Deck 6: Revenue Recognition

Question 1

The percentage-of-completion method of accounting for long-term construction projects is supported on the basis that it is more conservative than the completed contract method.

Answer 1

False

Question 2

The earnings based and contract based approaches will both result in the same amount of revenue being recognized over time.

Answer 2

True

Question 3

Warranty costs related to goods sold on instalment sales should not be accrued.

Answer 3

False

Question 4

The contract price must be known with certainty in order for the contract based approach to be applied.

Question 5

Non-refundable deposits automatically meet the criteria for immediate revenue recognition.

Question 6

In accounting, the term "revenue recognition" refers to measuring the expense related to the revenue for a specific period.

Question 7

Generally, expenses incurred to generate revenues should be matched to the revenues recognized in a given period.

Question 8

The percentage- of -completion method of accounting for long-term construction-type contracts is preferable when estimates of costs to complete and extent of progress toward completion are reasonably dependable.

Question 9

Receipt of cash by the seller at the time of sale is not required for the recognition of revenue.

Question 10

Collectability must be certain in order for revenue to be recognized.

Question 11

When rent is received in advance the event that triggers revenue recognition is the passage of time.

Question 12

The use of the contract based approach to revenue recognition is dependent on whether or not the transaction with the client has commercial substance.

Question 13

It may be argued that the earnings based approaches is more focused on the income statement while the contract based approach focuses on the balance sheet.

Question 14

A furniture manufacturer receives a purchase order from a client for a customized wooden cabinet. The cabinet will be delivered and paid for upon completion which is estimated to be in three months from now. This event would trigger a journal entry on the manufacturer's books if the earnings approach were used, but not if the contract approach were used.

Question 15

Revenues for certain commodities with a readily available market may be recognized at production since uncertainties with respect to the sale are likely to be minimal.

Question 16

The sale of a company's land would necessarily result in a gain or loss, and not a revenue or expense.

Question 17

An initial licensing fee that allows the holder to use the name of another company for a defined period of time would be capitalized and subsequently amortized over the number of periods benefitted.

Question 18

Revenues from peripheral transactions are considered gains, while those from a company's principal line of business would be considered sales or revenues.

Question 19

ASPE and IFRS will both follow a contract-based approach to revenue recognition in the future.

Question 20

Revenue should not be recognized if the buyer's obligation to pay the seller is contingent on the resale of the product.

Question 21

Using actual and estimated cost figures to estimate the degree of completion of a long-term construction project is an example of an input-based approach to estimation.

Question 22

ABC Inc. uses the percentage of completion method to account for one of its long-term construction projects. ABC reported a loss on this contract for its most recent fiscal year, but the contract is expected to be profitable. This is an onerous contract.

Question 23

In a consignment arrangement, the seller is essentially acting as an agent of the manufacturer of the goods or their owner.

Question 24

Economic Value Added (EVA) is the difference between a product's input cost and final sales price. This figure is dependent up on the firm's earnings process.

Question 25

The amount of revenue recognized by a franchisor will usually depend on the franchise agreement.

Question 26

When goods are sold, the event which triggers revenue recognition is the delivery of the goods.

Question 27

Under a bill and hold arrangement, revenue recognition is delayed until the buyer takes possession of the merchandise.

Question 28

When goods are sold, revenue may still be recognized if there is an insignificant degree of continuing managerial involvement in some instances.

Question 29

The gross approach to recording revenues results in higher earnings than does the net method.

Question 30

The percentage-of-completion method for long-term construction contracts can be used if at least the ultimate collection of the contract price is reasonably certain.

Question 31

The percentage-of-completion and completed contract methods will produce different periodic income amounts, but the Accounts Receivable balances will be equal.

Question 32

The value of the consideration received must be known or measurable with absolute certainty in order for revenue to be recognized.

Question 33

When one company is acting as an agent on behalf of another company or individual, it will normally report revenues on a net basis.

Question 34

If a company receives a commission on products it sells but otherwise has no control over selling prices, it is essentially acting as an agent on behalf of another company, and would likely record revenue from these sales on a net basis.

Question 35

Non-refundable payments can normally be recognized upon receipt, since there is no performance obligation related to these payments.

Question 36

There will be no impact on a company's net assets until revenue is recognized.

Question 37

The transaction price when non-monetary assets are involved in a sale is the value of the non-cash consideration received.

Question 38

"Billings on contracts" is a contra account to "Accounts Receivable."

Question 39

ABC Inc. uses the percentage of completion method to account for one of its long-term construction projects. Last year the company recorded revenue of $1 million during the first year of one of its projects, which at the time was expected to be profitable. Nearly one year later, the company has incurred substantial cost-overruns. The company now expects the contract to lose $500,000. This is an onerous contract. ABC should therefore record a loss of $500,000 on this contract for the current year.

Question 40

A purchase order received from a client would trigger a journal entry under the earnings-based revenue recognition approach, but not on the contract-based approach.

Question 41

When a one year-lease-term is signed, the lessor earns revenue with the passage of time.

Question 42

Revenues must always be recognized at a single point in time.

Question 43

As a general rule, the greater the uncertainty involved with respect to a sales transaction, the longer one would delay revenue recognition.

Question 44

Under IFRS, sales contracts with multiple deliverables may be treated as though they were a single element, for the sake of simplicity.

Question 45

Under IFRS, goods sold under Bill and Hold provisions must be on hand and ready for immediate delivery if revenue is to be recognized.

Question 46

When goods are sold f.o.b. shipping point, the revenue earnings process is usually not considered to be complete until the buyer has received the goods and inspected them.

Question 47

Under the completed contract method, all construction costs are accumulated in an inventory account.

