Revenue Recognition

Which approach does the new standard, Revenue from Contracts with Customers, adopt?

An asset-liability approach for revenue recognition

To address inconsistencies and weaknesses in revenue recognition, which comprehensive revenue recognition standard was developed?

Revenue from Contracts with Customers

Airbus records revenue of $200 million for the sale of the airplanes to American Airlines when it satisfies its performance obligation.

Which step in the process of revenue recognition does this represent?

Recognize revenue when each performance obligation is satisfied.

Airbus signed a contract to deliver airplanes to American Airlines.

Which step in the process of revenue recognition does this represent?

Identify the contract with customers.

What describes the converged standard on revenue recognition?

Recognizes and measures revenue based on changes in assets and liabilities

Airbus has only one performance obligation — to deliver airplanes to American Airlines, which has a transaction price of $200 million.

Which step in the process of revenue recognition does this represent?

Allocate transaction price to the separate performance obligations.

Bret Company sold 3,000 Holsks during 2020 at a total price of $12,000,000, with a warranty guarantee that the product was free of any defects. The cost of Holsks sold is $7,200,000. The term of the assurance warranty is two years, with an estimated cost of $80,000. In addition, Bret sold extended warranties related to 1,100 Holsks for 3 years beyond the 2-year period for $110,000.

Which amount should Bret recognize Unearned Warranty Revenue in 2020?

$110,000

In a consignment sale, which transaction does the consignee record?

Records a payable when consigned merchandise is sold.

How is an option to purchase a warranty recorded?

Revenue in the period that the service-type warranty is in effect.

What is the role of the agent in a Principal-Agent relationship?

Arrange for the principal to provide goods or services to a customer

Hendrix Inc., an equipment dealer, sells equipment on January 1, 2020, to Jimi Company for $200,000. Also, on January 1, 2020, Hendrix agrees to repurchase this equipment from Jimi Company on December 31, 2021, for a price of $233,280.

How should Hendrix Inc. record this transaction on January 1, 2020?

A liability of $200,000

On July 31, O'Malley Company contracted to have two products built by Taylor Manufacturing for a total of $370,000. The contract specifies that payment will only occur after both products have been transferred to O'Malley Company. Taylor determines that the standalone prices are $200,000 for Product 1 and $170,000 for Product 2.

On August 1, when Product 1 has been transferred, what does Taylor's journal entry to record this event incude?

Debit to Contract Assets for $200,000

How is a partial satisfaction of a multiple performance obligation reported on the balance sheet?

As a contract asset

How are unconditional rights to receive consideration because a performance obligation has been satisfied reported?

Reported as a receivable on the balance sheet

When must a company account for a contract modification as a new contract?

If goods or services are distinct and company has right to receive the standalone price

When should companies use the percentage-of completion method to account for long-term construction contracts?

Always unless required to use the completed-contract method

Which type of revenue or gain is generally recognized with the passage of time?

Long-term construction contracts

In selecting an accounting method for a newly contracted long-term construction project, what principal factor should be considered?

The degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable

How is a loss in the current period on a contract expected to be profitable upon completion in a later year recognized?

Under the percentage-of-completion method

How should the Billings on Construction in Process account be reported?

As a current asset or current liability section

Under the percentage-of-completion method, how should the balances of Billings on Construction in Process and Construction in Process be reported prior to the completion of a long-term contract?

Net, as a current asset if a debit balance, and as a current liability if a credit balance

When should the seller of a good or service recognize revenue?

When they determine that the performance obligation is satisfied

What best describes the percentage-of-completion method?

Revenue and gross profits are recognized each period based upon progress.

What is an example of a contract liability?

Unearned magazine subscription

Stossel Company sells 300 units for $200 each to Liberty Inc. for cash. Stossel allows Liberty to return any unused product within 30 days and receive a full refund. The cost of each product is $120. To determine the transaction price, Stossel decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the most likely amount. Using the most likely amount, Stossel estimates that 10 units will be returned, the costs of recovering the units will be immaterial, and the returned units are expected to be resold at a profit.

Which amount of refund liability should Stossel record at the time of sale?

$2,000

Beyond the one performance obligation to deliver airplanes to American Airlines, Airbus has also agreed to maintain the planes, which represents a separate performance obligation recorded for this promise.

Which step in the process of revenue recognition does this represent?

Identify the separate performance obligations in the contract.

A company began September with $200,000 of inventory. On 9/15, it sold half of this inventory for $185,000, on account, and expected to grant a $15,000 allowance.

On 9/18, due to product concerns, a $8,000 allowance was granted. At the month-end, the company expects to give the customer in the future an additional allowance of $2,000. Calculate net accounts receivable for the balance sheet and both net sales and gross profit for the income statement.

$175,000 A/R, $175,000 net sales & $75,000 gross profit

A company sold inventory that cost $500,000 for $800,000 on account. By the end of the accounting period, allowances (both granted and expected combined) totaled $30,000. Calculate net accounts receivable for the balance sheet and both net sales and gross profit for the income statement.

$770,000 A/R, $770,000 net sales & $270,000 gross profit 

A company received $250,000 from a customer for a service to be provided. The cost of providing the service is expected to be about $150,000. By the end of the accounting period, $40,000 remains unearned. How much revenue should be reported so far on the income statement?

$210,000 

A company sold 10,000 units of inventory for $20 each, on open account. Shortly after the sale, the company granted a $5,000 allowance because of a customer complaint regarding the quality of the inventory. At the end of the accounting period, an additional $5,000 allowance is expected to be given to this same customer. Calculate net sales.

$190,000