Question 1

Which of the following best explains what recognition means in financial reporting?
A)Recognition is the process of reporting an item that is due within 12 months in the current section of the balance sheet.
B)Recognition is the process of reporting an item in the notes to the financial statements.
C)Recognition is the process of presenting an item in the financial statements.
D)Recognition refers to the choice between using fair value and historical cost in the financial statements.

Accepted Answer

Recognition in financial reporting refers to the process of presenting an item in the financial statements. It involves determining whether an item meets the criteria for recognition and then reporting it in the appropriate financial statement.

Question 2

Which statement is correct about multiple performance obligation arrangements?
A)The residual method must normally be used.
B)The relative stand-alone selling price method must normally be used.
C)There is no specific method that must be used.
D)The adjusted market assessment approach is an acceptable residual approach that may be used.

Accepted Answer

The relative stand-alone selling price method is normally used to allocate the transaction price to the different performance obligations in a contract according to ASC 606, Revenue from Contracts with Customers. This method requires estimating the price at which the company would sell the promised goods or services separately to a customer.

Question 3

Discuss when it is acceptable to use the residual approach to allocate the transaction price to performance obligations.

Accepted Answer

The residual approach may only be used if either (i)the good or service in question have a highly variable selling price,or (ii)the entity has not yet established a price for that good or service.

Question 4

You are an accountant working at Phantastic Pharmaceutical Inc.and have been asked to explain to your controller the possible points at which revenue could be recognized by your organization.Identify two alternatives that are in accordance with IFRS 15 for recognizing revenue at Phantastic.

Accepted Answer

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Question 5

Discuss advantages and disadvantages of using the cash basis to recognize revenues.Provide three valid reasons in your discussion.

Accepted Answer

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Question 6

Simply Manufacturers has signed an order to supply 10,000 chairs at a price to be determined sixty days after delivery.Payment is due at that time.The price per chair may range from $0 to $100 depending on a series of events,the outcome of which cannot be accurately predicted.Which of the following factors is most likely to precludes Simply from recognizing revenue at time of delivery.
A)The purchaser bears the significant risks and rewards of ownership.
B)The revenue is variable in nature.
C)The purchaser is not obligated to pay for the goods at time of delivery.
D)Simply had not paid its suppliers for the materials used to manufacture the chairs.

Accepted Answer

The fact that the price per chair is variable in nature depending on several unpredictable events makes it difficult for Simply Manufacturers to determine the total revenue to be recognized at the time of delivery. As a result, revenue recognition may need to be deferred until after payment is received and the final price is determined. The other options (A, C, and D) do not necessarily preclude revenue recognition at the time of delivery.

Question 7

Explain how the transaction price should be allocated to the performance obligations in a multiple performance obligation sales arrangement.

Accepted Answer

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Question 8

Which statement is correct about multiple performance obligation arrangements?
A)The revenue recognition criteria no longer apply to these transactions.
B)The revenue must be allocated to the components of the sale evenly over the life of the contract.
C)The revenue must be recognized evenly over the life of the contract.
D)Identifying the different sources of revenue increases the representational faithfulness.

Accepted Answer

Identifying the different sources of revenue in multiple performance obligation arrangements increases the representational faithfulness by providing a more accurate depiction of the company's financial performance. This approach aligns with the principle that revenue should be recognized when or as the performance obligations are satisfied, allowing for a more precise matching of revenue with the delivery of goods or services.

Question 9

Fancy Cars sold a used car for $35,000 cash.The company will also provide 4 oil changes per year for 5 years and an extended service-type warranty for 5 years.This is the first time that Fancy has offered an extended warranty.They intend to offer it to customers on a stand-alone basis but have not yet established a sales price.The observable selling prices of the car and oil changes follow:
  
a.Determine how revenue should be allocated to the various components in this transaction.
b.Apply the appropriate revenue recognition criteria to determine when revenue should be recognized for the various components of this transaction.

Accepted Answer

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Question 10

On March 1,Pendant Textbook Publications delivered 100 copies of one of its accounting textbooks to the First University bookstore.The bookstore can return all unsold copies to Pendant.The retail price of each copy is $110,while the price charged to the bookstore is $80.Each book costs Pendant $40 to produce.On April 15,the distributor returns 30 unsold copies to Pendant.Based on these facts,how much revenue would Pendant recognize on April 15?
A)$2,800
B)$5,600
C)$7,700
D)$2,400

Accepted Answer

B)($80 ∗ 70 copies sold = $5,600)

Question 11

Explain how the timing of revenue recognition is affected by multiple performance obligations in the arrangement.Explain how revenue is ultimately recognized in a multiple performance obligations sales arrangements.

Accepted Answer

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Question 12

The residual approach which computes the stand-alone selling price as the transaction price less the total of the observable stand-alone selling prices of other goods services in the transaction.This approach is only acceptable if either (i)the good or service in question has a highly variable selling price,or (ii)the entity has not yet established a selling price for that good or service.

Accepted Answer

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Question 13

The adjusted market assessment approach which involves estimating what a customer would be willing to pay for the good or service or what competitors charge for a similar good or service.

Accepted Answer

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Question 14

A city transit authority issues 200,000 monthly passes at $80 each for sale at various retailers.Retailers act as consignees for these passes.Identify why the transit authority cannot recognize revenue at time of distribution.
A)The retailers have not taken physical possession of the asset.
B)A contract has not been entered into.
C)The transaction price is not known.
D)The retailers do not bear the significant risks and rewards of ownership.

Accepted Answer

The retailers do not bear the significant risks and rewards of ownership because they are acting as consignees, which means they do not actually own the passes they are selling. Therefore, the transit authority cannot recognize revenue at the time of distribution as the passes have not been purchased by the end customers yet.

Question 15

List the five key steps in the revenue recognition process.

Accepted Answer

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Question 16

Which of the following statements about the value creation process is not correct?
A)The value creation process reflects the wide range of possible points at which revenue could be recognized.
B)Recognizing revenue early in the value creation process is more conservative than waiting until cash is received.
C)Recognizing revenue early in the value creation process involves more uncertainties and lower reliability about cash flows.
D)Permitting too much choice in accounting policies impairs comparability of financial statements.

Accepted Answer

Recognizing revenue early in the value creation process is actually less conservative than waiting until cash is received. This is because early recognition could result in overestimating revenue and profits, leading to a potential misrepresentation of the company's financial performance. Waiting to recognize revenue until cash is received is a more conservative approach.

Question 17

Explain why a company should allocate revenue to multiple performance obligations in a sales transaction even if the company delivers all of the products or services in the same accounting period.

Accepted Answer

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Question 18

Explain why accounting standards generally prescribe a smaller set of alternatives for revenue recognition.

Accepted Answer

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Question 19

Which of the following is correct about the value creation process?
A)The value creation process is the same for all entities.
B)The value creation process is the same for all industries.
C)Any point on the value creation process is acceptable for revenue recognition.
D)The value creation process is specific to each entity.

Accepted Answer

The value creation process is specific to each entity. Different entities create value in different ways, and therefore have their own unique value creation process. This process can be influenced by a variety of factors, including the industry in which the entity operates, the products or services it offers, and the market in which it competes. Because the value creation process is specific to each entity, different entities may recognize revenue at different points in the process, depending on their specific circumstances.

Question 20

The expected cost plus margin approach which involves estimating expected costs to provide the good or service and adding a profit margin typical for that good or service.

Accepted Answer

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Quiz 4: Revenue and Recognition

Which of the following best explains what recognition means in financial reporting?

Which statement is correct about multiple performance obligation arrangements?