ch18 PDF
ch18 PDF
ch18 PDF
REVENUE RECOGNITION
CHAPTER LEARNING OBJECTIVES
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*10.
*11.
*12.
*13.
18 - 2
TRUE-FALSEConceptual
1.
The new revenue recognition standard adopted a liability approach as the basis for
revenue recognition.
2.
3.
The first step in the revenue recognition process is to identify the separate performance
obligations in the contract.
4.
Revenue from a contract with a customer cannot be recognized until a contract exists.
5.
6.
If the performance obligation is not highly dependent on, or interrelated with, other
promises in the contract, then each performance obligation should be accounted for
separately.
7.
8.
9.
When a sales transaction involves a significant financing component, the fair value is
determined either by measuring the consideration received or by discounting the payment
using an imputed interest rate.
10.
Companies rarely have to allocate the transaction price to more than one performance
obligation in a contract.
11.
When a company sells a bundle of goods at a discount, the discount should be allocated to
the product that caused the discount and not to the entire bundle.
Revenue Recognition
18 - 3
12.
A company recognizes revenue from a performance obligation over time by measuring the
progress toward completion.
13.
14.
When a company sells a product but gives the buyer the right to return it, revenue should
not be recognized until the sale is collected.
15.
Warranties that the product meets agreed-upon specifications in the contract at the time
the product is sold are referred to as assurance-type warranties.
16.
*17.
The most popular input measure used to determine the progress toward completion in
long-term contracts is the cost-to-cost basis.
*18.
If the difference between the Construction in Process and the Billings on Construction in
Process account balances is a debit, the difference is reported as a current asset.
*19.
The Construction in Process account includes only construction costs under the
percentage-of-completion method.
*20.
Under the cost-recovery method, companies recognize costs only when the contract is
completed.
*21.
The principal advantage of the cost-recovery method is that reported revenue reflects final
results rather than estimates.
*22.
Companies must recognize the entire expected loss on an unprofitable contract in the
current period under the percentage-of-completion method but not the cost-recovery
method.
*23.
A loss in the current period on a profitable contract must be recognized under both the
percentage-of-completion and cost-recovery method.
*24.
Neither the Billings account balance nor the Construction in Process account balance can
exceed the long-term contract price.
*25.
The provision for a loss on an unprofitable contract may be combined with the Construction
in Process account balance under percentage-of-completion but not cost-recovery.
True-False AnswersConceptual
Item
1.
2.
3.
4.
5.
Ans.
F
T
F
T
T
Item
6.
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8.
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10.
Ans.
T
F
F
T
F
Item
11.
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15.
Ans.
T
T
F
F
T
Item
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Ans.
T
T
T
F
F
Item
21.
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25.
Ans.
T
F
F
T
F
18 - 4
MULTIPLE CHOICEConceptual
26.
27.
28.
29.
30.
31.
32.
33.
A contract
a. must be in writing to be an enforceable contract.
b. is an agreement that creates enforceable rights and obligations.
c. is enforceable if each party can unilaterally terminate the contract.
d. does not need to have commercial substance.
Revenue Recognition
18 - 5
34.
35.
36.
On January 15, 2015, Bella Vista Company enters into a contract to build custom
equipment for ABC Carpet Company. The contract specified a delivery date of March 1.
The equipment was not delivered until March 31. The contract required full payment of
$75,000 30 days after delivery. This contract should be
a. recorded on January 15, 2015.
b. recorded on March 1, 2015.
c. recorded on March 31, 2015.
d. recorded on April 30, 2015.
37.
38.
When a contract modification does not result in a separate performance obligation, the
additional products are priced at the
a. standalone price of the product.
b. blended price of original contract and contract modification.
c. average selling price of original selling price and standalone price.
d. selling price specified in contract modification
39.
40.
When multiple performance obligations exists in a contract, they should be accounted for
as a single performance obligation when
a. each service is interdependent and interrelated.
b. the performance obligations are distinct but interdependent.
c. the product is distinct within the contract.
d. determination cannot be made.
18 - 6
41.
New Age Computers manufactures and sells pagers and radio paging systems which
include a 180 day warranty on product defects. It also sells an extended warranty which
provides an additional two years of protection. On May 10, it sold a paging system for
$3,850 and an extended warranty for another $1,200. The journal entry to record this
transaction would include
a. a credit to Service Revenue of $5,050.
b. a credit to Service Revenue of $1,200
c. a credit to Sales of $3,850 and a credit to Service Revenue of $1,200
d. a credit to Unearned Service Revenue of $1,200.
42.
43.
44.
Companies can use the expected value to estimate variable consideration when
a. the contract has only two possible outcomes.
b. a company has a small number of contracts with similar characteristics.
c. a company can use the most likely amount in a range of possible outcomes.
d. a company has a large number of contracts with similar characteristics.
45.
46.
Revenue Recognition
18 - 7
47.
48.
49.
When the bundle price is less than the sum of the standalone prices, the discount should
be allocated to
a. the product (or products) associated with the discount.
b. the entire bundle of products or services.
c. the product cost, thereby increasing product margin.
d. the selling price of product or services provided.
