Exam 4: Revenue and Recognition

Tyco Ltd entered into a contract to build a sports arena for $1,800,000.Construction commenced on August 1,2017,with a planned completion date of December 31,2019.A summary of the related accounting information is provided below: How much would the balance in accounts receivable be on the balance sheet of Tyco at the end of 2017 if Tyco uses the percentage of completion method?

Which statement about the cost recovery method is correct?

An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1.Identify why the insurance company cannot recognize revenue when the premium is received.

On March 1,Pendant Textbook Publications delivered 100 copies of one of its accounting textbooks to the First University bookstore.The bookstore can return all unsold copies to Pendant.The retail price of each copy is $110,while the price charged to the bookstore is $80.Each book costs Pendant $40 to produce.On April 15,the distributor returns 30 unsold copies to Pendant.Based on these facts,how much revenue would Pendant recognize on April 15?

On January 1,2018 Sukhi's Cycles Inc.sells a motorcycle for $24,000.Terms offered are $1,000 per month first due February 1,2018.The market interest rate for transactions of this type is 0.25% per month.What is the amount of revenue that Sukhi should record at time of sale?

Apartment King (AK)is building a luxury condominium for a contract price of $68,000,000.This is estimated to be a three-year project with an estimated cost of $54,000,000.AK uses the percentage of completion method of revenue recognition,using the cost-to-cost method of estimating the percentage complete.The following is the best available information at the end of each year: Required: a.Calculate the amount of gross profit to be recognized in Year 1,Year 2,and Year 3.Show computations in tabular form provided below. b.Prepare all the journal entries required in Year 2. c.Prepare the journal entry required in Year 3 to close the accounts related to the project. d.At the end of Year 2,if the estimated cost to complete is $28 million (instead of $27 million),how much gross profit would be recognized in Year 2?

The residual approach which computes the stand-alone selling price as the transaction price less the total of the observable stand-alone selling prices of other goods services in the transaction.This approach is only acceptable if either (i)the good or service in question has a highly variable selling price,or (ii)the entity has not yet established a selling price for that good or service.

On January 1,2018 Sukhi's Cycles Inc.sells a motorcycle for $24,000.Terms offered are $10,000 cash with the balance of $14,000 due on January 1,2020.The market interest rate for transactions of this type is 5% per annum.What is the amount of revenue that Sukhi should record at time of sale?

The expected cost plus margin approach which involves estimating expected costs to provide the good or service and adding a profit margin typical for that good or service.

On January 1,2018 Sukhi's Cycles Inc.sells a motorcycle for $24,000.Terms offered are $10,000 cash;$7,000 due on January 1,2019,and $7,000 due on January 1,2020.The market interest rate for transactions of this type is 4.0% per annum.What is the amount of revenue that Sukhi should record at time of sale?

Assume the following facts for a construction contract that was completed over four years.The contract price is $5.1 million. Using the percentage of completion method,calculate the gross profit or loss to be recognized as a result of this contract for each of the four years.The company used the cost-to-cost method to estimate the percentage complete.

What are some ways in which earnings management on construction contracts can be minimized?

Superior Cars sold a car for $35,000 cash.In addition,the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years.The normal observable stand-alone selling prices are as follows: a.Determine how revenue should be allocated to the various performance obligations in this transaction. b.Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

In July,Telly-Rental sells a home theatre for $1,000 on an installment basis.The cost of goods sold is $400.How much deferred gross profit is recorded by Telly-Rental in July?

Which statement is correct about multiple performance obligation arrangements?

The publisher of Accounting Digest received the following 12-month subscriptions during 2018.Each subscription is $100.The company has a December 31 year end.Each subscription becomes effective in the calendar month after the company receives the subscription.What amount of revenue will the company record in 2018 for the subscriptions received between January-March? (Round your response to the nearest dollar).

Explain why accounting standards generally prescribe a smaller set of alternatives for revenue recognition.

McNicols started selling franchise locations in April 2018.The franchisee pays continuing fees based on annual sales.The initial fee relates to finding a store location and training the franchisee at McNicols' training facility over a 2-year period. Required: a)Explain how McNicols should account for the initial fee.Ignore the time value of money. b)Assume that management estimates that 40% of the value of services related to the initial fee is fulfilled in the first year of signing the franchise agreement.Provide the journal entries to record this revenue in fiscal 2018 and in 2019. c)Explain how McNicols should account for the ongoing fees. d)Provide the journal entries to record the ongoing fees in fiscal 2018 and 2019.

Tradel Construction Company entered into a contract to build a condominium building for $1,800,000.Construction commenced on July 1,2017,with a planned completion date of December 31,2019.A summary of the related accounting information is provided below: How much gross profit would be recognized in 2019 if Tradel uses the completed contract method?

List the five key steps in the revenue recognition process.