978-1259722660 Chapter 5 Solution Manual Part 1

Chapter 5 Revenue Recognition and Profitability Analysis

QUESTIONS FOR REVIEW OF KEY TOPICS

Question 5–1

The five key steps in applying the core revenue recognition principle are:

1. Identify the contract with a customer.

5. Recognize revenue when (or as) each performance obligation is satisfied.

Question 5–2

A performance obligation is satisfied at a single point in time when control is

from the seller to the buyer. The customer is more likely to control a good or service

if the customer has:

1. An obligation to pay the seller.

5. Accepted the asset.

Management should evaluate these indicators individually and in combination to

decide whether control has been transferred.

Question 5–3

A performance obligation is satisfied over time if at least one of the following

three criteria is met:

1. The customer consumes the benefit of the seller’s work as it is performed,

cancels the contract.

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Answers to Questions (continued)

Question 5–4

Services typically qualify for revenue recognition over time because the customer

revenue recognized under the departure is not materially different from the amount

of revenue that would be recognized if revenue was recognized over time.

Question 5–5

Sellers account for a promise to provide a good or service as a performance

obligation if the good or service is distinct from other goods and services in the

Performance obligations that are not distinct are combined and treated as a single

performance obligation.

A performance obligation is distinct if it is both:

elsewhere, and

2. Separately identifiable from other goods or services in the contract. The good

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Answers to Questions (continued)

Question 5–6

If an arrangement has multiple performance obligations, the seller allocates the

stand-alone selling prices, the seller should estimate them.

Question 5–7

A contract specifies the legal rights and obligations of the seller and the customer.

For a contract to exist for purposes of revenue recognition, it must:

1. Have commercial substance, affecting the risk, timing or amount of the

5. Be probable that the seller will collect the amount it is entitled to receive.

We normally think of a contract as being specified in a written document, but

of a seller and a customer.

Question 5–8

Under U.S. GAAP, “probable” is defined as “likely to occur” or as “reasonably

than the definition in U.S. GAAP. Therefore, some contracts might not meet this

threshold under U.S. GAAP that do meet it under IFRS.

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Answers to Questions (continued)

Question 5–9

If a seller grants a customer the option to acquire additional goods or services,

that option gives rise to a performance obligation only if the option provides a

when those future goods or services are transferred or when the option expires.

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Question 5–10

Variable consideration is included in the contract’s transaction price when the

value or the most likely amount to be received, and includes that amount in the

contract’s transaction price.

Question 5–11

A seller is constrained to recognize only the amount of revenue for which the

seller believes it is probable that a significant amount of revenue won’t have to be

consideration on factors outside the seller’s control, and a long delay between when

the estimate must be made and when the uncertainty is resolved.

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Answers to Questions (continued)

Question 5–12

A right to return merchandise is not a performance obligation. Rather, it

represents a potential failure to satisfy the original performance obligation. We view

on variable consideration applies, and the seller must postpone recognizing any

revenue until returns can be estimated.

Question 5–13

A principal has primary responsibility for delivering a product or service and

commission for helping sellers to transact with buyers, and recognizes as revenue

only the commission it receives for facilitating the sale.

Question 5–14

In general, the “time value of money” refers to the fact that money to be received

larger amount in the future.

If payment occurs either before or after delivery, conceptually the arrangement

includes a financing component. However, when delivery and payment occur

for the time value of money in Chapter 6, and apply it to many future chapters.

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Answers to Questions (continued)

Question 5–15

If a seller purchases distinct goods or services from their customer and pays more

entitled to receive from the customer when calculating the transaction price of the

sale to the customer.

Question 5–16

1. Adjusted market assessment approach: Under this approach, the seller

competitors for similar products.

2. Expected cost plus margin approach: Under this approach, the seller estimates

the performance obligation.

3. Residual approach: Under this approach, the seller subtracts from the total

estimate of an unknown or highly uncertain stand-alone selling price.

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Answers to Questions (continued)

Question 5–17

For licenses of symbolic intellectual property (IP), like trademarks, logos, brand

period that benefit the customer.

For licenses of functional IP, sellers typically recognize revenue at the point in

software, drug formulas, and media content.

However, even for functional IP, sometimes sellers have to recognize revenue

of access, and revenue must be recognized over the license period.

Question 5–18

In franchise arrangements, the franchisor typically has multiple performance

obligations. The franchisor grants to the franchisee a right to sell the franchisor’s

franchise involves a license to use the franchisor’s intellectual property, but also

involves initial sales of products and services as well as ongoing sales of products

and services.

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Answers to Questions (continued)

Question 5–19

A bill-and-hold arrangement exists when a customer purchases goods but requests

that the seller retain physical possession until a later date. The key indicator of

whether control has passed from the seller to the customer for bill-and-hold

arrangements is whether the customer has control of the asset. Since the customer

doesn’t have physical possession of the goods in a bill-and-hold arrangement, the

customer isn’t normally viewed as controlling the goods. However, if the customer

goods are specifically identified as the customer’s, and are ready for physical

transfer, and the seller can’t use the goods or sell them to another customer, then

revenue would be recognized despite the customer not having taken physical

possession of the goods.

Question 5–20

Under U.S. GAAP, intellectual property (IP) is categorized as either functional or

symbolic, and symbolic IP is viewed as providing an access right that requires

revenue recognition over time. IFRS does not require revenue recognition over time

for symbolic IP if the seller is not affecting the usefulness of the IP to the customer

during the license period.

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