50.
51.
The most popular input measure used to determine the progress toward completion is
a. units-of-delivery method.
b. cost-to-cost basis.
c. labor hours worked.
d. tons produced.
52.
53.
54.
When a company has an obligation or right to repurchase an asset for an amount greater
than or equal to its selling price, the transaction should be treated as a
a. outright sale.
b. financing transaction.
c. repurchase transaction.
d. put option.
18 - 8
55.
When a customer purchases a product but is not yet ready to accept delivery, this is
referred to as
a. a repurchase agreement.
b. a consignment.
c. a principal-agent relationship.
d. a bill-and-hold arrangement
56.
57.
58.
59.
60.
61.
Revenue Recognition
18 - 9
62.
Entertainment Tonight, Inc. manufactures and sells stereo systems that include an
assurance-type warranty for the first 90 days. Entertainment Tonight also offers an optional
extended coverage plan under which it will repair or replace any defective part for 2 years
beyond the expiration of the assurance-type warranty. The total transaction price for the
sale of the stereo system and the extended warranty is $3,000. The standalone price of
each is $2,300 and $800, respectively. The estimated cost of the assurance-warranty is
$350. The accounting for warranty will include a
a. debit to Warranty Expense, $800.
b. debit to Warranty Liability, $350
c. credit to Warranty Liability, $800
d. credit to Unearned Warranty Revenue, $800
63.
64.
65.
66.
On July 31, OMalley Company contracted to have two products built by Taylor
Manufacturing for a total of $185,000. The contract specifies that payment will only occur
after both products have been transferred to OMalley Company. OMalley determines that
the standalone prices are $100,000 for Product 1 and $85,000 for Product 2. On August 1,
when Product 1 has been transferred, the journal entry to record this event include a
a. debit to Accounts Receivable for $100,000.
b. debit to Accounts Receivable for $85,000.
c. debit to Contract Assets for $85,000.
d. debit to Contract Assets for $100,000.
67.
*69.
*70.
How should the balances of progress billings and construction in process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory.
c. Net balance, as a current asset if debit balance, and current liability if credit balance.
d. Net balance, as income from construction if credit balance, and loss from construction if
debit balance.
*71.
In accounting for a long-term construction-type contract using the percentage-ofcompletion method, the gross profit recognized during the first year would be the estimated
total gross profit from the contract, multiplied by the percentage of the costs incurred during
the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.
*72.
*73.
Revenue Recognition
18 - 11
*74.
*75.
Cost estimates on a long-term contract may indicate that a loss will result on completion of
the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion or
cost-recovery method is employed.
b. recognized in the current period under the percentage-of-completion method, but the
cost-recovery method defers recognition of the loss to the time when the contract is
completed.
c. recognized in the current period under the cost-recovery method, but the percentageof-completion method defers the loss until the contract is completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or cost-recovery method is employed.
*76.
Cost estimates at the end of the second year indicate that a loss will result on completion
of the entire contract. Which of the following statements is correct?
a. Under the cost-recovery method, the loss is not recognized until the year the
construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first
year does not affect the computation of loss for the second year.
c. Under the cost-recovery method, when the billings exceed the accumulated costs, the
amount of the estimated loss is reported as a current liability.
d. Under the cost-recovery method, when the Construction in Process balance exceeds
the billings, the estimated loss is added to the accumulated costs.
*77.
When there is a significant increase in the estimated total contract costs but the increase
does not eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the cost-recovery methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase requires
a current period adjustment of excess gross profit recognized on the project in prior
periods.
c. Under the cost-recovery method only, the estimated cost increase requires a current
period adjustment of excess gross profit recognized on the project in prior periods.
d. No current period adjustment is required.
*78.
*80.
*81.
*82.
*83.
*84.
Occasionally a franchise agreement grants the franchisee the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the franchisor
should
a. increase revenue recognized from the initial franchise fee by the amount of the
expected future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase the
selling price when the franchisee subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made.
d. None of these answer choices are correct.
*85.
Revenue Recognition
18 - 13
Ans.
26.
27.
28.
29.
30.
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32.
33.
34.
d
c
b
d
a
c
b
b
d
Item
35.
36.
37.
38.
39.
40.
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42.
43.
Ans.
Item
a
c
d
b
c
a
d
a
b
44.
45.
46.
47.
48.
49.
50.
51.
52.
Ans.
d
a
c
c
b
a
d
b
a
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
c
b
d
a
b
d
d
c
d
62.
63.
64.
65.
66.
67.
*68.
*69.
*70.
d
a
c
b
d
c
a
b
c
*71.
*72.
*73.
*74.
*75.
76.
77.
*78.
*79.
b
c
a
c
a
c
b
c
d
*80.
*81.
*82.
*83.
*84.
*85.
a
b
b
a
b
d
53.
54.
55.
56.
57.
58.
59.
60.
61.
MULTIPLE CHOICEComputational
86.
