a. John is expected to receive $100 for his tutoring services provided that he keeps
track of his hours.
b. Melody’s Piano will get paid for the 50 pianos sold provided that the pianos are
non-defective after the customer takes control.
c. Cantankerous Computers gets paid a base amount for every repair plus an
additional hourly fee of $10.
d. Excellent Electronics has a 10% mail-in rebate program for the Model X-001
speaker system. The company sold $10,000 worth of systems and believes there is
a 50% chance that rebates will be redeemed.
119. Which of the following is correct about changes in estimated variable
consideration?
a. Changes in estimated variable consideration should be recognized as an
adjustment to revenue in the period the change in estimate is made.
b. Changes in estimated variable consideration should be applied retroactively to all
periods affected.
c. Changes in estimated variable consideration should be allocated retrospectively to
all prior periods.
d. Changes in estimated variable consideration are not recognized in periods after
transaction price is first estimated.
Use the following to answer questions 120 and 121:
On April 1st, Bob the Builder entered into a contract of one-month duration to build a
barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in
addition to a bonus depending on when the project is completed. Nolan created incentives
for Bob to finish the barn as soon as he can without jeopardizing the structural integrity
of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished
2 weeks early and 10% if the project finished a week early. The probability of finishing 2
weeks early is 30% and the probability of finishing a week early is 60%.
120. What is the expected transaction price with variable consideration estimated as
the expected value?
a. $4,750
b. $5,000
c. $5,500
d. $5,750
121. What is the expected transaction price with variable consideration estimated as
the most likely amount?
a. $4,750
b. $5,000
c. $5,500
d. $5,750
Use the following to answer questions 122 – 124:
Sanjeev enters into a contract offering variable consideration. The contract pays him
$1,000/month for six months of continuous consulting services. In addition, there is a
60% chance the contract will pay an additional $2,000 and a 40% chance the contract will
pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev
concludes that this contract qualifies for revenue recognition over time.
122. Assume Sanjeev estimates variable consideration as the most likely amount. What
is the amount of revenue Sanjeev would recognize for the first month of the contract?
a. $1,000
b. $1,333
c. $1,400
d. $1,200
123. Assume Sanjeev estimates variable consideration as the expected value. What is
the amount of revenue Sanjeev would recognize for the first month of the contract?
a. $1,000
b. $1,333
c. $1,400
d. $1,200
124. Assume that Sanjeev estimates variable consideration as the most likely amount.
After Sanjeev has recognized revenue for two months of the contract, he changes his
assessment of the chance the contract will pay him $3,000 to 70%. What adjustment to
revenue should Sanjeev recognize to account for that change in estimate?
a. Debit of $1,000
b. Debit of $334
c. Credit of $1,000
d. Credit of $334
Use the following to answer questions 125 – 127:
On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee
leasing and maintenance for an apartment building. The contract starts on July 1, 2016.
Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and
will receive an additional 15% of the fixed fee at the end of each year provided that
building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the
occupancy threshold, and concludes the revenue recognition over time is appropriate for
this contract.
125. Assume Emmet estimates variable consideration as the expected value. How
much revenue should Emmet recognize on this contract in 2016?
a. $25,000
b. $26,125
c. $28,750
d. $50,000
126. Assume Emmet estimates variable consideration as the most likely amount. How
much revenue should Emmet recognize on this contract in 2016?
a. $25,000
b. $26,125
c. $28,750
d. $50,000
127. Assume that Emmet accrues revenue each month, and estimates variable
consideration as the most likely amount. On November 1, Emmet revises its estimate of
the chance the building will exceed the 90% occupancy threshold to a 70% chance. What
is the total amount of revenue Emmet should recognize on this contract in November of
2016?
a. $3,125
b. $4,167
c. $4,792
d. $7,291
128. Which of the following is not an indicator that the constraint on recognizing
variable consideration should be applied?
a. Poor (limited) evidence on which to base an estimate
b. A broad range of outcomes that could occur
c. A short delay before uncertainty resolves
d. A history of the seller changing payment terms on similar contracts
129. On January 1, 2016, Elite Advertising was contracted to run a marketing
campaign for Pharm King’s new dieting pills. In addition to getting a base fee of
$150,000 for the 3-year campaign, Elite also may get an additional 5% of the base fee as
a bonus if a targeted sales level is reached at the end of three years. Elite currently lacks
sufficient information to make an estimate of the likelihood of the expected bonus, with
the marketing director indicating that “If you forced me to make an estimate, I’d say we
have a 50/50 chance. But don’t quote me on that – it’s really too early to tell.” Elite
concludes this contract qualifies for revenue recognition over time, and estimates variable
consideration using the most likely amount. How much revenue should Elite recognize as
of December 31, 2016?
a. $50,000
b. $51,250
c. $52,500
d. $57,500
130. Boomerang Computer Company sells computers with an unconditional right to
return the computer if the customer is not satisfied. Boomerang has a long history selling
these computers under this returns policy and can provide precise estimates of the amount
of returns associated with each sale. Boomerang most likely should recognize revenue:
a. When Boomerang delivers a computer to a customer, ignoring potential returns.
b. When Boomerang delivers a computer to a customer, in an amount that is reduced
by the expected returns.
c. When Boomerang receives cash from the customer.
d. When a customer returns a computer.
