Exam 4: Revenue and Recognition

On January 1, 2021 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, 2023. 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?

You are an accountant working at Phantastic Pharmaceutical Inc. and have been asked to explain to your controller the possible points at which revenue could be recognized by your organization. Identify two alternatives that are in accordance with IFRS 15 for recognizing revenue at Phantastic.

Which statement best explains the cost recovery method?

Southtel is a builder of large digital networks. In the midst of the high-tech euphoria, the company bid and won a $48,000,000 contract to build a network for the country of Elbonia. Details on the project over the last three years are as follows: Year 1 Year 2 Year 3 Cumulative costs incurred 16,500 36,000 54,000 Additional costs to complete as estimated at year end 49,500 12,000 0 Amounts invoiced to customer in the year 13,500 26,000 21,000 Cash collected in the year from the customer 10,500 25,000 12,500 Required: Calculate the amount of revenue, cost of goods sold (COGS), and gross profit (or loss)to be recognized in each of the three years. The company uses the percentage of completion method to account for long-term contracts. Record your answer in the following table. Year 1 Year 2 Year 3 Total Revenue 48,000 Less: Cost of goods sold 16,500 54,000 Less: Expected loss (recovery) (13,500) 0 Gross profit (loss) (6,000)

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

Which statement about the percentage of completion method is correct?

Discuss advantages and disadvantages of using the cash basis to recognize revenues. Provide three valid reasons in your discussion.

Which statement best describes a franchise arrangement?

Early in 2021, Forest Ltd. signed a contract to construct a warehouse. Forest's management estimated the gross profit on the contract to be $740,000, as indicated by the following: Contract price \ 3,500,000 Estimated costs 2,760,000 Estimated gross profit \ 740,000 At the end of 2021, the status of the work on the contract was as follows: Costs incurred to date \ 1,350,000 Estimated costs to complete 1,650,000 How much revenue can be recognized on this contract for 2021, assuming that Forest uses the Percentage of completion basis for long-term construction contracts (round to nearest dollar)?

Discuss when it is acceptable to use the residual approach to allocate the transaction price to performance obligations.

In the chart below, identify the revenue recognition method that you feel is most appropriate and also explain why. Transaction Revenue recognition method Why? A. An electronics store sells a computer with a -day lowest-price guarantee. (That is, if the customer finds a lower price on the same product offered by the company or a competitor, the company will refund the difference to the customer.) B. A university receives students'course fees, in full, at the start of the semester. C. A company deposits funds into a three-year term deposit that earns 3\% per year.

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.

YMN had sales of $1,500,000, including: •$25,000 of goods shipped on consignment to an unrelated company on December 28, 2021 and received by that company on December 31, 2021 •$20,000 of goods shipped F.O.B. shipping point to a different unrelated party on December 31, 2021 and received on January 2, 2022. On its income statement, what amount of net sales should YMN record for 2021?

Which of the following best explains what recognition means in financial reporting?

In the chart below, identify the revenue recognition method that you feel is most appropriate and also explain why. Transaction Revenue recognition method Why? A. An appliance store sells and delivers a fridge with a two-year warranty. B. An airplane manufacturer signs a contract to supply two planes over four years for Air Canada. C. An insurance company issues a one-year insurance policy.

Which statement is correct about the "winner's curse"?

On July 1, 2020, Cusak Construction Company Inc. contracted to build an office building for Candy Lane Corp. for a total contract price of $2,150,000. On July 1, Cusak estimated that it would take between two and three years to complete the building. In October 2022, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Candy Lane in 2020, 2021, and 2022. 2020 2021 2022 Costs incurred to date 340,000 1,150,000 2,400,000 Estimated costs to complete 1,360,000 1,150,000 0 Billings to Candy Lane 590,000 1,000,000 2,100,000 Required: Using the percentage of completion method, calculate the revenue and profit or loss to be recognized as a result of this contract for the years ended December 31, 2020, 2021, and 2022. The company used the cost-to-cost method to estimate the percentage complete.

Queensbridge Corp. started a contract in June 2020 to build a bridge at a fixed price of $45 million. The bridge was to be completed by October 2022 at a total estimated cost of $35 million. Total cumulative costs incurred by the end of December 2020 and 2021 were $7 million and $24 million, respectively. Because of cost overruns in 2021, it is now expected that the project will cost $5,000,000 more than originally estimated. Final costs at the end of the project totaled $36 million. Queensbridge Corp. follows the guidance in IFRS. Required: Determine the amount of gross profit to be recognized for the years ended December 31, 2020 and December 31, 2021.

Buildings Ltd. is constructing a residential building in downtown Vancouver for a contract price of $15,000,000. Costs for this contract were initially estimated to be $12,000,000. The company uses the percentage of completion method of revenue recognition, using the cost-to-cost method of estimating the percentage complete. The following information is available: Year 1 Year 2 Year 3 Costs incurred each year 4,500 8,500 2,000 Additional costs to complete estimated at year end 7,500 5,000 0 Billings 6,000 6,000 3,000 Collections 5,000 6,500 3,500 Required: a. Calculate the amount of gross profit to be recognized in each year. Show computations in good form. b. Calculate the amount of revenue to be recognized in Year 2. c. Prepare all the journal entries required in Year 2. d. Prepare the journal entry required in Year 3 to acknowledge completion and acceptance of the project.

Compare and contrast the revenue recognition criteria for a transaction involving the sale of goods with a transaction involving the provision of services.