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Exam 5: Revenue Recognition

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Question 1

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Under IFRS, firms have free choice as to whether they use the percentage-of-completion method or the cost recovery method to account for a long-term construction contract.

A) True
B) False

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Question 2

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Antonio's Car Services provides maintenance services for motorized vehicles. In March 2018, Rick placed an order for a new set of tires for $350. When a customer purchases goods or services in excess of $300, Antonio's gives the customer a 25% discount coupon for future purchases made in the next three months. Antonio's estimates that approximately 80% of customers utilize the coupon and that on average those customers will purchase goods or services that typically sell for $75. Required: (a) How many performance obligations are in Rick's contract? Explain the reasons for your answer. (b) Prepare a journal entry to record revenue for this transaction, assuming that Antonio's uses the residual method to estimate the stand-alone selling price of new tires sold without the discount coupon.

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(a) Number of performance obligations in...

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Question 3

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If the seller is a principal, the seller typically is vulnerable to risks associated with returns of inventory from the customer.

Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2017, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest. -Assume at March 15, 2017, the time of signing the contract, collection of the receivable was reasonably assured and there were no significant continuing obligations. The journal entry at signing would include a:

The transaction price should be adjusted to reflect the time value of money for interest payable, but not for interest receivable.

Arizona Desert Homes (ADH) constructed a new subdivision during 2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized below: ADH recognizes revenue over time with respect to these contracts. In its December 31, 2017, balance sheet, ADH would report:

Under what circumstances can revenue on long-term construction contracts be recognized over time according to percentage of completion?

Binz Company provides cleaning services and sells garbage bins to office clients. On June 1^st, Binz delivered 100 garbage bins to a client, and also entered into a 5-year contract for Binz to provide cleaning services to that client. Which of the following is most likely to be true?

On April 1^st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%. -What is the expected transaction price with variable consideration estimated as the most likely amount?

A warranty that the customer can purchase separately and that covers a long period of time after the purchase date is likely to be a quality-assurance warranty.

Indiana Co. began a construction project in 2018 with a contract price of $150 million to be received when the project is completed in 2020. During 2018, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed. Indiana:

The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS. -Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS can recognize revenue associated with the $50,000:

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there) . Sweeney recently transferred a painting on consignment to a local barbershop. -After Sweeney has transferred a painting to a barbershop, the painting:

The percentage-of-completion method violates the general rule for revenue recognition that:

Indiana Co. began a construction project in 2018 with a contract price of $150 million to be received when the project is completed in 2020. During 2018, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed. -Suppose that, in 2019, Indiana incurred additional costs of $63.75 million and estimated an additional $42.75 million in costs to complete the project. Indiana:

Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti's contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio's new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus. -Assuming Brunetti determines transaction price as the "expected value" of the variable consideration, what would be the appropriate transaction price for this contract?

Firms have free choice as to whether to recognize revenue over time or at a point in time to account for a long-term contract.

Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2017, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest. -Assume that at the time of signing the contract, collection of the receivable was assured and that service obligations were substantial. However, by October 20, 2017, substantially all continuing obligations had been met. The journal entry required at October 20, 2017 would include a:

Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:

On July 15, 2018, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2018, and the calibration service commenced on that date. - Assume that the scales, software and calibration service are viewed as one performance obligation. How much revenue will Ortiz recognize in 2018 for this contract?