7-1 Solutions
CHAPTER 7
REVENUE RECOGNITION, RECEIVABLES, AND
ADVANCES FROM CUSTOMERS
Questions, Exercises, and Problems: Answers and Solutions
7.2 The cost recovery method defers revenue recognition past the point where
the seller has delivered goods to the customer. It is used when there is
7.3 Both approaches apply accounting criteria to determine the amount and
timing of revenue recognition when an arrangement with a customer (a
7.4 The gross amount of accounts receivable is the amount owed by
customers. The allowance account provides a rough estimate of the credit
7.5 a. This statement is valid. Most businesses ought not to set credit
Solutions 7-2
7-3 Solutions
7.5 a. continued
b. When the larger uncollectible accounts result from a credit granting
policy that increases income overall. A business might liberalize its
c. When the net present value of the receipts from selling to new
7.6 If a firm computes the Bad Debt Expense figure at the end of the
accounting period but writes off specific accounts receivable during the
period as information about uncollectible accounts becomes available,
7.7 Manufacturing firms typically do not identify a customer or establish a
firm selling price until they sell products. Thus, these firms do not satisfy
Solutions 7-4
7.8 Under the installment method, accountants recognize proportionate parts
of the costs incurred as expenses each period as they recognize
7-5 Solutions
7.9 Application of the installment method requires a reasonably accurate
estimate of the total amount of cash the firm expects to receive from
7.10 There are two principal explanations. First, the obligation to customers
in the event the firm does not publish the magazines is $45,000. Second,
7.11 Both customer returns and bad debts ultimately affect the net cash
collected from customers. In accounting for estimated sales returns, the
7.12 Deferred Gross Margin is the difference between the Account Receivable
from the customer (the amount of cash that the firm will collect and
7.13 (Revenue recognition for various types of businesses.)
We have found this question to be an excellent one for class discussion
a. Time of sale.
Solutions 7-6
7-7 Solutions
7.13 continued
c. Probably as the firm collects cash using the installment method.
f. AICPA Statement of Position 79–4 stipulates that the firm should not
recognize revenue until it meets all of the following conditions:
1. The firm knows the sales price.
5. The film is available (that is, the licensee can exercise the right to
use the film and all conflicting licenses have expired).
Revenue recognition from the sale of rights to the television network
is appropriate as soon as the firm meets these conditions even though
Solutions 7-8
7-9 Solutions
7.13 continued
h. At the time of sale to a specific buyer at a set price. This will vary,
depending on who owns the whiskey during the aging process. We
i. As time passes and the firm lets borrowers use funds.
j. The alternatives here are (1) as customers make reservations, (2) as
customers make some formal commitments to confirm their
l. The issue here is whether to recognize revenue when the firm sells
stamps to food stores or when customers turn in the stamps for
n. The issue here is whether to recognize revenue while the livestock is
growing. A grower of timber faces a similar issue. For the reasons
Solutions 7-10
7.14 (Income recognition for various business arrangements.)
a. Company A is selling software and access to data and other software.
At the time of initial delivery of the software, Company A has been
b. The issue in this case for Company B is the ability of the SAPs to pay
for the software. Their ability to pay depends on the number of
customers they sign up and the collection of cash from these
c. The issue with Company C is whether it satisfies the criterion that
over two years.
d. Assuming that collectibility is not an issue, Company D will earn the
fee over the period during which it performs its obligation to provide
the customer with access to the auction site. If this period is short
(less than one accounting period) then Company D should be able to
7-11 Solutions
Solutions 7-12
7.14 continued
e. Company E should recognize the fee paid by the supplier as revenue,
f. Company F assumes more product risk in this case than in Part e. and
has many of the characteristics of a retailer. It assumes the risk of
goods sold expense for the cost of those units.
g. Company G has performed its obligation to the customer at the time it
delivers the computer. However, the amount of cash that Company G
will collect is uncertain, and has to be estimated. The issue for
h. Collectibility of the revenue is not an issue. However, Company H
7-13 Solutions
i. Assuming that Company I has performed its obligations, the issue for
Solutions 7-14
7.14 continued
j. This is a barter transaction. To justify recognizing revenue from
advertising space sold and expense for advertising space purchased,
these companies would need to demonstrate evidence of a price that
7.15 (Meaning of allowance for uncollectible accounts.)
