Question 1

Natural Designs sells furniture on 12 months' interest free terms to qualifying customers. On 30 June 2022, Natural Designs sells $20 000 of furniture to T. Bailey, payable by 30 June 2023. The appropriate interest rate for this transaction is determined to be 6% per annum. The present value of the $20 000 to be received in one year's time is $18 868. The journal entry to be recorded by Natural Designs at 30 June 2022 is:

Accepted Answer

The correct journal entry recognizes the sales revenue at its present value ($18,868) and defers the interest component ($1,132) to be recognized over the term of the receivable.

Question 2

Which of the following is not an example of an entity retaining significant risks and rewards of ownership?

Accepted Answer

The correct answer is C because the entity's confidence that the buyer will not rescind the purchase does not equate to the entity retaining significant risks and rewards of ownership. The risks and rewards are considered transferred to the buyer when the sale is made, regardless of the entity's confidence in the buyer's actions.

Question 3

Which of the following is not a condition that needs to be satisfied prior to recognising revenue from the rendering of services using the 'percentage of completion' method?

Accepted Answer

None of the conditions relate to whether the contract is cancellable or not. The conditions required to recognise revenue using the percentage of completion method are: (B) the amount of revenue can be measured reliably, (C) the stage of completion can be measured reliably, and (D) the costs of the transaction (including future costs) can be measured reliably.

Question 4

The Conceptual Framework refers to two elements of performance. They are:

Accepted Answer

The Conceptual Framework identifies expenses and income as the two elements of performance, focusing on how they affect financial performance.

Question 5

Which of the following are included in the scope of AASB 15/IFRS 15 Revenue from Contracts with Customers?
I. Insurance contracts.
II. Subscriptions.
III. Accounting for investments in associates.
IV. Accounting for share of joint venture revenue.

Accepted Answer

Subscriptions are included in the scope of AASB 15/IFRS 15 as they represent contracts with customers to provide goods or services in exchange for consideration. Insurance contracts, investments in associates, and accounting for share of joint venture revenue are not covered by AASB 15/IFRS 15.

Question 6

The two categories of income, as specified in the Conceptual Framework, are:

Accepted Answer

The Conceptual Framework for Financial Reporting specifies two categories of income: revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is often referred to in terms of sales, fees, interest, dividends, royalties, and rent. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity.

Question 7

Which of the following is not a condition to be satisfied when recognising revenue from the sale of goods or services?

Accepted Answer

The correct condition for recognizing revenue from the sale of goods or services involves the transfer of significant risks and rewards of ownership from the seller to the buyer, not the retention of control over the goods by the seller.

Question 8

Abbott Ltd sells goods to Costello Ltd and issues an invoice on 10 August. On that date, Costello Ltd requests that Abbott Ltd delay delivery of the goods until the 25 August when they expect to have finished preparing their site for the goods. The goods can then be delivered on 26 August. Costello Ltd pays for the goods on 12 August and accepts full responsibility for the goods from this payment date. Assuming all other revenue recognition criteria are met, on which date can Abbott Ltd recognise revenue for the sale of these goods?

Accepted Answer

The answer of Abbott Ltd sells goods to Costello Ltd...

Question 9

Wiseman Ltd is offering the following conditions to customers who purchase goods with a minimum total of $5 000 in the one transaction: 
-Initial deposit of 25% of purchase price.
-Immediate delivery of goods purchased.
-Interest rate of 10% p.a. charged on the outstanding balance.
-Repayment of the balance (including the interest) over 36 equal monthly instalments.
-Wiseman Ltd retains legal title to the goods until the final monthly payment has been made.
Wiseman Ltd would recognise revenue as follows:

Accepted Answer

The revenue recognition principle states that revenue should be recognised when it is earned and when the risks and rewards of ownership have transferred to the buyer. In this case, Wiseman Ltd retains legal title to the goods until the final monthly payment has been made, indicating that the risks and rewards have not yet been transferred to the buyer. Therefore, the revenue should only be recognised once the final payment has been received. Additionally, interest income should be recognised as it is received (monthly) since it is a separate revenue stream. Choice D best reflects these principles.

Question 10

Which of the following are excluded from the scope of AASB 15/IFRS 15?
I. Financial instruments within the scope of AASB 9/IFRS 9.
II. Insurance contracts within the scope of AASB 4/IFRS 4.
III. Arrangements between oil companies that agree to exchange oil to meet demands of customers in different locations.
IV. Lease agreements within the scope of AASB 16/IFRS 16.

