Question 1

Using actual and estimated cost figures to estimate the degree of completion of a long-term construction project is an example of an input-based approach to estimation.

Accepted Answer

Input-based approach relies on the actual cost incurred and estimated cost to complete the project. This approach estimates the degree of completion by analyzing the cost incurred so far and estimating the cost to complete the remaining work. Therefore, the given statement is true.

Question 2

ABC Inc. uses the percentage of completion method to account for one of its long-term construction projects. ABC reported a loss on this contract for its most recent fiscal year, but the contract is expected to be profitable. This is an onerous contract.

Accepted Answer

An onerous contract is one in which the costs to fulfill the contract exceed the economic benefits expected to be received from it. Since the contract is expected to be profitable overall, it is not considered onerous despite the reported loss in the most recent fiscal year.

Question 3

In a consignment arrangement, the seller is essentially acting as an agent of the manufacturer of the goods or their owner.

Accepted Answer

In a consignment arrangement, the seller agrees to sell goods on behalf of the owner or manufacturer, who retains ownership until the goods are sold. The seller acts as an agent or representative of the owner or manufacturer and receives a commission on the sale.

Question 4

Economic Value Added (EVA) is the difference between a product's input cost and final sales price. This figure is dependent up on the firm's earnings process.

Accepted Answer

The answer of Economic Value Added (EVA) is the difference...

Question 5

The amount of revenue recognized by a franchisor will usually depend on the franchise agreement.

Accepted Answer

The franchise agreement typically outlines the terms of the relationship between the franchisor and franchisee, including the revenue sharing structure. Therefore, the amount of revenue recognized by the franchisor would vary based on the specifics of the agreement in place.

Question 6

When goods are sold, the event which triggers revenue recognition is the delivery of the goods.

Accepted Answer

The answer of When goods are sold, the event which...

Question 7

Under a bill and hold arrangement, revenue recognition is delayed until the buyer takes possession of the merchandise.

Accepted Answer

In a bill and hold arrangement, revenue can be recognized before the buyer takes possession if specific criteria are met, such as the buyer requesting the arrangement and the goods being ready for delivery.

Question 8

When goods are sold, revenue may still be recognized if there is an insignificant degree of continuing managerial involvement in some instances.

Accepted Answer

According to the revenue recognition principle, revenue may be recognized when control of goods or services has been transferred to the customer. In some instances, even if there is an insignificant degree of continuing managerial involvement, control may still be deemed to have been transferred, and revenue can be recognized.

Question 9

The gross approach to recording revenues results in higher earnings than does the net method.

Accepted Answer

The gross approach to recording revenues does not affect the total earnings; it impacts how revenue and costs are presented. Gross revenue reporting shows total sales and the cost of goods sold separately, while net revenue reporting shows the net amount after deducting costs directly related to the sales. The overall profit or earnings remain the same under both methods.

Question 10

The percentage-of-completion method for long-term construction contracts can be used if at least the ultimate collection of the contract price is reasonably certain.

Accepted Answer

The answer of The percentage-of-completion method for long-term construction contracts...

Question 11

The percentage-of-completion and completed contract methods will produce different periodic income amounts, but the Accounts Receivable balances will be equal.

Accepted Answer

The percentage-of-completion method recognizes revenue as work is completed, while the completed contract method recognizes revenue only when the contract is complete. As a result, the Accounts Receivable balance will be equal under both methods, as it represents the amount of revenue that has been earned but not yet collected.

Question 12

The value of the consideration received must be known or measurable with absolute certainty in order for revenue to be recognized.

Accepted Answer

Revenue can be recognized when it is probable that the economic benefits will flow to the entity and the revenue amount can be measured reliably, not necessarily with absolute certainty.

Question 13

When one company is acting as an agent on behalf of another company or individual, it will normally report revenues on a net basis.

Accepted Answer

When acting as an agent, the company only collects a commission or fee for its services and therefore reports the revenue on a net basis after deducting these expenses.

Question 14

If a company receives a commission on products it sells but otherwise has no control over selling prices, it is essentially acting as an agent on behalf of another company, and would likely record revenue from these sales on a net basis.

Accepted Answer

When a company acts as an agent on behalf of another company, it does not have control over selling prices and usually receives a commission on the products it sells. In such cases, the company would record revenue from the sales on a net basis, which means deducting the commission earned and reporting only the net amount as revenue.

Question 15

Non-refundable payments can normally be recognized upon receipt, since there is no performance obligation related to these payments.

Accepted Answer

Non-refundable payments still require the recognition of a performance obligation under most accounting standards, such as IFRS 15 or ASC 606, and revenue can only be recognized when that performance obligation is satisfied, not merely upon receipt of payment.

Question 16

There will be no impact on a company's net assets until revenue is recognized.

Accepted Answer

Revenue recognition affects net assets because it increases assets (like cash or accounts receivable) and equity (retained earnings), but until revenue is recognized, these changes do not occur.

Question 17

The transaction price when non-monetary assets are involved in a sale is the value of the non-cash consideration received.

Accepted Answer

The transaction price of a sale that involves non-monetary assets is the fair value of the non-cash consideration received. This is in accordance with the accounting standard, IFRS 15 Revenue from Contracts with Customers. Therefore, the statement is true.

Question 18

"Billings on contracts" is a contra account to "Accounts Receivable."

Accepted Answer

"Billings on contracts" typically refers to a specific type of revenue recognition for long-term contracts and is not a contra account to "Accounts Receivable." Instead, it is more closely related to the process of recognizing revenue and may be part of "Contract Assets" or "Unbilled Receivables," depending on the accounting practices and stage of contract completion. Contra accounts to "Accounts Receivable" would be something like "Allowance for Doubtful Accounts."

Question 19

ABC Inc. uses the percentage of completion method to account for one of its long-term construction projects. Last year the company recorded revenue of $1 million during the first year of one of its projects, which at the time was expected to be profitable. Nearly one year later, the company has incurred substantial cost-overruns. The company now expects the contract to lose $500,000. This is an onerous contract. ABC should therefore record a loss of $500,000 on this contract for the current year.

Accepted Answer

The answer of ABC Inc. uses the percentage of completion...

Question 20

A purchase order received from a client would trigger a journal entry under the earnings-based revenue recognition approach, but not on the contract-based approach.

Accepted Answer

Under the earnings-based revenue recognition approach, revenue is recognized when the earnings process is complete, which typically occurs when goods or services are delivered or completed. Therefore, receiving a purchase order from a client would signify the beginning of the earnings process and trigger a journal entry. However, under the contract-based approach, revenue is recognized based on the completion of specific contractual obligations, which may not be triggered by the receipt of a purchase order.

Quiz 6: Revenue Recognition