Question 1

Which of the following is not true?

Accepted Answer

Licenses for symbolic intellectual property convey a right of access.

Question 2

Maas LLP developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectiveness of irrigation. Sunny Dale paid a licensing fee of $20,000 for a copy of the software. Although Sunny Dale can use the software as long as it wants, Maas expects that Sunny Dale will use the software for approximately 5 years. Maas does not anticipate any further interaction with Sunny Dale following transfer of the license. How much revenue should Maas recognize in the first year of the contract?

Accepted Answer

Because Maas's ongoing activities will not affect the value of the license, the software has standalone functionality, and the license transfers a right of use. Therefore, all license revenue can be recognized upon transfer of control of the software to the customer.

Question 3

Pita Pal sells fast-food franchises. Pita Pal receives $75,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of $75,000. Pita Pal also receives $36,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 2018, and on May 1, 2018 Rachel had completed training and was open for business. How much revenue in 2018 will Pita Pal recognize for its arrangement with Rachel?

Accepted Answer

Because Rachel had completed training and was open for business on May 1, 2018, Pita Pal apparently has satisfied its performance obligation with respect to the initial training, equipment and furnishings, so it would recognize $75,000 of revenue in 2018. In addition, since Rachel was a franchisee and using the Pita Pal name and consulting services for the last ten months of 2018, Pita Pal should recognize 10 ÷ 12 of a yearly fee of $36,000, or $30,000. In total, Pita Pal recognizes revenue from Rachel of $75,000 + 30,000 = $105,000 in.2018.

Question 4

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.
- Sweeney most likely should recognize revenue when:

Accepted Answer

Consignment arrangements normally do not qualify for revenue recognition until delivery is made to the end customer. Prior to that point, control of goods is viewed as having been retained by the consignor, not by the consignee.

Question 5

The Fremont (Ireland) Flyers were a semi-professional carriage racing team that competed up until the early 1930's. Mary Smith owns the Fremont Fliers' trademark, and recently licensed it to the Fremont (California) Flyers roller derby team. The license allows the roller derby team to use the trademark for five years for a total of $15,000. 
-Under IFRS, how much revenue would Mary recognize in year 1 of the license?

Accepted Answer

Even though a trademark is symbolic intellectual property, IFRS requires the seller to focus on whether the seller is providing continuing service over the license period. Given that the old Fremont Flyers have not operated in almost 100 years, there are no ongoing activities associated with the trademark, so IFRS would view the license as conveying a right of use and recognize all $15,000 in the first year of the license.

Question 6

Assume a contract for the sale of goods specifies that payment is to be made 15 months prior to delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?

Accepted Answer

If the payment is made fifteen months prior delivery, the contract includes a financing component whereby the seller is essentially borrowing money from the buyer. And, since the payment is outside one year of delivery, the financing component is viewed as significant, so interest expense is recognized.

Question 7

Bull'sEye sells gift cards redeemable for Bull'sEye products either in-store or online. During 2018, Bull'sEye sold $2,000,000 of gift cards, and $1,800,000 of the gift cards were redeemed for products. As of December 31, 2018, $150,000 of the remaining gift cards had passed the date at which Bull'sEye concludes that the cards will never be redeemed. How much gift card revenue should Bull'sEye recognize in 2018?

Accepted Answer

Sale of a gift card created deferred revenue, as it is a prepayment by a customer for goods or services to be delivered at a future date. Revenue is recognized when goods or services are delivered or when the likelihood of redemption is remote. In this case, $1,800,000 were redeemed and another $150,000 were viewed as expired, yielding total revenue of $1,950,000.

Question 8

Which of the following is not true?

Accepted Answer

If the seller provides access to its intellectual property, revenue is recognized over the period of time for which access is provided, not deferred until the end of the license period.

Question 9

Assume a contract for the sale of goods specifies that payment is to be made four months after delivery of a product. The seller is likely to do which of the following, with respect to the time value of money over the life of the contract?

Accepted Answer

If the payment is made nine months after delivery, the seller is essentially loaning money to the buyer. However, since the payment is within one year of delivery, the financing component of the contract is viewed as insignificant, so the time value of money is ignored.

Question 10

The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years. Assume that the UFL anticipates that, in addition to receiving the $1 million license fee, it will receive a bonus of $2 million in year 1 of the contract and a bonus of $3 million in years 2-4 of the contract based on Tank-Skin's sales. Also assume that the UFL is convinced that it is probable there will not be a significant reversal of any revenue recognized with respect to the bonus in subsequent periods. At the inception of the contract, what is the amount of transaction price that the UFL would estimate with respect to this license arrangement?

Accepted Answer

Normally the UFL would include an estimate of variable consideration in its estimate of the transaction price, yielding an estimate of $12 million (computed as $1 million initial fee + $2 million year 1 bonus + ($3 million × 3 years for subsequent-year bonuses). However, ASU No. 2014-09 does not allow estimates of sales-based royalties on licenses to be included in the transaction price until that consideration is no longer variable, so those amounts would be excluded from the transaction price estimated at the inception of the contract, and the transaction price would only include the $1 million initial fee.

