CHAPTER 17: ADVANCED ISSUES IN REVENUE RECOGNITION
1. The core principle of revenue recognition is that a company should recognize revenue when it has been earned.
a.
True
b.
False
False
1
Easy
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2. One type of revenue is the settlement of a liability that occurs as a result of a company’s primary operating activities.
a.
True
b.
False
True
1
Easy
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3. The FASB provides a 4-step model for evaluating when a company should recognize revenue.
a.
True
b.
False
False
1
Easy
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4. The first step of the revenue recognition model is to identify the contract with the customer.
a.
True
b.
False
True
1
Easy
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5. A contract may be written, oral, or implied by customary business practices.
a.
True
b.
False
True
1
Easy
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6. Revenue is recognized when a contract is enacted.
a.
True
b.
False
False
1
Easy
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7. A contract modification always results in a new contract if the modification adds distinct goods or services at a price
that reflects their stand-alone selling price.
a.
True
b.
False
True
1
Easy
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8. A constructive obligation is a promise in a contract with a customer to transfer goods or services.
a.
True
b.
False
False
1
Easy
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9. A good is considered distinct if it is a separately identifiable good from which a customer is able to receive benefits
either separate from or together with other resources.
a.
True
b.
False
True
1
Easy
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10. Nonrefundable fees from customers are recognized as revenue when received.
a.
True
b.
False
False
1
Easy
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11. There are two types of license: those that are distinct and those that are satisfied over a period of time.
a.
True
b.
False
False
1
Easy
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12. A company that is considered to be an agent in a revenue-producing transaction will recognize revenue for the net
amount of consideration received from the customer.
a.
True
b.
False
True
1
Easy
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13. When a customer pays a seller a significant period of time after the goods are delivered, the consideration received by
the seller always includes both transaction revenue and interest income.
a.
True
b.
False
True
1
Easy
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14. A company must adjust the consideration for the time value of money if the time period between the customer’s
payment and the company’s transfer of goods or services is more than three months.
a.
True
b.
False
False
1
Easy
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15. When a contract contains an uncertain, variable amount of consideration, GAAP requires that a company only
recognizes total consideration as if the uncertainty does not exist.
a.
True
b.
False
False
1
Easy
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16. If the customer buys goods and promises consideration in a form of a non-cash asset, the seller values the transaction
based on the fair value of the non-cash asset, not on the stand-alone price of the goods sold.
a.
True
b.
False
True
1
Easy
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17. If a contract contains only one performance obligation, no allocation of the transaction price is ever needed to
recognize revenue.
a.
True
b.
False
True
1
Easy
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18. The efforts-expended method of recognizing revenue over time is considered to be an output method.
a.
True
b.
False
False
1
Easy
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19. GAAP requires that incremental costs of obtaining a contract must be capitalized and amortized over the time of the
contract.
a.
True
b.
False
False
1
Easy
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20. A “contract asset” is a receivable that arises from the performance obligation of a contract.
a.
True
b.
False
False
1
Easy
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21. The Partial Billings account is a contra account of the Construction in Progress account.
a.
True
b.
False
True
1
Easy
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22. Construction in Progress is an inventory account typically valued at on the balance sheet at net realizable value.
a.
True
b.
False
True
1
Easy
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23. The FASB and the IASB jointly issued a comprehensive principles-based revenue recognition Model entitled
a.
Revenue Recognition.
b.
Revenue from Contracts with Customers.
c.
Principles of Revenue Recognition.
d.
Principle-Based Rules of Revenue Recognition.
b
1
Easy
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24. Revenues represent
a.
increases in assets and/or decreases in liabilities.
b.
increases in assets and/or increases in liabilities
c.
decreases in assets and/or decreases in liabilities.
d.
decreases in assets and/or increases in liabilities.
a
1
Challenging
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25. The FASB and the IASB agreed that the fundamental characteristic of revenue recognition is that
a.
the term revenue means different things to different companies in different countries.
b.
revenue should be recognized when it is earned.
c.
revenues are recognized and measured based on changes in assets and liabilities.
d.
the number of disclosures required for revenue recognition should be held to a minimum.
c
1
Easy
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26. Revenues are recognized when
a.
net assets increase or decrease as a result of any company activity.
b.
net assets increase or decrease as a result of primary operating activities.
c.
net assets increase as a result of any company activity.
d.
net assets increase as a result of primary operating activities.
d
1
Easy
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27. The first step of the revenue recognition model is
a.
to identify the contract with the customer.
b.
to identify the performance obligations to the customer.
c.
to recognize revenue when it is earned.
d.
to determine the transaction price.
a
1
Easy
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28. The new revenue recognition standard excludes coverage of all the following except
a.
