Deck 15: Revenue Recognition Issues

Question 1

If the borrower prepays interest,the inflow of future economic benefits represented by the prepayment would not constitute an item of revenue to the lender because the lender has a present obligation to the borrower to provide finance for the period to which the prepayment relates.

Answer 1

True

Question 2

In most cases dividend revenue should not be recognised until the dividend proposed has been ratified by the shareholders at the annual general meeting.

Answer 2

False

Question 3

With the percentage-of-completion method of accounting for construction contracts,profit is recognised in proportion to the work performed in each reporting period.

Answer 3

True

Question 4

If a company sells its product but gives the buyer the right to return the product,IASB (2011)requires revenue from the sales transaction to be recognised at the time of sale.

Question 5

When the gross method is used to record the interest inherent in a sales transaction,it is typical for the accrued interest to be offset against the note receivable.

Question 6

When it is probable that total contract costs will exceed total contract revenue,the expected loss should not be recognised as an expense until the future economic sacrifice eventuates.

Question 7

Gains never arise from the ordinary activities of an entity.

Question 8

Gains that result from revaluation of long-term assets are included in income.

Question 9

Transactions that result in an inflow of economic benefits such as the purchase of assets can be classified as a gain.

Question 10

The AASB (IASB)Conceptual Framework now divides revenues into 'income' and 'gains'.

Question 11

Where the percentage-of-completion method is based on costs,costs that relate to the contract activity generally and are not normally related to specific contracts,such as finance costs,should be allocated across the projects currently in progress.

Question 12

When the outcome of a construction contract can be estimated reliably,contract revenue and contract costs associated with the construction contract shall be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date.

Question 13

Gains must be reported net of related expenses.

Question 14

Under the AASB (IASB)Conceptual Framework an increase in economic benefits in the form of the reduction of a liability that is not a contribution by equity participants and results in an increase in equity during the reporting period,is income.

Question 15

Transfer of 'control' of the asset is central to the recognition of revenue under the new accounting standard IASB (2011).

Question 16

Unearned revenues are assets treated as liabilities,as these are received by a business for services to be performed at a future date.

Question 17

IASB (2011)requires revenues to be measured in terms of historical cost to improve reliability.

Question 18

When making a provision for doubtful debts,debtors' subsidiary ledgers are not adjusted,as the provision is made in anticipation of likely non-recoverability of amounts owing,although the identity of who will not pay is unknown.

Question 19

Accounting standards require that the provision for doubtful debts should be shown as a deduction from the class of assets to which it relates.The net expense in relation to bad and doubtful debts must also be disclosed.

Question 20

Construction costs plus gross profit earned to date from a construction contract are accumulated in the construction in progress account less progress billings and these are disclosed in the liability section of the statement of financial position.

Question 21

Under the AASB (IASB)Conceptual Framework income is now subdivided into:

A) revenues, which only include sales, fees, interest, dividends, royalties and rent; gains, which are no different in nature to revenue.
B) gains, which are regarded as constituting a separate element in the framework; revenues, which may only arise in the course of the ordinary activities of the entity.
C) revenues, which arise in the course of the ordinary activities of the entity; gains, which may or may not arise in the course of the ordinary activities of the entity.
D) increases in equity referred to as gains; reductions in liabilities which are classified as revenues.

Question 22

Interest revenue is derived from borrowing resources from another entity.

Question 23

In the situation that a debtor becomes unable to pay and the amount has not been anticipated through a provision for doubtful debts,what is the entry to record the bad debt?

A) Dr Debtors; Cr Provision for doubtful debts
B) Dr Provision for doubtful debts; Cr Debtors
C) Dr Bad debts expense; Cr Cash
D) Dr Bad debts expense; Cr Debtors

Question 24

Revenues may be generated by:

A) holding and disposing of inventory in the normal course of business.
B) having a liability forgiven.
C) receiving a donation.
D) all of the given answers.

Question 25

On 1 July 2013 Bigwell Ltd sells a machine to Archer Ltd in exchange for a promissory note that requires Archer Ltd to make five payments of $8000,the first to be made on 30 June 2014.The machine cost Bigwell Ltd $20 000 to manufacture.Bigwell Ltd would normally sell this type of machine for $30 326 for cash or short-term credit.The implicit interest rate in the agreement is 10%.What are the appropriate journal entries to record the sale agreement and the first two instalments using the gross method?

