Intermediate Accounting Vol 1, 3rd Edition By Fisher – Test Bank

 

 

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Sample Questions

 

Intermediate Accounting, Vol 1, 3e (Lo/Fisher)

Chapter 4   Revenue and Recognition

 

Learning Objective 1

 

1) Which of the following best explains what recognition means in financial reporting?

1.    A) Recognition is the process of reporting an item that is due within 12 months in the current section of the balance sheet.

2.    B) Recognition is the process of reporting an item in the notes to the financial statements.

3.    C) Recognition is the process of presenting an item in the financial statements.

4.    D) Recognition refers to the choice between using fair value and historical cost in the financial statements.

Answer:  C

Diff: 1     Type: MC

Skill:  Conceptual

Objective:  4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

 

2) Which of the following is correct about the value creation process?

1.    A) The value creation process is the same for all entities.

2.    B) The value creation process is the same for all industries.

3.    C) Any point on the value creation process is acceptable for revenue recognition.

4.    D) The value creation process is specific to each entity.

Answer:  D

Diff: 2     Type: MC

Skill:  Conceptual

Objective:  4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

 

3) Which of the following statements about the value creation process is not correct?

1.    A) The value creation process reflects the wide range of possible points at which revenue could be recognized.

2.    B) Recognizing revenue early in the value creation process is more conservative than waiting until cash is received.

3.    C) Recognizing revenue early in the value creation process involves more uncertainties and lower reliability about cash flows.

4.    D) Permitting too much choice in accounting policies impairs comparability of financial statements.

Answer:  B

Diff: 3     Type: MC

Skill:  Conceptual

Objective:  4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

 

4) Explain why accounting standards generally prescribe a smaller set of alternatives for revenue recognition.

Answer:  Accounting standards prescribe revenue recognition at later stages of the value creation process when the risks and uncertainties surrounding procurement, demand, price, credit, and indemnity risk are sufficiently low. This enables revenue to be measurable.

Diff: 1     Type: ES

Skill:  Conceptual

Objective:  4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

5) Discuss advantages and disadvantages of using the cash basis to recognize revenues. Provide three valid reasons in your discussion.

Answer:  Advantages/Pros:

·         The cash basis of revenue recognition would be more reliable since the cash receipt is readily verifiable.

 

Disadvantages/Cons:

·         This method usually delays the recognition of revenue, reducing its timeliness and relevance to users.

·         Information from the cash method is generally less useful for making predictions about the future, as they can fluctuate due to random events affecting the timing of payment.

·         While more reliable, the cash basis does not eliminate judgment and overstatements.

·         Restricting revenue recognition to the cash basis can have real consequences on business activities. For instance, a company would be less willing to sell products on credit; and the supply of credit is essential to the health of the economy.

Diff: 2     Type: ES

Skill:  Conceptual

Objective:  4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

 

 

Learning Objective 2

 

1) On March 1, Pendant Textbook Publications delivered 100 copies of one of its accounting textbooks to the First University bookstore. The bookstore can return all unsold copies to Pendant. The retail price of each copy is $110, while the price charged to the bookstore is $80. Each book costs Pendant $40 to produce. On April 15, the distributor returns 30 unsold copies to Pendant. Based on these facts, how much revenue would Pendant recognize on April 15?

1.    A) $2,800

2.    B) $5,600

3.    C) $7,700

4.    D) $2,400

Answer:  B

Explanation:  B) ($80 ∗ 70 copies sold = $5,600)

Diff: 1     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

2) Which statement is correct about multiple performance obligation arrangements?

1.    A) The revenue recognition criteria no longer apply to these transactions.

2.    B) The revenue must be allocated to the components of the sale evenly over the life of the contract.

3.    C) The revenue must be recognized evenly over the life of the contract.

4.    D) Identifying the different sources of revenue increases the representational faithfulness.

Answer:  D

Diff: 2     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

3) Which statement is correct about multiple performance obligation arrangements?

