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.
Multiple Choice Questions
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.
86. Which of the following is not one of the five steps for recognizing revenue?
e. Recognize revenue when (or as) each performance obligation is satisfied.
f. Determine the transaction price.
g. Allocate the transaction price to each performance obligation.
h. Estimate variable consideration.
87. Which one of the following is not one of the five steps for recognizing revenue?
i. Identify the contract with a customer
j. Recognize revenue when all the performance obligations have been satisfied
k. Identify the separate performance obligation(s) in the contract
l. Allocate the transaction price to the separate performance obligations
88. For a typical manufacturing company, the most common critical point for recognizing
revenue is the date:
m. An order is received.
n. Production is completed.
o. The product is delivered.
p. Payment is received.
89. Stayman Associates has sold a good to a buyer and wants to recognize revenue. Which
of the following is an indicator that control of a good has passed from Stayman to the
buyer?
a. Buyer has scheduled delivery.
b. Buyer has a strong credit history, such that bad debts are reasonably estimable.
c. Buyer has not scheduled delivery.
d. Buyer has assumed the risk and rewards of ownership.
90. Which of the following is not an indicator that the customer is likely to have control over
a good?
a. Asset warehoused by seller-affiliated third party
b. Accepted the asset
c. Legal title to the asset
d. Physical possession of the asset
91. On June 1st, Lucy & Bros received an order for 500 cupcakes. Lucy delivered the
cupcakes to the client on June 25th. A $50 deposit was received on June 5th and the
remaining $450 was paid on June 30th. Lucy likely would recognize revenue on
a. June 1st
b. June 5th
c. June 25th
d. June 30th
92. The core revenue principle states that
a. Companies recognize revenue when the earnings process is virtually complete and
it is probable that payments will be received.
b. 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.
c. Companies recognize revenue when goods or services are transferred to the
customer and payments are received.
d. Companies recognize revenue when the goods or services are transferred to the
customer in an arm’s length transaction.
93. Consider the following three scenarios:
I. ABC Lawncare performed lawn maintenance services for Drake Inc. on June 1st,
and received payment of $500 for those services.
II. On June 1st, Melly Corp received payment for 100 pounds of raw material to be
delivered to Drake Inc. in 6 months
III. Lodo, LLC collected cash on June 1st for services rendered on May 1st.
Given these scenarios, revenue can not be recognized on June 1st for
a. I, II
b. I only
c. II, III only
d. III only
94. Which of the following is not an indicator that revenue can be recognized over time?
a. The seller is enhancing an asset that the buyer controls as the service is performed.
b. The customer consumes the benefit of the seller’s work as the seller performs the
service.
c. The seller is creating an asset that has an alternative use to the seller, and the seller
can receive payment for its progress even if the customer cancels the contract.
d. None of the other answers is correct.
95. Revenue likely is recognized over time for all the following arrangements except for
a. Bank earning interest on a long term loan
b. Construction of a building
c. Providing a two-year gym membership
d. Manufacturing generally stocked items ordered by a favored customer
96. On November 1, 2016, Taylor signed a one-year contract to provide handyman services
on an as-needed basis to King Associates, with the contract to start immediately. King
agreed to pay Taylor $4,800 for the one-year period. Taylor is confident that King will
pay that amount, but payment is not scheduled to occur until 2017. Taylor should
recognize revenue in 2016 in the amount of
a. $0
b. $800
c. $2,400
d. $4,800
97. Mary signed up and paid $1200 for a 6 month ceramics course on June 1st with Choplet
Ceramics. As of August 1st, Choplet’s accounting records would indicate:
a. $400 of revenue, $800 of accounts receivable
b. $400 of revenue, $800 of deferred revenue
c. $1,200 of revenue, $1,200 of cash
d. $800 of revenue, $400 of accounts receivable
98. On February 1st, H&B Bank originated a loan for $50,000 at an interest rate of 7.2%. On
March 15th, an interest payment of $300 was received. Which of the following best
describes when interest revenue should be recognized?
