1. Which of the following is NOT a required element of a valid contract under ASC 606?
a) Approval and commitment of the parties
b) Identification of performance obligations
c) Fixed price for goods or services
d) Enforceable rights for payment
Answer: c) Fixed price for goods or services
Rat...
1. Which of the following is NOT a required element of a valid contract under
ASC 606?
a) Approval and commitment of the parties
b) Identification of performance obligations
c) Fixed price for goods or services
d) Enforceable rights for payment
Answer: c) Fixed price for goods or services
Rationale: ASC 606 (Revenue Recognition) does not require a fixed price but requires that the
transaction price can be estimated.
2. When does revenue recognition occur under the five-step model of ASC 606?
a) When the goods are shipped
b) When performance obligations are satisfied
c) When cash is received
d) When the customer signs the contract
Answer: b) When performance obligations are satisfied
Rationale: Revenue is recognized when control of the promised goods or services is transferred
to the customer, which typically occurs when performance obligations are satisfied.
3. A company provides a service with multiple deliverables. Under ASC 606, how
should revenue be allocated?
a) Based on estimated profit margin
b) According to the transaction price and standalone selling prices of each deliverable
c) Evenly across all deliverables
d) Based on the cost incurred for each deliverable
Answer: b) According to the transaction price and standalone selling prices of each deliverable
Rationale: Revenue must be allocated to each performance obligation based on its standalone
selling price, in proportion to the total transaction price.
4. A customer can benefit from the good or service either on its own or together
with other readily available resources. This refers to which aspect of a
performance obligation under ASC 606?
,a) Separability
b) Distinctiveness
c) Control
d) Price variability
Answer: b) Distinctiveness
Rationale: A performance obligation is distinct if the customer can benefit from it on its own or
with other resources.
5. Under ASC 606, when is a contract modification considered a separate
contract?
a) When the modification is of minor importance
b) When additional goods or services are distinct and priced at their standalone selling prices
c) When the original terms are renegotiated
d) When the contract term is extended without adding new services
Answer: b) When additional goods or services are distinct and priced at their standalone selling
prices
Rationale: A contract modification is treated as a separate contract if it adds distinct goods or
services and they are priced at standalone selling prices.
6. Which method is preferred under ASC 606 for estimating variable
consideration?
a) Most likely amount
b) Fixed contract price
c) Expected value or most likely amount
d) Actual cost
Answer: c) Expected value or most likely amount
Rationale: ASC 606 permits either the expected value or the most likely amount, depending on
which better predicts the amount of consideration.
7. For which of the following does the recognition of revenue require judgment in
estimating progress toward completion?
a) Point-in-time contracts
b) Contracts with financing components
, c) Over-time contracts
d) Contracts with fixed prices
Answer: c) Over-time contracts
Rationale: Revenue in over-time contracts is recognized based on progress toward completion,
often requiring judgment in estimating progress.
8. Under ASC 606, which of the following is considered when determining the
transaction price?
a) Market price fluctuations
b) Variable consideration
c) Cost of production
d) Historical selling price
Answer: b) Variable consideration
Rationale: The transaction price includes fixed and variable amounts, including consideration
affected by factors like discounts, rebates, and refunds.
9. A company offers customers the right to return products. How should this be
accounted for under ASC 606?
a) Recognize full revenue when products are shipped
b) Recognize revenue net of estimated returns
c) Defer revenue until the return period expires
d) Recognize revenue when cash is received
Answer: b) Recognize revenue net of estimated returns
Rationale: Revenue is recognized for products that are not expected to be returned, with a
liability recorded for expected returns.
10. Which method should be used to recognize revenue over time for a contract
with significant milestones?
a) Input method
b) Milestone recognition method
c) Output method
d) Percentage-of-completion
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