Deck 13: Revenue Recognition Issues

Question 1

Where the percentage-of-completion method is based on costs,costs that relate to the contract activity generally and are not normally related to specific contracts,such as finance costs,should be allocated across the projects currently in progress.

Answer 1

False

Question 2

Revenue recognition under IASB (2011)Revenue from Contracts with Customers requires that:

A)the entity has transferred to the buyer the significant risks and rewards of ownership.
B)the entity retains neither continuing managerial involvement to the degree normally associated with ownership nor effective control over the goods.
C)the costs incurred or to be incurred can be measured reliably.
D)there should be a direct function of the transfer of control of the goods and services to the customer.

Answer 2

D

Question 3

When it is probable that total contract costs will exceed total contract revenue,the expected loss should not be recognised as an expense until the future economic sacrifice eventuates.

Answer 3

False

Question 4

Gains must be reported net of related expenses.

Question 5

Accounting standards require that the provision for doubtful debts should be shown as a deduction from the class of assets to which it relates.The net expense in relation to bad and doubtful debts must also be disclosed.

Question 6

Gains never arise from the ordinary activities of an entity.

Question 7

If the borrower prepays interest,the inflow of future economic benefits represented by the prepayment would not constitute an item of revenue to the lender because the lender has a present obligation to the borrower to provide finance for the period to which the prepayment relates.

Question 8

Transfer of 'control' of the asset is central to the recognition of revenue under the new accounting standard IASB (2011)Revenue from Contracts with Customers.

Question 9

Interest revenue is derived from borrowing resources from another entity.

Question 10

Revenues may be generated by:

A)holding and disposing of inventory in the normal course of business.
B)having a liability forgiven.
C)receiving a donation.
D)all of the given answers.

Question 11

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). Because of uncertainty and depending on which measurement model is being applied,revenue recognition will take place at a limited number of points in the earnings cycle.In traditional historical-cost accounting,in most cases,at which point in the cycle above have revenues been recognised?

A)Point 5
B)Point 8
C)Point 7
D)Point 9

Question 12

The general rule under modified historical-cost accounting is that holding gains on non-current assets should be:

A)treated as revenue in the period that the fair value of the asset changes.
B)deferred and amortised over the life of the asset (effectively decreasing depreciation expense).
C)recognised as part of income and hence, of total comprehensive income
D)never recognised.

Question 13

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). In the traditional historical-cost accounting model,at what point has revenue been recognised for long-term construction contracts in the building industry?

A)Point 8
B)Point 4
C)Point 6
D)Point 5

Question 14

When making a provision for doubtful debts,debtors' subsidiary ledgers are not adjusted,as the provision is made in anticipation of likely non-recoverability of amounts owing,although the identity of who will not pay is unknown.

Question 15

Under the IASB Conceptual Framework income is now subdivided into:

A)revenues, which only include sales, fees, interest, dividends, royalties and rent; gains, which are no different in nature to revenue.
B)gains, which are regarded as constituting a separate element in the framework; revenues, which may only arise in the course of the ordinary activities of the entity.
C)revenues, which arise in the course of the ordinary activities of the entity; gains, which may or may not arise in the course of the ordinary activities of the entity.
D)increases in equity referred to as gains; reductions in liabilities which are classified as revenues.

Question 16

IASB (2011)Revenue from Contracts with Customers requires revenues to be measured in terms of historical cost to improve reliability.

Question 17

Unearned revenues are assets treated as liabilities,as these are received by a business for services to be performed at a future date.

Question 18

If a company sells its product but gives the buyer the right to return the product,IASB (2011)Revenue from Contracts with Customers requires revenue from the sales transaction to be recognised at the time of sale.

Question 19

With the percentage-of-completion method of accounting for construction contracts,profit is recognised in proportion to the work performed in each reporting period.

Question 20

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). For products such as precious metals or agricultural products revenue is recognised at which point in the earnings cycle shown above?

