Question 1

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 2

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

Clearly, it is inappropriate to record all the revenue upon delivery of simply one product or service if some products or services are delivered at different points in time.
All products or services in such a sales transaction are taken into account.
To record revenue in a manner that reflects the timing of delivery for each product or service in the sales arrangement, the sales price of the total arrangement is allocated to the individual components. Then the normal revenue recognition criteria are applied to each component to determine when the revenue from that element can be recorded by the company.

Question 3

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:
 $$\begin{array} { | l | l | } 
\hline \text { Gar } & \$ 30,000 \
\hline \text { Bil change } & \$ 50 \text { each oil change } \
\hline
\end{array}$$ 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

a. The residual method is appropriate since the fair value of the warranty is not determinable as a stand-alone price has not yet been established for the service-type warranty.
  b. Revenue for the car should be recognized upon delivery. Revenue for the oil changes will recorded as each of the 20 oil changes is performed (1,000/ (4/yr × 5 yrs)). The revenue for the warranty would be recognized over the 5 years.

Question 4

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

Accepted Answer

The answer of Explain how the transaction price should be...

Question 5

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 refers to the process of presenting an item in the financial statements. This means including it in the balance sheet, income statement, or statement of cash flows. It is an important step in financial reporting as it allows stakeholders to see the financial impact of certain transactions or events. Option A is incorrect as it refers specifically to the classification of a current liability on the balance sheet. Option B is incorrect as notes to the financial statements provide additional information but do not necessarily involve recognition. Option D is incorrect as fair value and historical cost are accounting methods, not the process of recognition itself.

Question 6

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

The answer of You are an accountant working at Phantastic...

Question 7

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

Pendant would recognize revenue for the 70 copies sold (100 delivered - 30 returned). The revenue recognized would be 70 copies x $80 (price charged to the bookstore) = $5,600.

Question 8

Superior Cars sold a car for $35,000 cash. In addition, the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years. The normal observable stand-alone selling prices are as follows:
 $$\begin{array} { | l | l | } 
\hline \text { Car } & \$ 35,000 \
\hline \text { Bil change } & \$ 50 \text { per oil change } \
\hline \text { service- type warranty } & \$ 4,000 \
\hline
\end{array}$$ a. Determine how revenue should be allocated to the various performance obligations in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Accepted Answer

The answer of Superior Cars sold a car for $35,000...

Question 9

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, which means the transit authority still owns the passes until they are sold to individual customers. Therefore, revenue cannot be recognized at the time of distribution to the retailers.

Question 10

Hedley Corporation sold hardware and software for $70,000 cash. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The observable stand-alone selling prices are as follows:
 $$\begin{array} { | l | l | } 
\hline \text { Hardware } & \$ 60,000 \
\hline \text { Software } & \$ 15,000 \
\hline \text { Hardware Maintenance } & \$ 5,000 \
\hline
\end{array}$$ 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

The answer of Hedley Corporation sold hardware and software for...

Question 11

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

Accepted Answer

The answer of Explain why accounting standards generally prescribe a...

Question 12

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 as each entity has different resources, capabilities, and strategies that are used to create value for its customers. Therefore, the value creation process will vary from one entity to another.

Question 13

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 variable nature of the revenue, i.e. the fact that the price per chair is not fixed and can range from $0 to $100 depending on uncertain events, makes it difficult to determine the total revenue that Simply will earn from the sale. Therefore, revenue recognition at time of delivery may not be appropriate. The other options are not as relevant to revenue recognition. A is related to transfer of ownership, but does not address revenue recognition specifically. C is related to payment terms, but does not necessarily impact revenue recognition. D is related to cost of goods sold, but does not impact revenue recognition directly.

Question 14

An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1. Identify why the insurance company cannot recognize revenue when the premium is received.
A)The insurance company has not transferred to the buyer the significant risks and rewards of ownership of the service.
B)The customer has not taken possession of the asset.
C)The insurance company earns the revenue over time, rather than at a point of time (time of sale).
D)The customer does not control the asset.

Accepted Answer

The insurance company earns the revenue over time, rather than at a point of time (time of sale). The revenue earned from the annual premiums is recognized over the coverage period, which starts from July 1 and ends on June 30 of the following year. Therefore, revenue cannot be recognized at the time the premium is received.

Question 15

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, as it may involve more uncertainties and risks. Therefore, statement B is not correct. The other statements are correct. A) The value creation process encompasses all the activities and stages involved in creating and delivering value to customers or stakeholders. It includes research and development, production, marketing, sales, delivery, and customer service. Revenue recognition occurs at different points along this process, depending on the type of transaction, the terms of sale, the transfer of risks and rewards, and the timing of payment. B) Early revenue recognition may increase the likelihood of overestimating revenues, expenses, profits, and cash flows, especially if the assumptions or estimates used are not reliable or verifiable. Therefore, conservatism requires that revenue should be recognized only when it is earned and collectible, and that the uncertainties and risks of the transaction should be adequately disclosed. C) The reliability of cash flows associated with early revenue recognition may be lower due to various factors, such as credit risk, payment delays, product returns, warranties, and contingencies. Therefore, the key criteria for revenue recognition are the transfer of ownership, the transfer of risks and rewards, the existence of an enforceable agreement, and the collection of payment. D) Accounting policies should be consistent, feasible, relevant, and understandable, and should follow the applicable accounting standards, principles, and rules. Too much discretion or variability in accounting policies may create confusion, bias, or manipulation of financial information, and may impair the comparability and relevance of financial statements.

Question 16

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

Accepted Answer

The answer of Discuss advantages and disadvantages of using the...

Question 17

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 18

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 19

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

The answer of Explain why a company should allocate revenue...

Question 20

List the five key steps in the revenue recognition process.

Accepted Answer

The answer of List the five key steps in the...

Quiz 4: Revenue and Recognition

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

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.

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

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

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.

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.

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

Which of the following is correct about the value creation process?

An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1. Identify why the insurance company cannot recognize revenue when the premium is received.

Which of the following statements about the value creation process is not correct?

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

Which statement is correct about multiple performance obligation arrangements?

Which statement is correct about multiple performance obligation arrangements?

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.

List the five key steps in the revenue recognition process.