A)

B)

C)

D)

Question 26

When goods are sold on extended credit there is an implicit financing arrangement contained in the sale agreement.In order to separate the financing element from the sale,it is necessary to calculate the applicable interest rate inherent in the agreement.What advice does IASB (2011)provide about this?

A) The implicit rate of interest is the more clearly determinable of either: (a) the prevailing rate of a similar instrument of an issuer with a similar credit rating; or (b) a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.
B) The implicit rate of interest is the internal rate of return implicit in the contract such that the sales price is equal to the fair market value of the asset.
C) The implicit rate of interest is the more reliably determinable of either: (a) the prevailing rate of a debt instrument of an issuer adjusted to the organisation-specific, risk adjusted rate of the issuer; or (b) a rate of interest that discounts the sales price to the fair market value of the goods or services.
D) The implicit rate of interest is the internal rate of return implicit in the contract such that the sales price is equal to the fair market value of the asset. This rate may have to be adjusted to take account of the risk of the issuer if it is significantly different to the market-determined interest rate for similar entities.

Question 27

On 1 July 2013 Bryson Ltd sells a machine to Adams Ltd in exchange for a promissory note that requires Adams Ltd to make five payments of $8000,the first to be made on 30 June 2014.The machine cost Bryson Ltd $20 000 to manufacture.Bryson Ltd would normally sell this type of machine for $30 326 for cash or short-term credit.The implicit interest rate in the agreement is 10%.What are the appropriate journal entries to record the sale agreement and the first two instalments using the net-interest method?

A)

B)

C)

D)

Question 28

The general rule under modified historical-cost accounting is that holding gains on non-current assets should be:

A) treated as revenue in the period that the fair value of the asset changes.
B) deferred and amortised over the life of the asset (effectively decreasing depreciation expense).
C) recognised as part of income and hence, of total comprehensive income
D) never recognised.

Question 29

When the collectability of an amount that has been recorded as revenue becomes uncertain,the appropriate accounting treatment is to:

A) recognise as an expense the amount in respect of which recovery has ceased to be probable.
B) calculate the discounted present value of the amount expected to be received and adjust the recorded revenue accordingly.
C) adjust the amount of revenue originally recognised.
D) make no adjustment as the amount and timing of the uncollectible amount is uncertain.

Question 30

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). In the traditional historical-cost accounting model,at what point has revenue been recognised for long-term construction contracts in the building industry?

A) Point 8
B) Point 4
C) Point 6
D) Point 5

Question 31

Kringle Company has agreed to provide services to North to South Ltd in exchange for a piece of equipment and a cash payment.The equipment is currently recorded in North to South's books at $73 000 but independent assessors have set the fair value at $65 000.The cash payment of $20 000 will be received 12 months after completion of the services.Kringle should record revenue as:

A) $85 000
B) $65 000 in the current period, $20 000 next period
C) $93 000
D) $65 000 plus the present value of the $20 000 cash component

Question 32

Vettori Ltd has the following information from an aged debtors listing for the current period. $$\begin{array} { | l | r | } \hline \text { Age } & \text { Amount } \\\hline \text { Less than } 1 \text { month old } & \$ 80000 \\\hline \text { Between } 1 \text { month and } 2 \text { months old } & \$ 60000 \\\hline \text { Between } 3 \text { and } 5 \text { months old } & \$ 30000 \\\hline \text { Over } 5 \text { months old } & \$ 5000 \\\hline\end{array}$$ Based on experience in the industry,Vettori Ltd uses the following basis for estimating uncollectible amounts: $$\begin{array} { | l | l | } \hline \text { Age } & \begin{array} { l } \text { Percentage } \\\text { uncollectible }\end{array} \\\hline \text { Less than } 1 \text { month old } & 0.50 \% \\\hline \text { Between } 1 \text { month and } 2 \text { months old } & 2.00 \% \\\hline \text { Between } 3 \text { and } 5 \text { months old } & 5.00 \% \\\hline \text { Over } 5 \text { months old } & 20 \% \\\hline\end{array}$$ Assuming that the current balance in the provision for doubtful debts is zero,what is the entry to record the provision for this period?
What is the entry to record the writing off of a bad debt of $1000 when a debtor goes bankrupt?