A)Point 1
B)Point 4
C)Point 6
D)Point 7

Question 21

In relation to the expense associated with the creation of an allowance for doubtful debts,the UK Taxation Authorities:

A)never allows a deduction for taxation purposes for that amount.
B)allows a deduction for taxation purposes for that amount when it is recognised as an expense.
C)allows a deduction for taxation purposes immediately.
D)allows a deduction for taxation purposes only when there is a bad debt written off against a credit customer's account.

Question 22

Hillier Construction Ltd commenced the construction of a building on 1 July 2013.It has a fixed-price contract for total revenues of $45 million.The expected completion date is 30 June 2016.The expected total cost to Hillier Construction at the beginning of the project is $35 million.The following information relates only to the construction of this building: $$\begin{array} { | l | r | r | r | } \hline \text { For the year ending } 30 \text { June } & \begin{array} { r } 2014 \\( \$ 000 )\end{array} & \begin{array} { r } 2015 \\( \$ 000 )\end{array} & \begin{array} { r } 2016 \\( \$ 000 )\end{array} \\\hline \text { Costs for the year } & 12500 & 15000 & 10000 \\\hline \text { Costs incurred to date } & 12500 & 27500 & 37500 \\\hline \text { Estimated costs to complete } & 23000 & 8500 & - \\\hline \text { Progress billings during the year } & 10000 & 12000 & 23000 \\\hline \text { Cash collected during the year } & 10000 & 11000 & 24000 \\\hline\end{array}$$ Hillier Construction uses the percentage-of-completion method based on cost to account for its construction contracts.What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)?

A) $\begin{array}{|l|l|l|}\hline 2014(\$ 000) & 2015(\$ 000) & 2016(\$ 000) \\\hline 3345 & 3530 & 3970 \\\hline\end{array}$
B) $\begin{array}{|l|l|l|}\hline 2014(\$ 000) & 2015(\$ 000) & 2016(\$ 000) \\\hline 3345 & 3530 & 625 \\\hline\end{array}$
C) $\begin{array}{|l|l|l|}\hline 2014(\$ 000) & 2015(\$ 000) & 2016(\$ 000) \\\hline 7747 & 20135 & 17118 \\\hline\end{array}$
D) $\begin{array}{|l|l|l|}\hline 2014(\$ 000) & 2015(\$ 000) & 2016(\$ 000): \\\hline 3571 & 4286 & 2857 \\\hline\end{array}$

Question 23

There are various appropriate accounting treatments when a sale is made subject to a right of return.These methods include:

A)recording the sale and accounting for the returns as they occur in future periods.
B)recording the cash received as held in trust until all return privileges have expired.
C)recording the sale but reducing sales by an estimate of the future returns.
D)recording the sale and accounting for the returns as they occur in future periods and recording the sale but reducing sales by an estimate of the future returns.

Question 24

Kringle Company has agreed to provide services to North to South Plc in exchange for a piece of equipment and a cash payment.The equipment is currently recorded in North to South's books at €73 000 but independent assessors have set the fair value at €65 000.The cash payment of €20 000 will be received 12 months after completion of the services.Kringle should record revenue as:

A)€85 000
B)€65 000 in the current period, €20 000 next period
C)€93 000
D)€65 000 plus the present value of the €20 000 cash component

Question 25

When goods are sold on extended credit there is an implicit financing arrangement contained in the sale agreement.In order to separate the financing element from the sale,it is necessary to calculate the applicable interest rate inherent in the agreement.What advice does IASB (2011)Revenue from Contracts with Customers provide about this?

A)The implicit rate of interest is the more clearly determinable of either: (a) the prevailing rate of a similar instrument of an issuer with a similar credit rating; or (b) a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.
B)The implicit rate of interest is the internal rate of return implicit in the contract such that the sales price is equal to the fair market value of the asset.
C)The implicit rate of interest is the more reliably determinable of either: (a) the prevailing rate of a debt instrument of an issuer adjusted to the organisation-specific, risk adjusted rate of the issuer; or (b) a rate of interest that discounts the sales price to the fair market value of the goods or services.
D)The implicit rate of interest is the internal rate of return implicit in the contract such that the sales price is equal to the fair market value of the asset.This rate may have to be adjusted to take account of the risk of the issuer if it is significantly different to the market-determined interest rate for similar entities.

