Exam 5: Revenue Recognition

When recognizing revenue over time on a long-term contract, the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete.

CompuTime Center sells a full assortment of computer parts, including motherboards, video cards, and cables. It also offers complementary computer assembly services. A customer places an order for an advanced workstation, and CompuTime asks for $3,500. If CompuTime were to sell only the parts in an advanced workstation, with no assembly, the price would be $3,300. 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 residual approach.

On July 15, 2018, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2018, and the calibration service commenced on that date. How many performance obligations exist in this contract?

Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:

Revenue is not recognized under the realization principle unless the earnings process is complete or virtually complete and there is reasonable certainty about the expected collection of the asset received.

On December 15, 2018, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2019, and December 15, 2020. Ignore interest charges. Rigsby has a December 31 year-end. In 2018, Rigsby would recognize realized gross profit of:

When the cost recovery method is used to account for a long-term construction contract under IFRS, an equal amount of cost and revenue is typically recognized during the early life of the contract, such that high initial gross profit is recognized in net income.

For a typical manufacturing company, the most common critical point for recognizing revenue is the date:

Bert's Meat Market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:

A contract between a seller and a buyer need not be in writing to be enforceable.

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 upon project completion. Required: Compute the amount of gross profit recognized by McCombs during 2017 and 2018.

Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing revenue associated with one of these sales?

Use of the installment sales method requires that firms track the gross profit percentage associated with a particular sale.

Optimus Pools, Inc. constructs outdoor swimming pools for wealthy individuals. Recently it obtained an order to build a three-lane swimming pool of 25 yards in length in the customer's backyard. Under the contract, Optimus is also obligated to install a water heater and a filtration system, which are necessary to make a swimming pool fully functional. Total price for the construction was $55,000. Each of these smaller components would typically cost $40,000, $10,000, and 20,000 if installed separately. Required: Given the information above, how many performance obligations are included in this contract?

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 2017, Lake would recognize realized gross profit of:

Sullivan Software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75. -Sullivan should recognize revenue for the two parts of the arrangement as follows:

Mammoth Publishing, Inc. owns a weekly magazine called "Nova Health," and sells annual subscriptions for $96. Customers prepay their subscription fee and receive 52 issues starting in the following month. The company also offers new subscribers a 25% discount coupon on its other weekly magazine called "Fishing & Camping," which has a list price of $84 for an annual subscription. Mammoth estimates that approximately 10% of the discount coupons will be redeemed. Required: (a) How many performance obligations are in a single subscription contract? Explain the reasons for your answer. (b) Prepare the journal entry to account for one new subscription of "Nova Health," clearly identifying the revenue or deferred revenue associated with each performance obligation.

Are the following separate performance obligations: prepayments, quality-assurance warranty, extended warranty, right of return? For each, indicate yes or no, and explain.

If an option to purchase an extended warranty at a special discount is included with a product when the product is purchased, a portion of the contract price needs to be allocated to the option.

If the seller is a principal, the seller should recognize gross revenue and cost of sales associated with the transaction.