Marle Construction enters into a contract with a customer to build a warehouse for
$850,000 on March 30, 20155 with a performance bonus of $50,000 if the building is
completed by July 31, 2015. The bonus is reduced by $10,000 each week that completion
is delayed. Marle commonly includes these completion bonuses in its contracts and, based
on prior experience, estimates the following completion outcomes:
Completed by
July 31, 2015
August 7, 2015
August 14, 2015
August 21, 2015
Probability
65%
25%
5%
5%
$895,000
$850,000
$552,500
$585,000
On June 1, 2015, Johnson & Sons sold equipment to James Landscaping Services. In
exchange for a zero-interest bearing note with a face value of $55,000, with payment due
in 12 months. The fair value of the equipment on the date of sale was $50,000. The
amount of revenue to be recognized on this transaction in 2015 is
a. $55,000.
b. $5,000
c. $50,000
d. $50,000 sales revenue and $2,917 interest revenue.
P & G Auto Parts sells parts to AAA Car Repair during 2015. P&G offers rebates of 2% on
purchases up to $30,000 and 3% on purchases above $30,000 if the customers purchases
for the year exceed $100,000. In the past, AAA normally purchases $150,000 in parts
during a calendar year. On March 25, 2015, AAA Car Repair purchased $37,000 of parts.
The journal entry to record the sale includes a
a. debit to Accounts Receivable for $37,000.
b. debit to Accounts Receivable for $36,260.
c. credit to Sales Revenue for $35,890.
d. credit to Sales Revenue for $36,260.
89.
Roche Pharmaceuticals entered into a licensing agreement with Zenith Lab for a new drug
under development. Roche will receive $6,750,000 if the new drug receives FDA approval.
Based on prior approval, Roche determines that it is 85% likely that the drug will gain
approval. The transaction price of this arrangement should be
a. $6,750,000.
b. $5,737,500.
c. $1,012,500.
d. $0 until approval is received.
90.
Meyer & Smith is a full-service technology company. They provide equipment, and
installation services as well as training. Customers can purchase any product or service
separately or as a bundled package. Container Corporation purchased computer
equipment, installation and training for a total cost of $120,000 on March 15, 2014.
Estimated standalone fair values of the equipment, installation, and training are $75,000,
$50,000, and $25,000 respectively. The transaction price allocated to equipment,
installation and training is
a. $75,000, $50,000, $25,000 respectively
b. $40,000, $40,000, $40,000 respectively
c. $120,000 for the entire bundle.
d. $60,000, $40,000 and $20,000 respectively.
91.
Meyer & Smith is a full-service technology company. They provide equipment, and
installation services as well as training. Customers can purchase any product or service
separately or as a bundled package. Container Corporation purchased computer
equipment, installation and training for a total cost of $120,000 on March 15, 2014.
Estimated standalone fair values of the equipment, installation and training are $75,000,
$50,000 and $25,000 respectively. The journal entry to record the transaction on March 15,
2014 will include a
a. credit to Sales Revenue for $120,000.
b. debit to Unearned Service Revenue of $25,000.
c. credit to Unearned Service Revenue of $20,000.
d. credit to Service Revenue of $50,000.
92.
Bella Pool Company sells prefabricated pools that cost $100,000 to customers for
$180,000. The sales price includes an installation fee, which is valued at $25,000. The fair
value of the pool is $160,000. The installation is considered a separate performance
obligation and is expected to take 3 months to complete. The transaction price allocated to
the pool and the installation is
a. $155,676 and $24,324 respectively
b. $160,000 and $25,000 respectively
c. $180,000 and $25,000 respectively
d. $138,378 and $21,622 respectively
Revenue Recognition
18 - 15
93.
Botanic Choice sell natural supplements to customers with an unconditional right of return
if they are not satisfied. The right of returns extends 60 days. On February 10, 2014, a
customer purchases $3,000 of products (cost $1,500). Assuming that based on prior
experience, estimated returns are 20%. The journal entry to record the sale and cost of
goods sold includes a
a. debit to Cash and a credit to Sales Revenue of $3,000.
b. credit to Refund Liability of $600 and a credit to Sales Revenue of $2,400.
c. debt to Cost of Goods Sold and credit to Inventory for $1,500.
d. credit to Estimated Inventory Returns of $300
94.
Botanic Choice sells natural supplements to customers with an unconditional right of return
if they are not satisfied. The right of returns extends 60 days. On February 10, 2014, a
customer purchases $3,000 of products (cost $1,500). Assuming that based on prior
experience, estimated returns are 20%. The journal entry to record the return of $200 of
merchandise includes a
a. credit to Refund Liability for $200.
b. credit to Returned Inventory for $100.
c. credit to Estimated Inventory Returns for $100.
d. debit to Estimated Inventory Returns for $100.
95.
96.
On November 1, 2015, Green Valley Farm entered into a contract to buy a $75,000
harvester from John Deere. The contract required Green Valley Farm to pay $75,000 in
advance on November 1, 2015. The harvester (cost of $55,000) was delivered on
November 30, 2014. The journal entry for John Deere to record the contract on November
1, 2015 includes a
a. credit to Accounts Receivable for $75,000.
b. credit to Sales Revenue for $75,000.
c. credit to Unearned Sales Revenue for $75,000.
d. debit to Unearned Sales Revenue for $75,000.