Question 26

Daniel Plc sells one of its properties to a financing company with an attached call option,which allows Daniel Plc to reacquire the property at a future date for €400 000.The current market value at the time of the sale is €300 000,but the financing company pays €350 000 for it.It is expected that the market value of the property will exceed €400 000 before the option expires.What is the appropriate treatment of this sale?

A)Record the revenue and make appropriate note disclosures about the call option and its associated risks.
B)Set-off the call option and the building-reporting changes in the difference between their current values as revenues or expenses as appropriate.
C)No entry would be required as the call option is off balance sheet and the building has not effectively been sold.
D)Record the inflow of cash and a liability.

Question 27

On 1 July 2013 Bigwell Plc sells a machine to Archer Plc in exchange for a promissory note that requires Archer Plc to make five payments of €8000,the first to be made on 30 June 2014.The machine cost Bigwell Plc €20 000 to manufacture.Bigwell Plc would normally sell this type of machine for €30 326 for cash or short-term credit.The implicit interest rate in the agreement is 10%.What are the appropriate journal entries to record the sale agreement and the first two instalments using the gross method?

A) $$\begin{array}{l}1 \text { July } 2013\\\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Note receivable } & 40000 & \\\hline \mathrm { Cr } & \text { Sales } & & 40000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of sales } & 20000 & \\\hline \mathrm { Cr } & \text { Inventory } & & 20000 \\\hline & & & \\\hline 30 \text { June } 2014 & & \\\hline \mathrm { Dr } & \text { Cash } & 8000 & \\\hline \mathrm { Cr } & \text { Note receivable } & & 8000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Note receivable } & 3033 & \\\hline \mathrm { Cr } & \text { Interest revenue } & & 3033 \\\hline & & & \\\hline 30 \text { June } 2015 & & \\\hline \mathrm { Dr } & \text { Cash } & 8000 & \\\hline \mathrm { Cr } & \text { Note receivable } & & 8000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Note receivable } & 2536 & \\\hline \mathrm { Cr } & \text { Interest revenue } & & 2536 \\\hline\end{array}\end{array}$$
B) $\begin{array}{l}1 \text { July } 2013\\\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Note receivable } & 40000 & \\\hline \mathrm{Cr} & \text { Sales } & & 30326 \\\hline \mathrm{Cr} & \text { Unearned revenue } & & 9674 \\\hline\\\hline\mathrm{Dr} & \text { Cost of sales } & 20000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 20000\\\hline\\\hline 30 \text { June } 2014 & & \\\hline \mathrm{Dr} & \text { Cash } & 8000 & \\\hline \mathrm{Cr} & \text { Note receivable } & & 8000 \\\hline\\\hline \mathrm{Dr} & \text { Interest revenue } & 4000 & \\\hline \mathrm{Cr} & \text { Unearned revenue } & & 4000 \\\hline\\30 \text { June } 2015 & & \\\hline \mathrm{Dr} & \text { Cash } & 8000& \\\hline \mathrm{Cr} & \text { Note receivable } & &8000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Interest revenue } & 3600& \\\hline \mathrm{Cr} & \text { Unearned revenue } & & 3600 \\\hline\end{array}\end{array}$
C) $\begin{array}{l}1 \text { July } 2013\\\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Note receivable } & 40000 & \\\hline \mathrm{Cr} & \text { Sales } & & 30326 \\\hline \mathrm{Cr} & \text { Unearned revenue } & & 9674 \\\hline\\\hline \mathrm{Dr} & \text { Cost of sales } & 20000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 20000 \\\hline\\\hline 30 & \text { June } 2014 & & \\\hline \mathrm{Dr} & \text { Cash } & & \\\hline \mathrm{Cr} & \text { Note receivable } & & 8000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Unearned revenue } & 3033 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 3033 \\\hline\\\hline30 \text { June } 2015 & & \\ \hline \mathrm{Dr} & \text { Cash } & 8000& \\\hline \mathrm{Cr} & \text { Note receivable } & &8000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Unearned revenue } & 2536 & \\\hline \mathrm{Cr} & \text { Interest revenue } && 2536 \\\hline\end{array}\end{array}$

