Exam 4: Revenue and Recognition

Ying Construction Company entered into a contract to build a new airport terminal for $2,500,000. Construction commenced on August 1, 2020, with a planned completion date of December 31, 2022. A summary of the costs, billings, and collections is provided below: Costs incurred during the year 500,000 700,000 1,100,000 Estimated costs to complete at year end 1,500,000 1,200,000 0 Billings during the year 440,000 1,000,000 1,060,000 Cash collections during the year 400,000 900,000 1,200,000 Ying uses the percentage of completion method. What amount would appear as accounts receivable on Ying's December 31, 2021 balance sheet?

Fancy Cars sold a used car for $35,000 cash. The company will also provide 4 oil changes per year for 5 years and an extended service-type warranty for 5 years. This is the first time that Fancy has offered an extended warranty. They intend to offer it to customers on a stand-alone basis but have not yet established a sales price. The observable selling prices of the car and oil changes follow: Gar \ 30,000 Bil change \ 50 each oil change a. Determine how revenue should be allocated to the various components in this transaction. b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized for the various components of this transaction.

Which of the following statements about the value creation process is not correct?

On January 1, 2021 Sukhi's Cycles Inc. sells a motorcycle for $24,000. Terms offered are $10,000 cash; $7,000 due on January 1, 2022, and $7,000 due on January 1, 2023. 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?

Tradel Construction Company entered into a contract to build a condominium building for $1,800,000. Construction commenced on July 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: Costs incurred during the year 400,000 500,000 650,000 Estimated costs to complete at year end 1,200,000 600,000 0 Billings during the year 360,000 440,000 1,000,000 Cash collections during the year 300,000 410,000 1,090,000 How much gross profit would be recognized in 2022 if Tradel uses the completed contract method?

Explain how the timing of revenue recognition is affected by multiple performance obligations in the arrangement. Explain how revenue is ultimately recognized in a multiple performance obligations sales arrangements.

Explain whether each of the following transactions would be accounted for as a change in accounting policy, change in accounting estimate or as an error correction. Assume that the entity reports its financial results in accordance with ASPE and all transactions are material. Transaction Appropriate accounting During the audit of the 2021 fiscal year, the auditors learned that Soorya Mining Inc. should have had used an average price of \ 850/0z . for its fiscal 2021 reporting, not \ 840/0z . During the audit of the 2021 fiscal year, the auditors learned that Everlast Construction used the cost recovery method to account for its long-term contracts as it could not reasonable estimate the outcome of its performance obligations. Everlast has since improved its estimating capabilities and has adopted the percentage of completion method. During the audit of the 2021 fiscal year, the auditors learned that Everlast Construction previously used the completed contract method. During the year Everlast adopted the percentage of completion method.

Explain how a company records revenue and expenses for a long-term contract under IFRS. Include an explanation of how changes in estimates are accounted for under this method.

Soorya Manufacturing makes educational toys that are sold to retailers on the following terms: Each type of toy has a fixed wholesale price, is shipped F.O.B. shipping point, and payment is due 45 days after the shipment. The retailer may return a maximum of 45% of an order at the retailer's expense up to 6 months after delivery. Sales are made only to retailers that have a good credit rating. In Soorya's 11 years of existence, the company has experienced a return rate of approximately 15%, a bad debt expense of 5% of sales and an average collection period of 90 days. Soorya provides a bonus to its senior managers based on annual revenues, net of returns. Required: a. Identify at least three different revenue recognition points that Soorya could use to record revenue. b. What revenue recognition criteria should Soorya use to determine when revenue should be recorded? c. Discuss the pros and cons for 2 alternative recognition points mentioned in point (a). Remember to support your reasoning with case facts. d. Recommend the recognition point that Soorya should use in its financial statements.

Which of the following is TRUE when goods are sold on on an installment basis?

Jennifer Furnishings frequently has sales involving "no down payment and no payments for three months." Three months after the purchase date, customers make four equal monthly payments (i.e., they make equal payments 3, 4, 5, and 6 months after purchase). Each payment is one-quarter of the purchase price. The company has a December 31 year-end. During 2021, the company made the following sales on installment plans. Jennifer makes 15% gross profit on these sales. Sales Tanuary 63,000 February 104,000 March 100,000 April 69,000 May 100,000 Tune 69,000 fuly 135,000 August 65,000 September 69,000 October 100,000 November 84,000 December 122,000 Total \ 1,080,000 Required: Using the installment sales method and ignoring the time value of money a)Determine the balance of installment accounts receivable at December 31, 2021. b)Determine the amount of deferred gross profit as at December 31, 2021. (Round to the nearest whole dollar.) c)Determine the sales revenue to recognize in 2021 for installment sales made in the year.

The publisher of TV Weekly received the following 52-week subscriptions during the first quarter of fiscal 2021. Each subscription is $110, which is a 47% discount off the newsstand price of $4 per issue. Each subscription becomes effective in the calendar month after the company receives the subscription. The company has a December 31 fiscal year. What amount of revenue will the company record in 2021 for the subscriptions received in January? (Round your response to the nearest dollar). Month Subscription Received Tanuary 4,300 February 4,200 March 4,100

In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. Telly-Rental generally earns a gross margin of 25%. The customer pays $500 in December. How much revenue is recorded by Telly-Rental in December?

Jones Contractors Inc. agreed to construct a building for $500,000. Construction commenced in 2020 and was completed in 2022. 2020 2021 2022 Costs incurred during the year 159,300 217,405 103,295 Estimated costs to complete 290,700 81,295 0 Billings during the year 90,000 200,000 210,000 Collections during the year 82,500 199,000 207,000 Required: For each of the three years, determine the following amounts relating to the above contract: revenue, expenses, gross profit, accounts receivable balance, and construction-in-process inventory balance. 2020 2021 2022 Revenue Expenses Gross profit (loss) Accounts receivable at end of year Construction in process inventory at end of year 0

Algae builds large ships and uses the percentage of completion method of revenue recognition. The following information pertains to the construction contracts it had in place as of its December 31, 2021 year-end. 2020 2021 Cost incurred to date 200 million 400 million Costs to complete contracts 600 million 600 million Total price of contracts outstanding at December 31,2021 1,300 million 1,300 million How much revenue will Algae recognize in 2020?

On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. The cost of each unit is $600 and the unit selling price is $750. At the end of June, TV World sold 50 units. How much cost of sales should be recorded by Electronics Distribution for the month of June?

Explain why a company should allocate revenue to multiple performance obligations in a sales transaction even if the company delivers all of the products or services in the same accounting period.

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: Year 1 Year 2 Year 3 Costs incurred each year 9,000 31,500 20,000 Estimated costs to complete 51,000 27,000 0 Billings 13,000 29,500 25,500 Collections 9,000 26,500 32,500 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. Cost incurred to date Estimated cost to complete Estimated total cost Contract price Estimated gross profit pr complete Grossprofit to date Gross profit previously recognized Current gross profit 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?

On September 1, 2021, Electric Depot sold 100 laptop computers at $750 each with a 120-day unconditional right of return. Customers have 90 days to pay. Based on past experience, Electric Depot estimates that approximately 1% will be returned. Which of the following is TRUE regarding Electric Depot's December 31, 2021 financial statements?

In September, Fast-Foods Inc. (FF)sells a franchise for an initial fee of $150,000 and ongoing fees based on 3% of gross profit. FF estimates that 20% of the initial fee relates to initial training, store design and opening activities; the remaining 80% relate to activities to be performed over 3 years. How much revenue should be recorded in September?