98.
On November 1, 2015, Green Valley Farm entered into a contract to buy a $75,000
harvester from John Deere. The contract required Green Valley Farm to pay $75,000 in
advance on November 1, 2015. The harvester (cost of $55,000) was delivered on
November 30, 2015. The journal entry for John Deere to record the delivery of the
equipment includes a
a. debit to Unearned Sales Revenue for $75,000.
b. credit to Unearned Sales Revenue for $75,000.
c. credit to Cost of Goods Sold for $55,000.
d. debit to Inventory for $55,000.
99.
Arizona Communications contracted to set up a call center for the City of Phoenix. Under
the terms of the contract, Arizona Communications will design and set-up a call center with
the following costs:
Design of call center
Computers, servers, telephone equipment
Software
Installation and testing of equipment
Selling commission
Annual service contract
$10,000
$275,000
$85,000
$15,000
$25,000
$50,000
In addition, Arizona Communications will maintain and service the equipment and software
to ensure smooth operations of the call center for an annual fee of $90,000. Ownership of
equipment installed remains with the City of Phoenix. The contract costs that should be
capitalized is
a. $460,000
b. $410,000
c. $360,000
d. $370,000
Use the following information for questions 100-103:
Seasons Construction is constructing an office building under contract for Cannon Company. The
contract calls for progress billings and payments of $1,240,000 each quarter. The total contract
price is $14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that
the building will take 3 years to complete, and commences construction on January 2, 2015.
Revenue Recognition
18 - 17
*100. At December 31, 2015, Seasons estimates that it is 30% complete with the construction,
based on costs incurred. What is the total amount of Revenue from Long-Term Contracts
recognized for 2015 and what is the balance in the Accounts Receivable account assuming
Cannon Company has not yet made its last quarterly payment?
Revenue
Accounts Receivable
a. $4,960,000
$4,960,000
b. $4,260,000
$ 1,240,000
c. $4,464,000
$ 1,240,000
d. $4,260,000
$4,960,000
*101. At December 31, 2015, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $14,400,000 due
to unanticipated price increases. At December 31, 2014, Seasons estimated it was 30%
complete. What is the total amount of Construction Expenses that Seasons will recognize
for the year ended December 31, 2015?
a. $10,800,000
b. $6,300,000
c. $6,390,000
d. $6,540,000
*102. At December 31, 2015, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $14,400,000 due
to unanticipated price increases. What is reported in the balance sheet at December 31,
2015 for Seasons as the difference between the Construction in Process and the Billings
on Construction in Process accounts, and is it a debit or a credit?
Difference between the accounts
Debit/Credit
a.
$3,380,000
Credit
b.
$1,240,000
Debit
c.
$880,000
Debit
d.
$1,240,000
Credit
*103. Seasons Construction completes the remaining 25% of the building construction on
December 31, 2016, as scheduled. At that time the total costs of construction are
$15,000,000. At December 31, 2015, the estimates were 75% complete and total costs of
$14,400,000. What is the total amount of Revenue from Long-Term Contracts and
Construction Expenses that Seasons will recognize for the year ended December 31,
2016?
Revenue
Expenses
a. $14,880,000
$15,000,000
b. $3,720,000
$ 3,750,000
c. $3,720,000
$ 4,200,000
d. $3,750,000
$ 3,750,000
Hayes uses the percentage-of-completion method as the basis for income recognition. For
the years ended December 31, 2015, and 2016, respectively, Hayes should report gross
profit of
a. $810,000 and $540,000.
b. $2,700,000 and $1,800,000.
c. $900,000 and $450,000.
d. $0 and $1,350,000.
*107. Monroe Construction Company uses the percentage-of-completion method of accounting.
In 2015, Monroe began work on a contract it had received which provided for a contract
price of $25,000,000. Other details follow:
2015
Costs incurred during the year
$12,000,000
Estimated costs to complete as of December 31
8,000,000
Billings during the year
11,000,000
Collections during the year
6,500,000
What should be the gross profit recognized in 2015?
a. $1,000,000
b. $13,000,000
c. $3,000,000
d. $5,000,000
Revenue Recognition
18 - 19
200,000
600,000
480,000
Income Statement
Income (before tax) on the contract recognized in 2015
120,000
120,000
For the years 2015 and 2016, Adler should recognize gross profit in 2015 and 2016 of
a.
b.
c.
d.
2015
0
1,548,000
1,620,000
1,620,000
2016
2,580,000
1,032,000
960,000
2,580,000
Billings to date
5,600,000
16,800,000
Collections to date
4,000,000
14,400,000
*113. If Kiner uses the percentage-of-completion method, the gross profit to be recognized in
2015 is
a. $2,880,000.
b. $3,200,000.
c. $4,320,000.
d. $4,800,000.
