Question 1

Which revenue recognition criterion is not satisfied when goods are sold on an installment basis?

Accepted Answer

When goods are sold on an installment basis, there is uncertainty about the probability that economic benefits will flow to the entity, as the full payment is not received upfront.

Question 2

Which revenue recognition criterion is not satisfied when goods are sold on consignment?

Accepted Answer

The transfer of risks and rewards of ownership is not satisfied when goods are sold on consignment. In a consignment sale, the ownership of the goods remains with the consignor until they are sold to a third party. As a result, the consignor bears the risks and rewards of ownership until the goods are actually sold. Therefore, revenue cannot be recognized until the goods are sold and ownership is transferred to the customer.

Question 3

On December 1, 2012, SuperTech sold 100 locks for laptop computers at $50 each with a 90-day unconditional right of return. Since this is a new product for SuperTech, it has no past history regarding estimated returns. Which of the following is true regarding SuperTech's December 31, 2012 financial statements?

Accepted Answer

Since SuperTech has no past history to estimate returns, it cannot reasonably estimate the amount of returns. Therefore, revenue recognition should be deferred until the return privilege expires.

Question 4

The publisher of TV Weekly received the following 52-week subscriptions during the first quarter of fiscal 2012. Each subscription is $110, which is a 47% discount off the newsstand price of $4 per issue. Each subscription becomes effective in the calendar month after the company receives the subscription. The company has a December 31 fiscal year. What amount of revenue will the company record in 2012 for the subscriptions received in January? (Round your response to the nearest dollar).

Accepted Answer

The answer of The publisher of TV Weekly received the...

Question 5

On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. The cost of each unit is $600 and the unit selling price is $750. At the end of June, TV World sold 50 units. How much cost of sales should be recorded by Electronics Distribution for the month of June?

Accepted Answer

The cost of sales is the cost of the goods sold by the seller during the period. Since only 50 out of 100 units were sold, the cost of sales should be calculated for those 50 units.

Cost of sales = Cost per unit * Units sold
Cost of sales = $600 * 50 = $30,000

Therefore, the correct answer is choice B.

Question 6

In September, Fast-Foods Inc. (FF)sells a franchise for an initial fee of $150,000 and ongoing fees based on 3% of gross profit. FF estimates that 20% of the initial fee relates to initial training, store design and opening activities; the remaining 80% relate to activities to be performed over 3 years. How much revenue should be recorded in September?

Accepted Answer

Revenue recognition for the initial fee involves allocating the revenue between training, store design, and opening activities (20%) and activities to be performed over the 3-year period (80%). 
So, the revenue from the initial fee for September would be: 
$150,000 * 20% = $30,000.

Additionally, ongoing fees based on 3% of gross profit will be recognized as revenue when earned in future periods. Therefore, the revenue recognized in September would only be $30,000.

Question 7

Which condition is not necessary to recognize revenue from the sale of goods?

Accepted Answer

Ownership transfer is not a necessary condition; rather, the focus is on the transfer of risks and rewards and loss of control over the goods.

Question 8

Which of the following statements is correct about the revenue recognition criteria for the provision of services?

Accepted Answer

The percentage of completion method requires that the outcome of the transaction be reliably estimable to recognize revenue as the service is performed.

Question 9

In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. The system costs Telly-Rental $400. Telly-Rental generally earns a gross profit of 15%. How much revenue is recorded by Telly-Rental in July?

Accepted Answer

The answer of In July, Telly-Rental sells a home theatre...

Question 10

In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. The cost of goods sold is $400. How much deferred gross profit is recorded by Telly-Rental in July?

Accepted Answer

Deferred Gross Profit = Selling Price - Cost of Goods Sold
Deferred Gross Profit = $1,000 - $400
Deferred Gross Profit = $600

Question 11

On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. The cost of each unit is $500 and the unit selling price is $800. At the end of June, TV World sold 50 units. How much revenue should be recorded by Electronics Distribution for the month of June?

Accepted Answer

Revenue is recognized when the goods are sold. As TV World sold 50 units at a selling price of $800 each, the revenue generated is $40,000 (50 units x $800 selling price). Even though the TVs were sold on consignment, the revenue should be recognized by Electronics Distribution because the risk and rewards of ownership have been transferred to TV World. Therefore, Choice C is the correct answer.

Question 12

Which of the following statements about the revenue recognition criteria is not correct?

Accepted Answer

Revenue recognition criteria are not the same for both sale of goods and provision of services. There are specific criteria for each. For example, for the sale of goods criteria includes transfer of risks and rewards of ownership, while for provision of services criteria includes stage of completion and degree of control.

Question 13

What accounting issue arises for recognizing non-monetary transactions?

Accepted Answer

Non-monetary transactions require determining the fair value or carrying amount to record the transaction, which can be complex due to the lack of a monetary exchange.

Question 14

Harris 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 Harris Corporation sold hardware and software for...

Question 15

On September 1, 2012, Electric Depot sold 100 laptop computers at $750 each with a 120-day unconditional right of return. Customers have 90 days to pay. Based on past experience, Electric Depot estimates that approximately 1% will be returned. Which of the following is true regarding Electric Depot's December 31, 2012 financial statements?

Accepted Answer

Under the accrual accounting method, revenue should be recognized when it is earned, regardless of when the cash is received. In this case, Electric Depot earned the revenue of $75,000 when it sold the laptops in September 2012. However, due to the unconditional right of return, the company needs to make an estimate of the expected returns and create a reserve for returns. Therefore, the sales of $75,000 should be recognized in September with a reserve for returns of $750 (1% of $75,000). This will ensure that the financial statements reflect the true economic reality of the transaction.

Question 16

The publisher of Accounting Digest received the following 12-month subscriptions during 2012. Each subscription is $100. The company has a December 31 year end. Each subscription becomes effective in the calendar month after the company receives the subscription. What amount of revenue will the company record in 2012 for the subscriptions received between January-March? (Round your response to the nearest dollar).

Accepted Answer

The answer of The publisher of Accounting Digest received the...

Question 17

Which statement best describes a franchise arrangement?

Accepted Answer

A franchise arrangement involves one party (the franchisor) licensing its business practices, brand, and intellectual property to another party (the franchisee) in exchange for fees and ongoing royalties. The franchisee operates a business using the franchisor's established system and brand, but retains some independence in how they operate.

Question 18

DB Inc. sells goods on a variety of terms to its customers, such as some sales on credit, some on consignment, and some on an installment basis. Which of the following revenue recognition methods is most applicable for a company like DB?

Accepted Answer

The installment method is used when there is high credit risk, allowing revenue recognition as cash is collected.

Question 19

In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. Telly-Rental generally earns a gross margin of 25%. The customer pays $500 in December. How much revenue is recorded by Telly-Rental in December?

Accepted Answer