Question 48

Under IFRS, interest revenue must be recognized using the effective interest method, and dividend revenue must be recognized when the right to receive them has been established, and there are no significant uncertainties.

Question 49

When a barter transaction has no commercial substance, a gain or loss must always be recognized on the income statement as a result of the exchange.

Question 50

Under IFRS, sales contracts with multiple deliverables should be split according to their relative fair values if possible, and accounted for accordingly.

Question 51

The use of actual and expected costs to determine the percentage of completion on a long term project is an example of an output method approach to evaluating contract progress.

Question 52

In the critical event that the revenue is not recognized at the time of the sale due to a return privilege, the gross margin is to be recognized only after the return privilege has expired.

Question 53

When a grocery store sells groceries and receives payment in the form of a cheque, the revenue principle would state that the revenue should not be recognized until the cheque clears the bank.

Question 54

If fair values cannot be determined during a barter transaction, the book value method must be used.

Question 55

Under the percentage-of-completion method of accounting for long-term construction contracts, revenue is recognized only when the construction is completed.

Question 56

If a client presents an extreme credit risk, the seller would be more likely to use the Installment Sales method to account for the transaction than the Cost Recovery Method.

Question 57

The earliest point at which all criteria for revenue recognition are met is known as a critical event.

Question 58

Biological assets are generally recognized at their net realizable values, with gains and losses flowing through income.

Question 59

Under the percentage-of-completion method of accounting for long-term construction contracts, revenue is recognized as construction progresses (usually on the basis of costs incurred) to attain a matching of revenues and expenses.

Question 60

If sales are made on "FOB destination" terms, the revenue earning process is completed when the products are removed from the seller's place of business by the common carrier.

Question 61

Payment on account of progress billings, when using the percentage of completion method of recognizing revenue are debited to cash and credited to progress billings.

Question 62

When using completed contract method of recognizing revenue, the billings to the customer are debited to cash and credited to progress billings.

Question 63

Which of the following is not required for the recognition of revenue?

A) Receipt of cash by the seller at the time of sale.
B) Seller must receive an item ultimately realizable in cash, noncash resources, or claims to cash.
C) The earnings process must be essentially complete.
D) The transaction must create a measurable financial statement element which fulfills the definition of a revenue.

Question 64

Non-monetary transactions lacking commercial substance can never result in a gain or loss being recorded.

Question 65

Most construction companies cannot afford to wait until the completion of the contract to collect their billings.

Question 66

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

A) The terms of payment in the contract.
B) The kind of technical facilities used in construction.
C) How reliable would an estimate be of the progress toward contract completion?
D) The method usually used by the contractor to account for other long-term construction contracts.

Question 67

If it becomes apparent that a long term project will result in a loss, the full amount of the loss must be accounted for in the year it is first estimable.

Question 68

Which of the following would not be considered a multiple-deliverable arrangement?

A) A product sold with a manufacturer's warranty, where both the product and warranty have separately identifiable revenue streams.
B) A product sold with a manufacturer's warranty which covers only product assurances, where only the product has a separately identifiable revenue stream.
C) Customer Loyalty Programs.
D) Franchise Fees.

Question 69

The completed-contract method of revenue recognition recognizes revenue on a long-term project as work progresses so that timely information is provided.

Question 70

In a normal sale, generally the most uncertain factor in the revenue recognition process is:

A) The seller's fulfillment of its responsibility in the transaction
B) The measurability of the resource or item received by the seller
C) The realizability of the resource or item received by the seller
D) The relevance of the resource or item received by the seller

Question 71

When cash is collected on account and the instalment sales method is used, the debit is to instalment accounts receivable and the credit is to cash.

Question 72

Once biological assets become ready for sale, they effectively become inventory. Deemed cost in this case is fair value of the items less their selling costs. Subsequently they are valued at their fair value less costs to sell with gains and losses flowing to income.

Question 73

Non-monetary transactions by definition involve no exchange of cash.

Question 74

The revenue principle states that revenue should be recognized only when a(n):

A) Exchange transaction involving goods and services has occurred and a cash down payment has been received.
B) Exchange transaction involving goods or services has occurred and the earnings process is essentially completed.
C) Sale or service transaction has occurred.
D) Completed earnings process can be projected.

Question 75

In accounting, the term "revenue recognition" refers to:

A) Measuring the expense related to the revenue for a specific period.
B) Identifying sources of revenue.
C) Identifying transactions that result in an inflow of cash from customers.
D) Identifying the period when the customer first indicates the need for a good or service.
E) Identifying transactions that should be recorded as revenue in the current reporting period.

Question 76

When work to be done and costs to be incurred on a long-term contract cannot be reliably estimated, which of the following methods of revenue recognition is preferable?

A) Percentage-of-completion method
B) Completed contract method
C) Sales method
D) Instalment method

Question 77

ABC Inc. sold a DVD player to a client on June 30^th, Year 2 for $150. The DVD player, which came with a 2-year warranty, was thought to be worth $100 if sold without the warranty. As a result of this sale, how much sales/revenue would ABC Inc. take into income on its December 31^st, Year 2 income statement?

A) $100.00.
B) $112.50.
C) $125.00.
D) $150.00.

Question 78

Which of the following statements regarding the percentage-of-completion and completed contract methods of accounting for long-term construction contracts are true?

A) They recognize different amounts of income for the construction period.
B) They produce the same inventory carrying values during the construction period.
C) Neither requires losses to be recognized in the period of occurrence.
D) Under only the percentage of completion method is it possible to recognize a loss for the period when an overall profit is expected on the contract.

Question 79

A long-term contract is automatically considered onerous if a loss is recognized in any given year.

Question 80

Bearer plants are recorded at their fair value less costs to sell.