*114. If Kiner uses the cost-recovery method, the gross profit to be recognized in 2016 is
a. $2,720,000.
b. $5,600,000.
c. $2,800,000.
d. $11,200,000.
Use the following information for questions 115 and 116.
*115. Horner Construction Co. uses the percentage-of-completion method. In 2015, Horner
began work on a contract for 16,500,000; it was completed in 2016. The following cost
data pertain to this contract:
Year Ended December 31
2015
2016
Cost incurred during the year
5,850,000
4,200,000
Estimated costs to complete at the end of year
3,900,000
The amount of gross profit to be recognized on the income statement for the year ended
December 31, 2016 is
a. 2,400,000.
b. 2,580,000.
c. 2,700,000.
d. 6,450,000.
Revenue Recognition
18 - 21
*116. If the cost-recovery method of accounting was used, the amount of gross profit to be
recognized for years 2015 and 2016 would be
a.
b.
c.
d.
2015
6,750,000.
6,450,000.
0.
0.
2016
0.
(300,000).
6,450,000.
6,750,000.
$40,000
11,500
38,500
$90,000
Upon signing of the agreement, a payment of $40,000 is due. Thereafter, two annual
payments of $30,000 are required. The credit rating of the franchisee is such that it would
have to pay interest of 8% to borrow money. The franchise agreement is signed on August
1, 2014, and the franchise commences operation on November 1, 2014. Assuming that no
future services are required by the franchisor once the franchise begins operations, the
entry on November 1, 2014 would include
a. a credit to Unearned Franchise Revenue for $40,000.
b. a debit to Service Revenue for $11,500.
c. a debit to Sales Revenue for $38,500.
d. a debit to Unearned Franchise Revenue for $40,000.
*121. Douglas Diners Inc. charges an initial franchise fee of $90,000 broken down as follows:
Rights to trade name, market area, and proprietary know-how
Training services
Equipment (cost of $10,800)
Total initial franchise fee
$40,000
11,500
38,500
$90,000
Upon signing of the agreement, a payment of $40,000 is due. Thereafter, two annual
payments of $30,000 are required. The credit rating of the franchisee is such that it would
have to pay interest of 8% to borrow money. The franchise agreement is signed on August
1, 2015, and the franchise commences operation on November 1, 2015. Assume that the
total training fees includes training services for the period leading up to the franchise
opening ($5,500 value) and for 3 months following opening. The journal entry on August 1,
2015 would include
a. a credit to Unearned Service Revenue for $11,500.
b. a credit to Unearned Service Revenue for $6,000.
c. a debit to Sales Revenue for $38,500.
d. a debit to Unearned Franchise Revenue for $40,000.
Revenue Recognition
18 - 23
*122. On January 1, 2015 Dairy Treats, Inc. entered into a franchise agreement with a company
allowing the company to do business under Dairy Treats's name. Dairy Treats had
performed substantially all required services by January 1, 2015, and the franchisee paid
the initial franchise fee of $840,000 in full on that date. The franchise agreement specifies
that the franchisee must pay a continuing franchise fee of $72,000 annually, of which 20%
must be spent on advertising by Dairy Treats. What entry should Dairy Treats make on
January 1, 2015 to record receipt of the initial franchise fee and the continuing franchise
fee for 2015?
a. Cash.................................................................................... 912,000
Franchise Fee Revenue...........................................
840,000
Revenue from Franchise Fees.................................
72,000
b. Cash.................................................................................... 912,000
Unearned Franchise Fees........................................
912,000
c. Cash.................................................................................... 912,000
Franchise Fee Revenue...........................................
840,000
Revenue from Franchise Fees.................................
57,600
Unearned Franchise Fees........................................
14,400
d. Prepaid Advertising..............................................................
14,400
Cash.................................................................................... 912,000
Franchise Fee Revenue...........................................
840,000
Revenue from Franchise Fees.................................
72,000
Unearned Franchise Fees........................................
14,400
*123. Wynne Inc. charges an initial franchise fee of $1,840,000, with $400,000 paid when the
agreement is signed and the balance in five annual payments. The present value of the
future payments, discounted at 10%, is $1,091,744. The franchisee has the option to
purchase $240,000 of equipment for $192,000. Wynne has substantially provided all initial
services required and collectibility of the payments is reasonably assured. The amount of
revenue from franchise fees is
a. $ 400,000.
b. $1,443,744.
c. $1,491,744.
d. $1,840,000.
86.
87.
88.
89.
90.
91.
92.
Ans.
a
d
c
b
d
c
a
Item
93.
94.
95.
96.
97.
98.
99.
Ans.
b
c
c
c
c
a
b
Item
*100.
*101.
*102.
*103.
*104.
*105.
*106.
Ans.
c
d
b
c
b
c
c
Item
*107.
*108.
*109.
*110.
*111.
*112.
*113.
Ans.
c
b
d
c
b
c
a
Item
*114.
*115.
*116.
*117.
*118.
*119.
*120.
Ans.
Item
Ans.
b
a
c
b
c
a
d
*121.
*122.
*123.
a
c
b
125.
