ACC 210 Exam 2

Revenue Recognition Principle

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to receive

On March 15, American Airlines received $350 from a customer for a flight to take place on May 3rd. What are the effects on the balance sheet?

Assets: 350 cash

Liabilities: 350 deferred revenue

On March 15, American Airlines received $350 from a customer for a flight to take place on May 3rd. American Airlines satisfies its performance obligation when the flight takes place on May 3rd. What happens to the balance sheet?

Liabilities: (350) deferred revenue

RE: 350

On March 15, American Airlines received $350 from a customer for a flight to take place on May 3rd. American Airlines satisfies its performance obligation when the flight takes place on May 3rd. What happens to the income statement?

Revenue: 350 service revenue

Net income: 350

On October 1st, Dropbox received a payment of $120 for an annual plan offering 1TB of storage space. What happens to the balance sheet?

Assets: 120 cash

Liabilities: 120 deferred revenue

On October 1st, Dropbox received a payment of $120 for an annual plan offering 1TB of storage space. On October 31st, Dropbox recognizes one-twelfth of the total revenue for the one m month of service provided. What happens to the balance sheet?

Liabilities: (10) deferred revenue

RE: 10

On October 1st, Dropbox received a payment of $120 for an annual plan offering 1TB of storage space. On October 31st, Dropbox recognizes one-twelfth of the total revenue for the one m month of service provided. What happens to the income statement?

Revenue: 10 service revenue

Net income: 10

What is allocation percentage?

Stand-alone selling price / total stand-alone selling prices

What is amount allocated?

Allocation % / transaction price

For $480, customers receive an Xbox
gaming console and a 24-month subscription to Xbox Live Gold and Xbox Game Pass. Microsoft sells Xbox consoles separately for $360 and sells the 24-month subscription for $10 a month ($240 total). What is the first step when you identify the contract?

Yes, Microsoft agrees to provide the bundle, the customer agrees to pay $480

For $480, customers receive an Xbox
gaming console and a 24-month subscription to Xbox Live Gold and Xbox Game Pass. Microsoft sells Xbox consoles separately for $360 and sells the 24-month subscription for $10 a month ($240 total). What is the second step when you identify performance obligations?

1. Xbox console

2. 24-month subscription service

For $480, customers receive an Xbox
gaming console and a 24-month subscription to Xbox Live Gold and Xbox Game Pass. Microsoft sells Xbox consoles separately for $360 and sells the 24-month subscription for $10 a month ($240 total). What is the third step when you determine the transaction price?

$480 for the bundle

For $480, customers receive an Xbox
gaming console and a 24-month subscription to Xbox Live Gold and Xbox Game Pass. Microsoft sells Xbox consoles separately for $360 and sells the 24-month subscription for $10 a month ($240 total). What is the fourth step when you allocate the transaction price?

Console: $360 / $600 =0.6%; 60% x $480 = $288

Subscription: $240 / $600 =0.4%; 40% x $480 = $192

For $480, customers receive an Xbox
gaming console and a 24-month subscription to Xbox Live Gold and Xbox Game Pass. Microsoft sells Xbox consoles separately for $360 and sells the 24-month subscription for $10 a month ($240 total). What is the fifth step when you recognize the revenue?

Console: $288 when delivered

Subscription: $192 evenly over 24 months ($8/month)

Microsoft sells one bundle for cash on January 1. Record all necessary transactions from January 1. (Ignore the impact on inventory.)

January 1st

Cash (A+) 480

Deferred Revenue (L+) 192

Sales Revenue (R+, SE+) 288

Microsoft sells one bundle for cash on January 1. Record all necessary transactions from January 31. (Ignore the impact on inventory.)

January 31st

Deferred Revenue (L-) 8

Service Revenue (R+, SE+) 8

Do contra-revenue accounts reduce or increase total revenue?

Reduce

Trade discounts

A reduction in the listed price, with revenue recorded at the discounted amount

Sales discounts

A discount offered for early payment on credit sales.

2/10, n/30 means a 2% discount if paid within 10 days; otherwise, the full amount is due within 30 days

Sales discount

Sales returns

Products returned by customers; companies may estimate and record expected future returns

Sales allowances

A price reduction for a production issue where the customer keeps the product but pays less

What is the accounting impact of contra-revenue accounts?

Decreases revenue, net income, and SE

Elegant Events is a bridal consulting company offering wedding-planning services for $500 each, with a 10%
discount for clients who purchase three or more. In June, the company completes the following transactions with
a client, Maya. On June 3rd, Maya purchases four wedding-planning services and qualifies for the group discount. How does it effect the balance sheet?

It does not

Elegant Events is a bridal consulting company offering wedding-planning services for $500 each, with a 10%
discount for clients who purchase three or more. In June, the company completes the following transactions with
a client, Maya. On June 6th, Elegant events provides services on account, with terms 5/10, n/30. How does it affect the balance sheet?

