Chapter 17: Advanced Issues in Revenue Recognition
53. 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 $10,000. If Oldham entered into a separate financing transaction with Windall, an
appropriate interest rate would be 8%. 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 $10,000
b.
Credit Sales Revenue $7,600
c.
Credit Discount on Note Receivable $2,400
d.
Credit Interest Revenue $2,400
a
1
Moderate
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54. Donner Construction enters into a contract with a customer to build a warehouse for $600,000 on March 30, 2017 with
a performance bonus of $30,000 if the building is completed by August 31, 2017. The bonus is reduced by $10,000
each week that completion is delayed. Donner commonly includes these completion bonuses in its contracts and,
based on prior experience, estimates the following completion outcomes:
Completed by
Probability
August 31, 2017
60%
September 7, 2017
30%
September 14, 2017
10%
What is the transaction price for this transaction?
a.
$630,000
b.
$625,000
c.
$615,000
d.
$600,000
b
1
Easy
United States – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
55. Bodine Corp. has a contract to deliver cleaning products to the community center. The contract with the aquatic center
states that the first 500 gallons of cleaner will cost $16 per gallon. However, the cost will drop to $12 per gallon for
all purchases over 500 gallons. Based on its experience, Bodine Corp. estimates that the center will use 800 gallons of
chemicals. What transaction price per gallon should Chlorine use for this contract?
a.
b.
c.
d.
b
1
Easy
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United States – OH – Default City – AICPA: FN-Decision Modeling
56. Noncash consideration should be recognized by the seller on the basis of
a.
original cost paid by customer.
b.
fair value of what is received from the customer.
c.
fair value of what is given up to the customer.
d.
fair value of equivalent goods or services.
b
1
Easy
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57. The transaction price for multiple performance obligations should be allocated based on
a.
total transaction price less residual value.
b.
forecasted cost of satisfying performance obligation.
c.
what the company could sell the goods for on a stand-alone basis.
d.
selling price from the company’s competitors.
c
1
Moderate
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58. BoTeck is a full-service technology company. It provides equipment, installation services, and training services.
Customers can purchase any product or service separately or as a bundled package. On May 3, Box-Rite Corporation
purchased computer equipment, installation, and training for a total cost of $120,000. Estimated stand-alone fair
values of the equipment, installation, and training are $75,000, $50,000, and $25,000 respectively. The transaction
price allocated to equipment, installation and training is
a.
$75,000, $50,000, and $25,000 respectively.
b.
$60,000, $40,000 and $20,000 respectively.
c.
$40,000, $40,000, and $40,000 respectively.
d.
$120,000 for the entire bundle.
b
1
Easy
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United States – OH – Default City – AICPA: FN-Measurement
59. BoTeck is a full-service technology company. It provides equipment, installation services, and training services.
Customers can purchase any product or service separately or as a bundled package. On May 3, Box-Rite Corporation
purchased computer equipment, installation, and training for a total cost of $120,000. Estimated stand-alone fair
values of the equipment, installation, and training are $75,000, $50,000, and $25,000 respectively. The journal entry
to record the sale and installation on May 3 will include
a.
credit to Service Revenue of $50,000.
b.
credit to Sales Revenue for $120,000.
c.
credit to Unearned Service Revenue of $20,000.
d.
debit to Unearned Service Revenue of $25,000.
c
1
Easy
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Bloom’s: Remembering
60. BoTeck is a full-service technology company. It provides equipment, installation services, and training services. For a
recent major group sale, the transaction price had a variable component contingent upon a threshold being reached.
Revenue allocated to equipment and installation services was recognized in fiscal year 2015; revenue allocated to
training services is being recognized over the next two years through the end of 2017. Now, in February 2016, the
contingent outcome previously expected has proven to be false and the transaction price has changed such that
additional revenue should be recognized for these performance obligations. What is the proper accounting for this
change in transaction price for equipment and installation services?
a.
prior period adjustment to increase 2015 revenue for the full amount of change
b.
increase 2016 and 2017 revenue by allocating adjustment equally to each year for the proportional amount of
change
c.
increase 2016 revenue by allocating adjustment to January and February equally to each month for the
proportional amount of change
d.
increase 2016 revenue by adjusting February for the full amount of change
d
1
Moderate
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Bloom’s: Remembering
61. Which of the following is not a criterion that indicates a performance obligation is satisfied over time?
a.