1.    A) The residual method must normally be used.

2.    B) The relative stand-alone selling price method must normally be used.

3.    C) There is no specific method that must be used.

4.    D) The adjusted market assessment approach is an acceptable residual approach that may be used.

Answer:  B

Diff: 2     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

4) Discuss when it is acceptable to use the residual approach to allocate the transaction price to performance obligations.

Answer:  The residual approach may only be used if either (i) the good or service in question have a highly variable selling price, or (ii) the entity has not yet established a price for that good or service.

Diff: 2     Type: ES

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

5) List the five key steps in the revenue recognition process.

Answer:

1) Identify the contract

2) Identify the performance obligation

3) Determine the transaction price

4) Allocate the transaction price to performance obligations

5) Recognize income in accordance with performance

Diff: 1     Type: ES

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

6) You are an accountant working at Phantastic Pharmaceutical Inc. and have been asked to explain to your controller the possible points at which revenue could be recognized by your organization. Identify two alternatives that are in accordance with IFRS 15 for recognizing revenue at Phantastic.

Answer:  Value creation occurs during many different business processes: research and development of the drugs, production of the drugs, signing of contract with the customer, delivery of drugs to the customer, or collection from the customer. IFRS requires that revenue be recognized at: either a point in time or over time as the performance obligations are satisfied. An example of the first alternative is recognizing revenue when the drug is delivered to the customer;. An example of the second alternative is recognizing revenue as performance is achieved in accordance with the benchmarks established in the contract e.g. regulatory approval.

Diff: 1     Type: ES

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

7) Explain how the transaction price should be allocated to the performance obligations in a multiple performance obligation sales arrangement.

Answer:  IFRS 15 requires that enterprises allocate the transaction price to the various performance obligations in a multiple performance obligation sales arrangement based on the observable stand-alone selling prices of the components. If this is not possible paragraph 79 of IFRS 15 identifies three alternatives noting that other approaches may also be suitable. The three alternatives identifies in paragraph 79 are:

1) The adjusted market assessment approach which involves estimating what a customer would be willing to pay for the good or service or what competitors charge for a similar good or service.

2) The expected cost plus margin approach which involves estimating expected costs to provide the good or service and adding a profit margin typical for that good or service.

3) The residual approach which computes the stand-alone selling price as the transaction price less the total of the observable stand-alone selling prices of other goods services in the transaction. This approach is only acceptable if either (i) the good or service in question has a highly variable selling price, or (ii) the entity has not yet established a selling price for that good or service.

Diff: 2     Type: ES

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

8) Explain how the timing of revenue recognition is affected by multiple performance obligations in the arrangement. Explain how revenue is ultimately recognized in a multiple performance obligations sales arrangements.

Answer:  Clearly, it is inappropriate to record all the revenue upon delivery of simply one product or service if some products or services are delivered at different points in time.

All products or services in such a sales transaction are taken into account.

To record revenue in a manner that reflects the timing of delivery for each product or service in the sales arrangement, the sales price of the total arrangement is allocated to the individual components. Then the normal revenue recognition criteria are applied to each component to determine when the revenue from that element can be recorded by the company.

Diff: 2     Type: ES

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

9) Explain why a company should allocate revenue to multiple performance obligations in a sales transaction even if the company delivers all of the products or services in the same accounting period.

Answer:  Proper allocation of revenue to the various revenue streams can make a difference to financial statement readers. Identifying different sources of revenue increases the representational faithfulness of the information and allows users to better understand the operations of the enterprise.

For example, knowing that a car company earns more from providing services than from the sale of a car could be quite informative to users in the prediction of future revenues and cash flows. Users could perceive some revenue sources as more sustainable than other sources.

This information will also reduce moral hazard and information asymmetry.

