CHAPTER 18
Revenue Recognition
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Current Environment;
5-Step Model.
1, 2, 3,
4, 5, 6
1
8
1, 2, 3
2. Contracts.
7
1, 2
1, 2, 3
1, 2
1
9, 10, 11
3, 4, 5, 19,
20
8, 12
6, 7, 8
9
4, 5
1
paid to customer
8, 13, 14,
6, 7, 8, 9,
3, 4, 6, 7,
5
6. Allocate transaction price to
performance obligations.
11,18,
19
9, 10, 11,
12, 13, 14,
15
1, 2, 3, 4, 5
Upfront fees.
Costs, Collectibility.
32, 33
31, 32
*9. Long–Term Contracts
34, 35,
36, 37
22, 23, 24
33, 34, 35,
36, 37
9, 10, 11
8
7. Satisfying Performance
Obligations – transfer
control: Returns;
repurchases; Bill and Hold;
5, 20, 21,
22, 23, 24,
25, 26, 27,
28, 29
13, 14, 15,
16, 17, 18,
19, 20
16, 17, 18,
19, 20 , 21,
22, 23, 24,
25, 26, 27
1, 2, 3, 5,
6, 7, 8
3, 4, 6, 7, 8
*10. Franchising.
38, 39
25
38, 39
12
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Problems
Concepts for
Analysis
revenue
recognition and
measurement.
1. Understand the
fundamental
1, 2
1
2. Understand and
apply the five-step
revenue
recognition
process.
3, 4, 5, 6, 7,
8, 9, 10, 11,
12
1, 2, 3, 4, 5,
8
1, 2, 3, 4, 8
revenue
17, 18, 20
3. Apply the five-step
process to major
11, 12, 13,
14, 15, 16,
1, 2, 3, 4, 5,
6, 7, 8
5, 6, 7
4. Describe
presentation and
disclosure
regarding revenue.
19, 21
2, 3, 4, 5
6, 7
completion method
for long-term
contracts.
*5. Apply the
percentage–of–
22
9, 10, 11
9
recovery method
for long-term
*6. Apply the cost–
23
9, 10, 11
6, 9
accounting for
*7. Identify the proper
24
10, 11
recognition for
franchises.
*8. Explain revenue
25
12
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E18.1
Fundamentals of Revenue Recognition
Simple
10–15
E18.2
Fundamentals of Revenue Recognition
Moderate
10–15
E18.3
Existence of a Contract.
Moderate
10–15
E18.4
Determine Transaction Price
Moderate
20–25
E18.5
Determine Transaction Price
Moderate
20–25
E18.6
Determine Transaction Price
Moderate
20–25
E18.7
Determine Transaction Price
Moderate
15–20
E18.8
Determine Transaction Price
Moderate
15–20
E18.9
Determine Transaction Price.
Moderate
20–25
E18.10
Allocate Transaction Price.
Complex
25–30
E18.11
Allocate Transaction Price.
Moderate
20–25
E18.12
Allocate Transaction Price.
Simple
10–15
E18.13
Allocate Transaction Price.
Moderate
25–30
E18.14
Allocate Transaction Price.
Moderate
25–30
E18.15
Allocate Transaction Price.
Simple
10–15
E18.16
Sales with Returns
Moderate
20–25
E18.17
Sales with Returns
Moderate
15–20
E18.18
Sales with Allowances
Moderate
20–25
E18.19
Sales with Returns.
Moderate
15–20
E18.20
Sales with Returns.
Moderate
25–30
E18.21
Sales with Returns.
Moderate
15–20
E18.22
Sales with Repurchase.
Moderate
20–25
E18.23
Repurchase Agreement
Moderate
10–15
E18.24
Bill and Hold.
Moderate
10–15
E18.25
Consignment Sales.
Moderate
5–10
E18.26
Warranty Arrangement.
Moderate
10–15
E18.27
Warranties
Moderate
15–20
E18.28
Existence of a Contract.
Moderate
10–15
E18.29
Contract Modification.
Moderate
20–25
E18.30
Contract Modification
Moderate
20–25
E18.31
Contract Costs.
Simple
10–15
E18.32
Contract Costs, Collectibility.
Moderate
20–25
Recognition of Profit on Long-Term Contracts.
Moderate
20–25
Analysis of Percentage-of–Completion Financial Statements.
Simple
10–15
Gross Profit on Uncompleted Contract.
Moderate
10–15
Recognition of Revenue on Long-Term Contract and Entries.
