Acct 3323 (intermediate 1) Brian Burnette CH 5/6

What is revenue

Inflows or other enhancements of assets of an entity or settlements of its liabilities from delivering or producing goods

What is the core revenue recognition principle?

companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services

What’s the first step in the revenue recognition process?

Identify the contract with customers

What’s the second step in the revenue recognition process?

Identify the separate performance obligations in the contract

What’s the third step in the revenue recognition process?

Determine the transaction price

What’s the fourth step in the revenue recognition process?

Allocate the transaction price to the separate performance obligations

What’s the five step in the revenue recognition process?

Recognize revenue when each performance obligation is satisfied

What’s the general rule when it comes to the timing of revenue recognition?

The obligation is complete when the control of the goods or service has been transferred from the seller to the customer.

What are the five indicators that control has transferred from seller to customer?

Customer has the obligation to pay the seller, legal title of the asset has been transferred, physical possession of the asset has been transferred, risk and rewards of ownership have been transferred, and the customer has accepted the asset.

What are the three criteria for revenue to be recognized over a period of time?

The customer consumes the benefit of the sellers work as it is performed, Customer controls the asset as it is created, and the seller is creating an asset that has no alternative use to the seller and the seller has the legal right to receive payment for the progress to date.

What are the methods used to determine progress towards completion?

Input based and output based

Why is it important for a seller to distinguish distinct promises to perform within a contract?

Because the timing of revenue recognition depends on identifying and separating these distinct performance obligations.

What makes a good or service capable of being distinct?

The customer could use the good or service on its own or in combination with other goods or services it could obtain elsewhere.

What does it mean for goods or services in a contract to be "separately identifiable"?

It means the seller is promising to provide goods or services individually, rather than as part of a combined good or service where the individual items are inputs to a whole.

what’s a contract?

an agreement that includes enforceable rights or obligations between two or more parties.

What are the five criteria that must be met for a contract to be accounted for under revenue recognition standards?

The contract has commercial substance. The parties have approved the contract. Rights of the parties are clearly identified. Payment terms are specified. It is probable that consideration will be collected.

A contract does not exist until-

one party to the contract performs under the contract.

How should companies account for contract changes or modifications?

They must determine whether the change should be treated as a new contract or as a modification to the existing contract, depending on the nature of the change

A prepayment is not ….

a promise to transfer goods or services to the customer therefor there is no performance obligations related to the payment

Prepayment price should be included in…

the transaction price and allocated to the performance obligations in the contract

The prepayment is considered deferred revenue until…

performance obligations are satisfied

What are the two types of warranties?

Assurance-type warranties and servie type warranties

What is a assurance-type warranty?

A warranty that covers defect’s in the products and are considered a cost of the sale not a performance obligation with in the revenue recognition generating process

What is a service-type warranty?

An offer to repair or otherwise cover usage of the product after the customer has control. (separate performance obligation within the contract)

When does a customer option for additional goods or services represent a separate performance obligation?

When the option provides a material right to the customer—such as free or discounted goods or services they wouldn’t otherwise receive—it is considered an additional performance obligation in the contract.

What does a firm report if the ultimate payment is not known?

The expected value or the most likely amount

I book a room at the Biltmore Hotel through Expedia for $250. Expedia collects $10 for arranging the reservation and remits the remaining $240 to the Biltmore. How much revenue should the Biltmore Hotel and Expedia recognize, and when should they recognize it? What relationship is the Biltmore representing?

Principal

I book a room at the Biltmore Hotel through Expedia for $250. Expedia collects $10 for arranging the reservation and remits the remaining $240 to the Biltmore. How much revenue should the Biltmore Hotel and Expedia recognize, and when should they recognize it? What relationship is Expedia representing?

Agent