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Exam 5: Revenue Recognition

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Question 141

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Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2017, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2017, $300,000 in 2018, and $300,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2018, $400,000 in 2019, and $400,000 in 2020 associated with those sales. In 2020, Lake also repossessed $200,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $75,000 at the time they were repossessed. - In 2020, Lake would record a loss on repossession of:

A) $45,000.
B) $200,000.
C) $120,000.
D) $80,000.

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Question 142

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Which of the following is not a performance obligation?

A) A good that the seller could sell separately and that is separately identifiable from other goods or services in the contract.
B) A right of return.
C) An option for a customer to purchase goods under terms that are more advantageous than those enjoyed by other customers.
D) An extended warranty.

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Question 143

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The amount of variable consideration that can be recognized is limited to the amount for which it is probable that there won't be a significant reversal of revenue recognized to date when uncertainty resolves in the future.

Under IFRS, firms typically use the cost recovery method if they conclude that the percentage-of-completion method is not appropriate to account for a long-term construction contract.

On April 1^st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%. -What is the expected transaction price with variable consideration estimated as the expected value?

In a consignment arrangement, revenue typically should not be recognized until sale to a third party occurs, even though there has been a physical transfer of goods to the consignee, because the consignor still retains legal title to the goods.

When accounting for multiple-element software arrangements, the revenue for each element is based on the separate prices stated for each element in the software contract.

JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion. -In 2019, JRE2 would report gross profit (loss) of:

Which of the following is not an approach for estimating stand-alone selling prices?

The transaction price is only allocated to goods or services that are both capable of being distinct and that are separately identifiable.

Waldman Associates received a written, approved contract to deliver economic consulting services, with service and payment commencing in one month. The contract specifies the services that Waldman is to perform, and the payment terms. Waldman and the customer both can cancel the contract without penalty prior to commencing service. Does Waldman have a contract for purposes of revenue recognition on the day the contract is received?

Beck Construction Company began work on a new building project on January 1, 2017. The project is to be completed by December 31, 2019, for a fixed price of $108 million. The following are the actual costs incurred and estimates of remaining costs to complete the project that were made by Beck's accounting staff: -What amount of gross profit (or loss) would Beck record on this project in each year, assuming that Beck recognizes revenue for this project over time according to percentage of completion? Place answers in the spaces provided below and show supporting computations.

The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years. Assume that the UFL anticipates that, in addition to receiving the $1 million license fee, it will receive a bonus of $2 million in year 1 of the contract and a bonus of $3 million in years 2-4 of the contract based on Tank-Skin's sales. Also assume that the UFL is convinced that it is probable there will not be a significant reversal of any revenue recognized with respect to the bonus in subsequent periods. At the inception of the contract, what is the amount of transaction price that the UFL would estimate with respect to this license arrangement?

Jing Statistical Services operates a website that links experienced statisticians with businesses that need data analyzed. Statisticians post their rates, qualifications, and references on the website, and Jing receives 25% of the fee paid to the statisticians in exchange for identifying potential customers. VetMed Associates contacts Jing and arranges to pay a consultant $1,500 in exchange for analyzing some data. Jing's income statement would include the following with respect to this transaction:

When recognizing revenue over time on a long-term contract, amounts billed and the cash actually received affect income recognition.

On July 1, Wiggins Associates enters into a contract to provide consulting services to Pennsylvania University (PU). The contract is anticipated to last four months and is intended to achieve significant cost savings at the university. The contract stipulates that PU will pay Wiggins $25,000 at the end of each month, and, if total cost savings reach a specific target, PU will pay an additional $20,000 to Wiggins at the end of the contract. Wiggins estimates a 75% chance that cost savings will reach the target. -Assume that Wiggins estimates uncertain consideration as the most likely amount. Required: Do the following for Wiggins: a. Prepare the journal entry on July 31 to record the first month of revenue under the contract. b. Assuming total cost savings exceed the target, prepare the journal entry, if any, on October 31 to record receipt of the $20,000 bonus (ignore the normal October payment of $25,000). c. Assuming total cost savings do not reach the target, prepare the journal entry, if any, on October 31 to record failure to receive the $20,000 bonus (ignore the normal October payment of $25,000).

If the contract contains multiple performance obligations, revenue must be recognized in an amount equal to the fair value of each of the separate performance obligations.

"Determine whether it is probable the seller will collect the consideration it is entitled to receive" is one of the five steps to applying the core revenue recognition principle.

Hans Cars & Trucks sells various types of used vehicles with a one-year warranty that covers any defects. When customers make a purchase, they also receive a coupon for 10 free engine oil changes and an option to change all of the tires for $50 after 30,000 miles. Typically, customers pay $25 for an oil change and $250 for a new set of tires. Required: (a) Given the information above, how many performance obligations exist in the contract to purchase a vehicle? (b) Assume the same contract but that it offers customers an option to change all of the tires for $250 after 30,000 miles. How many performance obligations exist in the contract to purchase a vehicle?

Assume that, on April 1, 2018, a customer visits MicrosoftStore.com and purchases Microsoft Windows 7 Ultimate for $170. Windows 7 Ultimate comes in a DVD format which the customer can use permanently, and Microsoft does not expect that its actions subsequent to April 1, 2018 will affect the value the customer obtains from using the software. Required: How much revenue should Microsoft recognize in 2018 with respect to this particular transaction?