Intermediate Accounting, 9e (Spiceland)
Chapter 5 Revenue Recognition
1) Companies recognize revenue when goods or services are transferred to customers for the
amount the company expects to be entitled to receive in exchange for those goods or services.
2) Companies always recognize revenue when goods or services are transferred to customers for
the amount the company expects to receive in exchange for those goods or services.
3) “Determine whether it is probable the seller will collect the consideration it is entitled to
receive” is one of the five steps to applying the core revenue recognition principle.
4) Staff Accounting Bulletin No. 101 was issued by the FASB to clarify its guidelines on
revenue recognition.
5) A transfer of goods or services is complete when the customer has control over the goods or
services.
6) Revenue always is recognized once the buyer has physical possession of goods.
7) Sellers should recognize revenue over time for a long term contract in which the seller is
receiving periodic payments for progress to date but may need to refund those payments in the
event the contract is cancelled.
8) A common output method used to measure progress towards completion is to compare cost
incurred to date to total costs estimated to complete the job.
9) Revenue should be recognized over time for the construction of an annex to a building that the
customer owns, even if the seller will not receive payment until the annex is completed.
10) A common output method used to measure progress towards completion is to determine the
proportion of promised goods or services that have been transferred to date.
11) No allocation of contract price is required if the transaction involves a performance
obligation to be satisfied over time.
12) The transaction price should be allocated to the contract’s performance obligations in
proportion to the stand-alone selling prices of the performance obligations.
13) No allocation of contract price is required if the transaction involves multiple performance
obligations that are satisfied at different points in time.
14) If the contract contains multiple performance obligations, revenue must be recognized in an
amount equal to the fair value of each of the separate performance obligations.
15) The transaction price is only allocated to goods or services that are both capable of being
distinct and that are separately identifiable.
16) Goods or services are distinct if they are either capable of being distinct or are separately
identifiable.
17) A contract between a seller and a buyer need not be in writing to be enforceable.
18) If the contract is not in writing, revenue cannot be recognized, even though goods have been
transferred and payment is expected to be received in exchange.
19) The probability that the customer will pay the seller does not affect whether a contract exists
for purposes of revenue recognition.
20) A contract exists for purposes of revenue recognition if either the seller or customer has
performed an obligation specified by the contract.
21) An option for a customer to purchase additional goods at a discount from list price is only a
performance obligation if the discount is a material right that the customer would not receive
otherwise.
22) A warranty that the customer can purchase separately and that covers a long period of time
after the purchase date is likely to be a quality-assurance warranty.
23) If an option to purchase an extended warranty at a special discount is included with a product
when the product is purchased, a portion of the contract price needs to be allocated to the option.
24) A fee for recording a new customer in the seller’s information system should be treated as a
separate performance obligation and should be recognized upon payment.
25) An option for a customer to purchase additional goods at a discount from list price is always
a performance obligation, because it confers a material right.
26) Accounting for quality-assurance warranties includes a credit to warranty expense and a
debit to contingent liability.
27) When a contract includes variable consideration, the probability-weighted amount must be
used when there are different probabilities of occurrence.
28) To account for variable consideration using the most likely amount, the probability of each
possible amount is multiplied by the possible amount to get an expected contract price.
29) If the estimate of a transaction price is revised, the price change is allocated entirely to the
remaining performance obligations that are yet to be satisfied.
30) The amount of variable consideration that can be recognized is limited to the amount for
which it is probable that there won’t be a significant reversal of revenue recognized to date when
uncertainty resolves in the future.
31) The right of return is a separate performance obligation, and a portion of the transaction price
needs to be allocated to it for revenue recognition.
32) When the right of return exists, revenue can be recognized at the point of sale if the seller can
make reliable estimates of future returns.
33) If the seller is a principal, the seller has primary responsibility for delivering a product or
service.
34) If the seller is a principal, the seller typically is not vulnerable to risks associated with
delivering the product or service.
35) If the seller is a principal, the seller typically is vulnerable to risks associated with returns of
inventory from the customer.
36) If the seller is a principal, the seller should recognize gross revenue and cost of sales
associated with the transaction.
37) If the seller is an agent, the seller typically is vulnerable to risk associated with delivering the
product or service.
38) If the seller is an agent, the seller typically recognizes cost associated with the sale on its
own line in the income statement.
39) The transaction price should be adjusted to reflect the time value of money for interest
payable, but not for interest receivable.
40) Sellers are only required to adjust the transaction price to reflect the time value of money
when the contract has a significant financing component.
41) If a seller makes payments to a customer to purchase goods or services, and those payments
are equal to the stand-alone selling prices of those goods or services, part of those payments are a
refund to the customer.
42) The adjusted market assessment approach can be used to estimate the stand-alone selling
price of a good or service.
43) The residual approach to estimate stand-alone selling prices is often used for goods or
services that are sold separately and that have stable prices.
44) Revenue typically should not be recognized when payment is received but the goods are
warehoused at the seller’s facility.
45) In a bill-and-hold arrangement, revenue only can be recognized after the sale of the goods to
the end user.
