Deck 6: Revenue Recognition

Question 1

When a sale involves goods and services, the selling price should NOT be

A)allocated to each of these parts.
B)allocated only to the part with the higher value.
C)allocated using the relative fair value method.
D)allocated using the residual method.

Answer 1

B

Question 2

Which of the following is NOT part of the definition of control?

A)ability to direct use of the asset
B)ability to obtain substantially all remaining benefits of the asset
C)ability to return the asset to its original owner
D)ability to prevent other companies from directing the use or receiving benefits from assets

Answer 2

C

Question 3

If an entity sells on credit, the risk that the customer will not pay is called

A)price risk.
B)credit risk.
C)commercial substance.
D)credit policy.

Answer 3

B

Question 4

Under IFRS, when a vendor gives a volume rebate to a customer, the vendor should account for it as a(n)

A)expense.
B)reduction of revenue.
C)reduction of inventory.
D)other gain or loss.

Question 5

Concessionary or abnormal terms may

A)reflect that risks and reward has not yet passed to the customer.
B)create additional recognition and measurement uncertainty.
C)indicate that no sale has taken place at all.
D)all of the above

Question 6

The new IFRS standard, IFRS 15 Revenue from Contracts with Customers adopts a(n)

A)earnings approach to revenue recognition.
B)asset-liability approach to revenue recognition.
C)cash-based approach to revenue recognition.
D)earned and realized approach to revenue recognition.

Question 7

Terms negotiated by a party to the contract that are more favourable than normal are called

A)credit terms.
B)barter transactions.
C)arm's length terms.
D)concessionary terms.

Question 8

Revenue from selling products is generally recognized

A)at the point of delivery.
B)at the completion of production.
C)after costs are recovered.
D)as cash is collected.

Question 9

Measurement uncertainty does NOT arise from

A)the inability to reasonably estimate related costs of the transaction.
B)the inability to reasonably estimate the consideration of the transaction.
C)the ability to measure the outcome of the transaction.
D)the inability to allocate costs already recorded to the correct account.

Question 10

Under the earnings approach for the sale of goods, which of the following would NOT be a reason to recognize revenue?

A)The risks and rewards are transferred to the buyer.
B)The vendor continues to have control over the goods sold.
C)Collectability is reasonably assured.
D)Costs and revenues can be reliably measured.

Question 11

In many cases, an entity may have an implicit obligation even if it is NOT explicitly noted in a sales contract.This is called a(n)

A)onerous obligation.
B)legal obligation.
C)constructive obligation.
D)earnings obligation.

Question 12

Under the earnings approach, if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction should be recognized at the time of sale if

A)the market for returnable goods is untested.
B)there is a transfer of the risks and rewards of ownership.
C)the amount of future returns can be reasonably estimated.
D)the amount of goods returned is likely to be high.

Question 13

The concept of commercial substance in purchase and sales transactions means that

A)the transaction is a bona fide purchase and sale.
B)the entity's cash flows are expected to change.
C)the transaction is a bona fide purchase and sale, and the entity's cash flows are expected to change.
D)the transaction must involve tangible assets.

Question 14

According to the AcSB guidelines, the process of reporting an item in the financial statements of an entity is

A)recognition.
B)realization.
C)allocation.
D)matching.

Question 15

When dealing with sales agreements, "acquired" means

A)consideration or rights to consideration.
B)goods to be delivered in the future.
C)dealing at arm's length.
D)measurement of the transaction.

Question 16

Control of an asset normally coincides with

A)transfer of possession to the buyer.
B)transfer of legal title to the buyer.
C)transfer of both possession and legal title to the buyer.
D)the receipt of payment from the buyer.

Question 17

The first step in the revenue recognition process under IFRS is

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

Question 18

When a contract becomes unprofitable to an entity, this is called a(n)

A)uncompleted contract.
B)zero-profit contract.
C)onerous contract.
D)unenforceable contract.

Question 19

A credit that is realized through an entity's ordinary activities would be treated as

A)a gain.
B)revenue.
C)other income.
D)other comprehensive income.

Question 20

When a vendor is exposed to continued risks of ownership because of potential return of the product, which of the following accounting procedures should NOT be used?

