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The second step in the process for revenue recognition is to


A) allocate transaction price to the separate performance obligations.
B) determine the transaction price.
C) identify the contract with customers.
D) identify the separate performance obligations in the contract.

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If a contract involves a significant financing component,


A) the time value of money is used to determine the fair value of the transaction.
B) the time value of money is not required to determine transaction price, if the payment is more than a year.
C) the transaction amount should be based on the current sales price of goods or services.
D) interest is not accrued as a result of the financing component.

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Companies always use the expected value, a probability-weighted amount, to estimate variable consideration.

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Consigned goods are recognized as revenues by the


A) consignor when a sale to a third party has occurred.
B) consignor when the merchandise has been shipped to a consignee.
C) consignee when a sale to a third party has occurred.
D) consignor when it receives payment from consignee for goods sold.

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Franchise revenues are recognized over time if


A) franchise rights are transferred at a point in time.
B) the franchisee fee is payable upon signing of contract.
C) performance obligations regarding franchise rights are completed when the franchise opens.
D) None of these answer choices are correct.

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A company recognizes revenue from a performance obligation over time by measuring the progress toward completion.

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Companies rarely have to allocate the transaction price to more than one performance obligation in a contract.

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Revenue from a contract with a customer


A) is recognized when the customer receive the rights to receive consideration.
B) is recognized even if the contract is still wholly unperformed.
C) can be recognized even when a contract is still pending.
D) cannot be recognized until a contract exists.

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In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be


A) the terms of payment in the contract.
B) the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
C) the method commonly used by the contractor to account for other long-term construction contracts.
D) the inherent nature of the contractor's technical facilities used in construction.

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Signing of the contract by the two parties is


A) not recorded until one or both parties perform under the contract.
B) recorded at the time the contract is approved by both parties.
C) not recorded until both parties perform under the contract.
D) recorded immediately after the contract is signed.

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The principal advantage of the cost-recovery method is that


A) reported revenue is based on final results rather than estimates of unperformed work.
B) it reflects current performance when the period of a contract extends into more than one accounting period.
C) it is not necessary to recognize revenue at the point of sale.
D) a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used.

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The percentage-of-completion method


A) recognizes revenue and gross profit each period based upon progress.
B) is used primarily for short-term contracts.
C) accumulates construction costs in the Billings on Construction in Progress account.
D) recognizes revenue and gross profits only when contract is completed.

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In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the


A) total costs incurred to date.
B) total estimated cost.
C) unbilled portion of the contract price.
D) total contract price.

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The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not cost-recovery.

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Revenue from a contract with a customer cannot be recognized until a contract exists.

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When a customer purchases a product but is not yet ready to accept delivery, this is referred to as


A) a repurchase agreement.
B) a consignment.
C) a principal-agent relationship.
D) a bill-and-hold arrangement

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Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the cost-recovery method.

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The fourth step in the process for revenue recognition is to


A) recognize revenue when each performance obligation is satisfied.
B) identify the separate performance obligations in the contract.
C) allocate transaction price to the separate performance obligations.
D) determine the transaction price.

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Seadrill Engineering licensed software to oil-drilling firms for 5 years.In addition to providing the software, the company also provides consulting services and support to ensure smooth operation of the software.The total transaction price is $350,000.Based on standalone values, the company estimates the consulting services and support have a value of $100,000 and the software license has a value of $250,000.Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes


A) a credit to Sales Revenue for $250,000 and a credit to Unearned Service Revenue of $100,000.
B) a credit to Service Revenue of $100,000.
C) a credit to Unearned Service Revenue of $100,000.
D) a credit to Sales Revenue of $350,000.

Correct Answer

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If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset.

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