a. This characterization of the allowance account is incorrect. The
b. This characterization of the allowance account is incorrect for the
f. This characterization of the allowance account is incorrect. The issue
with uncollectible accounts is nonpayment of amounts owed not
7-15 Solutions
Solutions 7-16
7.15 i. continued
j. This characterization is incorrect. Deferred revenues, commonly
called advances from customers, have credit balances and are
account, nor does it owe cash to customers.
k. This characterization is incorrect. When firms credit the allowance
account, they debit bad debt expense, a part of the retained earnings
7.16 (Pret a Manger; revenue recognition at end and after time of sale.)
a. Journal entry to record original transaction; customer pays in cash:
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+8.40
+8.40
IncSt → RE
b. Journal entry to record transaction that includes card; customer pays
in cash:
Cash ………………………………………………………………. 48.40
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+48.40
+40.00
+8.40
IncSt → RE
7-17 Solutions
7.16 continued
c. Journal entry to record transaction; customer pays with card:
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–8.40
+8.40
IncSt → RE
7.17 (Bed, Bath & Beyond; revenue recognition at and after time of sale.)
Cash …………………………………………………………………. 556.5
Sales Revenue ………………………………………………… 280.0
Assets
Liabilities
+
Shareholders’
Equity
(Class.)
+250.0
+556.5
+26.5
+280.0
IncSt → RE
7.18 (Marks and Spencer; revenue recognition at time of sale.)
a. Journal entry to recognize revenues and expenses:
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+9,022.0
+9,022.0
IncSt → RE
–5,535.2
–5,535.2
IncSt → RE
b. Journal entry to recognize sales returns and bad debts expense
(combined):
Sales Returns ………………………………………………….. 90.22
Solutions 7-18
7.18 b. continued
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–90.22
IncSt → RE
–225.55
–135.33
IncSt → RE
c. Beginning Balance, Allowance ……………………………………….. £ 1.10
Sales Returns ……………………………………………………………….. 90.22
Bad Debt Expense …………………………………………………………. 135.33
Less Ending Balance, Allowance …………………………………….. (3.30)
Total Returns and Writeoffs ……………………………………….. £ 223.35
7.19 (Lentiva, revenue recognition at time of sale.)
Fair Value of Laptop Component (= $1,500 X 50,000
Journal Entries on January 1, 2008
Cash …………………………………………………………………. 15,000,000
Assets
Liabilities
+
Shareholders’
Equity
(Class.)
+15,000,000
+4,687,500
+70,312,500
IncSt → RE
To record the sale of the laptops and training services.
The laptop sales meet the criteria for recognizing revenue equaling
Assets
Liabilities
+
Shareholders’
Equity
(Class.)
–60,000,000
–60,000,000
IncSt → RE
To record the cost of the laptop sales.
7-19 Solutions
7.19 continued
Journal Entries on December 31, 2008
Advances from Customer ……………………………………. 2,343,750
Cost of Training Services ……………………………………. 1,250,000
Assets
Liabilities
+
Shareholders’
Equity
(Class.)
–2,343,750
+2,343,750
IncSt → RE
+1,250,000
–1,250,000
IncSt → RE
Journal Entries on December 31, 2009
Advances from Customer ……………………………………. 2,343,750
Assets
Liabilities
+
Shareholders’
Equity
(Class.)
–2,343,750
+2,343,750
IncSt → RE
+1,250,000
–1,250,000
IncSt → RE
7.20 (Morrison’s Cafeteria; journal entries for coupons.)
a. January
Cash ………………………………………………………………. 50,100
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+50,100
+2,100
–48,000
IncSt → RE
Solutions 7-20
7.20 a. continued
Coupon Liability ……………………………………………… 1,600
Sales Revenue ……………………………………………… 1,600
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–1,600
+1,600
IncSt → RE
February
Cash ………………………………………………………………. 50,700
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+50,700
+2,200
–48,500
IncSt → RE
Coupon Liability ……………………………………………… 2,300
Sales Revenue ……………………………………………… 2,300
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–2,300
+2,300
IncSt → RE
March
Cash ………………………………………………………………. 52,400
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+52,400
+2,400
+50,000
IncSt → RE
Coupon Liability ……………………………………………… 2,100
Sales Revenue ……………………………………………… 2,100
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–2,100
+2,100
IncSt → RE
b. The Coupon Liability account has a balance of $4,700 (= $4,000 +