A)recording the sale, and accounting for returns as they occur in future periods
B)not recording the sale until all return privileges have expired
C)recording the sale, but reducing revenue by an estimate of future returns
D)recording the sale, but ignoring future returns

Question 21

When there is a continuous earnings process, but the progress toward completion is not measurable, ASPE requires the use of the

A)completed-contract method.
B)percentage-of-completion method.
C)zero-profit method.
D)discrete earnings method.

Question 22

Under IFRS, where a right to return exists,

A)sales returns and allowances are recognized as contra accounts to Revenues and Accounts Receivable.
B)a refund liability is recognized.
C)this right is disclosed in the financial statements; no accrual necessary.
D)this right does not need to be disclosed or accrued anywhere.

Question 23

If the earnings process has a critical event, it is often referred to as a

A)point of delivery.
B)constructive obligation.
C)discrete earnings process.
D)transfer of risks and rewards of ownership.

Question 24

Under a consignment sales arrangement,

A)the consignor receives the merchandise to sell.
B)the consignor retains legal title.
C)the consignee ships the merchandise to the consignor.
D)the consignee retains legal title.

Question 25

Which of the following is NOT an acceptable allocation approach to transaction pricing?

A)expected value approach
B)adjusted market assessment approach
C)expected cost plus a margin approach
D)residual approach

Question 26

Which of the following is NOT a scenario under which a company may recognize revenue over a period in time?

A)The customer receives and consumes the benefits as the seller performs.
B)The company's earnings would be more consistent under this approach.
C)The customer controls the asset as it is created or enhanced.
D)The company does not have an alternative use for the asset created or enhanced.

Question 27

The journal entries to recognize the revenue from a consignment sale would likely be identical under the earnings and the contract-based approaches assuming

A)the contract is entered into at the same time as when control over the goods is passed to the customer.
B)the underlying goods or services are valued under the residual value method.
C)the completed contract method is used.
D)the percentage-of-completion method is used.

Question 28

The appropriate approach to recognize long-term contract revenue under ASPE is

A)earnings approach to revenue recognition.
B)asset-liability approach to revenue recognition.
C)cash-based approach to revenue recognition.
D)earned and realized approach to revenue recognition.

Question 29

When a company sells a bundle of goods or services, the selling price of the bundle

A)will always be greater than the sum of individual stand-alone prices.
B)will always be equal to the sum of individual stand-alone prices.
C)may be less than the sum of individual stand-alone prices.
D)will always be less than the sum of individual stand-alone prices.

Question 30

Under a consignment sales arrangement, revenue is recognized under the earnings approach

A)upon shipment of the merchandise to the consignee.
B)upon receipt of the merchandise by the consignee.
C)upon sale by the consignee.
D)upon receipt by the consignor of notification of the sale.

Question 31

If the earnings process has a critical event, it is referred to as

A)a discrete earnings process.
B)a continuous earnings process.
C)a completed contract.
D)a critical earnings process.

Question 32

The most popular input measure used to determine the progress toward completion in the event a company qualifies to recognize revenue over a period of time is

A)cost-benefit basis.
B)percentage-of-completion basis.
C)cost-to-cost basis.
D)collection basis.

Question 33

Under a consignment arrangement, the risk that merchandise might NOT sell is

A)held with the consignor.
B)held with the consignee.
C)shared by the consignor and the consignee.
D)There is no risk associated with goods held on consignment.

Question 34

Which of the following is NOT true with regard to the expected value approach to measuring earnings?

A)It must be highly probable that there will not be a significant reversal of revenue previously recognized.
B)The company likely has experience with similar contracts.
C)It must be highly probable that there will be a significant reversal of revenue previously recognized.
D)The company is able to estimate the cumulative amount of net revenue.

Question 35

Under ASPE, the profession requires that the percentage-of-completion method be used when certain conditions exist.Which of the following is NOT one of those necessary conditions?

A)Estimates of progress toward completion, revenues, and costs are reasonably dependable.
B)The contractor can be expected to perform the contractual obligation.
C)The buyer can be expected to satisfy some of the obligations under the contract.
D)The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.

Question 36

The actions a company takes to add value are referred to as the

A)critical event.
B)earnings approach.
C)earnings process.
D)risks and rewards of ownership.

