F2 M1

Choice "C" is correct. Under US GAAP, when there is a receipt of a prepayment from a customer, an entity should recognize a contract liability in the amount of the prepayment. An entity will relieve that contract liability account and recognize revenue when the performance obligation identified in the contract is satisfied. If the consideration paid is nonrefundable and there are no remaining obligations to transfer goods or services, then it would be recognized as revenue. In this scenario, Landon receives payment before providing the equipment to the customer; therefore, there is an initial contract liability to be recognized at July 31 that will be relieved at August 31 when the equipment is provided and the contract has been completed. The journal entries for this transaction for Landon are as follows:

April 15, Year 3: No entry.

July 31, Year 3:

August 31, Year 3:

Choice "B" is correct: Decrease—Decrease. During Year 1, operating income will decrease whether revenue is recognized over time or at a point in time. In both cases, the entire estimated loss is recorded for a loss contract in progress (not only the loss incurred to date).

Choice "A" is correct. Although S&B does not take delivery until Year 3, JoJo can recognize the revenue from the sale on September 1, Year 2, because there is a substantive reason for the bill-and-hold arrangement, the roasters were built to S&B's specifications and therefore have been separately identified and cannot be directed to another customer, and the roasters are completed and ready to transfer to S&B on that date.

Choice "B" is correct. Collections received for service contracts should be recorded as an increase in the contract liability account.