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Exam 5: Revenue Recognition

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Question 111

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Veras Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each month. In addition, Veras will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents. • On January 1, based on historical experience, Veras estimated that there is a 75% chance that it will remain free of accidents for the entire year. • On March 20, three of the most senior drivers at Veras abruptly left. As a result, Veras had to hire inexperienced drivers to fill the vacant positions. Consequently, Veras revised its estimate to a 30% chance that it would earn the semiannual bonus. • On June 30, Moose confirmed that there was no accident between January and June, so Veras would be entitled to the semiannual bonus. Veras bases estimates of variable consideration on the most likely amount it expects to receive. -Prepare Veras' March 31 journal entry to record the revenue earned from March 1 - March 31, as well as any appropriate adjustments to the revenue already presumed recorded as earned from January 1 - February 28.

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In March, Veras' earns monthly service r...

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Question 112

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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.

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B) False

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Question 113

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Which of the following is correct about changes in estimated variable consideration?

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.

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.

Horowitz Paint Shop sold $3,000 of paint to a local construction company for cash on June 25, 2018. Because of a flood in the area, the customer requested that Horowitz not ship the items from its warehouse until July 3, 2018, so Horowitz set aside the paint on June 25, packaged and ready to ship on July 3. Required: For the second quarter ending on June 30, how much revenue should Horowitz recognize for the sale to the local construction company? Explain your answer.

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

The Rink offers annual $200 memberships that entitle members to unlimited use of ice-skating facilities and locker rooms. Each new membership also entitles the member to receive ten "20% off a $5 meal" coupons that are redeemable at the Rink's snack bar. The Rink estimates that approximately 80% of the coupons will be redeemed, and that, if the coupons weren't redeemed, $5 meals still would be discounted by 5% because of ongoing promotions. -Calculate how much of the transaction price should be allocated to each performance obligation in the contract. Show your work.

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

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

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.

Which one of the following is not one of the five steps for recognizing revenue?

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.

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.

IFRS provides detailed guidance concerning accounting for revenue with respect to multiple-element contracts.

Squeaky Shine provides car washing services in Jersey City, New Jersey. A three-month pass for automatic car wash sells for $60, which entitles the customer for an unlimited number of car washes during the contract period. Squeaky Shine estimates that pass holders wash their cars equally throughout the three-month period. On December 1st, customers purchased $1,260 of the three-month passes, with usage of the passes occurring evenly throughout the contract period. Required: 1) Prepare the journal entries that Squeaky Shine would record on December 1 and on December 31, 2018, with respect to this transaction. 2) State the account titles and amounts that will be included in Squeaky Shine's 2018 income statement and balance sheet.

Lexikon Pianos sells customized concert pianos throughout the U.S. Its grand concert piano sells for $200,000, which includes delivery and installation. The product comes with a two-year warranty that covers any product defects, and customers can choose to add an extended three-year warranty for maintenance and repair at a price of $2,000. Customers also get an option to upgrade traditional plastic keys to bone ones for an additional $20,000. The extended warranty would normally sell for $3,500, and the installation of bone keys carries a standalone price of $30,000. Required: (a) Given the information above, how many performance obligations exist in the contract to purchase a grand concert piano? (b) Now, assume that the standalone price of the extended warranty is $2,000, and that of the bone key upgrade is $20,000. How many performance obligations exist in the contract to purchase a grand concert piano?

"VSOE" stands for:

In February 2018, Omnibus Interior Corporation enters into a contract with Pike Realty to remodel a 6-unit luxury condominium in New York City. Under the contract, the company is entitled to receive a fixed fee of $1 million, and an additional performance bonus of $500,000 if the property is sold during the same year. Required: Given a strong demand for housing, Omnibus estimates that the property would most likely be sold within the same year, and bases estimates of variable consideration on the most likely estimate. On what transaction price should Omnibus base revenue recognition?

The following disclosure note appeared in a recent annual report to stockholders of Dell Inc., the computer manufacturer: "Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. Dell allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative list price of each element. For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs. Product revenue is recognized, net of an allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended warranty and service contracts, for which Dell is not obligated to perform, is recognized on a net basis at the time of sale." Briefly explain why Dell Computer recognizes revenue at different times for (a) product sales, (b) extended warranty and service contracts for which Dell is obligated to perform, and (c) extended warranty and service contracts for which a third party is obligated to perform.