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Revenue Recognition and Accounting for Contracts: A Comprehensive Assessment

Discussion on revenue recognition standards and contract accounting.

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    Revenue Recognition and Accounting for Contracts: A Comprehensive Assessment 1. The last step in the process for revenue recognition is to (Points : 1) allocate transaction price to the separate performance obligations. recognize revenue when each performance obligation is satisfied . determine the transaction price. identify the contract with customers. Question 2. 2. Seadrill Engineering licensed software to oil - drilling firms for 5 years. In addition to providing the software, the company also provides consulting services and support to ensure smooth operation of the software. The total transaction price is $350,000. Based on standalone values, the company estimates the consulting services and support have a value of $100,000 and the software license has a value of $250,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes (Points : 1) a credit to sales revenue for $250,000 and a credit to unearned service revenue of $100,000 . a credit to service revenue of $100,000. a credit to unearned service revenue of $100,000. a credit to sales revenue of $350,000. Question 3. 3. An option to purchase a warranty is recorded as (Points : 1) an expense in the period the goods or services are sold. a warranty liability for all costs incurred after sale due to correction of defects. revenue in the period that the service - type warranty is in effect . an assurance type warranty which is included in the sales price of the product. Question 4. 4. Cost estimates at the end of the second year indicate that a loss will result on completion of the entire contract. Which of the following statements is correct? (Points : 1) Under the completed - contract method, the loss is not recognized until the year the construction is completed. Under the percentage - of - completion method, the gross profit recognized in the first year must not be changed. Under the completed - contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability. Under the completed - contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs. Question 5. 5. Consigned goods are recognized as revenues by the (Points : 1)

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    2 consignor when a sale to a third party has occurred . consignor when the merchandise has been shipped to a consignee. consignee when a sale to a third party has occurred. consignor when it receives payment from consignee for goods sold. Question 6. 6. Eilert Construction Company had a contract starting April 2015, to construct a $21,000,000 building that is expected to be completed in September 2016, at an estimated cost of $19,250,000. At the end of 2015, the costs to date were $8,855,000 and the estimated total costs to complete had not changed. The progress billings during 2015 were $4,200,000 and the cash collected during 2015 was $2,800,000. Eilert uses the percentage - of - completion method. For the year ended December 31, 2015, Eilert would recognize gross profit on the building of (Points : 1) $0. $737,917. $805,000. $945,000. Question 7. 7. Horner Construction Co. uses the percentage - of - completion method. In 2014, Horner began work on a contract for $16,500,000; it was completed in 2015. The following cost data pertain to this contract: Year Ended December 31 2014 2015 Cost incurred during the year $5,850,000 $4,200,000 Estimated costs to complete at the end of year 3,900,000 — The a mount of gross profit to be recognized on the income statement for the year ended December 31, 2015 is (Points : 1) $ 2,400,000 . $2,580,000. $2,700,000. $6,450,000. Question 8. 8. When multiple performance obligations exists in a contract, they should be accounted for as a single performance obligation when (Points : 1) each service is interdependent and interrelated . both performance obligations are distinct but interdependent. the product is distinct within the contract. determination cannot be made.

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    3 Question 9. 9. The second step in the process for revenue recognition is to (Points : 1) allocate transaction price to the separate performance obligations. determine the transaction price. identify the contract with customers. identify the separate performance obligations in the contract. Question 10. 10. The third step in the process for revenue recognition is to (Points : 1) determine the transaction price . identify the separate performance obligations in the contract. allocate transaction price to the separate performance obligations. recognize revenue when each performance obligation is satisfied. Question 11. 11. Signing of the contract by the two parties is (Points : 1) not recorded until one or both parties perform under the contract . recorded at the time the contract is approved by both parties. not recorded until both parties perform under the contract. recorded immediately after the contract is signed. Question 12. 12. Bella Pool Company sells prefabricated pools that cost $100,000 to customers for $180,000. The sales price includes an installation fee, which is valued at $25,000. The fair value of the pool is $160,000. The installation is considered a separate performance obligation and is expected to take 3 months to complete. The transaction price allocated to the pool and the installation is (Points : 1) $ 155,676 and $24,324 respectively $160,000 and $25,000 respectively $180,000 and $25,000 respectively $138,378 and $21,622 respectively Question 13. 13 . When a customer purchases a product but is not yet ready for delivery, this is referred to as (Points : 1) a repurchase agreement. a consignment. a principal - agent relationship. a bill - and - hold arrangement

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    4 Question 14. 14. Under the completed - contract method (Points : 1) revenue, cost, and gross profit are recognized during the production cycle. revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed. revenue, cost, and gross profit are recognized at the time the contract is completed. None of these answers are correct. Question 15. 15. Gomez, Inc. began work in 2014 on contract #3814, which provided for a contract price of $14,400,000. Other details follow: 2014 2015 Costs incurred during the year $2,400,000 $7,350,000 Estimated costs to complete, as of December 31 7,200,000 0 Billings during the year 2,700,000 10,800,000 Collections during the year 1,800,000 11,700,000 Assume that Gomez uses the completed - contract method of accounting. The portion of the total gross profit to be recognized as income in 2015 is (Points : 1) $1,800,000. $2,700,000. $4,650,000. $14,400,000. Question 16. 16. Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is $14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2014. At December 31, 2015, Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $14,400,000 due to unanticipated price increases. What is the total amount of Construction Expenses that Seasons will recognize for the year ended Dec ember 31, 2015? (Points : 1) Revenue Expenses $14,880,000 $15,000,000 Revenue Expenses $3,720,000 $3,750,000

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