13,200,000
12,600,000
8,400,000
25,200,000
What amount of gross profit should Bruner have recognized in 2015 on this contract?
a. 4,200,000
b. 2,800,000
c. 2,100,000
d. 1,400,000
126.
During 2015, Gates Corp. started a construction job with a total contract price of
$14,000,000. The job was completed on December 15, 2015. Additional data are as follows:
Actual costs incurred during the year
Estimated remaining costs
Billed to customer
Received from customer
2015
$5,400,000
5,400,000
4,800,000
4,000,000
2016
$6,100,000
9,200,000
9,600,000
Under the cost-recovery method, what amount should Gates recognize as gross profit for
2016?
a. $900,000
b. $1,250,000
c. $1,900,000
d. $2,500,000
*124.
Ans.
Item
*125.
Ans.
Item
*126.
Ans.
Revenue Recognition
18 - 25
DERIVATIONS Computational
No. Answer
Derivation
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
*100.
*101.
*102.
*103.
*104.
Revenue Recognition
*105.
*106.
$1,800,000
($4,500,000 $3,000,000) = $900,000
$1,800,000 + $1,200,000
18 - 27
$12,000,000
($25,000,000 $20,000,000) = $3,000,000.
$12,000,000 + $8,000,000
*108.
*109.
*110.
2,340,000
- (6,600,000 3,900,000) = 1,620,000
3,900,000
(6,600,000 4,020,000) 1,620,000 = 960,000.
*111.
2,400,000
(14,400,000 9,600,000) = 1,200,000.
9,600,000
*112.
Derivation
*113.
$7,200,000
($16,800,000 $12,000,000) = $2,880,000.
$12,000,000
*114.
*115.
*117.
*118.
*119.
*120.
*121.
*122.
*123
Derivation
*124.
*125.
$12,600,000
($42,000,000 $37,800,000) = $1,400,000.
$37,800,000
*126.
Revenue Recognition
18 - 29
EXERCISES
Ex. 18-127Allocate transaction price.
Windsor Windows manufactures and sells custom storm windows for enclosed porches. Windsor
also provides installation service for the windows. The installation process does not involve
changes in the windows, so this service can be provided by other vendors. Windsor enters into the
following contract on June 1, 2015, with a local homeowner. The customer purchases windows for
a price of $3,500 and chooses Windsor to do the installation. Windsor charges the same price for
the windows irrespective of whether it does the installation or not. The price of the installation
service is estimated to have a fair value of $900. The customer pays Windsor $3,000 (which
equals the fair value of the windows, which have a cost of $1,700) upon delivery and the
remaining balance upon installation of the windows. The windows are delivered on August 1,
2015, Windsor completes installation on September 15, 2015, and the customer pays the balance
due. Prepare the journal entries for Windsor in 2015. (Round amounts to nearest dollar.)
Solution 18-127
June 1, 2015
No entry neither party has performed under the contract.
On August 1, 2015, Windsor has two performance obligations: (1) the delivery of the windows and
(2) the installation of the windows.
Windows
Installation
Total
$3,000
900
$3,900
Allocation
Windows ($3,000 $3,900) X $3,500 $2,692
Installation ($900 $3,900) X $3,500
808
Revenue recognized
$3,500
(round to nearest dollar)
Windsor makes the following entries for delivery and installation.
August 1, 2015
Cash....................................................................................
Accounts Receivable...........................................................
Unearned Service Revenue.........................................
Sales Revenue.............................................................
3,000
500
1,700
808
2,692
1,700
500
808
808
500
6,000
360*
3,240
600
5,400
3,600
July 3
Refund Liability.............................................................................
Accounts Receivable........................................................
250
Returned Inventory.......................................................................
Estimated Inventory Returns.............................................
100
250
100
Revenue Recognition
18 - 31
20
20
The journal entry to record payment within the discount period is as follows.
July 12
Cash ..........................................................................................
Sales Discounts (2% X $5,750)....................................................
Accounts Receivable........................................................
(b)
5,635
115
5,750
August 2, 2015
Cash ..........................................................................................
Accounts Receivable........................................................
5,750
5,750
$ 950
1,050
1,150
1,200
In each instance in which maintenance services are provided, the maintenance service is
separately priced within the arrangement at $200. Additionally, the incremental amount charged by
Appliance Store for installation approximates the amount charged by independent third parties.
Dishwashers are sold subject to a general right of return. If a customer purchases a dishwashers
with installation and/or maintenance services, in the event Appliance Store does not complete the
service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds
$800.
Instructions
(a) Assume that a customer purchases a dishwasher with both installation and maintenance
services for $1,200. Based on its experience, Appliance Store believes that it is probable that
the installation of the equipment will be performed satisfactorily to the customer. Assume that
the maintenance services are priced separately. Identify the separate performance obligations
related to the Appliance Store revenue arrangement.
The separate performance obligations are the dishwasher, installation, and maintenance
service, since each item has standalone value to the customer.
(b)
Dishwasher
Installation
Maintenance
Total
(c)
Cash
Sales Revenue
Service Revenue
Unearned Service Revenue
(b)
Cash.............................................................................................