A)

B)

C)

D)

Question 33

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). For products such as precious metals or agricultural products revenue is recognised at which point in the earnings cycle shown above?

A) Point 1
B) Point 4
C) Point 6
D) Point 7

Question 34

An entity shall recognise revenue from a contract when:

A) the entity has satisfied the performance obligation.
B) the goods or service have been transferred to the customer.
C) the customer obtains control of the goods or service.
D) All of the given answers are necessary for recognition of revenue from a contract.

Question 35

There are various appropriate accounting treatments when a sale is made subject to a right of return.These methods include:

A) recording the sale and accounting for the returns as they occur in future periods.
B) recording the cash received as held in trust until all return privileges have expired.
C) recording the sale but reducing sales by an estimate of the future returns.
D) recording the sale and accounting for the returns as they occur in future periods and recording the sale but reducing sales by an estimate of the future returns.

Question 36

Revenue recognition under IASB (2011)requires that:

A) the entity has transferred to the buyer the significant risks and rewards of ownership.
B) the entity retains neither continuing managerial involvement to the degree normally associated with ownership nor effective control over the goods.
C) the costs incurred or to be incurred can be measured reliably.
D) there should be a direct function of the transfer of control of the goods and services to the customer.

Question 37

Magazines Galore receives subscription money in advance,and has received $50 000 from customers on 1 February to cover the next ten issues of Wheels Galore.There are ten issues a year-one at the end of each month except for January and December.What are the appropriate accounting entries to record the receipt of the subscription money and (assuming no monthly entries have been made)the adjusting entry at 30 June (after June's issue has been mailed to subscribers)?

A)

B)

C)

D)

Question 38

When goods are sold 'free on board' (f.o.b.)shipping point,the revenue should be recognised when:

A) the goods are completed and ready to be transported.
B) the goods are received by the purchaser.
C) the goods are received by the common carrier.
D) None of the given answers are correct, there is no revenue involved for goods sold on terms 'free on board'.

Question 39

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). Because of uncertainty and depending on which measurement model is being applied,revenue recognition will take place at a limited number of points in the earnings cycle.In traditional historical-cost accounting,in most cases,at which point in the cycle above have revenues been recognised?

A) Point 5
B) Point 8
C) Point 7
D) Point 9

Question 40

Daniel Ltd sells one of its properties to a financing company with an attached call option,which allows Daniel Ltd to reacquire the property at a future date for $400 000.The current market value at the time of the sale is $300 000,but the financing company pays $350 000 for it.It is expected that the market value of the property will exceed $400 000 before the option expires.What is the appropriate treatment of this sale?

A) Record the revenue and make appropriate note disclosures about the call option and its associated risks.
B) Set-off the call option and the building-reporting changes in the difference between their current values as revenues or expenses as appropriate.
C) No entry would be required as the call option is off balance sheet and the building has not effectively been sold.
D) Record the inflow of cash and a liability.

Question 41

The percentage-of-completion method that may be used to account for construction contracts can be justified on the basis that:

A) The contractor will be continuously working and therefore earning revenue.
B) In most long-term construction projects, payments are made periodically throughout the life of the contract allowing revenue to be recognised.
C) It is unreasonable to expect a contractor to record revenue only when construction is completed.
D) The contracting firm has a basis for measuring completion at particular interim dates.

Question 42

In the case of a fixed price contract,AASB 111 specifies four conditions that must all be met in order for the percentage-of-completion method to be applied.These conditions include:

A) Costs related to the contract can be clearly identified and measured reliably.
B) It is probable that the economic benefits arising from the contract will flow to the contractor.
C) The entity commissioning the work has a good credit rating and is able to pay its debts.
D) Costs related to the contract can be clearly identified and measured reliably and it is probable that the economic benefits arising from the contract will flow to the contractor.

Question 43

In relation to the expense associated with the creation of an allowance for doubtful debts,the Australian Taxation Office:

A) never allows a deduction for taxation purposes for that amount.
B) allows a deduction for taxation purposes for that amount when it is recognised as an expense.
C) allows a deduction for taxation purposes immediately.
D) allows a deduction for taxation purposes only when there is a bad debt written off against a debtors account.