leases.
b.
long-term construction contracts.
c.
insurance contracts.
d.
financial instruments.
b
1
Moderate
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29. A contract
a.
must have commercial substance to be legally enforceable.
b.
may qualify for revenue recognition even if one party can unilaterally cancel the contract before performance.
c.
must be in writing to be enforceable for accounting purposes.
d.
is an agreement that creates enforceable rights and obligations.
d
1
Moderate
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30. A company should only apply the revenue recognition standard to contracts that meet all of the following criteria
except
a.
the contract has commercial substance.
b.
collectability of consideration is probable.
c.
each party’s rights regarding goods and services to be transferred are identified.
d.
the transaction price is fixed and determinable.
d
1
Easy
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31. On January 1, SaLow Company enters into a contract to provide custom-made equipment to ByHi Corporation for
$100,000. The contract terms allow cancellation without penalty by either party at any time prior to delivery of the
goods. The contract specifies a delivery date of March 15 but the equipment was not delivered until April 10. The
contract required full payment within 30 days after delivery. When should revenue be recognized for this contract?
a.
Never, because it includes a termination agreement.
b.
March 15
c.
April 10
d.
May 10
c
1
Moderate
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32. Revenue from a contract with a customer
a.
is recognized even if the contract is wholly unperformed.
b.
is recognized when the customer exercises its right to provide consideration.
c.
cannot be recognized even if the performance obligation has been satisfied.
d.
cannot be recognized until a contract exists.
d
1
Easy
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33. A company must account for a contract modification as a new contract if
a.
the modification adds distinct goods or services at a price that reflects their stand-alone selling price.
b.
the seller has the right to receive consideration equal to the stand-alone selling price of the promised goods or
services.
c.
the promised goods or services are distinct and separable from other goods or services promised in the original
contract.
d.
the promised goods or services are distinct and the contract has commercial substance.
a
1
Easy
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34. If a contract modification does not create a separate contract, it is accounted for using
a.
either a cumulative catch-up adjustment or a retrospective approach.
b.
either a cumulative catch-up adjustment or a prospective approach.
c.
either a retrospective approach or a prospective approach.
d.
either a cumulative catch-up adjustment, a prospective approach, or a retrospective approach.
b
1
Easy
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35. A contract modification does not add distinct goods and services. How is the contract modification accounted for?
a.
as a separate contract
b.
prospective method
c.
retrospective method
d.
cumulative catch-up method
d
1
Easy
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36. A contract adds distinct goods and services and the contract price does not reflect the stand-alone selling price of these
goods and services. How is the contract modification accounted for?
a.
as a separate contract
b.
prospective method
c.
retrospective method
d.
cumulative catch-up method.
b
1
Easy
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37. Saler Company entered into two contractual agreements with two customers. Customer 1 agreed to buy 5,000 units of
Product X11 per month for 24 months at $25 per unit. Customer 2 agreed to purchase advisory services for 12 months
at $16,000 per month. Both customers agreed to modify their contracts after 6 months had passed.
I.
If Customer 1 decides to buy more than 5,000 units in any given month, the price will be $21 for
the additional units, which is representative of the stand-alone price for this product in similar
situations.
II.
Customer 2 agrees to extend the period of time for advisory services to 15 months at the same
price and to purchase 2,000 units of Product X11 per month for the next nine months at $15 per
unit.
Which of these contract modifications creates a separate contract?
a.
I only
b.
II only
c.
Both I and II
d.
Neither I nor II
a
1
Easy
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38. On April 15, Topper Company agrees to a contract to sell 9,000 tie-dyed flags for $45,000 to PeaceTime, Inc. On
August 1, after 5,000 flags have been delivered, Topper and Peace modify the agreement to sell an additional 6,000
flags for $21,000 which is significantly lower than Topper’s stand-alone selling price at that time. During August,
Topper delivers 1,000 flags. How much revenue will Topper recognize for the month of August?
a.
$5,000
b.
$4,400
c.
$4,250
d.
$4,100
d
1
Moderate
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39. In January, Cigaro Corp. agrees to a contract to sell 14,000 sports caps for $140,000 to Dilly, Inc. In March, after
5,000 caps have been delivered, Cigaro and Dilly modify the agreement to sell an additional 6,000 caps for $33,000
which is significantly lower than Cigaro’s stand-alone selling price at that time. During April, Cigaro delivers 2,000
caps. How much revenue will Cigaro recognize for the month of April?
a.
$17,300
b.
$16,400
c.
$15,500
d.
