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ACC 356 Exam 2 Questions And Answers | Complete Study Solutions
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ACC 356 Exam 2 Questions And Answers | Complete Study Solutions
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ACC 356 Exam 2 Questions And Answers | CompleteStudy Solutions
What was the old definition of revenue recognition? ANS Revenue is recognized when it is realized or realizable
and earned
What was wrong with it? ANS This means if equity increases, we should recognize revenue
But this is completely circular
Doesn't actually address anything
What is the equation when you measure revenue? ANS Increase in value of assets
- increase in value of obligations
= revenue
You sell a newspaper for $8. Relate the equation to the newspaper example ANS Increase in value of assets ($8
cash)
- increase in value of obligations ($0)
= $8 revenue
THIS ONE IS SIMPLE
What is the 5 step Contract-Based Approach? ANS 1) Identify the contract with customers
2) Identify the separate performance obligations in the contract
3) Determine the transaction price
4) Allocate transaction price to separate performance obligations
5) Recognize revenue as performance obligations are satisfied
Relate 5 step contract-based approach to newspaper example ANS 1) pedestrian walking to magazine stand
2) to give them the magazine - rights to magazine
3) $8
4) Allocate $8 to transferring the magazine
5) at delivery or around the time
,What scope does 606 not apply to? ANS Leases
Insurance
Financial instruments
Guarantees
Non-monetary exchanges
Define contract ANS Agreement between 2+ parties that creates enforceable rights and obligations
Does a contract have to be explicit? ANS No - it can be written, oral, or implied
Does signing a contract give right to recognition of assets/liabilities? ANS No - you need performance on at
least one side first
What is meant by "probable"? ANS Collection needs to be probable for contract to be deemed valid
In US GAAP - "likely" - 75-80%
In IFRS - "more likely than not" >50%
What are some examples of performance obligations? ANS Selling an inventory (revenue = "Revenue from
sales")
Providing a service (revenue = "Revenue from services")
Permit use of an asset like apartment (revenue = "Revenue from rent")
When is the performance obligation satisfied? What does the customer need to have? ANS When customer
OBTAINS CONTROL of good/service
Why do we focus on the transfer of control? ANS Because then we no longer have the asset
It is consistent with definition of asset "obtained and controlled by particular entity"
Marine sells boats for $30,000 and provides mooring facilities for its customers at a rate of $5,000 per year. On May
1, Marine enters into a contract to sell a boat to Customer A and a year of mooring services to customer B. When
should the $35,000 of revenue be recognized? Walk through the 5-step contract based approach ANS 1)
Customer A and Customer B
2) Sell boat + provide services to other
, 3) $30k and $5k separately
4) $30k goes to boat, $5k goes to mooring services
5) For boat, likely at delivery:
Dr) Cash/AR $30,000
Cr) Sales Revenue $30,000
For mooring services, over time:
Dr) Cash/AR $417/month
Cr) Service Revenue $417/month
Carpenter enters into contract with OfficeCo. There is a deposit of $5k collected at beginning. Majority of payments
$15k are due after products have been delivered. OfficeCo can cancel contract at anytime. Any work in process
remains property of Carpenter. Work in process can be completed and sold to another company is contract is
cancelled. Physical possession and title pass at contract completion. When is revenue recognized for Carpenter?
ANS At deposit:
Dr) Cash $5k
Cr) Contract Liability $5k
At delivery:
Dr) Contract liability $5k
Dr) Cash receivable $15k
Cr) Sales Revenue $20k
Do we ever recognize revenue before we satisfy a performance obligation? Ex: if a customer pays us first? ANS
NO - it depends on what WE do for the CUSTOMER
We can write it down as unearned revenue if this happens
When should entity combine 2+ contracts into one contract? (3) ANS - If contract is negotiated as a package
with one objective
- If amount of consideration to be paid depends on price of other contract (buy one get half off)
- If goods/service in each contract are single performance obligation
How should transaction price be allocated to each separate performance obligation? ANS Based on RELATIVE
FAIR VALUE
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