Diff: 2     Type: ES

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

10) Simply Manufacturers has signed an order to supply 10,000 chairs at a price to be determined sixty days after delivery. Payment is due at that time. The price per chair may range from $0 to $100 depending on a series of events, the outcome of which cannot be accurately predicted. Which of the following factors is most likely to precludes Simply from recognizing revenue at time of delivery.

1.    A) The purchaser bears the significant risks and rewards of ownership.

2.    B) The revenue is variable in nature.

3.    C) The purchaser is not obligated to pay for the goods at time of delivery.

4.    D) Simply had not paid its suppliers for the materials used to manufacture the chairs.

Answer:  B

Diff: 1     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

11) Fancy Cars sold a used car for $35,000 cash. The company will also provide 4 oil changes per year for 5 years and an extended service-type warranty for 5 years. This is the first time that Fancy has offered an extended warranty. They intend to offer it to customers on a stand-alone basis but have not yet established a sales price. The observable selling prices of the car and oil changes follow:

 

Car	$30,000
Oil change	$50 each oil change

 

1.    Determine how revenue should be allocated to the various components in this transaction.

2.    Apply the appropriate revenue recognition criteria to determine when revenue should be recognized for the various components of this transaction.

Answer:

1.    The residual method is appropriate since the fair value of the warranty is not determinable as a stand-alone price has not yet been established for the service-type warranty.

 

	Value
Car	$30,000
Oil change (50 × 4/yr × 5 yrs)	$1,000
Warranty	$4,000	Total transaction price less the observable stand-alone selling price of the car and oil changes. $35,000 – $30,000 – $1,000
	$35,000

 

1.    Revenue for the car should be recognized upon delivery. Revenue for the oil changes will recorded as each of the 20 oil changes is performed (1,000/ (4/yr × 5yrs) ). The revenue for the warranty would be recognized over the 5 years.

Diff: 2     Type: ES

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

12) A city transit authority issues 200,000 monthly passes at $80 each for sale at various retailers. Retailers act as consignees for these passes. Identify why the transit authority cannot recognize revenue at time of distribution.

1.    A) The retailers have not taken physical possession of the asset.

2.    B) A contract has not been entered into.

3.    C) The transaction price is not known.

4.    D) The retailers do not bear the significant risks and rewards of ownership.

Answer:  D

Diff: 1     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

13) Hedley Corporation sold hardware and software for $70,000 cash. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The observable stand-alone selling prices are as follows:

 

Hardware	$60,000
Software	$15,000
Hardware Maintenance	$5,000

 

1.    Determine how revenue should be allocated to the various components in this transaction.

2.    Apply the appropriate revenue recognition criteria to determine when revenue should be recognized for the various components of this transaction.

Answer:

1.    The relative stand-alone selling price method is appropriate since the stand-alone sales prices of all components are observable.

 

	Stand-alone selling price	% of total selling pice	Transaction price	Amount allocated to PO
Hardware	$60,000	75%	$70,000	$52,500
Software	$15,000	18.75%	$70,000	$13,125
Hardware Maintenance	$5,000	6.25%	$70,000	$4,375
	$80,000	100%		$70,000

 

1.    Revenue for the Hardware should be recognized upon delivery/installation. Revenue for the software should be recorded over the one-year support period being provided. Revenue for the maintenance contract should be recognized over the 3-years.

Diff: 2     Type: ES

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

14) An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1. Identify why the insurance company cannot recognize revenue when the premium is received.

1.    A) The insurance company has not transferred to the buyer the significant risks and rewards of ownership of the service.

2.    B) The customer has not taken possession of the asset.

3.    C) The insurance company earns the revenue over time, rather than at a point of time (time of sale).

4.    D) The customer does not control the asset.

Answer:  C

Diff: 1     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

15) Superior Cars sold a car for $35,000 cash. In addition, the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years. The normal observable stand-alone selling prices are as follows:

 

Car	$35,000
Oil change	$50 per oil change
service- type warranty	$4,000

 

1.    Determine how revenue should be allocated to the various performance obligations in this transaction.

2.    Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Answer:

1.    The relative stand-alone sales price method is appropriate since the stand-alone sales price for all components is determinable.

