Question 5–21
Sometimes a company arranges for another company to sell its product under
consignment. The “consignor” physically transfers the goods to the other company
commission and approved expenses) to the consignor.
Because the consignor retains the risks and rewards of ownership of the product
customer.
Question 5–22
Sometimes companies receive non-refundable prepayments from customers for
the seller recognizes revenue when it expires or when, based on past experience,
the seller has concluded that customers will not redeem it.
Question 5–23
Bad debt expense must be reported clearly either on its own line in the income
Question 5–24
If the customer makes payment to the seller before the seller has satisfied
performance obligations, the seller records a contract liability. If the seller satisfies
other than the passage of time (for example, the seller satisfying other performance
obligations), the seller recognizes a contract asset.
Answers to Questions (continued)
Question 5–25
If a long-term contract qualifies for revenue recognition over time, the seller
recognizes revenue and costs when the project is complete.
Question 5–26
The billings on construction contract account is a contra account to the
reported as a contract liability.
Question 5–27
An estimated loss on a long-term contract must be fully recognized in the first
Question 5–28
The realization principle requires that two criteria be satisfied before revenue
can be recognized:
1. The earnings process is judged to be complete or virtually complete.
Question 5–29
At the time production is completed, there usually exists significant
SUPPLEMENT QUESTIONS FOR REVIEW OF KEY
TOPICS
Question 5–30
If the installment sale creates a situation where there is significant uncertainty
of delivery.
Question 5–31
The installment sales method recognizes gross profit by applying the gross
received equal to the cost of the item sold.
Answers to Questions (continued)
Question 5–32
Deferred gross profit is a contra installment receivable account. The balance
portion of remaining payments that represent cost recovery.
Question 5–33
The completed contract method recognizes revenue, cost of construction, and
gross profit at the end of the contract, after the contract has been completed. The
recognition is delayed until late in the contract for both approaches. Assuming that
the final costs are incurred just prior to completion of the contract, both approaches
should recognize gross profit at the same time.
Question 5–34
This guidance requires that if an arrangement includes multiple elements, the
recognized for the other parts.
Question 5–35
IFRS has less specific guidance for recognizing revenue for
components and when revenue from components can be recognized.
Answers to Questions (concluded)
Question 5–36
Specific guidelines for revenue recognition of the initial franchise fee are
provided by FASB ASC 952–605–25–1. A key to these guidelines is the
used for profit recognition, if a reasonable estimate of uncollectibility cannot be
made.
BRIEF EXERCISES
Brief Exercise 5–1
In 2018 Apache has transferred the land, and the construction company has an
Under accrual accounting, revenue is recorded when goods or services are
Brief Exercise 5–2
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,
contract.
Under Estate’s construction agreement with CyberB, if for any reason
the building is being constructed.
Brief Exercise 5–3
This contract qualifies for revenue recognition over time, because the
should recognize revenue of $4,000 ($6,000 × 8/12 months) in 2018.
Journal entries (not required):
December 31, 2018 adjusting entry
Service revenue ($6,000 x 8/12) 4,000
Brief Exercise 5–4
Based on relative stand-alone selling prices, the software comprises 70% of the
total fair values ($70,000 ÷ [$30,000 + 70,000]), and the technical support
months as the technical support service is provided.
The journal entry is recorded as follows:
Brief Exercise 5–5
$0. Under U.S. GAAP, “probable” is defined as “likely to occur” or as
under U.S. GAAP.
$80,000
Transaction Price
$56,000
Software
$24,000
Technical Support Service
70% 30%
Brief Exercise 5–7
Number of performance obligations in the contract: 1.
Access to eLean services is one performance obligation. Registration on the
transaction price associated with the service, and the monthly payments are the
other component.
Brief Exercise 5–8
Number of performance obligations in the contract: 1.
We need to consider three aspects of the vacuum contract: delivery of the
vacuum, the one-year quality-assurance warranty, and the option to purchase the
purchase a vacuum, because customers can purchase that warranty for the same
amount at other times, so the opportunity to buy it at the same time that they buy
the vacuum does not present a material right.
Brief Exercise 5–9
Number of performance obligations in the contract: 2.
We need to consider three aspects of the vacuum contract: delivery of the
the obligation to deliver a vacuum of appropriate quality. The option to purchase
the extended warranty, though, is a performance obligation within the contract to
vacuum could be sold without the option to purchase an extended warranty, so the
option is distinct, and qualifies as a performance obligation.
Brief Exercise 5–10
Number of performance obligations in the contract: 2.
In addition to the subscription, the renewal option is a performance obligation
the renewed protection is distinct, and qualifies as a performance obligation.