Exam 5: Revenue Recognition

CompuValue Center sells a full assortment of computer parts, including motherboards, video cards, and cables, and also offers complementary computer assembly services. CompuValue estimates that it incurs $50 in labor and materials on average to complete one assembly order, with an average of 75% profit based on cost. Required: Assuming that computer parts and assembly service are separate performance obligations, estimate the stand-alone selling price of the assembly service based on the expected cost plus margin approach.

Arizona Desert Homes (ADH) constructed a new subdivision during 2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized below: -ADH recognizes revenue upon completion of the contract. In its December 31, 2017, balance sheet, ADH would report:

Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness. • On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will earn the quarterly bonus. • On May 5, Portelli learned that, during March, there were two complaints from customers related to room cleanliness. Based on this new information, Portelli revised its estimate downward to 40% that it would earn the quarterly bonus. • On June 30, Silvia notified Portelli that, for the quarter ended, there were four complaints associated with room cleanliness, so Portelli would receive the bonus. Two days later, Portelli received all payments due for all services rendered in the second quarter, including the bonus. Portelli bases estimates of variable consideration on the most likely amount it expects to receive. -Prepare Portelli's June 30 and July 2 journal entries to record additional service revenue earned, as well as any necessary adjustments to revenue and receipt of payment from Silvia.

The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS. - Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS can recognize revenue associated with the $50,000:

Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2017 and completed in 2018. Cost and other data are presented below: -Assume that Beavis recognizes revenue on this contract over time according to percentage of completion. Required: Prepare all journal entries to record costs, billings, collections, and profit recognition.

A fee for recording a new customer in the seller's information system should be treated as a separate performance obligation and should be recognized upon payment.

Gupta Industries received a $300,000 prepayment from Packard Associates for the sale of new equipment. Gupta will bill Packard an additional $100,000 upon delivery of the equipment. Upon receipt of the $300,000 prepayment, how much should Gupta recognize for a contract asset, a contract liability, and accounts receivable?

Bull'sEye sells gift cards redeemable for Bull'sEye products either in-store or online. During 2018, Bull'sEye sold $2,000,000 of gift cards, and $1,800,000 of the gift cards were redeemed for products. As of December 31, 2018, $150,000 of the remaining gift cards had passed the date at which Bull'sEye concludes that the cards will never be redeemed. How much gift card revenue should Bull'sEye recognize in 2018?

Holmgren Seafoods, Inc. catches and processes salmon and tuna caught off the coast of Maine. In May 2018, it placed 100 freshly caught wild salmon with a retail price of $75 each in Joe's Fish Shop. Holmgren's contract with the shop stipulates that the shop will earn a 15% commission on each salmon sold. Joe's is responsible for purchasing any fish that remain unsold at the end of a three-day period. Required: During the three-day period, Joe's Fish Shop was able to sell 88 of the 100 salmon. How much revenue should Holmgren recognize with respect to this transaction?

Which of the following is not an indicator that the customer is likely to have control over a good?

Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time. - Assume that Sanjeev estimates variable consideration as the most likely amount. After Sanjeev has recognized revenue for two months of the contract, he changes his assessment of the chance the contract will pay him $3,000 to 70%. What adjustment to revenue should Sanjeev recognize to account for that change in estimate?

Estimated losses on long-term contracts are recognized as ratable over the contract term regardless of whether revenue is recognized over time or upon contract completion.

Which of the following is an example of an extended warranty?

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 its 2017 year-end balance sheet, Reliable would report installment receivables (net) of:

Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2017, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest. - Assuming that the initial services to be performed by Flapper Jack's subsequent to the signing are substantial and that collection of the receivable is reasonably assured, the journal entry required at signing would include a credit to:

The right of return is a separate performance obligation, and a portion of the transaction price needs to be allocated to it for revenue recognition.