Exam 17: Advanced Issues in Revenue Recognition

BoTeck is a full-service technology company. It provides equipment, installation services, and training services. Customers can purchase any product or service separately or as a bundled package. On May 3, Box-Rite Corporation purchased computer equipment, installation, and training for a total cost of $120,000. Estimated stand- alone fair values of the equipment, installation, and training are $75,000, $50,000, and $25,000 respectively. The transaction price allocated to equipment, installation and training is

Revenue is recognized when a contract is enacted.

Given that the determination of a variable transaction price may change over time, how is this change accounted for?

Revenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale. Required: Explain and justify why revenue is often recognized at the time of sale.

The Partial Billings account is a contra account of the Construction in Progress account.

On July 10, Boogie Footware agrees to a contract to sell 800 pair of flapper shoes for $16,000 to Twenties, Inc. On September 1, after 500 pair of have been delivered, Boogie and Twenties modify the agreement to reduce the price of the remaining 300 pair of flapper shoes to $10 a pair. During September, Boogie delivers 200 pairs of shoes. How much revenue will Boogie recognize for the month of September?

A contract may be written, oral, or implied by customary business practices.

Moover Construction enters into a contract with a customer to build a warehouse for $900,000 on June 30, 2017, with a performance bonus of $60,000 if the building is completed by October 31, 2017. The bonus is reduced by $20,000 each week that completion is delayed. The contract also states that if the warehouse receives a favorable safety inspection rating from government inspectors by November 30, Moover will receive a performance bonus of $40,000. Moover commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: In addition, Moover estimates there is a 90% chance that the warehouse will receive a favorable safety inspection rating upon timely completion. Required: a. Assume Moover uses the expected value approach. Determine the transaction price for this transaction. b. Assume Moover uses the most likely amount approach. Determine the transaction price for this transaction.

A Provision for Loss on Contract is reported in the financial statements as

In July 2016, Sykick Software Company licenses its accounting software to RayHawk Corporation at a cost of $30,000 for two years and also enters into a contract to install the software for an additional $3,000. Trident sells the software license with or without installation. The accounting software is not modified or customized by the customer. Required: Prepare journal entry for Sykick to record this transaction assuming that installation will occur in July 2016 when RayHawk pays Sykick $33,000 per their agreement.

Panama Builders, Inc. signed a contract to build a certain project for $4,000. In 2016, $800 of cost was incurred and $400 was billed to the customer and collected. At the end of 2016, it was estimated that it would take $2,400 to complete the project. In 2017, actual additional costs to complete the project amounted to $2,600. The remainder of the contract price was billed in 2017 and collected. Required: Prepare all journal entries for both years assuming Panama satisfies its performance obligation over time

Revenues represent

On January 1, 2017, Carly Fashions Inc. enters into a contract with a regional retail company to provide 500 blouses for $20,000 over the next 10 months. On September 1, 2017, after 400 of the blouses had been delivered 50 blouses per month), the contract is modified. Required: a. Fifty blouses were delivered each month for the first 8 months of 2017. Prepare Carly Fashions's monthly journal entry to record revenue. b. Assume that the contract is modified on September 1 to sell, once the original 500 blouses are delivered, an additional 100 blouses at $35 per blouse, which is the stand-alone selling price on October 1, 2017. The additional blouses are to be delivered in November. Prepare the November journal entry to record the contract modification. c. Assume instead that the contract is modified on September 1 to alter the price of the additional 100 blouses to $35 per blouse, which is the stand-alone selling price on October 1, 2017. Assume the blouses are delivered evenly on September 1 and October 1, 2017. Prepare the journal entries for September and October to record this contract modification.

When a customer pays a seller a significant period of time after the goods are delivered, the consideration received by the seller always includes both transaction revenue and interest income.

The FASB and the IASB agreed that the fundamental characteristic of revenue recognition is that

A ______is an explicit or implicit promise in a contract with a customer to transfer goods or services.

The efforts-expended method of recognizing revenue over time is considered to be an output method.

There are two types of license: those that are distinct and those that are satisfied over a period of time.

Which of the following is not an indicator that a company may be an agent?

Pensacola Building Co. signed a contract to build a road over a period of three years for a price of $600,000. Information relating to the performance of the contract is summarized below: Required: a. Assuming Pensacola satisfies its performance obligation over time, show how Construction in Progress would be disclosed on the balance sheet at December 31, 2016. b. Assuming Pensacola satisfies its performance obligation over time, prepare all 2017 entries.