Accepted Answer

AASB 15/IFRS 15, which deals with revenue from contracts with customers, explicitly excludes financial instruments within the scope of AASB 9/IFRS 9, insurance contracts within the scope of AASB 4/IFRS 4, lease agreements within the scope of AASB 16/IFRS 16, and certain non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers (such as the oil exchange arrangements).

Question 11

Which of the following statements relating to the identification of the performance obligation is incorrect?

Accepted Answer

A non-distinct good or service cannot be considered a separate performance obligation, as it cannot be distinguished from other goods or services in the contract and must be combined with other promised goods or services to form a single performance obligation. The other statements are correct and relate to the criteria for identifying performance obligations in a contract, as outlined in ASC 606.

Question 12

Which of the following is not a step in the recognition of revenue?

Accepted Answer

Allocating the buying price to the goods or services is a step in determining the transaction price, which is one of the steps in recognizing revenue. However, it is not one of the steps in the recognition of revenue itself. The other three choices are all steps in the recognition of revenue.

Question 13

In a principal/agent relationship for contracts with customers, the pre-determined fee or commission for services is earned by the:

Accepted Answer

In a principal/agent relationship, the agent is the one who provides services to the customer on behalf of the principal. The pre-determined fee or commission for those services is earned by the agent.

Question 14

Which of the following is not an example of an agency arrangement where the selling entity would recognise revenue on a net basis?

Accepted Answer

Option D is not an example of an agency arrangement as the distributor is not selling on behalf of any other party. Instead, it is purchasing stock on a sale-or-return basis from its supplier and will recognize revenue when the goods are sold to a third party. Options A, B, and C are all examples of agency arrangements where the selling entity recognizes revenue on a net basis after deducting the amounts remitted to the relevant authorities or suppliers.

Question 15

The first step in the recognition of revenue is:

Accepted Answer

The first step in the recognition of revenue is to identify the contract or contracts with the customer. Only after this step is completed can the other steps, such as determining the transaction price and identifying the performance obligation in the contract, be carried out.

Question 16

When allocating the transaction price for a contract with a customer, the 'expected cost plus a margin approach' requires the entity to:

Accepted Answer

The 'expected cost plus a margin approach' requires the entity to forecast its expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service. This approach ensures that the entity is able to cover its costs and earn a profit margin on the transaction. The other options are either not relevant or incorrect.

Question 17

The key issue with connection fees received for connecting a customer to a telecommunications network is:

Accepted Answer

The key issue with connection fees received for connecting a customer to a telecommunications network is whether the revenue is recognized in full upfront or over an actual or implied service period. This affects the timing of revenue recognition and can have a significant impact on a company's financial statements. The other choices are not directly relevant to this issue.

Question 18

Which of the following are part of the criteria that must be met when accounting for a contract with a customer?
I. Commercial substance.
II. Approval of contract by all parties.
III. Identification of the payment terms for the goods/services.
IV. The collection of the consideration from the customer is remote.

Accepted Answer

Criteria for accounting for a contract with a customer include commercial substance, approval of contract by all parties, and identification of the payment terms for the goods/services. The collection of consideration from the customer being remote is not a criteria but rather a factor that may impact revenue recognition.

Question 19

"The amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties" is the definition of:

Accepted Answer

The definition provided corresponds to the concept of transaction price, which is the amount of consideration an entity expects to receive in exchange for transferring goods or services to a customer. Choice A corresponds to the contract as a whole, choice B corresponds to one of the components of transaction price, and choice C refers to a promise to transfer goods or services to a customer.

Question 20

Lily Ltd sells and delivers goods to Rose Ltd on 13 March. Both parties agree that Rose Ltd will hold the goods on consignment to be sold to third parties. Rose Ltd is not required to pay Lily Ltd for the goods until they are sold to a third party. Which of the following statements is incorrect?

Accepted Answer

Lily Ltd recognises revenue on 13 March for the sale of goods to Rose Ltd is incorrect. Lily Ltd only recognises revenue when the goods are sold to a third party by Rose Ltd. Until then, the transaction is considered a consignment sale and Lily Ltd retains the risks and rewards of ownership of the goods. Therefore, option C is incorrect. The other options are all correct: A) Lily Ltd does not recognise any revenue until Rose Ltd has on-sold goods to a third party. B) Lily Ltd retains the risks and rewards of ownership of the goods after delivery to Rose Ltd. D) At the time of delivery of the goods to Rose Ltd, there is no probability that future economic benefits will flow to Lily Ltd.

Quiz 15: Revenue