Warranty Expense........................................................................
Warranty Liability..............................................................
Sales Revenue.................................................................
62,500
1,500
1,500
62,500
63,500
1,500
1,500
62,500
1,000
Revenue Recognition
18 - 33
July 1, 2015
No entry neither party has performed on July 1, 2014.
(b)
(c)
2,500
2,500
2,500
1,600
2,500
1,600
5,400,000
3,000,000
7,200,000
2016
$2,200,000
*Solution 18-133
(a)
(b)
(c)
(d)
$2,640,000
$8,000,000 = $4,400,000
$4,800,000
Accounts Receivable.................................................................... 3,300,000
Billings on Construction in Process ..................................
3,300,000
4,400,000
Revenue
Costs
Total gross profit
Recognized in 2015
Recognized in 2016
Or
Total revenue
Recognized in 2015
Recognized in 2016
Costs in 2016
Gross profit in 2016
$8,000,000
4,840,000
3,160,000
(1,760,000)
$ 1,400,000
$8,000,000
(4,400,000)
3,600,000
(2,200,000)
$ 1,400,000
Revenue Recognition
18 - 35
Instructions
(a) How much gross profit should be reported for 2015? Show your computation.
(b) How much gross profit should be reported for 2016?
(c) Make the journal entry to record the revenue and gross profit for 2016.
*Solution 18-134
(a)
$3,600,000
$10,000,000 = $2,000,000
$18,000,000
(b)
$10,400,000
$8,000,000 = $4,160,000
$20,000,000
Less 2014 gross profit
Gross profit in 2015
(c)
2,000,000
$2,160,000
8,960,000
2015
1,500,000
2,500,000
2,200,000
2,000,000
2016
2,640,000
1,760,000
4,000,000
3,500,000
2017
4,600,000
-05,600,000
5,500,000
Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting
and for cost-recovery accounting, show the gross profit that should be recorded for 2015, 2016,
and 2017.
Cost-Recovery
Gross Profit
2015
____________
2015
____________
2016
____________
2016
____________
2017
____________
2017
____________
2015
2016
2017
Cost-Recovery
Gross Profit
1,200,000d
*Solution 18-135
2015
2016
2017
Percentage-of-Completion
Gross Profit
675,000a
165,000b
360,000c
1,500,000
1,800,000 = 675,000
4,000,000
2,640,000
1,400,000 = 840,000
4,400,000
(675,000)
165,000
5,800,000
4,600,000
1,200,000
(840,000)
360,000
5,800,000
4,600,000
1,200,000
Total revenue
Total costs
Total gross profit
Recognized to date
2017 gross profit
Total revenue
Total costs
Total gross profit
Revenue Recognition
18 - 37
*Ex. 18-136Franchises.
Pasta Inn charges an initial fee of $1,600,000 for a franchise, with $320,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the annual
payments, discounted at 10%, is $1,014,000. The franchisee has the right to purchase $60,000 of
kitchen equipment and supplies for $50,000. An additional part of the initial fee is for advertising to
be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a
month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the
initial services required by the contract.
Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in good form.
*Solution 18-136
Total fee
Amount due
Present value of payments
Bargain purchase
Advertising ($1,000 60)
Revenue from franchise fees
$1,600,000
$1,280,000
(1,014,000)
Cash.......................................................................................... 320,000
Notes Receivable...................................................................... 1,280,000
Discount on Notes Receivable ......................................
Revenue from Franchise Fees ......................................
Unearned Franchise Fees .............................................
(266,000)
(10,000)
(60,000)
$1,264,000
266,000
1,264,000
70,000
PROBLEMS
Pr. 18-137Allocate Transaction Price, Discounts, Time Value.
Master Grill Company sells outdoor grilling products, providing gas and charcoal grills,
accessories, and installation services for custom patio grilling stations.
Instructions
Respond to the requirements related to the following independent revenue arrangements for
Master Grill products and services.
(a) Master Grill offers contract MG100 which is comprised of a free-standing gas grill for small
patio use plus installation to a customers gas line for a total price $700. On a standalone
basis, the grill sells for $600 (cost $350), and Master Grill estimates that the fair value of the
installation service (based on cost-plus estimation) is $150. Master Grill signed 15 MG100
contracts on May 30, 2015, and customers paid the contract price in cash. The grills were
delivered and installed on June 15, 2015. Prepare journal entries for Master Grill for MG100
in May and June 2015.
(b)
Master Grill sells its specialty combination gas/wood-fired grills to local restaurants. Each grill
is sold for $900 (cost $500) on credit with terms 2/20, net/60. Prepare the journal entries for
the sale of 20 grills on August 1, 2015, and upon payment, assuming the customer paid on
(1) August 20, 2015, and (2) September 29, 2015. Assume the company records sales net.
Solution 18-137
(a)
The total revenue of $10,500 ($700 X 15) should be allocated to the two performance
obligations based on their relative fair values. In this case, the fair value of the grills is
considered $9,000 ($600 X 15) and the fair value of the installation fee is $2,250 ($150 X 15).
