Exam 5: Revenue Recognition

Briefly explain how a company that recognized revenue over time by estimating percentage of completion using a cost-to-cost ratio could manage earnings upward to meet a profit projection. What sort of ethical problems could result from that earnings management?

Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment sales method and the cost recovery method.

Which of the following is typically true for a bill-and-hold arrangement?

Sellers are only required to adjust the transaction price to reflect the time value of money when the contract has a significant financing component.

DGA Associates, Inc. sells computer workstations designed for architects. In 2018, it sold 120 workstations for $360,000. For each workstation sold, DGA distributed a 40% discount coupon for any additional future purchases made in the next 12 months. Based on historical experience, DGA expects that approximately 30% of the coupons will be utilized, and the goods purchased with the coupons would normally sell for $350. Required: (a) How many performance obligations are in a contract to purchase a computer workstation? Explain the reasons for your answer. (b) Prepare a journal entry to record revenue for the sale of 120 computer workstations, assuming that DGA uses the residual method to estimate the stand-alone selling price of the workstations sold without the discount coupon.

Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2018, are presented below: Estimated cost to complete: Assuming BCC used the cost recovery method to recognize revenue under IFRS, what would gross profit have been in 2017 and 2018 (rounded to the nearest thousand)?

When a long-term contract does not qualify for revenue recognition over time, all gross profit and loss recognition occurs when the contract is completed.

Staff Accounting Bulletin No. 101 was issued by the FASB to clarify its guidelines on revenue recognition.

On July 1, Wiggins Associates enters into a contract to provide consulting services to Pennsylvania University (PU). The contract is anticipated to last four months and is intended to achieve significant cost savings at the university. The contract stipulates that PU will pay Wiggins $25,000 at the end of each month, and, if total cost savings reach a specific target, PU will pay an additional $20,000 to Wiggins at the end of the contract. Wiggins estimates a 75% chance that cost savings will reach the target. -Assume that Wiggins estimates variable consideration as the expected value. Required: Prepare the journal entry on July 31 to record the first month of revenue under the contract.

Which of the following statement is most true?

Omni-Resistor, Inc. specializes in waterproofing homes, office buildings and other structures. Recently it completed a waterproofing renovation for a building at a local university. The contract specifies that Omni-Resistor will receive a flat lump sum of $100,000 for the renovation, and an additional $2,500 if there is no roof leaking through the roof within the first year after the renovation. The seller estimates that there is an 85% chance that no leakage will occur within the first year. Required: (a) Assuming Omni-Resistor uses the most likely value to estimate the variable consideration, calculate the transaction price. (b) Assuming Omni-Resistor determines transaction price as the "expected value" of the variable consideration, calculate the transaction price. (c) Assume Omni-Resistor uses the "expected value" approach, but is very uncertain of that estimate due to a lack of experience with similar renovations. Calculate the transaction price.

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 2018, Reliable would recognize gross profit of:

Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2018, are presented below: Estimated cost to complete: - Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2018 would be (rounded to the nearest thousand):

The Fremont (Ireland) Flyers were a semi-professional carriage racing team that competed up until the early 1930's. Mary Smith owns the Fremont Fliers' trademark, and recently licensed it to the Fremont (California) Flyers roller derby team. The license allows the roller derby team to use the trademark for five years for a total of $15,000. -Under U.S. GAAP, how much revenue would Mary recognize in year 1 of the license?

Johnson sells $100,000 of product to Robbins, and also purchases $10,000 of advertising services from Robbins. The advertising services have a fair value of $8,000. Johnson should record revenue on its sale of product to Robbins of:

Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. 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 Romano 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, Romano estimated that there is a 75% chance that it will earn the quarterly bonus. • On May 5, Romano learned that, during March, there were two complaints from customers related to room cleanliness. Based on this new information, Romano revised its estimate downward to 40% that it would earn the quarterly bonus. • On June 30, Silvia notified Romano that, for the quarter ended, there were four complaints associated with room cleanliness, so Romano would receive the bonus. Two days later, Romano received all payments due for all services rendered in the second quarter, including the bonus. Romano bases estimates of variable consideration on the expected value of the consideration it expects to -Prepare Romano's April 30 journal entry to account for the revenue earned in April.

Summerhill Construction builds luxury houses in remote areas. On June 1, 2018, the company signed a contract to build a house in an undeveloped section of a mountainside, and received $2 million in advance for the job. To complete the project, the company must construct a pathway leading to the building lot, clear a large hillside, and construct a wooden house. Normally, the company would charge $400,000, $1,400,000, and $500,000, respectively, for each of these tasks if done separately. Required: Given the information above, how many performance obligations are included in this contract?

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: Compute the amount of gross profit recognized during 2017 and 2018.

In 2018, Chicago Construction began work on a three-year construction project to build a new performing arts complex (the PAC). The PAC contract price is $150 million. Chicago recognizes revenue on this contract over time according to percentage of completion. At the end of 2018, the following financial statement information indicates the results to date for the PAC (missing items denoted by letter): Required: Compute the following, placing your answer in the spaces provided and showing supporting computations below:

Which of the following is true about accounting for contract assets (CIP in excess of billings) in each balance sheet prior to completion of long-term construction contracts?