Moderate
15–20
Amounts for Long-Term Contracts.
Franchise Entries.
Moderate
20–25
Franchise fee, initial down payment.
Moderate
15–20
P18.1
Allocate Transaction Price, Upfront Fees.
Moderate
30–35
P18.2
Allocate Transaction Price, Modification of Contract.
Moderate
20–25
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
P18.3
Allocate Transaction Price, Discounts, Time Value.
Moderate
30–35
P18.4
Allocate Transaction Price, Discounts, Time Value.
Complex
35–40
P18.5
Allocate Transaction Price, Returns, and Consignments
Complex
35–40
P18.6
Warranty, Customer Loyalty Program.
Moderate
25–30
P18.7
Customer Loyalty Program
Moderate
30–35
P18.8
Time Value, Gift cards, Discounts.
Moderate
30–35
Recognition of Profit on Long-Term Contract.
Complex
30–40
Moderate
20–25
Complex
40–50
Franchise Revenue.
Moderate
35–45
CA18.1
Five-Step Revenue Process.
Moderate
20–30
CA18.2
Satisfying Performance Obligations.
Moderate
20–30
CA18.3
Recognition of Revenue—Theory.
Moderate
25–30
CA18.4
Recognition of Revenue—Theory.
Moderate
25–30
CA18.5
Discounts
Complex
20–25
CA18.6
Recognition of Revenue from Subscriptions.
Complex
35–45
CA18.7
Revenue Recognition—Bonus points.
Moderate
25–30
CA18.8
Revenue Recognition—Membership Fees, Ethics.
20–25
ANSWERS TO QUESTIONS
1. Most revenue transactions pose few problems for revenue recognition. This is because, in many
cases, the transaction is initiated and completed at the same time. However, due to the
complexity of some transactions, many believe the revenue recognition process is increasingly
2. IFRS lacked guidance in a number of areas. (GAAP had numerous standards related to revenue
recognition, but many believed the standards were often inconsistent with one another.)
LO: 1, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
3. The revenue recognition principle indicates that revenue is recognized in the accounting period
when a performance obligation is satisfied. That is, a company recognizes revenue to depict the
4. The five steps in the revenue recognition process are:
1. Identify the contract(s) with customers.
5. Change in control is the deciding factor in determining when a performance obligation is satisfied.
Control is transferred when the customer has the ability to direct the use of and obtain
6. Revenues are recognized generally as follows:
(a) Revenue from selling products—date of delivery to customers.
(b) Revenue from services performed—when the services have been performed (performance
Questions Chapter 18 (Continued)
7. The first step in the revenue recognition process is the identification of a contract or contracts
with the customer. A contract is an agreement between two or more parties that creates
enforceable rights or obligations. That is, the contract identifies the performance obligations in a
8. No entry is required on October 10, 2019, because neither party has performed on the contract.
That is, neither party has an unconditional right as of October 10, 2019. On December 15, 2019,
Executor delivers the product and therefore should recognize revenue on that date as it satisfied
9. A performance obligation is a promise in a contract to provide a product or service to a customer.
This promise may be explicit, implicit, or possibly based on customary business practice. To
10. To determine whether a performance obligation exists, the company must provide a distinct
product or service to the customer. To determine whether a company has to account for multiple
11. In this situation, it appears that Engelhart has two performance obligations: (1) one related to
Questions Chapter 18 (Continued)
12. The transaction price is the amount of consideration that a company expects to receive from a
customer in exchange for transferring goods and services. The transaction price in a contract is
13. Variable consideration (when the price of a good or service is dependent on future events),
includes such elements as price or volume discounts, rebates, credits, performance bonuses, or
royalties. A company estimates the amount of variable consideration it will receive from the
14. The transaction price should include management’s estimate of the amount of consideration to
which the entity will be entitled. Given the multiple outcomes and probabilities available based on
prior experience, the probability-weighted method is the most predictive approach for estimating
the variable consideration. In this situation:
25% chance of $421,000 if by February 1 (25% X $421,000) = $ 105,250
15. Allee should only allocate variable consideration to the performance obligation if it is reasonably
assured that it will be entitled to that amount. In this case, it does not have experience with
16. In measuring the transaction price, companies make the following adjustment for:
(a) Time value of money – When a sales transaction involves a significant financing component
(that is, interest is accrued on consideration to be paid over time), the fair value (transaction
price) is determined either by measuring the consideration received or by discounting the
Questions Chapter 18 (Continued)
(b) When noncash consideration is involved, revenue is generally recognized on the basis of
the fair value of what is received. If the fair value cannot be determined, then the company
17. Any discounts or volume rebates should reduce consideration received and reduce revenue
recognized.