Question 44

Russell Ltd commenced the construction of a bridge on 1July 2013.It has a fixed-price contract for total revenues of $35 million.The expected completion date is 30 June 2016.The expected total cost to Russell Ltd at the beginning of the project is $29 million.The following information relates only to the construction of the bridge: $$\begin{array} { | l | r | r | r | } \hline \text { For the year ending } 30 \text { June } & \begin{array} { r } 2014 \\( \$ 000 )\end{array} & \begin{array} { r } 2015 \\( \$ 000 )\end{array} & \begin{array} { r } 2016 \\( \$ 000 )\end{array} \\\hline \text { Costs for the year } & 12000 & 18000 & 7000 \\\hline \text { Costs incurred to date } & 12000 & 30000 & 37000 \\\hline \text { Estimated costs to complete } & 19500 & 6300 & - \\\hline \text { Progress billings during the year } & 10000 & 12000 & 13000 \\\hline \text { Cash collected during the year } & 7000 & 10000 & 18000 \\\hline\end{array}$$ Russell Ltd uses the percentage-of-completion method based on cost to account for its construction contracts.Assuming that the entries for 2014 have been made,what are the journal entries for the year ended 30 June 2015 (rounded to the nearest $000)?

A)
$$\begin{array} { | r | l | r | r | } \hline & & \$ ( 000 ) & \$ ( 000 ) \\\hline \mathrm { Dr } & \text { Construction in progress } & 18000 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 18000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 12000 & \\\hline \mathrm { Cr } & \text { Billings on construction in progress } & & 12000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction expenses } & 18000 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 15992 \\\hline \mathrm { Cr } & \text { Construction in progress } & & 2408 \\\hline\end{array}$$
B)
$$\begin{array} { | r | l | r | r | } \hline & & \$ ( 000 ) & \$ ( 000 ) \\\hline \mathrm { Dr } & \text { Construction in progress } & 30000 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 30000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 12000 & \\\hline \mathrm { Cr } & \text { Billings on construction in progress } & & 12000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Unearned revenue } & 18000 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 15686 \\\hline \mathrm { Cr } & \text { Construction in progress } & & 2314 \\\hline\end{array}$$
C)
$$\begin{array} { | l | l | r | r | } \hline & & \$ ( 000 ) & \$ ( 000 ) \\\hline \mathrm { Dr } & \text { Construction in progress } & 12000 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 12000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 12000 & \\\hline \mathrm { Cr } & \text { Billings on construction in progress } & & 12000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction in progress } & 18000 & \\\hline \mathrm { Dr } & \text { Construction expenses } & 12000 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 30000 \\\hline\end{array}$$
D)
$$\begin{array} { | r | l | r | r | } \hline & & \$( 000 ) & \$ ( 000 ) \\\hline \mathrm { Dr } & \text { Construction in progress } & 18000 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 18000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 12000 & \\\hline \mathrm { Cr } & \text { Billings on construction in progress } & & 12000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction in progress } & 1477 & \\\hline \mathrm { Dr } & \text { Construction expenses } & 18000 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 19477 \\\hline\end{array}$$

Question 45

Biological assets are:

A) recognised as income when sold.
B) to be valued at market value, with any increase being capitalised and amortised over the period until the asset is sold.
C) to be valued at market value, with any increase being treated as income.
D) to be valued at fair value, with any increase being treated as income.

Question 46

In considering whether to recognise revenue when there are associated options:

A) The probability of the exercise of the options must be considered.
B) The probability of the exercise of the options must not be considered.
C) Put options will always give rise to revenue, whereas call options will not.
D) Call options will always give rise to revenue, whereas put options will not.

Question 47

When the cost basis is used to calculate the percentage of completion,cost items that may need adjustment include:

A) discounts for the bulk purchase of construction materials.
B) gains and losses on foreign currency translation.
C) materials delivered and paid for, but not yet used.
D) interest charges on late payments for materials and other items used in the construction project.

