Deck 5: Revenue Recognition

Question 1

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

Answer 1

True

Question 2

A transfer of goods or services is complete when the customer has control over the goods or services.

Answer 2

True

Question 3

Staff Accounting Bulletin No. 101 was issued by the FASB to clarify its guidelines on revenue recognition.

Answer 3

False

Question 4

"Determine whether it is probable the seller will collect the consideration it is entitled to receive" is one of the five steps to applying the core revenue recognition principle.

Question 5

Goods or services are distinct if they are either capable of being distinct or are separately identifiable.

Question 6

If the contract contains multiple performance obligations, revenue must be recognized in an amount equal to the fair value of each of the separate performance obligations.

Question 7

A contract exists for purposes of revenue recognition if either the seller or customer has performed an obligation specified by the contract.

Question 8

No allocation of contract price is required if the transaction involves multiple performance obligations that are satisfied at different points in time.

Question 9

The transaction price is only allocated to goods or services that are both capable of being distinct and that are separately identifiable.

Question 10

No allocation of contract price is required if the transaction involves a performance obligation to be satisfied over time.

Question 11

The probability that the customer will pay the seller does not affect whether a contract exists for purposes of revenue recognition.

Question 12

Sellers should recognize revenue over time for a long term contract in which the seller is receiving periodic payments for progress to date but may need to refund those payments in the event the contract is cancelled.

Question 13

Revenue should be recognized over time for the construction of an annex to a building that the customer owns, even if the seller will not receive payment until the annex is completed.

Question 14

The transaction price should be allocated to the contract's performance obligations in proportion to the stand-alone selling prices of the performance obligations.

Question 15

Revenue always is recognized once the buyer has physical possession of goods.

Question 16

Companies always recognize revenue when goods or services are transferred to customers for the amount the company expects to receive in exchange for those goods or services.

Question 17

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.

Question 18

A common output method used to measure progress towards completion is to determine the proportion of promised goods or services that have been transferred to date.

Question 19

A common output method used to measure progress towards completion is to compare cost incurred to date to total costs estimated to complete the job.

Question 20

If the contract is not in writing, revenue cannot be recognized, even though goods have been transferred and payment is expected to be received in exchange.

Question 21

An option for a customer to purchase additional goods at a discount from list price is only a performance obligation if the discount is a material right that the customer would not receive otherwise.

Question 22

Sellers are only required to adjust the transaction price to reflect the time value of money when the contract has a significant financing component.

Question 23

The transaction price should be adjusted to reflect the time value of money for interest payable, but not for interest receivable.

Question 24

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

Question 25

When a contract includes variable consideration, the probability-weighted amount must be used when there are different probabilities of occurrence.

Question 26

If the seller is a principal, the seller has primary responsibility for delivering a product or service.

Question 27

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.

Question 28

The amount of variable consideration that can be recognized is limited to the amount for which it is probable that there won't be a significant reversal of revenue recognized to date when uncertainty resolves in the future.

Question 29

When the right of return exists, revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns.

Question 30

If the seller is a principal, the seller typically is vulnerable to risks associated with returns of inventory from the customer.

Question 31

The right of return is a separate performance obligation, and a portion of the transaction price needs to be allocated to it for revenue recognition.

Question 32

To account for variable consideration using the most likely amount, the probability of each possible amount is multiplied by the possible amount to get an expected contract price.

Question 33

Accounting for quality-assurance warranties includes a credit to warranty expense and a debit to contingent liability.

Question 34

If the seller is an agent, the seller typically is vulnerable to risk associated with delivering the product or service.

Question 35

A warranty that the customer can purchase separately and that covers a long period of time after the purchase date is likely to be a quality-assurance warranty.

Question 36

An option for a customer to purchase additional goods at a discount from list price is always a performance obligation, because it confers a material right.

Question 37

If the seller is a principal, the seller typically is not vulnerable to risks associated with delivering the product or service.

Question 38

If the seller is an agent, the seller typically recognizes cost associated with the sale on its own line in the income statement.

Question 39

If the estimate of a transaction price is revised, the price change is allocated entirely to the remaining performance obligations that are yet to be satisfied.

Question 40

A fee for recording a new customer in the seller's information system should be treated as a separate performance obligation and should be recognized upon payment.