The customer receives control of a delivered product which has an expected useful life of many years.
b.
The seller’s performance does not create an asset with an alternative use to the seller and the seller has a right
to payment for performance completed to date.
c.
The customer simultaneously receives and consumes the benefits of the seller’s performance as the seller
performs.
d.
The seller’s performance creates or enhances an asset that the customer controls as the asset is created or
enhanced.
a
1
Easy
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Bloom’s: Remembering
62. Which of the following is an input method for recognizing revenue over time?
a.
results-achieved method
b.
units-produced method
c.
milestones-reached method
d.
d
1
Easy
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efforts-expended method
Exhibit 17-1
The following information relates to a project of the Cumberland Construction Company:
2016
2017
2018
Actual total costs incurred to date
$136,000
$616,000
$882,000
Estimated costs to complete
714,000
264,000
—
The contract price was $1,200,000. Cumberland uses the cost-to-cost method of revenue recognition.
63. Refer to Exhibit 17-1. What amount of revenue would be recognized in 2016?
a.
$400,000
b.
$192,000
c.
$136,000
d.
$0
b
1
Moderate
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United States – OH – Default City – AICPA: FN-Decision Modeling
64. Refer to Exhibit 17-1. Assume revenue in the amount of $200,000 was recognized in 2016. What amount of revenue
would be recognized in 2017?
a.
$840,000
b.
$640,000
c.
$616,000
d.
$416,000
b
1
Moderate
ACCT.WHAL.16.17.6 – LO: 17.6
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Bloom’s: Analyzing
65. On January 1, 2017, Fryer Company enters into a contract to supply 600 pastry frying machines to a regional donut
retailer. The machines will be delivered at a rate of 25 machines per month over 2 years at a transaction price of
$1,000 per machine. The salesperson received a $36,000 sales commission on the date the contract was signed. The
journal entry to record the transaction on January 1 will include a
a.
debit Prepaid Sales Commissions for $36,000.
b.
debit Sales Commission Expense for $36,000.
c.
credit Sales Revenue $600,000.
d.
credit Sales Revenue $564,000.
a
1
Moderate
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Bloom’s: Analyzing
66. A contract asset
a.
represents the seller’s performance obligation.
b.
arises when a customer’s payment of consideration occurs prior to the seller’s performance under the contract.
c.
represents the seller’s unconditional right to receive consideration from a customer.
d.
arises when the seller’s right to consideration from a customer is conditional upon something other than the
passage of time.
d
1
Easy
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Bloom’s: Remembering
67. Able Bakers sells cooking supplies and training services. Under a contract with Putnam Restaurants, Able will provide
$60,000 of supplies and three months of training for $2,000 per month. Able’s right to receive consideration for
cooking supplies is conditional upon providing one month of training services before they can bill the customer for
the supplies. When Able delivers the supplies on the first day of training services, Able will recognize
a.
$60,000 receivable.
b.
$60,000 contract liability.
c.
$60,000 contract asset.
d.
$60,000 unearned revenue.
c
1
Easy
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United States – OH – Default City – AICPA: FN-Decision Modeling
68. What type of account is Partial Billings?
a.
asset
b.
contra asset
c.
liability
d.
Revenue
b
1
Easy
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United States – OH – Default City – AICPA: FN-Decision Modeling
69. What type of account is Construction in Progress?
a.
asset
b.
contra asset
c.
expense
d.