Question 48

The percentage of completion can be measured in a number of ways,including:

A) physical estimates or surveys of the work performed to date.
B) the work plan basis, which uses the project management plan to calculate the percentage of the construction completed.
C) the billings basis, using the proportion that progress billings to date bear to the total estimated billings for the contract.
D) physical estimates or surveys of the work performed to date and the billings basis, using the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.

Question 49

A group of contracts shall be treated as:

A) a single contract if negotiated as a package.
B) a single contract only when the contracts are performed concurrently.
C) individual construction contracts.
D) all of the given answers.

Question 50

The following journal entries were recorded by a vendor who sold goods and received promissory notes on 1 July 2012 in exchange. Assuming that the issuer of the promissory notes intends to make three equal payments of $5000 at the end of each of the 3 years,30 June 2013,30 June 2014 and 30 June 2015; what is the amount of interest revenue recorded by the vendor at 30 June 2015?

A) Nil
B) $536
C) $1014
D) $1441

Question 51

Using the cost method to calculate the percentage of completion,the formula for the current period revenue or gross profit to be recognised is:

A) costs incurred to the end of the current period divided by most recent estimate of total costs.
B) estimated total revenue or gross profit from the contract multiplied by (costs incurred to the end of the current period divided by most recent estimate of total costs) less (total revenue or gross profit recognised in prior periods).
C) costs incurred to the end of the current period divided by most recent estimate of total costs multiplied by (total revenue or gross profit recognised in prior periods).
D) estimated total revenue or gross profit from the contract divided by (costs incurred to the end of the current period multiplied by most recent estimate of total costs) less (total revenue or gross profit recognised in prior periods).

Question 52

Hillier Construction Ltd commenced the construction of a building on 1 July 2013.It has a fixed-price contract for total revenues of $45 million.The expected completion date is 30 June 2016.The expected total cost to Hillier Construction at the beginning of the project is $35 million.The following information relates only to the construction of this building: $$\begin{array} { | l | r | r | r | } \hline \text { For the year ending } 30 \text { June } & \begin{array} { r } 2014 \\( \$ 000 )\end{array} & \begin{array} { r } 2015 \\( \$ 000 )\end{array} & \begin{array} { r } 2016 \\( \$ 000 )\end{array} \\\hline \text { Costs for the year } & 12500 & 15000 & 10000 \\\hline \text { Costs incurred to date } & 12500 & 27500 & 37500 \\\hline \text { Estimated costs to complete } & 23000 & 8500 & - \\\hline \text { Progress billings during the year } & 10000 & 12000 & 23000 \\\hline \text { Cash collected during the year } & 10000 & 11000 & 24000 \\\hline\end{array}$$ Hillier Construction uses the percentage-of-completion method based on cost to account for its construction contracts.What are the journal entries for the year ended 30 June 2014 (rounded to the nearest $000)?

A)
$$\begin{array} { | l | l | r | r | } \hline & & \$ 000 & \$ 000 \\\hline \mathrm { Dr } & \text { Construction expenses } & 12500 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 10000 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction in progress } & 3345 & \\\hline \mathrm { Cr } & \text { Gross profit on construction contract } & & 3345 \\\hline\end{array}$$
B)
$$\begin{array} { | l | l | r | r | } \hline & & \$ 000 & \$ 000 \\\hline \mathrm { Dr } & \text { Construction in progress } & 12500 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 10000 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction in progress } & 3571 & \\\hline \mathrm { Dr } & \text { Construction expenses } & 12500 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 16071 \\\hline\end{array}$$
C)
$$\begin{array} { | r | l | r | r | } \hline & & \$ 000 & \$ 000 \\\hline \mathrm { Dr } & \text { Construction in progress } & 12500 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 10000 & \\\hline \mathrm { Cr } & \text { Billings on construction in progress } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction in progress } & 3345 & \\\hline \mathrm { Dr } & \text { Construction expenses } & 12500 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 15845 \\\hline\end{array}$$
D)
$$\begin{array} { | l | l | r | r | } \hline & & \$ 000 & \$ 000 \\\hline \mathrm { Dr } & \text { Construction in progress } & 12500 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 10000 & \\\hline \mathrm { Cr } & \text { Billings on construction in progress } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction expenses } & 12500 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 12500 \\\hline\end{array}$$