 

	Stand-alone selling price	Allocated Value
Car	$35,000	$30,625  [$35,000/$40,000 × $30,000]
Oil change ($50 × 4/yr × 5 yrs)	$1,000	$875       [$1,000/$40,000 × $30,000]
Warranty	$4,000	$3,500    [$4,000/$40,000 × $30,000]
	$40,000	$35,000

 

1.    Revenue for the car should be recognized upon delivery. Revenue for the oil changes will recorded as each of the 20 oil changes is performed (875/ (4/yr × 5yrs) ). The revenue for the warranty would be recognized over the 5-years.

Diff: 2     Type: ES

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

16) The publisher of TV Weekly received the following 52-week subscriptions during the first quarter of fiscal 2018. Each subscription is $110, which is a 47% discount off the newsstand price of $4 per issue. Each subscription becomes effective in the calendar month after the company receives the subscription. The company has a December 31 fiscal year. What amount of revenue will the company record in 2018 for the subscriptions received in January? (Round your response to the nearest dollar).

 

Month	Subscription Received
January	4,300
February	4,200
March	4,100

 

1.    A) $247,142

2.    B) $250,690

3.    C) $433,583

4.    D) $1,279,500

Answer:  C

Explanation:  C) 4,300 ∗ 11/12 months ∗ 110 subscription price = $433,583.33

Diff: 2     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

17)  Harris Corporation sold hardware and software for $70,000 cash. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The observable stand-alone selling prices are as follows:

 

Hardware	$60,000
Software	$8,900
Hardware Maintenance	$4,000

 

1.    Determine how revenue should be allocated to the various components in this transaction.

2.    Apply the appropriate revenue recognition criteria to determine when revenue should be recognized for the various components of this transaction.

Answer:

1.    The relative stand-alone selling price method is appropriate since the stand-alone sales prices of all components are observable.

 

	Stand-alone sales price	Allocated Value
Hardware	$60,000	$57,613  [$60,000/$72,900 × $70,000]
Software	$8,900	$8,546    [$8,900/$72,900 × $70,000]
Hardware Maintenance	$4,000	$3,841    [$4,000/$72,900 × $70,000]
	$72,900	$70,000

 

1.    Revenue for the Hardware should be recognized upon delivery/installation. Revenue for the software should be recorded over the one-year support period being provided. Revenue for the maintenance contract should be recognized over the 3-years.

Diff: 2     Type: ES

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

18) The publisher of Accounting Digest received the following 12-month subscriptions during 2018. Each subscription is $100. The company has a December 31 year end. Each subscription becomes effective in the calendar month after the company receives the subscription. What amount of revenue will the company record in 2018 for the subscriptions received between January-March? (Round your response to the nearest dollar).

 

Month	Subscription Received
January	4,300
February	4,200
March	4,100
April	4,400
May	6,100

 

1.    A) $315,000

2.    B) $779,167

3.    C) $1,051,667

4.    D) $1,260,000

Answer:  C

Explanation:  C) [(4,300 ∗ 11/12 months) + (4,200 × 10/12 months) + (4,100 ∗ 9/12 months)] ∗ $100 subscription price = $1,051,667

Diff: 3     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

19) On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. Electronic Distribution’s pays its wholesaler $500 for each TV. It then sells each TV for $800 to its retail customers including TV World. At the end of June, TV World sold 50 units. How much revenue should be recorded by Electronics Distribution for the month of June?

1.    A) $80,000

2.    B) $50,000

3.    C) $40,000

4.    D) $25,000

Answer:  C

Explanation:  C) 50 units ∗ $800/unit = $40,000

Diff: 1     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

20) On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. The cost of each unit is $600 and the unit selling price is $750. At the end of June, TV World sold 50 units. How much cost of sales should be recorded by Electronics Distribution for the month of June?