Assets: 1,800 AR

RE: 1,800

Elegant Events is a bridal consulting company offering wedding-planning services for $500 each, with a 10%
discount for clients who purchase three or more. In June, the company completes the following transactions with
a client, Maya. On June 6th, Elegant events provides services on account, with terms 5/10, n/30. How does it affect the income sheet?

Revenue: 1,800 Service Revenue

Net income: 1,800

Elegant Events is a bridal consulting company offering wedding-planning services for $500 each, with a 10%
discount for clients who purchase three or more. In June, the company completes the following transactions with
a client, Maya. On June 10th, Maya reports that one section of her planning packet contained errors in the vendor listings. After confirming the mistake, management grants her a $100 sales allowance. How does this effect the balance sheet?

Assets: (100) AR

RE: (100)

Elegant Events is a bridal consulting company offering wedding-planning services for $500 each, with a 10%
discount for clients who purchase three or more. In June, the company completes the following transactions with
a client, Maya. On June 10th, Maya reports that one section of her planning packet contained errors in the vendor listings. After confirming the mistake, management grants her a $100 sales allowance. How does this effect the income statement?

Revenues: (100) Sales allowance

Net income: (100)

Elegant Events is a bridal consulting company offering wedding-planning services for $500 each, with a 10%
discount for clients who purchase three or more. In June, the company completes the following transactions with
a client, Maya. Maya pays the outstanding amount. How does this effect the balance sheet?

Assets: 1,615 cash

Assets: (1,700) AR

RE: (85)

Elegant Events is a bridal consulting company offering wedding-planning services for $500 each, with a 10%
discount for clients who purchase three or more. In June, the company completes the following transactions with
a client, Maya. Maya pays the outstanding amount. How does this effect the income statement?

Revenue: (85) sales discount

Net income: (85)

What are the advantages and disadvantages of extending credit to customers?

Increases in sales by allowing customers to buy now and pay later.

Some customers may fail to pay, resulting in bad debts.

Total amount customers owe us. Balance sheet - asset

Accounts receivable

Our estimate of the portion of AR we do NOT expect to collect. Balance sheet - contra-asset

Allowance for uncollectible accounts (AUA)

Amount of AR we actually expect to collect. Balance sheet - net asset

Net accounts receivable

When is revenue recognized over time?

As the company provides a service over a period

What is an example of revenue recognized over time?

A monthly subscription

What is deferred revenue?

Cash received before the company earns the revenue. It is a liability until the service is provided or the product obligation is satisfied.

Is deferred revenue a liability?

Yes, until the service is provided or the product obligation is satisfied

How do you allocate a bundle price?

Standalone selling price of an item ÷ total standalone prices × bundle price

A customer pays $120 on October 1 for 12 months of service. How much revenue is earned on October 1st?

Debit Cash $120; Credit Deferred Revenue $120

A customer pays $120 on October 1 for 12 months of service. How much revenue is earned on October 31st?

Debit Deferred Revenue $10; Credit Service Revenue $1

A $480 bundle includes a $360 console and a $240 subscription. How is the price allocated?

Recognize $288 when the console is delivered and $8 monthly for the subscription

Equipment costs $12,000 and is delivered January 15. When is revenue recognized?

Recognize the full $12,000 in January when the equipment is delivered.

A $12,000 support plan covers 12 months beginning January 1. How much January revenue is earned?

$1,000

What is a trade discount?

A reduction from the list price. Record the sale at the discounted price.

What is a sales return?

The customer returns merchandise, reducing sales revenue.

What is a sales allowance?

The customer keeps the product but receives a price reduction.

How do you calculate net sales revenue?

Sales Revenue − Sales Returns − Sales Allowances − Sales Discounts.

Four services cost $500 each with a 10% trade discount. What is the recorded sale?

$1,800 recorded sale

Elegant Events grants a $100 allowance on its $1,800 sale. What is the remaining receivable?

$1,700

Elegant Events grants a $100 allowance on its $1,800 sale. What is the journal entry?

Debit Sales Allowances $100; Credit Accounts Receivable $100.

Elegant Events owes $1,700 after an allowance and qualifies for a 5% discount. How much cash is received?

$1,615

Six monitors cost $500 each. There is a 20% trade discount, a $200 allowance, and a 2% cash discount. How much cash is received?

$2,156

What is Accounts Receivable?

Money customers owe the company for credit sales. It is an asset

What is the journal entry for a credit sale?

Debit Accounts Receivable; Credit Revenue

Why is the allowance method used?

To estimate uncollectible accounts and recognize bad debt expense in the appropriate period

What is Allowance for Uncollectible Accounts (AUA)?

A contra-asset account that estimates the portion of receivables the company will not collect.

How do you calculate net accounts receivable?

Accounts Receivable − Allowance for Uncollectible Accounts

How do you calculate bad debt expense using a percentage of ending AR?

1. Ending AR × estimated uncollectible percentage = desired ending AUA.

2. Subtract the existing AUA credit balance to determine the adjustment

What is the write-off entry?