Question 53

Undersea Construction Ltd commenced the construction of a tunnel under a major river for public transport on 1 July 2014.It has a fixed-price contract for total revenues of $36 million.The expected completion date is 30 June 2017.The expected total cost to Undersea Construction at the beginning of the project is $28 million.The following information relates only to the construction of the tunnel: $$\begin{array} { | l | r | r | r | } \hline \text { For the year ending } 30 \text { June } & \begin{array} { r } 2015 \\( \$ 000 )\end{array} & \begin{array} { r } 2016 \\( \$ 000 )\end{array} & \begin{array} { r } 2017 \\( \$ 000 )\end{array} \\\hline \text { Costs for the year } & 5000 & 15000 & 10000 \\\hline \text { Costs incurred to date } & 5000 & 20000 & 30000 \\\hline \text { Estimated costs to complete } & 22000 & 8500 & - \\\hline \text { Progress billings during the year } & 10000 & 22000 & 4000 \\\hline \text { Cash collected during the year } & 9000 & 19000 & 8000 \\\hline\end{array}$$ Undersea Construction uses the percentage-of-completion method based on cost to account for its construction contracts.What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)?

A)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) : & 2015 ( \$ 000 ) : & 2016 ( \$ 000 ) : \\\hline 4000 & 4000 & ( 3000 ) \\\hline\end{array}$$
B)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) : & 2015 ( \$ 000 ) : & 2016 ( \$ 000 ) : \\\hline 10000 & 22000 & 4000 \\\hline\end{array}$$
C)
$$\begin{array} { | l | l | l |} \hline 2014 ( \$ 000 ) : & 2015 ( \$ 000 ) : & 2016 ( \$ 000 ) : \\\hline 1667 & 3596 & 737 \\\hline\end{array}$$
D)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) : & 2015 ( \$ 000 ) : & 2016 ( \$ 000 ) : \\\hline 925 & 3989 & 1086 \\\hline\end{array}$$

Question 54

Russell Ltd commenced the construction of a bridge on 1July 2013.It has a fixed-price contract for total revenues of $35million.The expected completion date is 30 June 2016.The expected total cost to Russell Ltd at the beginning of the project is $29 million.The following information relates only to the construction of the bridge: $$\begin{array} { | l | r | r | r | } \hline \text { For the year ending } 30 \text { June } & \begin{array} { r } 2014 \\( \$ 000 )\end{array} & \begin{array} { r } 2015 \\( \$ 000 )\end{array} & \begin{array} { r } 2016 \\( \$ 000 )\end{array} \\\hline \text { Costs for the year } & 12000 & 18000 & 7000 \\\hline \text { Costs incurred to date } & 12000 & 30000 & 37000 \\\hline \text { Estimated costs to complete } & 19500 & 6300 & - \\\hline \text { Progress billings during the year } & 10000 & 12000 & 13000 \\\hline \text { Cash collected during the year } & 7000 & 10000 & 18000 \\\hline\end{array}$$ Russell Ltd uses the percentage-of-completion method based on cost to account for its construction contracts.What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)?

A)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) & 2015 ( \$ 000 ) & 2016 ( \$ 000 ) \\\hline 1333 & ( 2408 ) & 408 \\\hline\end{array}$$
B)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) & 2015 ( \$ 000 ) & 2016 ( \$ 000 ) \\\hline 1333 & ( 2408 ) & - 926 \\\hline\end{array}$$
C)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) & 2015 ( \$ 000 ) & 2016 ( \$ 000 ) \\\hline 1200 & ( 2314 ) & ( 1000 ) \\\hline\end{array}$$
D)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) & 2015 ( \$ 000 ) & 2016 ( \$ 000 ) \\\hline 1864 & 1477 & ( 5341 ) \\\hline\end{array}$$

Question 55

Which of the following is not a disclosure requirement of IASB (2011)?

A) progress billings in excess of costs incurred on construction contracts
B) If control of an asset is transferred to a customer before the customer pays consideration this must be disclosed as a contract asset or receivable.
C) If alternative descriptions are used in the statement of financial position sufficient information must be disclosed to the users to be able to distinguish between receivables and contract assets.
D) The gross amount of work progress must be disclosed in the statement of financial position.

Question 56

The following journal entries were recorded by a vendor who sold goods and received promissory notes on 1 July 2012 in exchange. What is the interest rate implicit in the arrangement?