1.    A) $37,500

2.    B) $30,000

3.    C) $60,000

4.    D) $75,000

Answer:  B

Explanation:  B) 50 units ∗ 600/unit = $30,000

Diff: 1     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

21) Which of the following is TRUE when goods are sold on consignment?

1.    A) The customer has taken physical possession of the asset.

2.    B) The selling entity has the present right to payment for the asset.

3.    C) The significant risks and rewards of ownership have been transferred.

4.    D) The customer has accepted the asset.

Answer:  A

Diff: 1     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

22) Which of the following is TRUE when goods are sold on on an installment basis?

1.    A) Revenue is recognized at time of the initial sale.

2.    B) Cost of goods sold is debited for the cost of the merchandise sold.

3.    C) Revenue is not recognized until all monies due under the contract have been collected.

4.    D) The deferred gross profit liability is debited as cash is collected.

Answer:  D

Diff: 1     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

23) In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. The system costs Telly-Rental $400. Telly-Rental generally earns a gross profit of 15%. How much revenue is recorded by Telly-Rental in July?

1.    A) $0

2.    B) $150

3.    C) $400

4.    D) $1,000

Answer:  A

Explanation:  A) Revenue is deferred until cash is received.

Diff: 1     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

24) In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. Telly-Rental generally earns a gross margin of 25%. The customer pays $500 in December. How much revenue is recorded by Telly-Rental in December?

1.    A) $125

2.    B) $250

3.    C) $500

4.    D) $1,000

Answer:  C

Diff: 1     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

25) In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. The cost of goods sold is $400. How much deferred gross profit is recorded by Telly-Rental in July?

1.    A) $0

2.    B) $400

3.    C) $600

4.    D) $1,000

Answer:  C

Explanation:  C) 1000 – 400 = 600

Diff: 1     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

26) Which statement best describes a franchise arrangement?

1.    A) An arrangement in which one party licenses its business practices to another party.

2.    B) An arrangement in which one party exchanges goods or services with another party with little or no consideration.

3.    C) An arrangement in which one party provides goods to another party to sell on its behalf and will accept all goods that are not sold.

4.    D) An arrangement in which one party allows the purchaser to make payments over an extended period of time.

Answer:  A

Diff: 1     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

27) In September, Fast-Foods Inc. (FF) sells a franchise for an initial fee of $150,000 and ongoing fees based on 3% of gross profit. FF estimates that 20% of the initial fee relates to initial training, store design and opening activities; the remaining 80% relate to activities to be performed over 3 years. How much revenue should be recorded in September?

1.    A) $4,500

2.    B) $30,000

3.    C) $120,000

4.    D) $150,000

Answer:  B

Explanation:  B) 20% ∗ 150,000 = $30,000

Diff: 1     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

28) On December 1, 2018, SuperTech sold 100 locks for laptop computers at $50 each with a 90-day unconditional right of return. Since this is a new product for SuperTech, it has no past history regarding estimated returns. Which of the following is TRUE regarding SuperTech’s December 31, 2018 financial statements?

1.    A) Sales of $5,000 should only be recognized in 2019 when the return privilege expires.

2.    B) Sales of $5,000 should be recognized in 2018 as long as there is a reserve for returns.

3.    C) Sales of $5,000 should be recognized in 2018, with future costs accrued as an estimated liability.

4.    D) Sales should only be recognized as the related cash is collected.

Answer:  A

Explanation:  A) The right of return means that the revenue to be recognized is variable in nature. Given the uncertainty, revenue cannot be recognized until the amount of variable consideration is known which is when the right of return expires.

Diff: 2     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

29) On September 1, 2018, Electric Depot sold 100 laptop computers at $750 each with a 120-day unconditional right of return. Customers have 90 days to pay. Based on past experience, Electric Depot estimates that approximately 1% will be returned. Which of the following is TRUE regarding Electric Depot’s December 31, 2018 financial statements?

