Question 1

Revenue is recognized when a contract is enacted.

Accepted Answer

Revenue is recognized when the performance obligations in the contract are satisfied, not merely when the contract is enacted.

Question 2

The efforts-expended method of recognizing revenue over time is considered to be an output method.

Accepted Answer

The efforts-expended method is considered an input method because it measures the extent of completion based on the inputs (such as labor hours or costs) that have been put into the contract to date, rather than measuring the value of goods or services transferred to the customer (output).

Question 3

A constructive obligation is a promise in a contract with a customer to transfer goods or services.

Accepted Answer

A constructive obligation arises from a company's actions where there is an established pattern of past practice, published policies, or a sufficiently specific current statement that creates a valid expectation by other parties (such as customers or employees) that the company will discharge those responsibilities. It is not necessarily a promise in a contract with a customer to transfer goods or services, which would typically be considered a contractual obligation.

Question 4

The first step of the revenue recognition model is to identify the contract with the customer.

Accepted Answer

The first step in the five-step revenue recognition model under ASC 606 is to identify the contract(s) with a customer.

Question 5

When a contract contains an uncertain, variable amount of consideration, GAAP requires that a company only recognizes total consideration as if the uncertainty does not exist.

Accepted Answer

GAAP requires that a company estimate the amount of consideration to which it expects to be entitled, taking into account the effect of variability, rather than ignoring the uncertainty.

Question 6

A contract modification always results in a new contract if the modification adds distinct goods or services at a price that reflects their stand-alone selling price.

Accepted Answer

A contract modification that adds distinct goods or services at their stand-alone selling price is treated as a separate contract under accounting standards.

Question 7

If the customer buys goods and promises consideration in a form of a non-cash asset, the seller values the transaction based on the fair value of the non-cash asset, not on the stand-alone price of the goods sold.

Accepted Answer

The transaction is valued based on the fair value of the non-cash asset received, as it reflects the value of the consideration the seller is receiving in exchange for the goods.

Question 8

A contract may be written, oral, or implied by customary business practices.

Accepted Answer

Contracts can be formed in various ways, including written agreements, oral agreements, and through conduct that implies agreement, such as customary business practices.

Question 9

One type of revenue is the settlement of a liability that occurs as a result of a company's primary operating activities.

Accepted Answer

Revenue can include the settlement of liabilities when it results from a company's primary operating activities, such as providing goods or services.

Question 10

When a customer pays a seller a significant period of time after the goods are delivered, the consideration received by the seller always includes both transaction revenue and interest income.

Accepted Answer

When a customer pays a seller a significant period of time after the goods are delivered, the seller has extended credit to the customer. As a result, the seller has earned interest income in addition to the transaction revenue.

Question 11

The core principle of revenue recognition is that a company should recognize revenue when it has been earned.

Accepted Answer

The answer of The core principle of revenue recognition is...

Question 12

A good is considered distinct if it is a separately identifiable good from which a customer is able to receive benefits either separate from or together with other resources.

Accepted Answer

A good is considered distinct if it can be separately identified and if the customer can benefit from it on its own or together with other resources, which aligns with the definition provided.

Question 13

If a contract contains only one performance obligation, no allocation of the transaction price is ever needed to recognize revenue.

Accepted Answer

When a contract has only one performance obligation, the entire transaction price is attributed to that single obligation, eliminating the need for allocation.

Question 14

A company that is considered to be an agent in a revenue-producing transaction will recognize revenue for the net amount of consideration received from the customer.

Accepted Answer

An agent recognizes revenue for the net amount because it only earns a commission or fee from the transaction, not the gross amount billed to the customer.

Question 15

There are two types of license: those that are distinct and those that are satisfied over a period of time.

Accepted Answer

The statement seems to confuse types of licenses with revenue recognition methods. Licenses can be distinct or part of a bundle, and revenue can be recognized at a point in time or over time, depending on the nature of the performance obligation.

Question 16

A "contract asset" is a receivable that arises from the performance obligation of a contract.

Accepted Answer

A "contract asset" is recognized when a company has satisfied a performance obligation but does not yet have an unconditional right to payment; it differs from a receivable, which represents an unconditional right to payment.

Question 17

The FASB provides a 4-step model for evaluating when a company should recognize revenue.

Accepted Answer

The FASB outlines a 5-step model for recognizing revenue in the Accounting Standards Codification (ASC) 606, not a 4-step model.

Question 18

Nonrefundable fees from customers are recognized as revenue when received.

Accepted Answer

Nonrefundable fees from customers are recognized as revenue when the company has performed the promised service or transferred the goods to the customer, not merely when the fees are received. Revenue recognition is based on the satisfaction of performance obligations, not the timing of payments.

Question 19

A company must adjust the consideration for the time value of money if the time period between the customer's payment and the company's transfer of goods or services is more than three months.

Accepted Answer

The answer of A company must adjust the consideration for...

Question 20

GAAP requires that incremental costs of obtaining a contract must be capitalized and amortized over the time of the contract.

Accepted Answer

The answer of GAAP requires that incremental costs of obtaining...

Quiz 17: Advanced Issues in Revenue Recognition