a. At a point in time (February 1st)
b. At a point in time (March 15th)
c. At a point in time (March 31st)
d. Over time
99. Rothbart Manufacturing agrees to manufacture bumper cars for 12 Banners Amusement
Parks. Under the terms of the contract, 12 Banners will pay Rothbart a total of $60,000,
and 12 Banners can cancel the contract if it so chooses but must pay Rothbart for work
completed. Rothbart believes that, if 12 Banners cancelled the contract, Rothbart could
sell the bumper cars to another amusement park and still make a profit. The
manufacturing contract is expected to last six months, and as of December 31, 2016, the
job is 80% complete. How much revenue should Rothbart recognize in 2016 for this
contract?
a. $0
b. $12,000
c. $48,000
d. $60,000
100. Which of the following is not a characteristic of a distinct good or service?
a. It can be used on its own or in combination with other goods or services the seller
could obtain elsewhere
b. It is not highly dependent on other goods or services in the contract
c. It has a stand-alone selling price
d. It is not interrelated with other goods or services in the contract
101. For contracts that include more than one separate performance obligation:
a. Revenue is recorded over time at the fair value of each performance obligation.
b. Revenue is recognized in the amount of the contract price on the date the last
separate performance obligation is satisfied.
c. The contract price is allocated to each performance obligation in proportion to the
obligations’ stand-alone selling prices.
d. Revenue is recognized in the amount of the contract price on the date the contract
is signed.
102. Binz Company provides cleaning services and sells garbage bins to office clients.
On June 1st, Binz delivered 100 garbage bins to a client, and also entered into a 5-year
contract for Binz to provide cleaning services to that client. Which of the following is
most likely to be true?
a. Revenue for the garbage bins and the cleaning services must be recognized on
June 1st.
b. Revenue for the garbage bins is recognized on June 1st and no revenue will be
recognized for the cleaning services until the end of the 5th year.
c. Revenue for the garbage bins is recognized on June 1st and revenue for the
cleaning service is recognized over the 5 years as those services are performed.
d. Binz Company should not recognize any revenue until the end of the 5th year.
103. Goods and services are capable of being distinct if:
a. The seller regularly sells the good or service separately.
b. A buyer could use the good or service on its own.
c. A buyer could use the good or service in combination with goods or services the
buyer could obtain elsewhere.
d. The seller regularly sells the good or service separately, or the buyer could use the
good or service on its own, or the buyer could use the good or service in
combination with goods or services the buyer could obtain elsewhere.
104. Minarski Electronics sells computers and provides hardware maintenance
services. On April 1st, Minarski sold a package deal containing a computer and a one-year
unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold
separately, the computer costs $840 and the one-year unlimited maintenance/repair
service costs $360. How much revenue does Minarski Electronics recognize for the
month ended April 30th, assuming that revenue is accrued monthly?
a. $1,000
b. $870
c. $725
d. $30
Use the following to answer questions 105-107:
On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an
ingredient-weighing system for a price of $90,000. The system included finely tuned scales
that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to
allow the weighing sytem to function in EverFresh’s automated system, and a one-year
contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with
other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to
provide these goods and services separately, it would charge $60,000 for the scales, $10,000
for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the
equipment and software on August 1, 2016, and the calibration service commenced on that
date.
105. How many performance obligations exist in this contract?
a. 0
b. 1
c. 2
d. 3
106. Assume that the scales, software and calibration service are all separate
performance obligations. How much revenue will Ortiz recognize in 2016 for this
contract?
a. $0
b. $63,000
c. $74,250
d. $90,000
107. Assume that the scales, software and calibration service are viewed as one
performance obligation. How much revenue will Ortiz recognize in 2016 for this
contract?
a. $0
b. $37,500
c. $63,000
d. $90,000
108. A contract does not exist for purposes of applying the revenue recognition
principle in all of the following cases except for when:
a. The seller believes it is not probable that it will collect the amount it’s entitled to
receive under the contract.
b. The seller and buyer did not sign a formalized written contract.
c. The seller and buyer can terminate the contract without penalty and neither has
performed any obligations under the contract.
d. The seller believes it is highly likely but not certain that the buyer will agree to
the terms of the contract.