Question 11

Which of the following is not true about contract liabilities?

Accepted Answer

Contract liabilities are not conditional obligations. They are an obligation that arises due to a customer prepayment.

Question 12

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop. 
-After Sweeney has transferred a painting to a barbershop, the painting:

Accepted Answer

Consignment arrangements normally do not qualify for revenue recognition until delivery is made to the end customer. Prior to that point, control of goods is viewed as having been retained by the consignor, not by the consignee, so the consignor retains the goods in the consignor's inventory. In this case, that means that Sweeney will retain the painting in its inventory until the painting is sold to an end customer.

Question 13

Which of the following is not true about contract assets?

Accepted Answer

Contract assets are recognized when the seller has at least partially fulfilled its performance obligations but not yet been paid, and payment depends on something other than the passage of time.

Question 14

Which of the following is not true about accounting for revenue from franchise arrangements?

Accepted Answer

Franchise arrangements typically include multiple performance obligations because the goods or services included in the arrangement are both capable of being distinct and are separately identifiable.

Question 15

Which of the following is most true regarding consignment arrangements?

Accepted Answer

Consignment arrangements normally do not qualify for revenue recognition until delivery is made to the end customer. Prior to that point, control of goods is viewed as having been retained by the consignor, not by the consignee.

Question 16

On June 1^st, Joseph & Company received a $500 deposit for 80 cases of wine. On June 10^th the customer identified specific vintages that are included in Joseph's inventory, and asked that Joseph not ship the wine until June 20 so the customer could ready space to store the wine, so Joseph set those wines aside for the customer, boxed and ready for shipment to the customer. On June 20^th the wine was shipped and delivered to the customer. Joseph likely would recognize revenue on

Accepted Answer

Bill-and-hold arrangements normally do not qualify for revenue recognition until delivery is made to the customer. Prior to that point, control of goods is not viewed as having passed to the customer. However, sellers can recognize revenue prior to delivery if it is concluded that the customer controls the product (the customer specifically identified the goods), there is good reason for the bill-and-hold arrangement (the customer needed time to make space for the wine), and the product is specifically identified as belonging to the customer and is ready for shipment (Joseph has a good faith deposit, the customer selected the goods, the goods were prepared for shipment and set aside from regular goods for sale).

Question 17

Johnson sells $100,000 of product to Robbins, and also purchases $10,000 of advertising services from Robbins. The advertising services have a fair value of $8,000. Johnson should record revenue on its sale of product to Robbins of:

Accepted Answer

Johnson is paying more for advertising services than the fair value of those services, so the excess of $2,000 (computed as $10,000 price paid - 8,000 fair value of the services) is viewed as a refund of part of the $100,000 sale. Therefore, Johnson records revenue of $98,000 (computed as $100,000 - 2,000).

Question 18

The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years. How much of the $1 million initial license fee should the UFL recognize as revenue in the first year of the contract?

Accepted Answer

The license is for symbolic intellectual property, so the presumption is that the UFL's ongoing activities affect the value of the trademark to Tank-Skin, and the UFL should recognize revenue over time. Therefore, the amount of $1 million initial license fee that the NFL should recognize as revenue is $250,000 (computed as $1 million ÷ 4 years).

Question 19

The Fremont (Ireland) Flyers were a semi-professional carriage racing team that competed up until the early 1930's. Mary Smith owns the Fremont Fliers' trademark, and recently licensed it to the Fremont (California) Flyers roller derby team. The license allows the roller derby team to use the trademark for five years for a total of $15,000. 
-Under U.S. GAAP, how much revenue would Mary recognize in year 1 of the license?

Accepted Answer

A trademark is symbolic intellectual property, so U.S. GAAP requires recognizing revenue over time. $15,000 ÷ 5 years = $3,000 revenue recognized in year 1 of the license.

Question 20

Which of the following is typically true for a bill-and-hold arrangement?

Accepted Answer

Bill-and-hold arrangements normally do not qualify for revenue recognition until delivery is made to the customer. Prior to that point, control of goods is not viewed as having passed to the customer.

Quiz 5: Revenue Recognition

Which of the following is not true?

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there) . Sweeney recently transferred a painting on consignment to a local barbershop. - Sweeney most likely should recognize revenue when:

Assume a contract for the sale of goods specifies that payment is to be made 15 months prior to delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?

Which of the following is not true?

Assume a contract for the sale of goods specifies that payment is to be made four months after delivery of a product. The seller is likely to do which of the following, with respect to the time value of money over the life of the contract?

Which of the following is not true about contract liabilities?

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there) . Sweeney recently transferred a painting on consignment to a local barbershop. -After Sweeney has transferred a painting to a barbershop, the painting:

Which of the following is not true about contract assets?

Which of the following is not true about accounting for revenue from franchise arrangements?

Which of the following is most true regarding consignment arrangements?

Johnson sells $100,000 of product to Robbins, and also purchases $10,000 of advertising services from Robbins. The advertising services have a fair value of $8,000. Johnson should record revenue on its sale of product to Robbins of:

Which of the following is typically true for a bill-and-hold arrangement?