Revenue Recognition v.2.0- Review Questions- Answer Key and Evaluative Feedback

Transcription

1 Revenue Recognition v.2.0- Review Questions- Answer Key and Evaluative Feedback CHAPTERS At which of the following times did the accounting boards choose to allow the entity (i.e. business) to recognize revenue from a contract? (A) At contract inception. - Incorrect. Revenue cannot be recognized at contract inception. The correct answer is "C. When a business entity delivers, specifically cited as transfers, the contracted goods and/or services to the control of the customer. (B) After creating the goods provided in the contract or paying for the services rendered in the contract. - Incorrect. Revenue is not recognized upon creation of the goods or paying of the services to render within the contract. The correct answer is "C. When a business entity delivers, specifically cited as transfers, the contracted goods and/or services to the control of the customer. (C) When a business entity delivers, specifically cited as transfers, the contracted goods and/or services to the control of the customer. - Correct! The accounting boards chose to allow an entity (i.e. business) to recognize revenue only when a business entity delivers, specifically cited as transfers, the contracted goods and/or services to the control of the customer, which completes a performance obligation that arises from the contract. (D) After all of the performance obligations within the contract have been completed to the customer s satisfaction. - Incorrect. Not all performance obligations in a contract must be completed to customer satisfaction before revenue can be recognized. The correct answer is C. When a business entity delivers, specifically cited as transfers, the contracted goods and/or services to the control of the customer. 2. Which of the following terms is defined in paragraph in Section A of the FASB (Topic 606) as being each promise to transfer to the customer either: same pattern of transfer to the customer (see paragraph ).? (A) Performance Obligation- Correct! Paragraph in Section A of the FASB (Topic 606) defines a performance obligation within a contract as each promise to transfer to the customer either: same pattern of transfer to the customer (see paragraph ). Page 1 of 6

2 (B) Contract- Incorrect. Paragraph in Section A of the FASB Accounting defines a performance obligation within a contract as each promise to transfer to the customer either: same pattern of transfer to the customer (see paragraph ). The correct answer is A. Performance Obligation. (C) Transaction Price- Incorrect. Paragraph in Section A of the FASB Accounting defines a performance obligation within a contract as each promise to transfer to the customer either: same pattern of transfer to the customer (see paragraph ). The correct answer is A. Performance Obligation. (D) Standalone Selling Price- Incorrect. Paragraph in Section A of the FASB (Topic 606) defines a performance obligation within a contract as each promise to transfer to the customer either: same pattern of transfer to the customer (see paragraph ). The correct answer is A. Performance Obligation. 3. Which of the following terms is specifically defined in paragraph within Topic A in the FASB (Topic 606) as the amount of consideration (for example, payment) to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.? (A) Performance Obligation- Incorrect. Paragraph within Topic A in the FASB (Topic 606) specifically defines a transaction price as the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. The correct answer is C. Transaction Price. (B) Contract- Incorrect. Paragraph within Topic A in the FASB Accounting specifically defines a transaction price as the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. The correct answer is C. Transaction Price. Page 2 of 6

3 (C) Transaction Price- Correct! Paragraph within Topic A in the FASB Accounting specifically defines a transaction price as the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. (D) Standalone Selling Price- Incorrect. Paragraph within Topic A in the FASB (Topic 606) specifically defines a transaction price as the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. The correct answer is C. Transaction Price. 4. Which of the following terms is used within Topic 606 to signify the state the customer must have in relation to the contracted goods and/or services before the associated performance obligation can be satisfied, and revenue recognized, by the entity? (A) Control- Correct! As shown in Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation within the Summary in Section A of the FASB Accounting, an entity should recognize revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. (B) Reward of Ownership- Incorrect. Previous guidance for revenue recognition often used the term reward of ownership to denote the transfer of contracted goods and/or services to the customer. The correct answer is A. Control. (C) Transfer of Risk- Incorrect. Previous guidance for revenue recognition often used the term transfer of risk to denote the transfer of contracted goods and/or services to the customer. The correct answer is A. Control. (D) Consideration- Incorrect. Consideration is given to the entity is exchange for the contracted goods and/or services, but control over those goods and/or services does not occur until the entity transfers the goods and/or services to the customer. The correct answer is A. Control. 5. An entity may simply expense incremental costs associated with obtaining a contract when incurred if the amortization period of the incremental costs, when recognized as an asset, is of a time period shown by which of the following durations? (A) One day or less- Incorrect. If the amortization period for these costs when recognized as an asset is one year or less, then the entity may simply expense the costs when incurred. The correct answer is D. One year or less. (B) One week or less- Incorrect. If the amortization period for these costs when recognized as an asset is one year or less, then the entity may simply expense the costs when incurred. The correct answer is D. One year or less. Page 3 of 6