109. Which of the following is a characteristic of a contract for purposes of revenue
recognition?
e. Commercial substance.
f. Nonverbal.
g. Reasonable profit margin.
h. Notarized within the company’s state of incorporation.
110. Waldman Associates received a written, approved contract to deliver economic
consulting services, with service and payment commencing in one month. The contract
specifies the services that Waldman is to perform, and the payment terms. Waldman and
the customer both can cancel the contract without penalty prior to commencing service.
Does Waldman have a contract for purposes of revenue recognition on the day the
contract is received?
a. Yes, because Waldman has a written approved contract.
b. No, because Waldman and the customer can cancel without penalty, and neither has
performed an obligation under the contract.
c. Maybe, depending on whether Waldman can estimate collectability of the receivable.
d. There is insufficient data on which to base an answer.
111. What is the effect of bad debts on revenue recognition?
a. The seller must believe it is probable it will collect the amounts it is entitled to
collect.
b. Bad debts must be of a remote likelihood in order to recognize revenue.
c. Bad debts are deducted from revenue to calculate net revenue on the income
statement, similar to sales returns.
d. Bad debts are ignored when determining whether to recognize revenue, but
recognized as an expense on the income statement.
112. Which of the following is considered a performance obligation?
a. Up-front registration fees for a gym membership
b. Extended warranties on electronic products
c. Quality-assurance warranties on electronic products
d. A processing fee to obtain a bank loan
113. Which of the following is not a performance obligation?
a. A good that the seller could sell separately and that is separately identifiable from
other goods and services in the contract.
b. A right of return.
c. An option for a customer to purchase goods under terms that are more advantageous
than those enjoyed by other customers.
d. An extended warranty.
114. Which of the following is an example of an extended warranty?
a. Fancy Headphones, Inc. provides assurance that its headphones are defect-free
after purchase.
b. Azalea’s Flowers assures clients that its flowers will stay fresh for at least a week.
c. Mark Electronics offers a warranty at an affordable price that provides additional
protection after the customer takes possession of the product.
d. Erickson Electronics promises to make repairs or replace any product found to be
defective within a week of purchase.
115. Orange Inc. offers a discount on an extended warranty on its oPhone when the
warranty is purchased at the time the oPhone is purchased. The warranty normally has a
price of $150, but Orange offers it for $120 when purchased along with an oPhone.
Orange anticipates a 75% chance that a customer will purchase the extended warranty
along with the oPhone. Assume Orange sells to 1,000 oPhones with the extended
warranty discount offer. What is the total stand-alone selling price that Orange would
use for the extended warranty discount option for purposes of allocating revenue among
the performance obligations in those 1,000 oPhone contracts?
a. $0
b. $22,500
c. $30,000
d. $120,000
116. In which of the following is the option described not a performance obligation?
a. Customers accumulate points for every dollar spent at Madeline’s Book Store.
The points can be redeemed for books once certain levels are met.
b. Customers can get 5% cash back for every $100 spent on eco-friendly products.
c. Customers can “buy two, get one free” at a menswear store.
d. Upon purchase of any name-brand TV, customers can purchase a 5-year extended
warranty at a 25% discount.
117. Which of the following statement is most true?
a. Variable consideration means that the transaction price is uncertain.
b. Basing an estimate on the most likely amount is always superior to basing an
estimate on the expected value.
c. The most likely estimated amount is estimated by multiplying the possible
amounts with their respective probability of occurrence.
d. When the transaction price is uncertain, revenue should not be recognized.
118. Which of the following is an example of a variable consideration?