Receivable
a
1
Easy
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United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
70. Assuming that the performance obligation is satisfied over time, Construction in Progress represents inventory that is
valued at
a.
accrued cost.
b.
incurred cost.
c.
lower of cost or market.
d.
net realizable value.
d
1
Moderate
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71. A construction project is expected to take two-and-a-half years to complete. Partial Billings exceeds Construction in
Progress. The two accounts are reported together on the balance sheet in the
a.
current assets section.
b.
long-term assets section.
c.
current liabilities section.
d.
long-term liabilities section.
c
1
Moderate
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72. A construction project is expected to take two-and-a-half years to complete. Partial Billings is less than Construction
in Progress. The two accounts are reported together on the balance sheet in the
a.
current assets section.
b.
long-term assets section.
c.
current liabilities section.
d.
long-term liabilities section.
a
1
Moderate
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73. A Provision for Loss on Contract is reported in the financial statements as
a.
a contra-liability account.
b.
a loss account.
c.
an asset account.
d.
a contra-asset account.
d
1
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Chapter 17: Advanced Issues in Revenue Recognition
Exhibit 17-2
In 2016, Omega Construction began work on a contract with a price of $850,000 and estimated costs of $595,000.
Data for each year of the contract are as follows:
2016
2017
2018
Costs incurred during the year
$238,000
$319,600
$105,000
Estimated costs to complete
357,000
139,400
-0-
Partial billings
260,000
210,000
380,000
Collections
240,000
200,000
410,000
74. Refer to Exhibit 17-2. Assuming the performance obligation is satisfied over time, what would be the gross profit in
2016?
a.
$102,000
b.
$260,000
c.
$255,000
d.
$425,000
a
1
Moderate
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75. Refer to Exhibit 17-2. Assuming the performance obligation is satisfied over time, what would be the balance in
Construction in Progress at the end of 2017?
a.
$557,600
b.
$659,600
c.
$680,000
d.
$782,000
c
1
Moderate
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Bloom’s: Analyzing
76. Noyes Construction Corporation contracted to construct a building for $4,500,000. Construction began in 2016 and
was completed in 2017. Data relating to the contract are summarized below:
Year ended
December 31
2016 2017
Costs incurred $1,800,000 $1,350,000
Estimated costs to complete 1,200,000 —
Noyes assumes the performance obligation is satisfied over time. What amount of gross profit should Hayes report for
2016?
a.
$0
b.
$675,000
c.
$810,000
d.
$900,000
d
1
Moderate
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United States – OH – Default City – AICPA: FN-Decision Modeling
77. In 2017, Dygress Construction Co. began work on a contract for $16,500,000; it was completed in 2018. The
following cost data pertain to this contract:
Year Ended December 31
2017 2018
Cost incurred during the year $5,850,000 $4,200,000
Estimated costs to complete at the end of year 3,900,000 —
Assuming the performance obligation is satisfied over time, what is the amount of gross profit to be recognized on the
income statement for the year ended December 31, 2018?
a.
$2,400,000
b.
$2,695,000
c.
$4,050,000
d.
$6,450,000
a
1
Moderate
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78. Each of the following definitions relates to terms relevant for revenue recognition.
______
1)
an agreed-upon change in the type, quantity, or price of goods or
services to be delivered
______
2)
a promise in a contract with a customer to transfer goods or
services
______
3)
a contract term that could cause the amount of consideration
received to be less than the amount expected
______
4)
an agreement between two or more parties that creates enforceable
rights and obligations
______
5)
the costs that a seller incurs by obtaining the contract but would
not have been incurred if the contract had not been obtained
______
6)
arises when a customer’s payment of consideration occurs prior to
the seller’s performance
______
7)
increases in assets or settlements of liabilities from activities that
are the company’s ongoing major or central operations
______
8)
represents the seller’s unconditional right to receive consideration
from a customer
______
9)
the amount of consideration a seller expects to be entitled to
receive in exchange for providing the promised goods or services
to the customer.
Terms:
a.
Transaction price
b.
Performance obligation
c.
Contract
d.
Receivable
e.
Contract liability
f.
Revenues
g.
Incremental costs
h.
Contract modification
i.
Applicable constraint
Required:
Match each definition to the appropriate term.