Question 41

If a seller makes payments to a customer to purchase goods or services, and those payments are equal to the stand-alone selling prices of those goods or services, part of those payments are a refund to the customer.

Question 42

Revenue typically should not be recognized when payment is received but the goods are warehoused at the seller's facility.

Question 43

Under IFRS, if a license gives a customer access to symbolic intellectual property, revenue always should be recognized over time.

Question 44

If a license is acquired to use intellectual property for a 5-year period, revenue always is recognized at the point in time the customer begins to benefit from the license.

Question 45

An account receivable is recognized if the seller has a conditional right to receive payment.

Question 46

If a licensee benefits from the seller's activity over the license period with respect to the licensed intellectual property, revenue should be recognized over time.

Question 47

Disclosure notes to the financial statements regarding significant revenue recognition policies are only required when they will not reveal important information to competitors, suppliers or customers.

Question 48

In a bill-and-hold arrangement, revenue only can be recognized after the sale of the goods to the end user.

Question 49

In franchise arrangements, the franchisor's performance obligations are not separately identifiable, so revenue must be recognized over time.

Question 50

The adjusted market assessment approach can be used to estimate the stand-alone selling price of a good or service.

Question 51

When recognizing revenue over time on a long-term contract, amounts billed and the cash actually received affect income recognition.

Question 52

The same revenue recognition requirements always apply to franchise arrangements that apply to other selling arrangements.

Question 53

Sellers recognize revenue for gift cards at the point in time control of the gift card is transferred to the customer.

Question 54

If a license gives a customer access to functional intellectual property, revenue always should be recognized at the point in time that the customer can begin using the intellectual property.

Question 55

The residual approach to estimate stand-alone selling prices is often used for goods or services that are sold separately and that have stable prices.

Question 56

In a consignment arrangement, revenue typically should not be recognized until sale to a third party occurs, even though there has been a physical transfer of goods to the consignee, because the consignor still retains legal title to the goods.

Question 57

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.

Question 58

A license to use a company trademark should be viewed as an access right, with revenue recognized over the license period.

Question 59

Contract liability, deferred revenue and unearned revenue are all ways to describe a liability that the seller recognizes with respect to unsatisfied performance obligations for which the seller has already been paid.

Question 60

Under U.S. GAAP, if a license gives a customer access to symbolic intellectual property, revenue always should be recognized over time.

Question 61

Under IFRS, firms typically use the cost recovery method if they conclude that the percentage-of-completion method is not appropriate to account for a long-term construction contract.

Question 62

Use of the installment sales method indicates little uncertainty about collection of the receivable.

Question 63

Firms have free choice as to whether to recognize revenue over time or at a point in time to account for a long-term contract.

Question 64

Revenue from the sale of computer software is always recognized at the point of sale.

Question 65

When a long-term contract does not qualify for revenue recognition over time, all gross profit and loss recognition occurs when the contract is completed.

Question 66

For long-term construction contracts, the cost recovery method under IFRS requires recognizing equal amounts of revenue and cost until all costs are recovered.

Question 67

When revenue is recognized over time versus upon completion of the contract, different amounts of total profit or loss are recognized for a particular contract.

Question 68

Estimated losses on long-term contracts are recognized as ratable over the contract term regardless of whether revenue is recognized over time or upon contract completion.

Question 69

Under IFRS, firms have free choice as to whether they use the percentage-of-completion method or the cost recovery method to account for a long-term construction contract.

Question 70

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.

Question 71

When the right of return exists and a seller cannot make reliable estimates of future returns, the installment sales method can be used.

Question 72

Under IFRS, one of the conditions for revenue from product sales to be recognized is when the risks and rewards of ownership have been transferred to the customer.

Question 73

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

Question 74

Revenue on a multiple-element contract typically is allocated to independent parts of the contract based on their relative selling prices.

Question 75

Recognition of franchise fee revenue is dependent on judgments of both substantial performance and expected collection of fees.

Question 76

Vendor-specific objective evidence of separate sales prices is required for multiple-element software contracts, but estimated selling prices can be used for other multiple-element contracts under U.S. GAAP.

Question 77

Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment sales method and the cost recovery method.

Question 78

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.

Question 79

Initial franchise fees are always recognized on the date they are received.

Question 80

When the expected collection of accounts receivable is difficult to estimate, companies must use the cost recovery method.