The total fair value to consider is therefore $11,250 ($9,000 + $2,250). The allocation is as
follows.
Equipment ($9,000 / $11,250) X $10,500 = $8,400
Installation ($2,250 / $11,250) X $10,500 = $2,100
Master Grill makes the following entries.
May 30, 2015
Cash..........................................................................................
Unearned Service Revenue (Installation).......................
Unearned Service Revenue (Equipment).......................
10,500
2,100
8,400
2,100
8,400
5,250
2,100
8,400
5,250
Revenue Recognition
18 - 39
1.
August 1, 2015
Accounts Receivable
[$18,000 (2% X $18,000)].........................................
Sales Revenue.........................................................
Cost of Goods Sold..........................................................
Inventory ($500 X 20)...............................................
August 20, 2015
Cash................................................................................
Accounts Receivable................................................
2.
17,640
17,640
10,000
10,000
17,640
17,640
August 1, 2015
Accounts Receivable
[$18,000 (2% X $18,000)].........................................
Sales Revenue.........................................................
Cost of Goods Sold..........................................................
Inventory ($500 X 20)...............................................
September 29, 2015
Cash................................................................................
Accounts Receivable................................................
Sales Discounts Forfeited
(2% X $18,000)......................................................
17,640
17,640
10,000
10,000
18,000
17,640
360
$4,000,000
$ 850,000
1,750,000
400,000
3,000,000
$1,000,000
$2,250,000
$ 464,000
648,000
193,000
1,305,000
3,000,000
It should be noted that included in the above costs incurred to date were standard electrical and
mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs
should not be considered in the costs incurred to date.
Instructions
(a) Compute the percentage of completion on the contract at the end of 2015.
(b)
Indicate the amount of gross profit that would be reported on this contract at the end of 2015.
(c)
Make the journal entry to record the income (loss) for 2015 on Dobson's books.
(d)
Indicate the account(s) and the amount(s) that would be shown on the balance sheet of
Dobson Construction at the end of 2015 related to its construction accounts. Also indicate
where these items would be classified on the balance sheet. Billings collected during the year
amounted to $1,900,000.
(e)
Assume the latest forecast on total costs at the end of 2015 was $4,060,000. How much
income (loss) would Dobson report for the year 2015?
Solution 18-138
(a)
Costs to date
Less materials on job site
$1,305,000
(105,000)
$1,200,000
$1,600,000
1,200,000
$ 400,000
(c)
1,600,000
Revenue Recognition
18 - 41
(e)
Current Assets
Accounts receivable
Current Liability
Billings in excess of contract costs and
recognized profit
$4,000,000
4,060,000
$ (60,000)
Project
A
B
C
D
E
3.
4.
Total Contract
Price
500,000
720,000
475,000
200,000
450,000
2,345,000
Billings Through
12/31/15
340,000
210,000
475,000
100,000
400,000
1,525,000
Contract Costs
Incurred Through
12/31/15
424,000
195,000
350,000
123,000
320,000
1,412,000
Estimated
Additional Costs to
Complete Contracts
101,000
455,000
-097,000
80,000
733,000
Cash Collections
Through 12/31/15
310,000
210,000
390,000
65,000
400,000
1,375,000
Prepare the general journal entry(ies) to record revenue and gross profit on project B (second
project) for 2015, assuming that the percentage-of-completion method is used.
(c)
Indicate the balances that would appear in the statement of financial position at December
31, 2015 for the following accounts for Project D (fourth project), assuming that the
percentage-of-completion method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process
(d)
How would the balances in the accounts discussed in part (c) change (if at all) for Project D
(fourth project), if the cost-recovery method is used?
Solution 18-139
(a)
(1) and (2)
Projects
Contract price
Contract costs incurred
Additional costs
to complete
Total cost
Total gross profit
or (loss)
A
500,000
424,000
B
720,000
195,000
C
475,000
350,000
D
200,000
123,000
E
450,000
320,000
101,000
525,000
455,000
650,000
-0350,000
97,000
220,000
80,000
400,000
70,000
125,000
(20,000)
50,000
(25,000)
The amount reported as income (loss) under the cost-recovery method for 2015 is:
Project A
B
C
D
E
(25,000)
-0125,000
(20,000)
-0 80,000
The amount reported as income (loss) under the percentage-of-completion method for 2015 is:
Project A
B
C
D
E
(25,000)
21,000
125,000
(20,000)
40,000
141,000
Revenue Recognition
18 - 43
(c)
(d)
Construction in Process................................................................
Construction Expenses.................................................................
Revenue from Long-term Contracts..................................
Billings
Cash collections
Accounts receivable
Billings on Construction in Process
100,000
(65,000)
35,000
100,000
Costs incurred
Loss reported
Construction in process
123,000
(20,000)
103,000
21,000
195,000
216,000
$233,000
158,000
$ 75,000
22,000
$100,000
252,000
352,000
330,000
$ 22,000
$ 50,000
$182,000
170,000
12,000
15,000
22,000