46) In franchise arrangements, the franchisor’s performance obligations are not separately
identifiable, so revenue must be recognized over time.
47) The same revenue recognition requirements always apply to franchise arrangements that
apply to other selling arrangements.
48) In a consignment arrangement, revenue typically should not be recognized until sale to a
third party occurs, even though there has been a physical transfer of goods to the consignee,
because the consignor still retains legal title to the goods.
49) Sellers recognize revenue for gift cards at the point in time control of the gift card is
transferred to the customer.
50) If a license is acquired to use intellectual property for a 5-year period, revenue always is
recognized at the point in time the customer begins to benefit from the license.
51) If a licensee benefits from the seller’s activity over the license period with respect to the
licensed intellectual property, revenue should be recognized over time.
52) Under U.S. GAAP, if a license gives a customer access to symbolic intellectual property,
revenue always should be recognized over time.
53) Under IFRS, if a license gives a customer access to symbolic intellectual property, revenue
always should be recognized over time.
54) If a license gives a customer access to functional intellectual property, revenue always
should be recognized at the point in time that the customer can begin using the intellectual
property.
55) A license to use a company trademark should be viewed as an access right, with revenue
recognized over the license period.
56) Contract liability, deferred revenue and unearned revenue are all ways to describe a liability
that the seller recognizes with respect to unsatisfied performance obligations for which the seller
has already been paid.
57) An account receivable is recognized if the seller has a conditional right to receive payment.
58) Disclosure notes to the financial statements regarding significant revenue recognition
policies are only required when they will not reveal important information to competitors,
suppliers or customers.
59) When recognizing revenue over time on a long-term contract, amounts billed and the cash
actually received affect income recognition.
60) When recognizing revenue over time on a long-term contract, the percent complete is often
estimated by comparing the cost incurred to date with the total estimated cost to complete.
61) Firms have free choice as to whether to recognize revenue over time or at a point in time to
account for a long-term contract.
62) When revenue is recognized over time versus upon completion of the contract, different
amounts of total profit or loss are recognized for a particular contract.
63) Estimated losses on long-term contracts are recognized as ratable over the contract term
regardless of whether revenue is recognized over time or upon contract completion.
64) When a long-term contract does not qualify for revenue recognition over time, all gross
profit and loss recognition occurs when the contract is completed.
65) Revenue is not recognized under the realization principle unless the earnings process is
complete or virtually complete and there is reasonable certainty about the expected collection of
the asset received.
66) Under IFRS, one of the conditions for revenue from product sales to be recognized is when
the risks and rewards of ownership have been transferred to the customer.
67) Use of the installment sales method requires that firms track the gross profit percentage
associated with a particular sale.
68) When the expected collection of accounts receivable is difficult to estimate, companies must
use the cost recovery method.
69) Use of the installment sales method indicates little uncertainty about collection of the
receivable.
70) Over the life of a particular account receivable, the same total amount of gross profit is
recognized under the installment sales method and the cost recovery method.
71) When the right of return exists and a seller cannot make reliable estimates of future returns,
the installment sales method can be used.
72) Under IFRS, firms have free choice as to whether they use the percentage-of-completion
method or the cost recovery method to account for a long-term construction contract.
73) For long-term construction contracts, the cost recovery method under IFRS requires
recognizing equal amounts of revenue and cost until all costs are recovered.
74) When the cost recovery method is used to account for a long-term construction contract
under IFRS, an equal amount of cost and revenue is typically recognized during the early life of
the contract, such that high initial gross profit is recognized in net income.
75) Under IFRS, firms typically use the cost recovery method if they conclude that the
percentage-of-completion method is not appropriate to account for a long-term construction
contract.
76) Revenue from the sale of computer software is always recognized at the point of sale.
77) Revenue on a multiple-element contract typically is allocated to independent parts of the
contract based on their relative selling prices.
78) Vendor-specific objective evidence of separate sales prices is required for multiple-element
software contracts, but estimated selling prices can be used for other multiple-element contracts
under U.S. GAAP.
79) Recognition of franchise fee revenue is dependent on judgments of both substantial
performance and expected collection of fees.
80) Initial franchise fees are always recognized on the date they are received.
81) When accounting for multiple-element software arrangements, the revenue for each element
is based on the separate prices stated for each element in the software contract.
82) When accounting for multiple-element arrangements, GAAP indicates that sellers can
separately record revenue for part of an arrangement even if the part does not have value to the
customer on a stand-alone basis.
83) IFRS provides detailed guidance concerning accounting for revenue with respect to multiple-
element contracts.
84) Companies recognize revenue only when:
A) A contract is reasonably likely to exist.
B) A performance obligation is designated in a written contract.
C) A written contract is in place and payment is variable.
D) Control over goods or services has been transferred from the seller to the customer.
85) Which of the following is one of the steps for recognizing revenue?
A) Identify the performance obligations of the contract.
B) Determine whether bad debts can be reasonably estimated.
C) Estimate the total transaction price of the contract based on fair value.
D) Allocate all revenue to the performance obligation with the largest stand-alone selling price.