Debit Allowance for Uncollectible Accounts; Credit Accounts Receivable

Does writing off a specific account change net AR or create new bad debt expense?

No. AR and AUA decrease equally, so net AR stays the same. No new expense is recorded at write-off.

Kimzey bills $50 million, collects $30 million, and estimates 30% of remaining AR is uncollectible. Find net AR.

$14 million

Kimzey writes off a $4 million account when AR is $20m and AUA is $6m. What is net AR afterward?

$14m

Ending AR is $40,000, 10% is uncollectible, and AUA already has a $500 credit balance. Find the journal entry for bad debt expense.

Debit Bad Debt Expense $3,500; Credit AUA $3,500.

Beginning AR is $75,000; sales $45,000; collections $50,000; write-offs $3,000. Beginning AUA is $6,000 credit; bad debt expense is $4,000. Find net AR.

$60,000.

How do you calculate interest on a note?

Principal × Annual Interest Rate × Time Fraction

A $12,000 note earns 8% annual interest. How much interest accrues for three months?

$240

A $12,000 note earns 8% annual interest. $240 is the amount that interest accrues over 3 months. What is the journal entry?

Debit Interest Receivable $240; Credit Interest Revenue $240

What is inventory?

Goods held for sale to customers or used to make products for sale. Inventory is an asset until sold

When does inventory become an expense?

When the inventory is sold, its cost becomes Cost of Goods Sold (COGS)

How do you calculate cost of goods available for sale?

Beginning Inventory + Purchases.

What is the COGS formula?

Beginning Inventory + Purchases − Ending Inventory

How do you calculate ending inventory?

Beginning Inventory + Purchases − COGS

How do you calculate gross profit?

Net Sales Revenue − Cost of Goods Sold

What is the difference between perpetual and periodic inventory?

Perpetual updates inventory records continuously. Periodic calculates inventory and COGS at the end of the period.

What is specific identification?

Tracks the actual cost of each individual item sold.

What does FIFO mean?

First In, First Out. The oldest inventory costs are assigned to units sold first.

What does LIFO mean?

Last In, First Out. The newest inventory costs are assigned to units sold first.

How do you calculate weighted-average cost per unit?

Total cost of goods available for sale ÷ total units available for sale

Mario has 100 units at $7, 300 at $9, and 600 at $11. Find total inventory cost.

$10,000

Mario has 100 units at $7, 300 at $9, and 600 at $11. The total inventory cost is $10,000. Find the average cost.

$10 per unit

Mario has 100 units at $7, 300 at $9, and 600 at $11. Mario sells 800 units. Calculate COGS using FIFO.

$7,800

Mario has 100 units at $7, 300 at $9, and 600 at $11. Mario sells 800 units. Calculate ending inventory using FIFO.

$2,200

Mario has 100 units at $7, 300 at $9, and 600 at $11. Mario sells 800 units. Calculate COGS using LIFO

$8,400

Mario has 100 units at $7, 300 at $9, and 600 at $11. Mario sells 800 units. Calculate ending inventory using LIFO.

$1,600

Mario sells 800 units at an average cost of $10. Find COGS.

$8,000

Mario sells 800 units at an average cost of $10. Find ending inventory.

$2,000

Mario's 800 sold units consist of 100 at $7, 250 at $9, and 450 at $11. Find COGS

$7,900

Mario's 800 sold units consist of 100 at $7, 250 at $9, and 450 at $11. Find ending inventory.

$2,100

When inventory costs rise, how does LIFO compare with FIFO?

LIFO generally produces higher COGS, lower ending inventory, lower pretax income, lower income tax expense, and lower net income

Why is FIFO called the balance-sheet method in class?

Ending inventory reflects more recent inventory costs

Why is LIFO called the income-statement method in class?

COGS reflects more recent inventory costs

What is the LIFO conformity rule?

A company using LIFO for tax reporting must also use LIFO for financial reporting

Is LIFO permitted under IFRS?

No. LIFO is allowed under U.S. GAAP but prohibited under IFRS.

Beginning inventory is 50 units at $72; purchases are 200 at $75 and 100 at $80. If 320 sell, find COGS using FIFO

$24,200.

Beginning inventory is 50 units at $72; purchases are 200 at $75 and 100 at $80. If 320 sell, find ending inventory using FIFO..

$2,400

Beginning inventory is 50 units at $72; purchases are 200 at $75 and 100 at $80. If 320 sell, find COGS using LIFO

$24,440

Beginning inventory is 50 units at $72; purchases are 200 at $75 and 100 at $80. If 320 sell, find ending inventory using LIFO

$2,160

Beginning inventory is 50 units at $72; purchases are 200 at $75 and 100 at $80. If 320 sell, find gross profit if COGS is $24,440 and sales revenue is $38,400

$13,960.

How do you record an inventory purchase on account?

Debit Inventory; Credit Accounts Payable