while using it. Using the residual approach, the
company estimates the value of an app update to be $25 and the value of the coaching
services to be $1,050.
Required:
a. How many separate performance obligations are included in the package deal?
b. How much of the package price of $1,050 should CPA Now allocate to each of the
performance obligations?
102. Trans Fat Express, Inc. entered an agreement with a franchisee on July 1, 2018. The
agreement specified that Trans Fat Express receive an initial franchise fee of $200,000
(30% due at signing; the balance to be paid in equal annual installments plus interest at
8% of the unpaid balance beginning July 1, 2019). The $200,000 franchise fee is
comprised of (1) consideration for the right to operate the franchise, and (2) payment for
services to be performed by Trans Fat Express that include site selection and building
design, employee training, and management training. Performance of these services is
deemed to have occurred when the franchise opens for business in April 2019. Trans Fat
Express allocates 60% of the fee to the right to operate the franchise and the remainder to
the services performed.
Required:
a. Prepare the entry to record the signing of the franchise agreement and receipt of the
payment due at that time.
b. Prepare any adjusting journal entries necessitated at December 31, 2018 by this
agreement.
c. Prepare the entry Trans Fat Express should make when the franchisee opens the
location in April 2019.
103. Peachpit Software Developers shipped its accounting package to a customer on
September 10, 2018. In addition to the software, Peachpit’s contract requires the
company to provide: (1) training to the customer’s accounting staff during October of
2018 and again in January 2019 when the upgrade is released—75% of the training hours
are provided during October, (2) technical product support for one year starting October
1, 2018, and (3) a major upgrade to the software early in 2019. The customer paid the
total contract price of $80,000 upon receipt of the invoice on September 17, 2018.
Peachpit would charge the following if these individual contract elements were sold
separately:
Fair Value
Accounting package (software)
$65,000
Training customer’s staff
10,000
Customer support
15,000
Accounting software upgrade
10,000
Totals
$100,000
Required:
a. Prepare a journal entry to record receipt of the cash payment.
b. Determine the amount of revenue to be recognized in 2018 and prepare the necessary
journal entry.
