Exam 8: Revenue Recognition

Argus sells auto parts. On August 1, a customer purchases parts for $3,900 on account. The parts cost Argus $1,300. Argus uses the periodic inventory method. The customer paid for the parts on August 31. Required: Prepare the necessary entries to record the sale and the collection of cash at the end of the month.

When may companies use the completed-contract method?

A good or service must be explicitly identified in a contract in order to identify a performance obligation.

Craft Construction Craft Construction entered into a contract to construct a generator station for a utility customer. The project was started in 2019 and completed in 2020. Cost and other information is presented below. Costs incurred during the year \ 225,000 \ 550,000 Estimated costs to complete 450,000 -0- Billings during the year 200,000 700,000 Cash collections during the year 150,000 750,000 -Refer to Craft Construction. Assume Craft uses the percentage-of-completion method for revenue recognition. Compute the amount of gross profit for 2019 and 2020.

The method of reporting gross profit for long term contracts that does a better job of providing relevant information on the income statement is the ________.

IT Technology enters into a contract with the federal government to create a system for the price of $19 million. IT receives $7.6 million when the contract is signed and the other $11.4 million upon completion of the project. The government maintains control of the system during the creation process. IT estimates that 36,000 labor hours will be required to complete the product. During the current year 10,800 labor hours are used and during the following year, the remaining 25,200 hours were used. What will be included in the journal entry at the end of the current year? (Round any intermediary calculations to the nearest cent, and round your final answer to the nearest dollar.)

The general rule is that the transaction price should be allocated to the performance obligations based on the relative standalone selling prices unless a discount is ________.

An automotive manufacturer, A-2 Auto, provides maintenance services to Mako. In exchange, A-2 Auto received 600 shares of Mako's no-par common stock. Mako's common stock is currently trading on the open market for $29 per share. The standalone value of the maintenance provided was $20,200. What is the transaction price of this contract?

White Labs is a wholesaler who sells microscopes for use in high schools to retailers. On August 1 White contracts with the XYZ to sell 1,000 microscopes to XYZ to be delivered September 1. The contract price is set at $370 each, with a 10% volume discount if sales exceed 2,500 microscopes within the year. The probability of sales exceeding 2,500 microscopes is expected to be 55%. Ignore any constraints on variable consideration. Using the most-likely-amount approach, the consideration to be recognized is estimated to be ________.

Explain a bill-and-hold arrangement.

The final step in the revenue recognition process is the allocation of the transaction price to the performance obligation.

If the seller does not meet the three criteria for revenue recognition, then it assumes that goods or services are transferred over time.

Able Company enters into a contract with a customer to provide them with an accounts receivable program. Able will also provide installation services as part of the contract. The customer is free to enlist the services of another entity to install the software. What is the number of performance obligations for this contract?

The last step in revenue recognition is to ________.

When a contract is expected to affect the risk, timing, or amount of the entity's future cash flows, the contract is said to have ________.

What are the five criteria that must be met for a contract with a customer to exist?

Transactions where a buyer accepts title and billings but delays receipt of the goods is a bill-and-hold arrangement.

Derby Company sells season passes to its entertainment center. The passes sell for $135 each and are good for the year. On January 1, Derby sells 5,400 passes and received cash. The amount of revenue to be recognized each month is ________.

Craft Construction Craft Construction entered into a contract to construct a generator station for a utility customer. The project was started in 2019 and completed in 2020. Cost and other information is presented below. Costs incurred during the year \ 225,000 \ 550,000 Estimated costs to complete 450,000 -0- Billings during the year 200,000 700,000 Cash collections during the year 150,000 750,000 -Refer to Craft Construction. Assume that Craft uses the completed-contract method for revenue recognition. Make the appropriate journal entries for 2019 and 2020 for Craft Company.

Penn sells cameras. On August 1, a customer purchases a camera for $5,700 on account. The camera cost Penn $2,500. Penn uses the periodic inventory method. The customer paid for the camera at the end of the month. Required: Prepare all necessary entries to record the sale and collection of cash at the end of the month.