INTERMEDIATE ACCOUNTING II - FINAL EXAM

revenue

arises from entities entering into contract with their customers for goods that they sell or services they provide from and entity’s MAIN business activities

contract with customer

agreement between two or more parties that creates enforceable rights and enforceable obligations for each party involved

implied

a contract can be written, oral, or ____________ from customary business practice

enforceable obligation

the promise to perform the service for the customer or provide a good

enforceable right

the right to receive consideration for their service or good

revenue recognition principle

recognize revenue in the accounting period in which the entity’s performance obligation is satisfied

sales revenue

Account related to sale of goods

service revenue

account related to sales of services

debit cash, credit revenue

When a company receive consideration at the same time the performance obligation is satisfied, then the entry is…

debit accounts receivable, credit service revenue

When a company satisfies the performance obligation prior to receiving consideration, then the entry is…

debit cash, credit unearned services revenue

When a company receives the consideration prior to satisfying the performance obligation, then the entry is…

revenue recognition pronouncement

assists companies to identify key components of contracts and analyze their contracts so they can apply the revenue recognition principle appropriately and consistently

inception date

date when a contract is considered established, and the company has an obligation to fulfill its terms

performance obligation (contract liability)

Depicts the obligation by a company to transfer of goods or services to customers in a contract

contract right (contract asset)

company has the right to receive the transaction price or consideration upon satisfaction of the performance obligation

Identify the contract

What is step 1 of the five-step process for revenue recognition?

valid

according to the guidance, entities can only recognize revenue from a contract if it is…

Must have commercial substance

What is step 1 to determine whether a contract is valid?

Must be approved by each party

What is step 2 to determine whether a contract is valid?

commercial substance

Contract has _______________ if the future cash flows of a company changes as a result of the contract

Must be able to identify enforceable rights

What is step 3 to determine whether a contract is valid?

Must be able to identify payment terms

What is step 4 to determine whether a contract is valid?

probable that company will collect substantially all of the consideration

What is step 5 to determine whether a contract is valid?

75-80%

There must be at least a __________ chance of collectability for a company to consider it probable that they will receive consideration

not valid

If there is an option to terminate the contracts without compensation by either party, then the contract is considered…

valid

If there is a contract with a termination option but one or both parties started performing under the agreement, then it is considered…

Identify the separate performance obligations

What is step 2 of the five-step process for revenue recognition?

explicit performance obligation

described in the contract

implicit performance obligation

Company has a known, expected business practice

Are the goods/services distinct from one another?

First question to determine whether a good/service has separate performance obligations

Are the goods/services distinct within the contract

Second question to determine whether a good/service has separate performance obligations

distinct from one another

Asks whether the good/service can be sold separately, typically with a standalone price

distinct within the contract

Asks whether the good/service can be used alone without extra purchase from the same company

Determine transaction price

What is step 3 of the five-step process for revenue recognition?

transaction price

amount of consideration to which a company expects to be entitled to in exchange for transferring promised goods or services to a customer

variable consideration, non-cash consideration, financing components, and prompt payment incentives

In some contracts, the transaction price may not be certain because it depends on factors like…

variable consideration

performance bonuses for delivering a good or services ahead of time

non-cash consideration

asset other than cash is received

financing component

when a customer is allowed to pay over a long period of time

prompt payment incentives

reductions to considerations such as rebates or discounts

consideration

When it comes to determining ______________ FASB requires companies to recognize revenue that they are reasonably assured that they will receive and it is probable that a significant reversal of that revenue will not occur

expected value approach and most likely value approach

Two methods to determine variable consideration…

expected value approach

when there are several ways the transaction price can end up and the company can calculate the probability of each outcome based on prior experience with similar contracts

most likely value approach

usually when the variable compensation only has two possible outcomes

fair value of the item received

when dealing with a noncash consideration, according to GAAP, the transaction price is the ______________________ at the inception date of the contract

12 months

If a payment period is over _______________, then FASB considers that the company has essentially financed the good or service that the customer is acquiring

part sales/service revenues and part interest revenue

Transaction price for payment period longer than 12 months must be recognized in two pieces which include…

cash selling price

To determine sales revenue for a payment period longer than 12 months, the company must estimate the _____________ of the good at inception date of the contract

difference between

To determine the interest revenue for a payment period longer than 12 months, the company must find the ___________________ the cash selling price and the contract’s transaction price

present value

To determine the cash selling price, company must find the ______________ of the transaction price

reduce

If the company determine that a prompt payment incentive is probable, then _____________ the revenue when recorded

allocate transaction price to separate performance obligations

What is step 4 of the five-step process for revenue recognition?

