Exam 5: Revenue Recognition

Mahogany Billiards sells upscale pool tables and related supplies. It sells a premium package consisting of a pool table imported from Europe, a full set of cues and balls, and on-site installation by its staff. Mahogany determines that each of these components is a performance obligation. Mahogany sells the pool table separately for $3,000 and the set of cues and balls for $1,000. The entire package is sold at $4,500. Mahogany does not offer on-site installation separately, as part of company policy. It also estimates that it incurs about $350 of compensation and other costs per each installation. Other competing vendors sell on-site installation separately for $450, on average. Mahogany typically earns a profit margin of 40% over cost, and its prices are generally 5% lower than those charged by competitors. Required: Estimate the stand-alone selling price of the installation service using (a) the adjusted market assessment approach, (b) the expected cost plus margin approach, and (c) the residual approach.

Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500. -Typically, if Beaumont were to sell the equipment only, it would ask for $2,000. Required: Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the lessons based on the residual approach.

Under IFRS, which of the following is not a condition for recognizing revenue?

Revenue from the sale of computer software is always recognized at the point of sale.

Under GAAP, with respect to multiple-element arrangements, if the revenue for a particular part of a multiple-element arrangement does not qualify for separate recognition, it is:

With respect to delaying revenue recognition until completion of a long-term contract, it is the case that:

Briefly explain the difference between an account receivable, a contract asset, and a contract liability, with respect to balance sheet disclosure.

A contract does not exist for purposes of applying the revenue recognition principle in all of the following cases except for when:

Which of the following is not true about contract liabilities?

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. - Total cash collections on installment sales during 2018 would be:

Minarski Electronics sells computers and provides hardware maintenance services. On April 1^st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $840 and the one-year unlimited maintenance/repair service costs $360. How much revenue does Minarski Electronics recognize for the month ended April 30^th, assuming that revenue is accrued monthly?

Dr. Privacy, Inc. specializes in shredding office documents and destroying computer hard drives for various clients in the U.S. In June 2018, it enters into a contract with the U.S. government to properly discard computer hard drives. The contract specifies a fixed fee of $50,000 for the first 25,000 hard drives, and an additional $5,000 for each incremental 10,000 drives. The company estimates a 65% chance of handling 25,000 drives or fewer, 30% chance of handling more than 25,000 drives but fewer than 35,000 drives, and 5% chance of handling more than 35,000 drives but fewer than 45,000 drives. Required: Assuming that the company determines transaction price as the expected value of the consideration, what is Dr. Privacy's estimate of the transaction price for this contract?

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 IFRS, how much revenue would Mary recognize in year 1 of the license?

Typhoon Sons & Co. manufactures various types of golf clubs to third party vendors. On April 1, 2018, Typhoon delivers a large quantity of golf clubs to Resona Country Club. Under the sales agreement, Resona is obligated to pay Typhoon $200,000 within six months. On May 1, Typhoon purchases for cash the right to advertise its products during Resona's annual golf tournament event for $3,000. Resona normally charges $2,500 for such services. On August 15, Resona pays Typhoon all amounts owed. Required: Prepare the journal entries Typhoon should record to account for the transaction on April 1, May 1 and August 15. Indicate the amount of revenue that Typhoon should recognize on its sale of golf clubs to Resona.

When using the cost recovery method of accounting for long-term construction contracts under IFRS, early in the life of the contract it is typically the case that:

Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized below: SDH uses the cost recovery method under IFRS to recognize revenue. - What is SDH's journal entry to record revenue in 2018?

Colombo Coffee sells gift cards that can be used at its 55 branches. During 2017, customers purchased $25,000 of gift cards, of which $3,000 were redeemed during 2018. It is estimated that a balance of $1,500 of cards sold in 2017 remains unused as of the end of 2018, and Colombo determines that this amount will never be redeemed, based on historical experience. During 2018, Colombo further sold $32,000 of gift cards, of which $26,000 were redeemed and $6,000 remain unused but may be used by customer in 2019. Required: How much gift card revenue should Colombo recognize in 2018?

Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized below: SDH uses the cost recovery method under IFRS to recognize revenue. - In its December 31, 2017, balance sheet, SDH would report:

Rothbart Manufacturing agrees to manufacture bumper cars for 12 Banners Amusement Parks. Under the terms of the contract, 12 Banners will pay Rothbart a total of $60,000, and 12 Banners can cancel the contract if it so chooses but must pay Rothbart for work completed. Rothbart believes that, if 12 Banners cancelled the contract, Rothbart could sell the bumper cars to another amusement park and still make a profit. The manufacturing contract is expected to last six months, and as of December 31, 2018, the job is 80% complete. How much revenue should Rothbart recognize in 2018 for this contract?

Revenue likely is recognized over time for all the following arrangements except for