A) 29.6%
B) 16%
C) 10%
D) 12%

Question 57

Transactions such as the purchase of assets or the issuance of debt are not considered income because:

A) they involve external parties.
B) they necessarily involve cash.
C) they do not result in an increase in equity.
D) they both result in an increase of the asset or liability concerned.

Question 58

IASB (2011)specifies the accounting treatment in the case that the outcome of a construction contract cannot be reliably assessed.The treatment specified is:

A) (a) Contract costs must be deferred and matched against revenues in the financial year in which they are recognised where it is not probable that the costs will be recovered in the current period; and (b) where it is probable that the costs will be recovered in the current period, revenue must be recognised only to the extent of the costs incurred.
B) (a) Construction costs must be recognised as a contra asset in the financial year in which they are incurred and set-off against the receivable recorded on the contract; and (b) where the receivable is less than the accrued costs, the difference must be written off as an expense in the period.
C) (a) Contract costs must be recognised as an expense in the financial year in which they are incurred; and (b) where it is probable that the costs will be recovered, revenue must be recognised only to the extent of the costs incurred.
D) (a) Construction costs must be accrued and reported as a deferred asset to the extent that it is considered probable that the costs will be recovered; and (b) revenue may be recognised only to the extent of the costs incurred.

Question 59

Which of the following is an example of a situation in which an entity does not retain the control of the asset?

A) when the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions
B) when the entity provides a 30-day return from purchase with a full refund for the goods sold
C) when the buyer has the right to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return
D) when the goods are shipped subject to installation and the installation is a significant part of the contract that has not yet been completed by the entity

Question 60

Hillier Construction Ltd commenced the construction of a building on 1 July 2013.It has a fixed-price contract for total revenues of $45 million.The expected completion date is 30 June 2016.The expected total cost to Hillier Construction at the beginning of the project is $35 million.The following information relates only to the construction of this building: $$\begin{array} { | l | r | r | r | } \hline \text { For the year ending } 30 \text { June } & \begin{array} { r } 2014 \\( \$ 000 )\end{array} & \begin{array} { r } 2015 \\( \$ 000 )\end{array} & \begin{array} { r } 2016 \\( \$ 000 )\end{array} \\\hline \text { Costs for the year } & 12500 & 15000 & 10000 \\\hline \text { Costs incurred to date } & 12500 & 27500 & 37500 \\\hline \text { Estimated costs to complete } & 23000 & 8500 & - \\\hline \text { Progress billings during the year } & 10000 & 12000 & 23000 \\\hline \text { Cash collected during the year } & 10000 & 11000 & 24000 \\\hline\end{array}$$ Hillier Construction uses the percentage-of-completion method based on cost to account for its construction contracts.What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)?

A)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) & 2015 ( \$ 000 ) & 2016 ( \$ 000 ) \\\hline 3345 & 3530 & 3970 \\\hline\end{array}$$
B)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) & 2015 ( \$ 000 ) & 2016 ( \$ 000 ) \\\hline 3345 & 3530 & 625 \\\hline\end{array}$$
C)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) & 2015 ( \$ 000 ) & 2016 ( \$ 000 ) \\\hline 7747 & 20135 & 17118 \\\hline\end{array}$$
D)
$$\begin{array} { | l | l | l | } \hline 2014 ( \$ 000 ) & 2015 ( \$ 000 ) & 2016 ( \$ 000 ) : \\\hline 3571 & 4286 & 2857 \\\hline\end{array}$$

Question 61

IASB and FASB initiated a joint project to clarify the principle for recognising revenue and develop a common revenue standard for IFRS and US GAAP so as to:

A) remove inconsistencies and weaknesses in existing revenue requirements.
B) provide a more robust framework for addressing revenue issues.
C) simplify the preparation of financial statements.
D) All of the given answers are correct.

Question 62

Explain the difference between revenue and gains as defined in the AASB (IASB)Conceptual Framework.

Question 63

Lonsdale Ltd sells mobile phones and provides a one-year warranty.Lonsdale is able to recognise revenue at point-of-sale in accordance with IASB (2011)because:

A) this is industry practice.
B) repairs are unlikely within a year of sale.
C) cost of repairs can be estimated based on experience and this is recognised as warranty expense in the year of sale.
D) cost of repairs can be estimated based on experience and this is recognised as sales returns.