Question 37

Conditional rights should be reported on the statement of financial position

A)as contract assets.
B)as receivables.
C)only once the conditions have been met.
D)as contract liabilities.

Question 38

A returned asset should be recorded

A)as a direct reduction to inventory.
B)in a separate account from inventory.
C)at the same value it was sold for, without considering impairment.
D)Silly question, returned assets aren't recorded.

Question 39

At the time of contract signing,

A)no journal entry is recorded.
B)a contract liability is recorded.
C)a contract asset is recorded.
D)a note to the financial statements must be included.

Question 40

Where there are potentially multiple performance obligations within a single contract, if products or services are interdependent and interrelated, they must be

A)accounted for as multiple performance obligations.
B)combined and reported as a single performance obligation.
C)sold separately.
D)combined under a new contract.

Question 41

Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract.In this case, the entire expected loss should be

A)recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is used.
B)recognized in the current period under the percentage-of-completion method, but the completed-contract method should defer recognition of the loss to the time when the contract is completed.
C)recognized in the current period under the completed-contract method, but the percentage-of-completion method should defer the loss until the contract is completed.
D)deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is used.

Question 42

Under ASPE, when 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 can be made.
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.

Question 43

Losses in a current period on a profitable contract

A)are generally deferred until the contract is complete.
B)are only recognized immediately under the completed-contract method.
C)are only recognized immediately under the percentage-of-completion method.
D)are recognized immediately under both the completed-contract method and the percentage-of-completion method.

Question 44

Which of the following statements regarding the completed contract method is NOT true?

A)The company makes the same annual entries to record costs of construction, progress billings, and collections from customers as those under the percentage-of-completion method.
B)The company makes the same entries to recognize revenue as those under the percentage-of-completion method.
C)The company makes different entries to recognize revenue than under the percentage-of-completion method.
D)Losses on an unprofitable contract are immediately recorded.

Question 45

Losses on unprofitable long-term construction projects

A)are generally deferred until the contract is complete.
B)are only recognized immediately under the completed-contract method.
C)are only recognized immediately under the percentage-of-completion method.
D)are recognized immediately under both the completed-contract method and the percentage-of-completion method.

Question 46

Use the following information for questions.
On April 1, Heavy Metal Corp.consigned 50 handcrafted benches to Disco Co.Heavy Metal's cost was $350 per bench.Total freight costs were $700, which were paid by Disco.On August 1, Heavy Metal received a cheque for $14,100 from Disco which included the following information:
Under the earnings approach, total sales were

A)$15,540.
B)$18,550.
C)$19,060.
D)$19,425.

Question 47

Blues Construction Corp.has consistently used the percentage-of-completion method.During 2017, Blues entered into a fixed-price contract to construct an office building for $6,000,000.Information relating to the contract is as follows: Under the earnings approach, contract costs incurred during 2015 were

A)$1,440,000.
B)$1,485,000.
C)$1,575,000.
D)$2,160,000.

Question 48

Under ASPE, when work to be done and costs to be incurred on a long-term contract can be estimated reliably, which of the following methods of revenue recognition is preferable?

A)instalment method
B)percentage-of-completion method
C)completed-contract method
D)zero-profit method

Question 49

Cost estimates at the end of the second year indicate a loss will result on completion of the entire contract.Which of the following statements is correct?

A)Under the completed-contract method, the loss is not recognized until the year the construction is completed.
B)Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed.
C)Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.
D)Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs.

Question 50

The principal disadvantage of output measures in measuring progress toward completion of long-term contracts is

A)inefficiencies may cause the productivity relationship to change.
B)front-end loading.
C)units are not comparable in time, effort, or cost to complete.
D)the measures are not universally applicable.

Question 51

All of the following are disadvantages of input measures in measuring progress toward completion of long-term contracts EXCEPT

A)inefficiencies may cause the productivity relationship to change.
B)front-end loading.
C)units are not comparable in time, effort, or cost to complete.
D)the measures are not universally applicable.

Question 52

Under the percentage-of-completion method, how should earned but unbilled revenues on a long-term contract be disclosed on the statement of financial position?

A)as construction in process in the current asset section
B)as construction in process in the noncurrent asset section
C)as a receivable in the noncurrent asset section
D)in a note to the financial statements until the customer is formally billed for the portion of work completed

Question 53

Under the percentage-of-completion method, how should the balances of progress billings and construction in process be disclosed in the financial statements prior to the completion of the contract?

