Question 1

Explain how revenue should be allocated to the components in a multiple deliverable sales arrangement.

Accepted Answer

While IAS 18 paragraph 13 makes it clear that enterprises should allocate revenue to the components of arrangements with multiple deliverables, the standard does not specify how this allocation should be made. Different methods can result in different amounts allocated to each component and different timing of recognition.
In principle, there are two reasonable ways to make this allocation. The first is the relative fair value method (also called the proportional method), meaning that we allocate revenue in proportion to the estimated fair values of the components.
The second method is the residual value method, meaning that one of the components picks up the portion of the sale price that remains after allocating to all the other components.

Question 2

Discuss where judgment needs to be applied in the residual value and relative fair value methods.

Accepted Answer

It is a matter of professional judgment how one chooses the order of the residual value allocation and how one chooses between the relative fair value method and the residual fair value method.
That judgment should take into consideration the reliability of the fair value estimates. If the fair values of all the components were measured with about the same degree of reliability or accuracy, then it would make more sense to apply the relative fair value method.
On the other hand, big differences in the reliability of the measurements suggests that it would make sense to first allocate the price to those components that are measured with the greatest reliability, with the least reliably measured component taking the remaining unallocated value.

Question 3

Fancy Cars sold a car for $35,000. In addition, the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years. The normal selling prices are as follows:
  a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Accepted Answer

a. The residual value method is appropriate since the fair value for all components is not determinable.
  b. 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.

Question 4

An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

Accepted Answer

The stage of completion criterion is not met because the coverage period has not yet begun. The insurance company cannot recognize revenue until the coverage period starts, which in this case is July 1. Once the coverage period starts, the insurance company can recognize revenue as the other criteria have been satisfied.

Question 5

Simply Manufacturers has signed an order to supply 10,000 chairs at a price to be determined in the future. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

Accepted Answer

The amount of revenue cannot be measured reliably because the price is to be determined in the future.

Question 6

Hedley Corporation sold hardware and software for $70,000. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The normal selling prices are as follows:
  a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Accepted Answer

The answer of Hedley Corporation sold hardware and software for...

Question 7

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

Accepted Answer

Recognizing revenue early in the value creation process is less conservative as it may be premature and revenues may not ultimately materialize. Waiting until cash is received is more conservative as it ensures that revenue has actually been collected.

Question 8

Explain how the timing of revenue recognition is affected by multiple deliverables in the arrangement. Explain how revenue is ultimately recognized in a multiple deliverable sales transaction.

Accepted Answer

The answer of Explain how the timing of revenue recognition...

Question 9

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

Accepted Answer

Recognition refers to the process of presenting an item in the financial statements, which includes reporting it in the appropriate section of the balance sheet, income statement, or statement of cash flows. It is not limited to items due within 12 months or items reported in the notes to the financial statements. The choice between fair value and historical cost is related to measurement, not recognition.

Question 10

Superior Cars sold a car for $35,000. In addition, the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years. The normal selling prices are as follows:
  a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Accepted Answer

The answer of Superior Cars sold a car for $35,000....

Question 11

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

Accepted Answer

The answer of Discuss advantages and disadvantages of using the...

Question 12

Here are the general definition and recognition criteria for assets. For each criterion, provide the related revenue recognition criteria.
a. The entity gives up the future benefits embodied in the asset.
b. The entity gives up control of the resource and therefore removes the item as an asset.
c. The future inflows of resources (e.g., from accounts receivable)are reasonably measurable.
d. The future inflows of resources (e.g., from accounts receivable)are probable.

Accepted Answer

The answer of Here are the general definition and recognition...

Question 13

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 which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

Accepted Answer

The answer of A city transit authority issues 200,000 monthly...

Question 14

Which statement is correct about multiple deliverable sales arrangements?

Accepted Answer

Identifying different sources of revenue in multiple deliverable sales arrangements ensures that each component is recognized appropriately, enhancing the accuracy and reliability of financial reporting.

Question 15

On March 1, Pendant Textbook Publications delivers 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?

Accepted Answer

Pendant would recognize revenue for the 70 copies sold (100 delivered - 30 returned) at the price charged to the bookstore, which is $80 per copy. Therefore, the revenue recognized would be 70 copies x $80 = $5,600.

Question 16

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 conceptually valid for recognizing revenue at Phantastic.

Accepted Answer

The answer of You are an accountant working at Phantastic...

Question 17

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

Accepted Answer

The answer of Explain why accounting standards generally prescribe a...

Question 18

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

Accepted Answer

The value creation process is specific to each entity, meaning that it varies based on the activities, resources, and capabilities of each individual entity. Therefore, it cannot be the same for all entities or all industries, and not any point on the value creation process is acceptable for revenue recognition.

Question 19

Which statement is correct about multiple deliverable sales arrangements?

Accepted Answer

There is no specific method that must be used for multiple deliverable sales arrangements. However, the method chosen must be able to fairly allocate the revenue to the individual deliverables based on their standalone selling price. The residual value method and the relative fair value method are both acceptable methods, but neither one is required. Option D is not relevant to the topic of multiple deliverable sales arrangements.

Question 20

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

Accepted Answer

The answer of Explain why a company should allocate revenue...

Quiz 4: Revenue Recognition

Explain how revenue should be allocated to the components in a multiple deliverable sales arrangement.

Discuss where judgment needs to be applied in the residual value and relative fair value methods.

An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

Simply Manufacturers has signed an order to supply 10,000 chairs at a price to be determined in the future. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

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

Explain how the timing of revenue recognition is affected by multiple deliverables in the arrangement. Explain how revenue is ultimately recognized in a multiple deliverable sales transaction.

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

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

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 which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

Which statement is correct about multiple deliverable sales arrangements?

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 conceptually valid for recognizing revenue at Phantastic.

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

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

Which statement is correct about multiple deliverable sales arrangements?

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