1.    A) Sales of $75,000 should only be recognized after 120 days when the return privilege expires.

2.    B) Sales of $74,250 should be recognized and a provision for refund liability of $750 established in September.

3.    C) Sales of $75,000 should be recognized in September 2018.

4.    D) Sales should only be recognized as the related cash is collected.

Answer:  B

Diff: 2     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

30) Which of the following is an acceptable revenue-recognition method?

1.    A) At time of shipment, if warranty uncertainty is not reliably measurable.

2.    B) At time of shipment to the consignee, for consignment sales.

3.    C) Installment method, if credit risk is high.

4.    D) At the point of sale, if credit risk is very high.

Answer:  C

Diff: 2     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

31) RU FIT Centre opened for business on April 5, 2018. For revenue recognition purposes, all memberships are assumed to be issued at the beginning of the month, with 1-year memberships costing $600 and 2-year memberships costing $960. During April, 32 1-year memberships and 25 2-year memberships were sold. RU FIT Centre prepares monthly financial statements. Which of the following statements is correct?

600.          A) Revenue to be recognized as earned for the month of April is $2,600.

601.          B) Revenue to be recognized as earned for the month of April is $3,600.

602.          C) Revenue to be recognized as earned for the month of April is $43,200.

603.          D) Deferred revenue at April 30 would be $43,200.

Answer:  A

Explanation:  A) (32 × $600 × 1/12) + (25 × $960 × 1/24) = $2,600

Diff: 2     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

32) Shear Company sells computer equipment with a 2-year warranty. Prior experience indicates that costs associated with this warranty average 1% in the first year and 2% in the second year. In 2018, Shear had sales of $1,800,000. It paid $250,000 for materials and labour to make warranty-related repairs in 2018. What amount should the warranty expense for 2018 be?

1.    A) $18,000

2.    B) $36,000

3.    C) $54,000

4.    D) $250,000

Answer:  C

Explanation:  C) $1,800,000 × 3% = $54,000

Diff: 2     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

33) YMN had sales of $1,500,000, including:

·         $25,000 of goods shipped on consignment to an unrelated company on December 28, 2018 and received by that company on December 31, 2018

·         $20,000 of goods shipped F.O.B. shipping point to a different unrelated party on December 31, 2018 and received on January 2, 2019.

On its income statement, what amount of net sales should YMN record for 2018?

1.    A) $1,455,000

2.    B) $1,475,000

3.    C) $1,525,000

4.    D) $1,545,000

Answer:  B

Explanation:  B) $1,500,000 – $25,000 = $1,475,000

Diff: 3     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

34) Simple Inc. had sales of $1,500,000, including:

·         $30,000 of goods sold that were on consignment from an unrelated company on December 28, 2018

·         $10,000 of goods shipped F.O.B shipping point on December 28, 2018.

·         $20,000 of goods shipped F.O.B. destination point on December 31, 2018.

On its income statement, what amount of net sales should Simple Inc. record for 2018?

1.    A) $1,440,000

2.    B) $1,470,000

3.    C) $1,480,000

4.    D) $1,490,000

Answer:  C

Explanation:  C) $1,500,000 – $20,000 = $1,480,000

Diff: 3     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

35) Philips Corp. is unsure how to record the following transactions:

·         $60,000 of goods shipped F.O.B shipping point on December 28, 2018.

·         $50,000 of goods shipped F.O.B. destination point on December 31, 2018.

What amount of sales related to these two transactions should Philips Corp. record in fiscal 2018?