A)progress billings as deferred income, construction in progress as a deferred expense
B)progress billings as income, construction in process as inventory
C)net, as a current asset if a debit balance, and a current liability if a credit balance
D)net, as income from construction if a credit balance, and loss from construction if a debit balance

Question 54

Under the completed-contract method,

A)revenue, costs, and gross profit are recognized during the contract.
B)revenue and costs are recognized during the contract, but gross profit recognition is deferred until the contract is completed.
C)costs are recognized during the contract, but revenue and gross profit are not.
D)revenue, costs and gross profit are not recognized until the contract is finished.

Question 55

R&B Inc.entered into a contract with Jingles Corporation, in which R&B agreed to provide Jingles with building supplies.Jingles agreed to pay a total of $18,000 at delivery.Under the contract-based view, R&B's net contract position can be assumed to be

A)$18,000.
B)$9,000.
C)$4,500.
D)$0.

Question 56

Which of the following statements does NOT describe a long-term construction project that is accounted for under the completed-contract method?

A)Revenues are recognized at the end of the contract.
B)Revenues are recognized evenly throughout the contract.
C)Gross profit is recognized at the end of the contract.
D)Losses are recognized immediately.

Question 57

On January 1, 2017, Reggae Ltd.sold land that cost $180,000 for $240,000, receiving a note bearing interest at 10 percent.The note will be paid in three annual instalments of $96,510 starting December 31, 2017.Assuming that collection of the note is very uncertain, how much revenue from this sale should Reggae recognize in 2017?

A)$0
B)$18,000
C)$24,000
D)$96,510

Question 58

The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it

A)is unacceptable for income tax purposes.
B)gives results based upon estimates which may be subject to considerable uncertainty.
C)is likely to assign a small amount of revenue to a period during which a large amount of revenue was actually earned.
D)no revenue is recognized during the contract.

Question 59

The completed contract method for accounting for long-term construction projects requires that

A)no revenue is recognized until the project is completed.
B)costs are accumulated and revenue is recognized in proportion to cash collected.
C)gross profit is calculated each period, but deferred until the end of the contract.
D)revenue is calculated each period, but deferred until the end of the contract.

Question 60

Use the following information for questions.
A product and service are bundled together and sold to customers for $450.The fair values of the product and service are $350 and $150 respectively.
Under the relative fair value method, how much would be allocated to the product?

A)$150.00
B)$388.89
C)$350.00
D)$300.00

Question 61

Use the following information to answers questions
During 2017, Indie Corp.started a construction job with a total contract price of $700,000.Indie has consistently used the completed contract method.The job was completed on December 15, 2017.Additional data are as follows:
For 2017, what amount should Horn recognize as gross profit?

A)$0
B)$80,000
C)$95,000
D)$125,000

Question 62

In 2017, Pop Construction Corp.began work on a contract for $3,700,000.Other details follow: Pop uses the percentage-of-completion method.For calendar 2017, Pop should report gross profit of

A)$150,000.
B)$420,000.
C)$700,000.
D)$2,220,000.

Question 63

Use the following information for questions.
A product and service are bundled together and sold to customers for $450.The fair values of the product and service are $350 and $150 respectively.
Under the residual method, how much would be allocated to the product?

A)$350.00
B)$388.89
C)$300.00
D)$150.00

Question 64

Use the following information for questions.

Which of the following should be shown on the statement of financial position at December 31, 2017 related to Contract 3?

A)unbilled contract costs, $140,000
B)unbilled contract costs, $60,000
C)accounts receivable, $760,000
D)construction in process, $480,000

Question 65

Use the following information for questions.

Which of the following should be shown on the statement of financial position at December 31, 2017 related to Contract 2?

A)inventory, $272,000
B)inventory, $328,000
C)liability, $272,000
D)liability, $600,000

Question 66

Bluegrass Builders Ltd.Is using the completed-contract method for a $2,000,000 contract that will take two years to complete.Data at December 31, 2017, the end of the first year, are The gross profit or loss that should be recognized for 2017 is

A)$50,000 gross profit.
B)$25,000 gross profit.
C)$25,000 loss.
D)$0.