$11,000
b
1
Moderate
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40. On July 10, Boogie Footware agrees to a contract to sell 800 pair of flapper shoes for $16,000 to Twenties, Inc. On
September 1, after 500 pair of have been delivered, Boogie and Twenties modify the agreement to reduce the price of
the remaining 300 pair of flapper shoes to $10 a pair. During September, Boogie delivers 200 pairs of shoes. How
much revenue will Boogie recognize for the month of September?
a.
$3,000
b.
$2,000
c.
$1,625
d.
$1,375
d
1
Moderate
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41. On July 15, Zink Jewels agrees to a contract to sell 4,000 promise rings for $100,000 to Costless Stores, Inc. On
October 1, after 2,000 rings pair of have been delivered, Zink and Costless modify the agreement to reduce the price
of the remaining 1,000 rings to $12 each. During October, Zink Jewels delivers 600 rings. How much revenue will
Zink recognize for the month of October?
a.
$13,050
b.
$7,200
c.
$3,300
d.
$2,175
c
1
Moderate
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42. A ________ is an explicit or implicit promise in a contract with a customer to transfer goods or services.
a.
constructive obligation
b.
performance obligation
c.
liability obligation
d.
constructive liability
a
1
Easy
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43. When multiple service-related performance obligations exist within a contract, they should be accounted for as a
single performance obligation when
a.
the performance obligations are distinct but interdependent.
b.
each service is interrelated and interdependent.
c.
the services are capable of being distinct.
d.
the services are both capable of being distinct and distinct within the context of the contract.
b
1
Easy
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44. Which of these three characteristics (I, II, and III) are required in order for a promised good or service to be
considered distinct?
I. Commercial substance
II. Distinct within the context of the contract
III. Capable of being distinct
a.
I and II only
b.
I and III only
c.
II and III only
d.
I, II, and III
c
1
Easy
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45. Which of the following is not an indicator that a promise is separately identifiable within a contract?
a.
lack of integration with other promised goods or services.
b.
does not modify another good or service.
c.
is not dependent on other goods or services.
d.
lack of commercial substance like other goods or services.
d
1
Easy
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46. What is the appropriate revenue recognition procedure for upfront payments received in a contract with a customer?
a.
capitalize and amortize over the contract term
b.
defer recognition until the end of the contract
c.
recognize immediately
d.
recognize whenever the related performance obligation is satisfied
d
1
Easy
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47. Which of the following is not an indicator that a company may be an agent?
a.
The company provides goods or services to customers.
b.
The company does not have inventory risk.
c.
The company’s consideration is in the form of a commission.
d.
The company does not have discretion in establishing prices for goods and services.
a
1
Easy
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48. The role of the agent in a principal-agent relationship is to
a.
provide goods or services to a customer.
b.
arrange for the principal to provide goods or services to a customer.
c.
develop and maintain goodwill of the principal’s customers.
d.
collect payment from the customer and remit it to the principal.
a
1
Easy
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49. The transaction price
a.
includes only cash and cash equivalents and does not include non-cash consideration.
b.
excludes discounts, coupons, rebates, penalties, or nonrefundable fees.
c.
is the amount of consideration a company expects to receive from a customer.
d.
must be clearly specified by the contract for each separate performance obligation.
c
1
Easy
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50. If a contract involves a significant financing component
a.
the time value of money is not required to determine transaction price if the payment is more than a year after
the transfer occurs.
b.
the transaction amount should be based on the current sales price of goods or services.
c.
interest is not accrued as a result of the financing component.
d.
the time value of money is used to determine the fair value of the transaction.
d
1
Easy
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51. A customer agrees to pay a seller over time with a promissory note. Which of the following statements related to this
situation is false?
a.
The transaction price is determined by adjusting the promised amount of future consideration to reflect the
time value of money.
b.
The objective for the adjusting for time value of money is to separate the contract into a revenue element and a
financing element.
c.
When adjusting for the time value of money, the seller should use the current prime lending rate as the
discount rate.
d.
Sellers are not required to adjust for the time value of money if the time period between the customer’s
payment and the company’s transfer of goods or services is less than one year.
c
1
Easy
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52. On January 1, 2017, Oldham Company sold goods to Windall Company in exchange for a 3-year, non-interest-bearing
note with a face value of $30,000. If Oldham entered into a separate financing transaction with Windall, an
appropriate interest rate would be 10%; therefore, the transaction price would be $22,540. Which of the following
statements is true about the journal entry that records the transaction when Oldham delivers the goods to Windall on
January 1, 2017?
a.
Debit Note Receivable for $22,540
b.
Credit Sales Revenue $22,540
c.
Debit Discount on Note Receivable $7,460
d.
Credit Interest Revenue $7,460
b
1
Moderate
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