18. If an allocation of transaction price to various performance obligations is needed, the allocation is
based on what the company could sell the good or service on a standalone basis (referred to as
19. Since each element sells separately and has a separate standalone selling price, the equipment,
installation, and training are three separate performance obligations.
The total revenue of £80,000 should be allocated to the three performance obligations based on
20. A company satisfies its performance obligation when the customer obtains control of the good or
service. Indications that the customer has obtained control are:
1. The company has a right to payment for the asset.
Questions Chapter 18 (Continued)
21. Companies satisfy performance obligations either at a point in time or over a period of time.
Companies recognize revenue over a period of time if one of the following three criteria is met:
1. The customer receives and consumes the benefits as the seller performs.
2. The customer controls the asset as it is created or enhanced (e.g., a builder constructs a
building on a customer’s property).
22. A company recognizes revenue from a performance obligation over time by measuring the
progress toward completion. The method selected for measuring progress should depict the
transfer of control from the company to the customer. The most common are the cost–to-cost and
units-of-delivery methods. The objective of these methods is to measure the extent of progress in
23. To account for sales with rights of return, (and for some services that are provided subject to a
refund), companies generally recognize all of the following.
a. Revenue for the transferred products in the amount of consideration to which seller is
reasonably assured to be entitled considering the products expected to be returned or
allowances granted.
24. If a company sells a product in one period and agrees to buy it back in the next period, legal title
may have transferred, but the economic substance of the transaction is that the seller retains the
risks of ownership. When companies enter into repurchase agreements, they are allowed to
Questions Chapter 18 (Continued)
25. Bill–and-hold arrangements result when the buyer is not yet ready to take delivery but the buyer
takes title and accepts billing. Revenue is recognized at the time title passes, if all of the
26. In a principal-agent relationship, the principal’s performance obligation is to provide goods or
perform services for a customer. The agent’s performance obligation is to arrange for the
27. A sale on consignment is the shipment of merchandise from a manufacturer (or wholesaler) to a
dealer (or retailer) with title to the goods and the risk of sale being retained by the manufacturer
who becomes the consignor. The consignee (dealer) is expected to exercise due diligence in
28. The two types of warranties are:
a. Warranties that the product meets agreed-upon specifications in the contract at the time the
product is sold. This type of warranty is included in the sale price of the company’s product
and is often referred to as an assurance-type warranty.
b. Warranties that provide an additional service beyond the assurance-type warranty. This
warranty is not included in the sale price of the product and is referred to as a service-type
warranty.
LO: 3, Bloom: K, Difficulty: Moderate, Time: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
Questions Chapter 18 (Continued)
29. The total transaction price is $420 [$300 + ($5 X 24)]. That is, Campus Cellular is providing a
30. Under the asset-liability model for recognizing revenue, companies recognize assets and
liabilities according to the definitions of assets and liabilities in a revenue arrangement. For
example, when a company has a right to consideration for meeting a performance obligation, it
has a right to consideration from the customer and therefore has a contract asset. A contract
31. A contract modification occurs if a company changes the contract terms during the term of the
contract. When a contract is modified, the company must determine whether a new performance
32. (a) Companies divide fulfillment costs (contract acquisition costs) into two categories: (1) those
that give rise to an asset, and (2) those that are expensed as incurred. Companies
recognize an asset for the incremental costs, if these costs are incurred to obtain a contract
with a customer. In other words, incremental costs are costs that a company would not
incur if the contract had not been obtained (for example, selling commissions). Other
Questions Chapter 18 (Continued)
(b) Collectibility – Any time a company sells a product or performs a service on account, a
collectibility issue occurs. Collectibility refers to a customer’s credit risk, that is, the risk that
a customer will be unable to pay the amount of consideration in accordance with the
33. The disclosure requirements for revenue recognition are designed to help financial statement
users understand the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. To achieve that objective, companies disclose qualitative and
quantitative information about all of the following:
*34. For the most part, companies recognize revenue at the point of sale because that is when the
performance obligation is satisfied. Under certain circumstances, companies recognize revenue
over time. The most notable context in which revenue is recognized over time is long-term
construction contract accounting. Long-term contracts frequently provide that the seller (builder)
may bill the purchaser at intervals, as it reaches various points in the project.