proportionately

If there is more than one performance obligation, then the company must identify each standalone price, and allocate the transaction price __________________

adjusted market assessment approach, cost plus a margin approach, and residual approach

If an observable price is not available to allocate transaction price, then there are three different approach the company can use, which includes…

adjusted market assessment approach

company estimates the price that customers in the market are willing to pay for those goods or services

cost plus a margin approach

company estimates the expected costs of satisfying a performance obligation and then adds an appropriate margin for that good or service

residual approach

only used if a company has stand alone prices for all obligations except for one

Recognize revenue as each performance obligation is satisfied

What is step 5 of the five-step process for revenue recognition?

indicators that control has been obtained by customer

company has transferred legal title to the asset, company has transferred physical possession of the asset, customer has accepted the asset, customer has assumed significant risks and rewards of ownership, and the company has a right to payment for the asset

control

company satisfies performance obligation when (or as) the customer obtains ____________ of the good or service

Customer receives benefits as the seller performs, customer assumes control as asset is create, or an asset with no alternative use to the company is created

A company can recognize revenue over time if one of the three criteria is met, which includes…

example of customer receiving benefits as seller performs

contract for a weekly cleaning service of an apartment, where each week the customer receives and consumers the benefit of a clean apartment, so the cleaning company can recognize revenue each week

example of customer assuming control as the asset is created

Construction of the new Tappan Zee Bridge, which is a multiple year construction project

another company took over contract, they would not need to go back and re-do what has already been done or if the company was fired they would have the right to be paid up to what has been complete

If company meet the criteria that the asset has no alternative use to the company, then it must also meet one of these requirements…

completion

Companies can recognize revenue overtime by measuring the progress made towards …

straight-line basis

For service companies, progress to completion for revenue overtime is calculated on a…

lease

contract that allows for the right to control the use of a specific property, for a specified period of time, in return for compensation

lessor

legally owns the property being leased and gets compensation

lessee

has all the rights and risks of using the specific property, and pays the compensation

commencement date

the day the lease contract begins

lease term

specified period of time the lease is in effect

lease payments

compensation paid by the lessee to the lessor, and dictated in the lease contract

less costly, protection against obsolescence, flexibility

Advantages for the lessee of leasing

less costly

most leases don’t require a significant down payment which helps to conserve cash, and lease payments are often fixed which protect against inflation

protection against obsolescence

lessee can often turn in older models of an asset for more advanced technology assets

flexibility

a lease agreement often has less restrictions than a mortgage or a note with a financial institution

generate recurring profits, can stimulate sales of a lessors product, and lessor can generate additional revenue by selling asset

Advantages of the lessor for leasing

Short-term lease

lease that, at the commencement date, has a lease term of 12 months or less

Long-term lease

lease that, at the commencement date, has a lease term greater than 12 months

renewal option

option to extend the contract lease term

termination option

option to terminate the lease prior to the lease term as specified in the contract

Finance lease

non-cancellable and transfers all risks and rewards of ownership of the underlying asset to the lessee

operating lease

if the lease does not qualify as a financing lease

balance sheet, income statement

between operating and financing leases, reporting for the _____________ is the same, but reporting for the _____________ is different

Transfer of ownership test

What is the first test to determine if a lease is financing?

transfer of ownership test

Does the lease transfer title/ownership at the end of the lease term → if yes financing

Purchase option test

What is the second test to determine if a lease is financing?

Purchase option test

Can the lessee purchase the asset at the end of the lease term and is it reasonable certain that they will exercise this option → if yes then financing

bargain purchase option

if the lease purchase option allows the lessee to purchase the property for a price that is significantly lower than the underlying asset’s expected fair value at the date the option becomes exerciseable

Lease term test

What is the third test to determine if a least is financing?

Lease term test

does the lease term take up a major part of the remaining economic life of the underlying asset → if yes then financing

renewal option

For the lease term test, if there is a ____________, then the lease should include it if it is reasonably certain that the lessee will exercise it

termination option

For the lease term test, if there is a _______________, then the lease should subtract that amount if it is reasonably certain that the lessee will terminate early

75%

If the lease term is __________ or greater than the economic life of the leased asset, then the lease term test is satisfied

Present value test

What is the fourth test to determine if a least is financing?

Present value test

Does the present value sum of all lease payments and guaranteed residual value substantially equal the fair value of the asset → if so then financing

lease payments

_____________________ should include rental payments as well as any payment related to purchase, renewal or termination options that the lessee is reasonably certain to exercise

residual value

estimated worth of the leased asset at the end of the lease

guaranteed residual value

lessee is guaranteeing that the asset will be worth an agreed amount/value at the end of the lease

less than

If the actual asset is worth ________________ the guaranteed residual value at the end of the lease, then the lessee would pay the lessor the difference