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Exam 5: Revenue Recognition

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Question 101

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On December 15, 2018, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2019, and December 15, 2020. Ignore interest charges. -Rigsby has a December 31 year-end. In its December 31, 2018, balance sheet, Rigsby would report:

A) Realized gross profit of $100,000.
B) Deferred gross profit of $100,000.
C) Installment receivables (net) of $3,200,000.
D) Installment receivables (net) of $4,000,000.

E) B) and D)
F) A) and D)

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Question 102

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Stayman Associates has sold a good to a buyer and wants to recognize revenue. Which of the following is an indicator that control of a good has passed from Stayman to the buyer?

A) Buyer has scheduled delivery.
B) Buyer has a strong credit history, such that bad debts are reasonably estimable.
C) Buyer has not scheduled delivery.
D) Buyer has assumed the risk and rewards of ownership.

E) A) and D)
F) A) and C)

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Question 103

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Use of the installment sales method indicates little uncertainty about collection of the receivable.

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 or services.

Assume that GM signs a contract to deliver 10 buses to the Tompkins Consolidated Area Transit (TCAT), which provides transit service throughout Tompkins County, for $4 million. Under the contract, TCAT makes a cash payment of $4 million to GM, and the 10 buses are shipped immediately from GM's existing inventory. At the same time, GM obtains the right to advertise its products on all of TCAT buses for six months, and makes a cash payment of $20,000 to GM for the advertising service. The fair value of the advertising service is $18,000. Required: Prepare the journal entries GM should record to account for the sale of the buses and the purchase of the advertisements. Indicate the amount of revenue GM should recognize for its sale of buses to TCAT.

Accorsi & Sons specializes in selling and installing upscale home theater systems. On March 1, 2018, Accorsi sold a premium home theater package that includes a projector, set of surround speakers, and high quality leather seats, along with complete installation service, for $32,500. If sold separately, each of these goods or services would have cost $15,000 (projector), $12,500 (speakers), $17,500 (seats), and $3,000 (installation), respectively. Required: How much of the transaction price would be allocated to the projector, the speakers, the leather seats, and the installation service, assuming that each of these four parts of the contract is a separate performance obligation? Show your work.

Which of the following is not something that revenue recognition disclosures typically should help investors to understand?

Which of the following applies to a seller who is an agent?

In 2018, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions) : -What is the amount of gross profit on the project recognized by CCC during 2018?

The following information applies to the questions displayed below. Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products. -Estimate the stand-alone selling price of the software using the expected cost plus margin approach.

Explain the differences between how a principal and agent would show a sale of a product that has gross revenues of $1,000, cost of goods sold of $750, and a commission paid by the principle of 10% of gross sales on their respective income statements.

Initial franchise fees are always recognized on the date they are received.

Berry Farm produces organic tomatoes and strawberries. In June 2018, it transported 100 boxes of strawberries with a price of $20 per box to the Bay Farmers' Market. Berry Farm paid an upfront fee of $100 to present its products at the market for one week, and the market earns a 25% profit margin on each item sold, but Berry Farm is responsible for any items that remain unsold at the end of the week. Required: The market was able to sell 65 boxes of strawberries to customers. How much revenue should Berry Farm recognize with respect to this transaction?

On February 12, 2018, Mohawk Home and Garden enters into contract with a local business to provide weekly grass-cutting services between May and September of that year, and receives $2,000 in advance. As part of a local business promotion, Mohawk offers a 50% discount on any barbecue grill with a list price in excess of $200. In the past, Mohawk charged the same amount ($2,000) for the same weekly grass-cutting service, but without the grill discount coupon. Based on historical experience with other clients, Mohawk estimates that about 40% of the coupons will be redeemed, purchasing grills with an average total list price of $400. Required: (a) How many performance obligations are in this contract? Explain the reasons for your answer. (b) Prepare the journal entry to account for the transaction as of February 12, 2018, clearly identifying the revenue or deferred revenue associated with each performance obligation.

If a license is acquired to use intellectual property for a 5-year period, revenue always is recognized at the point in time the customer begins to benefit from the license.

Briefly describe at least two indicators that can be used to distinguish whether a seller is a principal or an agent according to GAAP.

Which of the following is not a characteristic of a distinct good or service?

Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness. • On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will earn the quarterly bonus. • On May 5, Portelli learned that, during March, there were two complaints from customers related to room cleanliness. Based on this new information, Portelli revised its estimate downward to 40% that it would earn the quarterly bonus. • On June 30, Silvia notified Portelli that, for the quarter ended, there were four complaints associated with room cleanliness, so Portelli would receive the bonus. Two days later, Portelli received all payments due for all services rendered in the second quarter, including the bonus. Portelli bases estimates of variable consideration on the most likely amount it expects to receive. -Prepare Portelli's April 30 journal entry to account for the revenue earned in April.

Baldi Piano manufactures customized pianos for concert halls. On July 1, 2018, Baldi signed a contract to deliver a concert piano for $150,000. Under the contract, Baldi is also obligated to provide a one-year maintenance service. If sold separately, the piano and the maintenance service would have cost $140,000 and $20,000, respectively. Required: How much of the transaction price would be allocated to the piano and the maintenance service, assuming they are separate performance obligations? Show your work.

If the contract is not in writing, revenue cannot be recognized, even though goods have been transferred and payment is expected to be received in exchange.