A company satisfies a performance obligation and recognizes revenue over time if at least one of
the following three criteria is met:
1. The customer simultaneously receives and consumes the benefits of the entity’s performance
as the entity performs.
2. The company’s performance creates or enhances an asset (for example, work in process)
Questions Chapter 18 (Continued)
Therefore, if criterion 1 or 2 is met, then a company recognizes revenue over time if it can
reasonably estimate its progress toward satisfaction of the performance obligations. That is, it
recognizes revenues and gross profits each period based upon the progress of the
*35. Under the percentage-of-completion method, income is reported to reflect more accurately the
production effort. Income is recognized periodically on the basis of the percentage of the job
completed rather than only when the entire job is completed. The principal disadvantage of the
*36. The methods used to determine the extent of progress toward completion are the cost–to-cost
method and units-of-delivery method. Costs incurred and labor hours worked are examples of
*37. The two types of losses that can become evident in accounting for long-term contracts are:
(1) A current period loss involved in a contract that, upon completion, is expected to produce
a profit.
(2) A loss related to an unprofitable contract.
The first type of loss is actually an adjustment in the current period of gross profit recognized on
Questions Chapter 18 (Continued)
Cost estimates at the end of the current period may indicate that a loss will result upon com–
*38. It is improper to recognize the entire franchise fee as revenue at the date of sale when many of
*39. Continuing franchise fees should be reported as revenue when the performance obligations
related to those fees have been satisfied by the franchisor. These revenues are generally
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 18.1
(a) In applying the 5-step process, it appears that a valid contract exists
between Leno Computers and Fallon Electronics for the following
reasons:
1. The contract has commercial substance—Fallon Electronics has
agreed to pay cash for the computers.
2. The parties have approved the contract and are committed to
perform—Fallon Electronics has made a commitment to purchase
(b) The contract may not be valid if the contract is wholly unperformed
and each party can unilaterally terminate the contract without
BRIEF EXERCISE 18.2
No entry is required on May 10, 2019, because neither party has performed
BRIEF EXERCISE 18.2 (continued)
The journal entry to record the sale and related cost of goods sold is as
follows.
June 15, 2019
Accounts Receivable ………………………………………………. 2,000
Sales Revenue …………………………………………………. 2,000
July 15, 2019
BRIEF EXERCISE 18.3
There is one performance obligation in this situation which is the providing
of the licensed software and custom support together. Both the software
license and the custom customer support services are distinct, but they are
BRIEF EXERCISE 18.4
Three performance obligations exist in this contract—manufacture of the 3–
D printer, installation services and the maintenance services. Destin
clearly has a performance obligation for the manufacture of the 3-D printer.
Destin may or may not have a performance obligation for the installation of
BRIEF EXERCISE 18.5
Ismail accounts for the bundle of goods and services as a single
performance obligation because the goods or services in the bundle are
highly interrelated. Ismail also ‘provides a significant service by integrating
BRIEF EXERCISE 18.6
The transaction price should include management’s estimate of the amount
Completion Date Probability Expected Value
August 1 70% chance of €1,150,000 = € 805,000
BRIEF EXERECISE 18.7
(a) In this situation, Nair uses the most likely amount as the estimate –
€1,150,000.
(b) When there is limited information with which to develop a reliable
LO: 2, Bloom: AP, Difficulty: Simple, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
BRIEF EXERECISE 18.8
(a) Yang would recognize revenue of ¥1,000,000 at delivery.
BRIEF EXERCISE 18.9
January 2, 2019
Notes Receivable (€11,000 – €1,000) ………………….. 10,000
Sales Revenue ……………………………………. 10,000
BRIEF EXERCISE 18.10
Parnevik should record revenue of $660,000 on March 1, 2019, which is the
fair value of the inventory in this case. Parnevik is also financing this
(a) The journal entries to record Parnevik’s sale to Goosen Inc. and
related cost of goods sold is as follows.
BRIEF EXERCISE 18.10 (continued)
(b) Parnevik makes the following entry to record interest revenue for 2019.
December 31, 2019
Discount on Notes Receivable …………………… 55,000
Interest Revenue
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
BRIEF EXERCISE 18.11
January income ……………………………………………….. £ 0
BRIEF EXERCISE 18.12
Manual reduces revenue by $6,600 ($110,000 X .06) because it is probable
BRIEF EXERCISE 18.13
July 10, 2019
Accounts Receivable ………………………………………. 700,000