Chapter 17: Advanced Issues in Revenue Recognition
79. Consider each of the following scenarios for Bunsen Suppliers Company:
a. The common practice of Bunsen Suppliers is to obtain a written sales agreement. When an Anson Store called on
the phone with an urgent need, however, Bunsen orally agreed to deliver goods in exchange for $6,000, then
immediately delivered these goods to Anson without a written agreement.
b. Bunsen Suppliers has a written agreement to deliver goods to Comfort Inc. for $110 per unit. The price will drop
to $95 per unit for all units if Comfort purchases more than 1,000 units per month.
c. Bunsen Suppliers has a written agreement with Darwin Company to deliver 800 units of product each Saturday
afternoon. Darwin can alter the quantity or cancel a delivery any time before noon Saturday.
Required:
Determine if a contract exists for each of these scenarios and comment on revenue recognition issues.
80. On January 1, 2017, Carly Fashions Inc. enters into a contract with a regional retail company to provide 500 blouses
for $20,000 over the next 10 months. On September 1, 2017, after 400 of the blouses had been delivered (50 blouses
per month), the contract is modified.
Required:
a. Fifty blouses were delivered each month for the first 8 months of 2017. Prepare Carly Fashions’s monthly journal
entry to record revenue.
b. Assume that the contract is modified on September 1 to sell, once the original 500 blouses are delivered, an
additional 100 blouses at $35 per blouse, which is the stand-alone selling price on October 1, 2017. The additional
blouses are to be delivered in November. Prepare the November journal entry to record the contract modification.
c. Assume instead that the contract is modified on September 1 to alter the price of the additional 100 blouses to $35
per blouse, which is the stand-alone selling price on October 1, 2017. Assume the blouses are delivered evenly on
September 1 and October 1, 2017. Prepare the journal entries for September and October to record this contract
modification.
81. In July 2016, Sykick Software Company licenses its accounting software to RayHawk Corporation at a cost of
$30,000 for two years and also enters into a contract to install the software for an additional $3,000. Trident sells the
software license with or without installation. The accounting software is not modified or customized by the customer.
Required:
Prepare journal entry for Sykick to record this transaction assuming that installation will occur in July 2016 when
RayHawk pays Sykick $33,000 per their agreement.
82. FreeStuff, Inc. operates a website which markets products from various manufacturers. FreeStuff accepts customer
orders, forwards those orders and 80% of the customer payment to the appropriate manufacturer who then ships
product directly to the customer.
Required:
Prepare the journal entry by FreeStuff when payment is received from a customer for $500 for merchandise to be
provided by Handy Manufacturing.
83. Pizza-Iz–Us charges an initial fee of $1,800,000 for a licensing contract, with $360,000 paid when the agreement is
signed and the balance in four annual payments. The present value of the annual payments, discounted at 9%, is
$1,166,000. Included in the initial fee is a $50,000 allowance for promotional services to be provided by Pizza-Iz–Us
during the next five years. The value of the advertising is $1,000 a month. Collectibility of the payments is reasonably
assured and Pizza-Iz–Us has performed all the initial services required by the licensing contract.
Required:
Prepare the journal entry to record the initial licensing agreement including the initial cash receipt.
84. Moover Construction enters into a contract with a customer to build a warehouse for $900,000 on June 30, 2017, with
a performance bonus of $60,000 if the building is completed by October 31, 2017. The bonus is reduced by $20,000
each week that completion is delayed. The contract also states that if the warehouse receives a favorable safety
inspection rating from government inspectors by November 30, Moover will receive a performance bonus of $40,000.
Moover commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the
following completion outcomes:
Completed by
Probability
October 31, 2017
35%
November 7, 2017
50%
November 14, 2017
10%
November 21, 2017
5%
In addition, Moover estimates there is a 90% chance that the warehouse will receive a favorable safety inspection
rating upon timely completion.
Required:
a. Assume Moover uses the expected value approach. Determine the transaction price for this transaction.
b. Assume Moover uses the most likely amount approach. Determine the transaction price for this transaction.
85. Freesure Company manufactures and sells commercial refrigerators. It is currently running a promotion in which it
pays a $500 rebate to any customer that purchases a refrigeration unit from one of its participating dealers. The rebate
must be returned within 90 days of purchase. Given its historical experience and the ease of obtaining a rebate,
Freesure expects all qualifying customers to receive the rebate.
Required:
Prepare the journal entry to record the sale of a refrigerator to a participating dealer for $6,000.