Exam 5: Revenue Recognition

When using the cost recovery method of accounting for long-term construction contracts under IFRS:

Orange Inc. offers a discount on an extended warranty on its oPhone when the warranty is purchased at the time the oPhone is purchased. The warranty normally has a price of $150, but Orange offers it for $120 when purchased along with an oPhone. Orange anticipates a 75% chance that a customer will purchase the extended warranty along with the oPhone. Assume Orange sells to 1,000 oPhones with the extended warranty discount offer. What is the total stand-alone selling price that Orange would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 oPhone contracts?

Many high-tech companies sell products with the opportunity for retailers to return the merchandise if it is unsold after a certain period. This reduces the retailer's risk of inventory obsolescence. Explain the implications on revenue recognition under this kind of policy. Include a specific example.

Which of the following is not true about contract assets?

Are sellers ever constrained from including variable consideration in the transaction price used to estimate revenue? Explain, providing indicators of circumstances that could require that constraint.

Which of the following is not true?

On November 1, 2018, Taylor signed a one-year contract to provide handyman services on an as-needed basis to King Associates, with the contract to start immediately. King agreed to pay Taylor $4,800 for the one-year period. Taylor is confident that King will pay that amount, but payment is not scheduled to occur until 2019. Taylor should recognize revenue in 2018 in the amount of

On June 1^st, Joseph & Company received a $500 deposit for 80 cases of wine. On June 10^th the customer identified specific vintages that are included in Joseph's inventory, and asked that Joseph not ship the wine until June 20 so the customer could ready space to store the wine, so Joseph set those wines aside for the customer, boxed and ready for shipment to the customer. On June 20^th the wine was shipped and delivered to the customer. Joseph likely would recognize revenue on

McCombs Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2017 and completed in 2018. Cost and other data are presented below: -Assume that McCombs recognizes revenue on this contract over time according to percentage of completion. Required: Prepare all journal entries to record costs, billings, collections, and profit (loss) recognition. Round your answers to the nearest whole dollar.

AgriFoods, Inc. prepares and delivers agricultural products to industrial-scale kitchens and food service providers. One of its key customers is Home Kitchen & Co., which provides cafeteria solutions for corporations and universities. On January 1, 2018, AgriFoods obtained a one-year contract to supply a pre-specified amount of vegetables to Home Kitchen, and received $600,000 in cash. Then, on March 15, AgriFoods hired Home to run one of its employee cafeterias for a period of six months, from April to September, and paid $70,000 in cash. For similar arrangements, Home usually charged $50,000. Required: (a) Prepare the journal entries AgriFoods would record on January 1, 2018 and January 31, 2018 with respect to the sales contract. Assume revenue is accrued on a monthly basis. (b) Prepare the journal entry to account for AgriFoods' purchase of Home's services.

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2017, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2017, $300,000 in 2018, and $300,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2018, $400,000 in 2019, and $400,000 in 2020 associated with those sales. In 2020, Lake also repossessed $200,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $75,000 at the time they were repossessed. - In 2019, Lake would recognize realized gross profit of:

Moretti Department Store sells gift cards that expire three years from the date of purchase. During 2016, Moretti sold $50,000 of gift cards, of which $1,500 were redeemed during 2018. At the end of 2018, it is estimated that approximately $800 of the 2016 balance remains unused, and Moretti concludes that it will never be redeemed. Moretti sold another $55,000 of gift cards in 2017, of which $22,000 were redeemed in 2018, and $60,000 of gift cards in 2018, of which $40,000 were redeemed in 2018. Required: How much revenue with respect to gift cards should Moretti recognize in 2018?

Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents. • On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year. • On March 20, three of the most senior drivers at Terra abruptly left. As a result, Terra had to hire inexperienced drivers to fill the vacant positions. Consequently, Terra revised its estimate to a 30% chance that it would earn the semiannual bonus. • On June 30, Moose confirmed that there was no accident between January and June, so Terra would be entitled to the semiannual bonus. Terra bases estimates of variable consideration on the expected value it expects to receive. -Prepare Terra's June 30 journal entry to account for the revenue earned from June 1 - June 30, as well as any necessary adjustments to revenue.

Beck Construction Company began work on a new building project on January 1, 2017. The project is to be completed by December 31, 2019, for a fixed price of $108 million. The following are the actual costs incurred and estimates of remaining costs to complete the project that were made by Beck's accounting staff: -What amount of gross profit (or loss) would Beck record on this project in each year, assuming that Beck recognizes revenue for this project upon completion of the project? Place answers in the spaces provided below and show supporting computations.

Recognition of franchise fee revenue is dependent on judgments of both substantial performance and expected collection of fees.

Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents. • On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year. • On March 20, three of the most senior drivers at Terra abruptly left. As a result, Terra had to hire inexperienced drivers to fill the vacant positions. Consequently, Terra revised its estimate to a 30% chance that it would earn the semiannual bonus. • On June 30, Moose confirmed that there was no accident between January and June, so Terra would be entitled to the semiannual bonus. Terra bases estimates of variable consideration on the expected value it expects to receive. -Prepare Terra's January journal entry to account for the revenue earned from January 1 - January 31.

Briefly explain the circumstances that indicate the seller has a bill-and-hold sale and a consignment sale, and how that affects the timing of revenue recognition for each.

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2017. Collections on this sale were $20,000 in 2017, $15,000 in 2018, and $20,000 in 2019. -In 2019, Reliable would recognize gross profit of:

A transfer of goods or services is complete when the customer has control over the goods or services.

Explain briefly how a company who sells to distributors with a right of return might manage earnings if the company was falling short of profit projections. What sort of ethical problems could result from that earnings management?