Question 67

Use the following information to answers questions
During 2017, Indie Corp.started a construction job with a total contract price of $700,000.Indie has consistently used the completed contract method.The job was completed on December 15, 2017.Additional data are as follows:
For 2015, what amount should Horn recognize as gross profit?

A)$0
B)$80,000
C)$95,000
D)$125,000

Question 68

A project was correctly accounted for under the percentage-of-completion method.At the end of the project, the Construction-in-Process account includes total debits and credits of $3,500,000.Assuming that total gross profit of $1,200,000 was recognized throughout the contract, total construction costs were

A)$4,600,000.
B)$3,500,000.
C)$2,300,000.
D)$2,100,000.

Question 69

Use the following information for questions.
In 2017, Hip-hop Inc.began a three year construction contract for $7,000,000.Hip-hop uses the percentage-of-completion method.The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract.The financial statement presentation relating to this contract for calendar 2017 follow:
What was the initial estimated gross profit on this contract?

A)$762,860
B)$810,462
C)$1,300,408
D)$1,729,412

Question 70

Country Corp.contracted to construct a building for $1,500,000.Construction began in 2017 and was completed in 2018.Data relating to the contract follow: Country uses the percentage-of-completion method.For the calendar years 2014 and 2015, respectively, Country should report gross profit of

A)$270,000 and $170,000.
B)$900,000 and $600,000.
C)$300,000 and $140,000.
D)$0 and $440,000.

Question 71

Use the following information for questions.
Alternative Ltd.Began work in 2017 on a contract for $1,200,000.Other details follow:
Assume that Alternative uses the completed-contract method of accounting.The portion of the total gross profit to be recognized in 2018 is

A)$150,000.
B)$225,000.
C)$387,500.
D)$1,200,000.

Question 72

Rap Construction Corp.uses the percentage-of-completion method.In 2017, Rap began work on a contract for $1,650,000 which was completed in 2018.Data on the costs are:

Question 73

Classical Ltd.Began work in 2017 on a contract for $1,250,000.Other data are: If Classical uses the percentage-of-completion method, the gross profit to be recognized in 2017 is

A)$450,000.
B)$210,000.
C)$200,000.
D)$100,000.

Question 74

Use the following information for questions.

Which of the following should be shown on the income statement for 2017 related to Contract 1?

A)gross profit, $180,000
B)gross profit, $240,000
C)gross profit, $400,000
D)gross profit, $420,000

Question 75

Use the following information for questions.
Alternative Ltd.Began work in 2017 on a contract for $1,200,000.Other details follow:
Assume that Alternative uses the percentage-of-completion method of accounting.The portion of the total gross profit to be recognized in 2017 is

A)$75,000.
B)$100,000.
C)$300,000.
D)$400,000.

Question 76

Classical Ltd.Began work in 2017 on a contract for $1,250,000.Other data are: If Classical uses the completed-contract method, the gross profit to be recognized in 2018 is

A)$375,000.
B)$400,000.
C)$850,000.
D)$1,000,000.

Question 77

Punk Construction Corp.has consistently used the percentage-of-completion method.In 2017, Punk started work on a $7,000,000 construction contract that was completed in 2018.The following information was taken from Cymbal's 2017 accounting records: Under the earnings approach, what amount of gross profit should Cymbal recognize in 2017 on this contract?

A)$700,000
B)$466,667
C)$350,000
D)$233,333

Question 78

SEQ CHAPTER \h \r 1On June 1, Freedom Distributions (FD)shipped 100 TVs to Universal TV (UTV)on consignment.FD buys these TVs from their supplier for $600 each and sells them to UTV for $800.UTV then retails them for $1,200 each.By the end of June, Universal TV reported that they had sold 60 of these TVs, and remitted the appropriate amount to FD.How much revenue should be recorded by FD in connection with this transaction?

A)$72,000
B)$60,000
C)$48,000
D)$36,000

Question 79

Use the following information for questions.
In 2017, Hip-hop Inc.began a three year construction contract for $7,000,000.Hip-hop uses the percentage-of-completion method.The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract.The financial statement presentation relating to this contract for calendar 2017 follow:
How much cash was collected in 2014 on this contract?

A)$50,000
B)$340,000
C)$400,000
D)$600,000