131. Gunk Goblin sells vacuums and just launched a policy where customers have the
right to return a vacuum during a three-year period following purchase. Gunk
management has no experience under this sort of policy and does not believe it can
accurately estimate returns. What is the longest period of time that Gunk may have to
wait before recognizing revenue associated with one of these sales?
a. No time delay, recognize revenue upon delivery.
b. Gunk should recognize revenue as cash is received.
c. Gunk should defer revenue recognition until costs are recovered.
d. Three years, after the right of return has expired.
132. Under which of the following circumstances is it most appropriate to use the
residual method to estimate stand-alone selling prices?
a. The seller hasn’t previously sold the product and hasn’t determined a price for it.
b. The seller provides the product bundled with other goods and services.
c. The seller does not have competitors from which to observe market prices of
similar products.
d. The seller is unable to accurately estimate variable consideration associated with
the contract.
133. Which of the following is not an approach for estimating stand-alone selling
prices?
a. Adjusted market assessment approach
b. Expected cost plus margin approach
c. Residual approach
d. Fair market appraisal approach
Use the following to answer questions 134-135:
Wilson Links Products sells a product that involves two separate performance
obligations: the SwingRight golf club weight and the SwingCoach teaching software.
SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight
and the SwingCoach as a package deal for $200. The SwingCoach software is not sold
separately. Wilson is aware that other vendors charge $100 for similar software, and
Wilson’s prices are generally 10% lower than what is charged by those vendors. Wilson
estimates that it incurs approximately $65 of cost per copy of the software, and usually
charges 50% above cost on similar products.
134. Estimate the stand-alone selling price of the software using the adjusted market
assessment approach.
a. $50
b. $80
c. $90
d. $97.50
135. Estimate the stand-alone selling price of the software using the expected cost plus
margin approach.
a. $50
b. $80
c. $90
d. $97.50
136. Estimate the stand-alone selling price of the software using the residual approach.
a. $50
b. $80
c. $90
d. $97.50
137. Which of the following does not apply to a seller who is a principal?
a. Has control over goods or services
b. Primarily responsible for providing goods or services to customer
c. Exposed to risks associated with holding inventory
d. Primary performance obligation is to facilitate the transfer of goods or services
138. Which of the following applies to a seller who is an agent?
a. Warehouses inventory
b. Liable for the delivery of goods or services to the client
c. Charges a commission for each transaction
d. Records revenue at full transaction price
139. Explodia.com sells fireworks over the Internet. Customers access Explodia’s
website and select particular products, and Explodia refers the customer order to a
fireworks manufacturer who fulfills the order, ships to the customer, and pays Explodia a
20% commission. Which of the following is true about Explodia?
a. Explodia is an agent in this transaction.
b. Explodia is primarily responsible for providing the product to the customer.
c. Explodia’s income statement would report gross revenue and cost of sales
associated with these transactions.
d. Explodia warehouses inventory.
140. Jing Statistical Services operates a website that links experienced statisticians
with businesses that need data analyzed. Statisticians post their rates, qualifications, and
references on the website, and Jing receives 25% of the fee paid to the statisticians in
exchange for identifying potential customers. VetMed Associates contacts Jing and
arranges to pay a consultant $1,500 in exchange for analyzing some data. Jing’s income
statement would include the following with respect to this transaction:
a. Revenue of $1,500
b. Revenue of $1,500, and cost of services of $1,125
c. Revenue of $375
d. Revenue of $1,875 and cost of services of $1,500
141. Assume a contract for the sale of goods specifies that payment is to be made four
months after delivery of a product. The seller is likely to do which of the following, with
respect to the time value of money over the life of the contract?
a. Recognize interest expense.
b. Recognize interest revenue.
c. Recognize additional cost of goods sold.
d. Ignore the time value of money.
142. Assume a contract for the sale of goods specifies that payment is to be made 15
months prior to delivery of a product. The seller is likely to do which of the following
with respect to the time value of money over the life of the contract?
a. Recognize interest expense.
b. Recognize interest revenue.
c. Recognize additional cost of goods sold.
d. Ignore the time value of money.
143. Johnson sells $100,000 of product to Robbins, and also purchases $10,000 of
advertising services from Robbins. The advertising services have a fair value of $8,000.
Johnson should record revenue on its sale of product to Robbins of:
a. $100,000
b. $98,000
c. $92,000
d. $90,000
144. Which of the following is not true?
a. Licensing fees are recognized as revenue over time for any licenses for which the
seller expects its ongoing activities to affect the benefits that the buyer receives
from intellectual property.
b. License fees are recognized over time for any license that is viewed as providing a
right of access.
c. License fees are recognized as revenue at a point in time if the buyer expects that
the seller’s future activities will not affect the benefit the buyer derives from the
intellectual property.
d. Licensing fees are recognized as revenue at the end of the license period, when
the seller has completed its performance obligation to provide access to its
intellectual property.