Question 64

What are the three conditions that must be met in order for revenue to be recognised when the sale of a product gives the buyer the right to return the product?

Question 65

Describe the output and input measures of performance that an entity is required to use when measuring the progress to date on a construction contract.

Question 66

When a performance obligation is satisfied,an entity shall recognise revenue:

A) in full if it is an immaterial amount.
B) when the asset is transferred and the customer gains control of the asset.
C) when the entity retains control.
D) when the risks and rewards are transferred to the customer.

Question 67

Which of the following statements is not in accordance with IASB (2011)Revenue from Contracts with Customers with respect to revenue recognition when right of return exists?

A) Revenue E Revenue recognition of the consideration for the transferred products to which the entity is reasonably assured to be entitled.
B) when goods are sold or services are rendered recognition of a refund liability
C) recognition of an asset for its right to recover products from customers on settling the refund liability
D) All of the given answers are in accordance with the accounting standard

Question 68

IASB (2011)requires an entity to recognise revenue for a performance obligation satisfied over time only if the entity can:

A) reasonably measure with complete satisfaction the performance obligation.
B) reasonably measure its expected revenue of the performance obligation.
C) reasonably measure its expected costs of the performance obligation.
D) reasonably measure its progress towards complete satisfaction of the performance obligation.

Question 69

Which of the following statements is incorrect with respect to revenue recognition of construction contracts?

A) The percentage-of-completion method is to be applied for fixed price contracts if the recognition criteria are satisfied.
B) IASB (2011) requires individual construction contracts to be accounted for separately and the requirements of the standard to be applied separately to each contract.
C) The percentage-of-completion method should be used, provided certain conditions are met that enable the outcome of the contract to be reliably measured.
D) Percentage-of-completion method requires contract revenue to be matched with progress billings, resulting in the reporting of revenue, expenses and profit which can be attributed to the amount billed to customers.

Question 70

IASB and FASB initiated a joint project to address some inconsistencies of recognition of revenue in contracts with customers with other accounting standards.Discuss two of these inconsistencies.

Question 71

Discuss the different conditions detailed in IASB (2011)that must be satisfied before the percentage-of-completion method can be used.

Question 72

Describe,with examples,how the recognition of revenue,at the time of sale,is affected when products require transportation.

Question 73

Discuss how the use of call and put options affect revenue recognition for sales of merchandise with associated conditions.

Question 74

Explain the accounting treatment when a third party supplies the awards under a customer loyalty programme.

Question 75

Which of the following is not a step in recognising revenue according to IASB (2011)?

A) Identify the contract with a customer.
B) Determine the transaction price.
C) Recognise revenue before title of the assets transfers to the customer.
D) Identify the separate performance obligations in a contract.

Question 76

Werribee Direct Ltd is a mail order company that allows its customers to order online and return the goods without obligations.Werribee Direct Ltd had experienced a high ratio of returned merchandise from online sales.What is the appropriate accounting treatment for this sale that is in accordance with IASB (2011)Revenue?

A) Record the sale only when the option to return has expired.
B) Record the sale and reduce this by an estimate of future returns.
C) Record the sale and account for returns as they occur.
D) Record the sale as deferred revenue and recognise revenue progressively until expiry of the option.

Question 77

In accordance with IASB (2011)discuss the five steps to recognising revenue.

Question 78

Which of the following statements is not an indicator of the transfer of the control of an asset to a customer?

A) The entity has a present right to payment for the asset.
B) The entity has transferred physical possession of the asset.
C) The customer has legal title to the asset.
D) When goods or services are exchanged or swapped for goods or services, the revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred.

Question 79

Bellarine Ltd is publisher of Mode magazine and its customers usually sign a three-year subscription with an advance payment of $500.Mode magazine has 12 issues in a year.What is the appropriate accounting treatment for this sale on the date of signing that is in accordance with IASB (2011)Revenue?

A) Recognise revenue in full as this is an immaterial amount.
B) Recognise the sale as a provision.
C) Recognise the sale as unearned revenue.
D) Disclose the sale in the notes as a contingent item.