4 (C) One month or less- Incorrect. If the amortization period for these costs when recognized as an asset is one year or less, then the entity may simply expense the costs when incurred. The correct answer is D. One year or less. (D) One year or less- Correct! If the amortization period for these costs when recognized as an asset is one year or less, then the entity may simply expense the costs when incurred. CHAPTERS Which of the following choices is the primary objective of the new guidance for Disclosures as cited in paragraph within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606)? (A) To allow financial statement users to know the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. - Correct! Paragraph within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606) specifically states The objective of the disclosure requirements in this Topic is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. (B) To provide financial statement preparers adequate tools to recognize revenue from contracts with customers by allowing the aggregation of details in financial statements. - Incorrect. Paragraph within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606) specifically states The objective of the disclosure requirements in this Topic is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The correct answer is A. To allow financial statement users to know the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. (C) To prevent the disaggregation of revenue from contracts with customers into categories that show how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors. - Incorrect. Paragraph within Topic A in the FASB (Topic 606) specifically states The objective of the disclosure requirements in this Topic is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The correct answer is A. To allow financial statement users to know the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. (D) To require entities to present information in accordance with the guidance provided for disclosure requirements in Topic 606, regardless of whether or not the entity is presenting that information in accordance with another Topic. - Incorrect. Paragraph within Topic A in the FASB Accounting Standards Update No Revenue from Page 4 of 6

5 Contracts with Customers (Topic 606) specifically states The objective of the disclosure requirements in this Topic is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The correct answer is A. To allow financial statement users to know the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. 2. Returns of defective products in exchange for a functioning product should be considered under the scope of the guidance covering which of the following choices? (A) Sale with a Right of Return- Incorrect. Returns of defective products in exchange for a functioning product fall under the scope of the guidance covering Warranties found in paragraphs through within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606). The correct answer is B. Warranties. (B) Warranties- Correct! Returns of defective products in exchange for a functioning product fall under the scope of the guidance covering Warranties found in paragraphs through within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606). (C) Nonrefundable Upfront Fees- Incorrect. Returns of defective products in exchange for a functioning product fall under the scope of the guidance covering Warranties found in paragraphs through within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606). The correct answer is B. Warranties. (D) Repurchase Agreements- Incorrect. Returns of defective products in exchange for a functioning product fall under the scope of the guidance covering Warranties found in paragraphs through within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606). The correct answer is B. Warranties. 3. According to the material within the lesson titled Principal versus Agent Considerations, if the entity is expected to provide the contracted goods and/or service itself, then the entity is the principal in the contract and should recognize which of the following choices when the performance obligation is satisfied? (A) Net Revenue- Incorrect. When an entity enters into a contract with a customer where a third party is involved in providing the contracted goods and/or services to the customer, the entity should determine whether the entity itself will provide the contracted goods and/or services or whether the third party will provide the contracted goods and/or services. If the entity is expected to provide the contracted goods and/or service itself, then the entity is the principal in the contract and should recognize gross revenue when the performance obligation is satisfied. The correct answer is D. Gross Revenue. (B) A Contract Liability- Incorrect. When an entity enters into a contract with a customer where a third party is involved in providing the contracted goods and/or services to the customer, the entity should determine whether the entity itself will provide the Page 5 of 6

6 contracted goods and/or services or whether the third party will provide the contracted goods and/or services. If the entity is expected to provide the contracted goods and/or service itself, then the entity is the principal in the contract and should recognize gross revenue when the performance obligation is satisfied. The correct answer is D. Gross Revenue. (C) A Contract Asset- Incorrect. When an entity enters into a contract with a customer where a third party is involved in providing the contracted goods and/or services to the customer, the entity should determine whether the entity itself will provide the contracted goods and/or services or whether the third party will provide the contracted goods and/or services. If the entity is expected to provide the contracted goods and/or service itself, then the entity is the principal in the contract and should recognize gross revenue when the performance obligation is satisfied. The correct answer is D. Gross Revenue. (D) Gross Revenue- Correct! When an entity enters into a contract with a customer where a third party is involved in providing the contracted goods and/or services to the customer, the entity should determine whether the entity itself will provide the contracted goods and/or services or whether the third party will provide the contracted goods and/or services. If the entity is expected to provide the contracted goods and/or service itself, then the entity is the principal in the contract and should recognize gross revenue when the performance obligation is satisfied. 4. Customers unexercised rights are commonly called which of the following terms? (A) Breakage- Correct! The guidance provided in paragraphs through within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606) applies to accounting for customers unexercised rights, or as they are commonly called, breakage. (B) Customer Loyalty Programs- Incorrect. The guidance provided in paragraphs through within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606) applies to accounting for customers unexercised rights, or as they are commonly called, breakage. The correct answer is A. Breakage. (C) Put Options- Incorrect. The guidance provided in paragraphs through within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606) applies to accounting for customers unexercised rights, or as they are commonly called, breakage. The correct answer is A. Breakage. (D) Setup Fees- Incorrect. The guidance provided in paragraphs through within Topic A in the FASB Accounting Standards Update No Revenue from Contracts with Customers (Topic 606) applies to accounting for customers unexercised rights, or as they are commonly called, breakage. The correct answer is A. Breakage. Page 6 of 6