ACCT 321 Chapter 18

  1. The new standard, Revenue from Contracts with Customers
    adopts an asset-liability approach for revenue recognition
  2. The seller of a good or service should recognize revenue when
    each performance obligation is satisfied
  3. One criteria that indicates the company should disregard revenue guidance to contracts is
    each party can unilaterally terminate the contract without compensation.
  4. Sufjan Company has a contract to sell 200 units to a customer for $14,000. After 140 units have been delivered, Sufjan modifies the contact by promising to deliver 30 more units for an additional $60 per unit (the standalone selling price at the time of the contract modification). What is the total revenue after the modification?
  5. Which type of revenue or gain is generally recognized as time passes?
    Revenue from interest, rent, and royalties.
  6. In determining the transaction price, the company must consider:
    Variable consideration, noncash consideration, time value of money, and consideration payable
  7. Sherman Company enters into a contract with a customer to build a warehouse for $400,000, with a performance bonus of $100,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 20% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that Sherman has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 50% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed 1 week late, and a 20% probability that it will be completed 2 weeks late. What is the total transaction price for this revenue arrangement?
  8. On January 1, 2015, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $629,406 (imputed rate of 12%). The goods have an inventory cost on Fullbright’s books of $240,000. What amount of Sales Revenue should Fullbright recognize in 2015?
  9. On January 1, 2015, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $629,406 (imputed rate of 12%). The goods have an inventory cost on Fullbright’s books of $240,000. What amount of Interest Revenue should Fullbright recognize in 2015?
    $48000 ($400,000 * 12%)
  10. Which method of measuring the fair value of a performance obligation is dependent on the standalone selling prices of other goods or services promised in the contract?
    residual value
  11. Mocha purchases equipment, installation, and training from Lynne for a price of $1,000,000 and chooses Lynne to do the installation. Lynne charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The price of the installation service is estimated to have a fair value of $20,000.
    •The fair value of the training sessions is estimated at $40,000. Other companies can also provide these training services.
    •Mocha is obligated to pay Lynne the $1,000,000 upon the delivery and installation of the equipment.
    •Lynne delivers the equipment on May 1, 2015, and completes the installation of the equipment on July 1, 2015. Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 8 years.
    Lynne should record Unearned Service Revenue of $37,736 at 7/1/15 [($40,000/$1,060,000) X $1,000,000] related to the training.
  12. Indications that the customer has taken control of the good or service are
    • the selling company has transferred legal title to the asset.
    • the selling company has right to payment for the good or service.
    • the customer has physical possession of the asset.
  13. 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 ten 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. What amount of refund liability should Stossel record at the time of sale?
  14. Hendrix Inc., an equipment dealer, sells equipment on January 1, 2015, to Jimi Company for $200,000. It agrees to repurchase this equipment from Jimi Company on December 31, 2016, for a price of $233,280. At 1/1/15, Hendrix should record
    A liability of $200,000
  15. In a bill-and-hold arrangement, what criteria must be met for the customer to have obtained control of the product?
    • The product currently must be ready for physical transfer to the customer.
    • The seller cannot have the ability to use the product or to direct it to another customer.
    • The reason for the bill-and-hold arrangement must be substantive.
  16. In a consignment sale, the consignee
    records a payable when consigned merchandise is sold
  17. Bret Company sold 3,000 Holsks during 2015 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. Bret should recognize Unearned Warranty Revenue in 2015 of
  18. On January 1, 2015, Purdy Company enters into a contract to transfer Blue and Rain to Georgia Co. for $300,000. The contract specifies that payment for Blue will not occur until Rain is also delivered. In other words, payment will not occur until both Blue and Rain are transferred to Georgia. Purdy determines that standalone prices are $110,000 for Blue and $190,000 for Rain. Purdy delivers Blue to Georgia on February 10, 2015. On March 15, 2015, Purdy delivers Rain to Georgia. Purdy should record
    Contract Asset of $110,000 on February 10.
  19. When using the percentage of completion method, the company
    recognizes revenues and gross profit each period during the contract.
  20. Companies should use the percentage-of completion method to account for long-term construction contracts
    unless required to use the completed-contract method.
  21. Billings on Construction in Process is reported
    as a current asset or current liability, depending on whether its balance is larger or smaller than the Construction in Process account balance
  22. Under the percentage-of-completion method, how should the balances of Billings on C-I-P 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.
  23. Black Bear Construction Company has a contract to construct a $6,000,000 bridge at an estimated cost of $5,300,000. The contract is to start in July 2015, and the bridge is to be completed in October 2017. The following data pertain to the construction period.
    2015   2016  2017  Costs to date $1,325,000   $3,780,000   $5,430,000
    Estimated costs to complete  3,975,000   1,620,000    —    
    Progress billings during the year   1,200,000     3,200,000     1,600,000    
    Cash collected during the year     1,000,000     2,340,000     2,660,000    

    What amount of gross profit should Black Bear recognize in 2016 using the percentage-of-completion method?
    [(70% X ($6,000,000 - $5,400,000)] – [25% X ($6,000,000 - $5,300,000)] = $245,000.
  24. What amount of gross profit should Black Bear recognize in 2017 using the percentage-of-completion method?
    ($6,000,000 - $5,430,000) - [(70% X ($6,000,000 - $5,400,000)] = $150,000.
  25. Under the completed contract method, the Construction in Process account balance consists of
    construction costs only.
Card Set
ACCT 321 Chapter 18
for review for the midterm