1.    A) $0

2.    B) $50,000

3.    C) $60,000

4.    D) $110,000

Answer:  C

Diff: 2     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

36) Here are some financial records for Accounting Plus Magazine which started operations in October 2018. Sales for its first month were as follows:

 

Subscriptions sold	Price per subscription	Subscription start date	Subscription term (months)
16,400	25	Oct 1	6 months
11,800	40	Oct 1	12 months

 

What would be the subscription revenue to be recognized for the month of Oct 2018? (Round to the nearest dollar).

1.    A) $68,333

2.    B) $107,667

3.    C) $774,333

4.    D) $882,000

Answer:  B

Explanation:  B) (16,400 ∗ 25 ∗ 1/6) + (11,800 ∗ 40 ∗ 1/12) = 107,667

Diff: 3     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

37) Here are some financial records for Accounting Plus Magazine which started operations in October 2018. Sales for its first month were as follows:

 

Subscriptions sold	Price per subscription	Subscription start date	Subscription term (months)
16,400	25	Oct 1	6 months
11,800	40	Oct 1	12 months

 

What would be the deferred revenue at Oct 31, 2018? (Round to the nearest dollar).

1.    A) $107,667

2.    B) $341,667

3.    C) $774,333

4.    D) $882,000

Answer:  C

Explanation:  C) (16,400 ∗ 25 ∗ 5/6) + (11,800 ∗ 40 ∗ 11/12) = 774,333

Diff: 3     Type: MC

Skill:  Computational

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

 

 

38) Which of the following methods of revenue recognition would be selected when a vendor has another firm acting as its selling agent?

1.    A) Cost recovery method.

2.    B) Returned goods method.

3.    C) Installment sales method.

4.    D) Consignment sales method.

Answer:  D

Diff: 2     Type: MC

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

39) Based on the note disclosure provided below for XYZ Group, when would the following types of revenue be recognized?

1.    a) Consignment sales of vehicles (Sales with repurchase commitments).

2.    b) Financial services.

3.    c) Lease rentals.

4.    d) Post-sale services (Multiple-component contracts).

5.    e) Sale of products.

 

Revenues from the sale of products are recognized when the risks and rewards of ownership of the goods are transferred to the customer, the sales price is agreed or determinable and receipt of payment can be assumed. Revenues are stated net of discounts, allowances, settlement discount and rebates. In the case of long-term contracts, revenues are generally recognized in accordance with IFRS 15 (Revenue) on the basis of the stage of completion of work performed using the percentage of completion method. Revenues also include lease rentals and interest income from financial services. Revenues for the Financial Operations sub-group also include the interest income earned by Group financing companies.

 

If the sale of products includes a determinable amount for subsequent services (“multiple performance obligation contracts”) the related revenues are deferred and recognized as income over the period of the contract. Amounts are normally recognized as income by reference to the expected pattern of related expenditure.

Profits arising on the sale of vehicles for which a Group company retains a repurchase commitment (buy-back contracts) are not recognized until such profits have been realized. The vehicles are included in inventories and stated at cost.

Answer:

1.    Deferred until product is sold to consumer.

2.    Interest income as time elapses.

3.    As rental period expires.

4.    Deferred and recognized as revenue over period of contract according to the pattern of expected costs.

5.    Upon transfer of risks and rewards, price is agreed or determinable, and payment is likely.

Diff: 2     Type: ES

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

40) In the chart below, identify the revenue recognition method that you feel is most appropriate and also explain why.

 

Transaction	Revenue recognition method	Why?
A. An appliance store sells and delivers a fridge with a two-year warranty.
B. An airplane manufacturer signs a contract to supply two planes over four years for Air Canada.
C. An insurance company issues a one-year insurance policy.

Answer:

Transaction	Revenue recognition method	Why?
A	At point of sale	Sale of goods: risk and rewards transferred.
B	According to degree of completion	Sale of goods: significant risk and rewards transferred; remaining indemnity risk is small and estimable.
C	Over time	Provision of services. Revenue earned as time elapses.

Diff: 2     Type: ES

Skill:  Conceptual

Objective:  4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.