145. Maas LLP developed software that helps farmers to plow their fields in a manner
that prevents erosion and maximizes the effectiveness of irrigation. Sunny Dale paid a
licensing fee of $20,000 for a copy of the software. Although Sunny Dale can use the
software as long as it wants, Maas expects that Sunny Dale will use the software for
approximately 5 years. Maas does not anticipate any further interaction with Sunny Dale
following transfer of the license. How much revenue should Maas recognize in the first
year of the contract?
a. $0
b. $4,000
c. $5,000
d. $20,000
Use the following to answer questions 146 – 147:
The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel.
Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee
plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The
license agreement is for 4 years.
146. How much of the $1 million initial license fee should the UFL recognize as
revenue in the first year of the contract?
a. $0
b. $250,000
c. $1,000,000
d. Cannot tell from information given.
147. Refer to the information in the previous question. Assume that the UFL
anticipates that, in addition to receiving the $1 million license fee, it will receive a bonus
of $2 million in year 1 of the contract and a bonus of $3 million in years 2-4 of the
contract based on Tank-Skin’s sales. Also assume that the UFL is convinced that it is
probable there will not be a significant reversal of any revenue recognized with respect to
the bonus in subsequent periods. At the inception of the contract, what is the amount of
transaction price that the UFL would estimate with respect to this license arrangement?
a. $0
b. $1,000,000
c. $3,000,000
d. 12,000,000
148. Which of the following is not true about accounting for revenue from franchise
arrangements?
a. Franchise arrangements often include a performance obligation for a license as
well as for delivery of goods and services.
b. Franchise arrangements typically include one or more performance obligations for
which revenue is recognized at a point in time.
c. Franchise arrangements typically include one or more performance obligations for
which revenue is recognized over a period of time.
d. Franchise arrangements typically include one performance obligation because the
goods and services included in the arrangement are not separately identifiable.
149. Pita Pal sells fast-food franchises. Pita Pal receives $75,000 from a new
franchisee for providing initial training, equipment, and furnishings that together have a
stand-alone selling price of $75,000. Pita Pal also receives $36,000 per year for use of
the Pita Pal name and for ongoing consulting services (starting on the date the franchise
is purchased). Rachel became a Pita Pal franchisee on March 1, 2016, and on May 1,
2016 Rachel had completed training and was open for business. How much revenue in
2016 will Pita Pal recognize for its arrangement with Rachel?
a. $0
b. $75,000
c. $99,000
d. $111,000
150. Which of the following is typically true for a bill-and-hold arrangement?
a. Revenue is recognized at the point in time when the arrangement is made.
b. Revenue is recognized at the point in time when goods are manufactured.
c. Revenue is recognized at the point in time when the delivery of goods is made.
d. Revenue is recognized at the point in time at which payment from the customer is
received.
151. On June 1st, Joseph & Company received a $500 deposit for 80 cases of wine. On
June 10th the customer identified specific vintages that are included in Joseph’s inventory,
and asked that Joseph not ship the wine until June 20 so the customer could ready space
to store the wine, so Joseph set those wines aside for the customer, boxed and ready for
shipment to the customer. On June 20th the wine was shipped and delivered to the
customer. Joseph likely would recognize revenue on
a. June 20th
b. June 10th
c. June 1st
d. Upon consumption of the wine by the customer
152. Which of the following is most true regarding consignment arrangements?
a. Revenue is recognized at the point in time when the consignment arrangement is
made.
b. Revenue is recognized when goods are transferred to the consignee.
c. Revenue is recognized upon sale by the consignee to an end customer.
d. Revenue is never recognized because GAAP does not allow such arrangements.
Use the following to answer questions 153 –154:
Todd Sweeney is an artist who sells his work under consignment (he displays his work in local
barbershops, and customers purchase his work there). Sweeney recently transferred a painting on
consignment to a local barbershop.
153. Sweeney most likely should recognize revenue when:
a. He paints the painting, because the painting is produced while he works.
b. When he transfers the painting to a barbershop.
c. When the barbershop sells the painting.
d. When the barbershop’s right of return expires.
154. After Sweeney has transferred a painting to a barbershop, the painting:
a. Should be counted in Sweeney’s inventory until the barbershop sells it.
b. Should be counted in the barbershop’s inventory, as the barbershop now possesses
it.
c. Should be counted in either Sweeney’s or the barbershop’s inventory, depending
on which incurred the cost of preparing the painting for display.
d. We lack sufficient information to know who should carry the painting in
inventory.
155. Bull’sEye sells gift cards redeemable for Bull’sEye products either in-store or
online. During 2016, Bull’sEye sold $2,000,000 of gift cards, and $1,800,000 of the gift
cards were redeemed for products. As of December 31, 2016, $150,000 of the remaining
gift cards had passed the date at which Bull’sEye concludes that the cards will never be
redeemed. How much gift card revenue should Bull’sEye recognize in 2016?
a. $2,000,000
b. $1,950,000