D) $\begin{array}{l}1 \text { July } 2013\\\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Note receivable } & 30326 & \\\hline \mathrm{Cr} & \text { Sales } & & 30326 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cost of sales } & 20000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 20000 \\\hline\\\hline 30 \text { June } 2014 & & \\\hline \mathrm{Dr} & \text { Cash } & 8000 & \\\hline \mathrm{Cr} & \text { Note receivable } & & 4967 \\\hline \mathrm{Cr} & \text { Interest revenue } & & 3033 \\\hline\\\hline 30 & \text { June } 2015 & & \\\hline \mathrm{Dr} & \text { Cash } & 8000 & \\\hline \mathrm{Cr} & \text { Note receivable } & & 4497 \\\hline \mathrm{Cr} & \text { Interest revenue } & & 3503 \\\hline \end{array}\end{array}$

Question 28

When the cost basis is used to calculate the percentage of completion,cost items that may need adjustment include:

A)discounts for the bulk purchase of construction materials.
B)gains and losses on foreign currency translation.
C)materials delivered and paid for, but not yet used.
D)interest charges on late payments for materials and other items used in the construction project.

Question 29

Using the cost method to calculate the percentage of completion,the formula for the current period revenue or gross profit to be recognised is:

A)costs incurred to the end of the current period divided by most recent estimate of total costs.
B)estimated total revenue or gross profit from the contract multiplied by (costs incurred to the end of the current period divided by most recent estimate of total costs) less (total revenue or gross profit recognised in prior periods).
C)costs incurred to the end of the current period divided by most recent estimate of total costs multiplied by (total revenue or gross profit recognised in prior periods).
D)estimated total revenue or gross profit from the contract divided by (costs incurred to the end of the current period multiplied by most recent estimate of total costs) less (total revenue or gross profit recognised in prior periods).

Question 30

On 1 July 2013 Bryson Plc sells a machine to Adams Plc in exchange for a promissory note that requires Adams Plc to make five payments of €8000,the first to be made on 30 June 2014.The machine cost Bryson Plc €20 000 to manufacture.Bryson Plc would normally sell this type of machine for €30 326 for cash or short-term credit.The implicit interest rate in the agreement is 10%.What are the appropriate journal entries to record the sale agreement and the first two instalments using the net-interest method?

A) $\begin{array}{|c|l|l|l|}\hline 1 \text { July } 2013 & & \\\hline \mathrm{Dr} & \text { Note receivable } &40000 & \\\hline \mathrm{Cr} & \text { Sales } & &40000 \\\hline & && \\\hline \mathrm{Dr} & \text { Cost of sales } & 20000& \\ \hline \mathrm{Cr} & \text { Inventory }&&20000\\\hline & && \\\hline {\text { J0 June } 2014} & & \\\hline \mathrm{Dr} & \text { Cash } & 8000 & \\\hline \mathrm{Cr} & \text { Note receivable } & & 8000 \\\hline & & & \\\hline 30 \text { June } 2015 & & \\\hline \mathrm{Dr} & \text { Cash } &8000 & \\\hline \mathrm{Cr} & \text { Note receivable } & &8000\\\hline\end{array}$
B) $\begin{array}{|c|l|r|r|}\hline {\text { July } 2013} & \\\hline \mathrm{Dr} & \text { Note receivable } & 30326 & \\\hline \mathrm{Cr} & \text { Sales } & & 30326 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cost of sales } & 20000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 20000 \\\hline\\\hline 30 \text { June } 2014 & & \\\hline \mathrm{Dr} & \text { Cash } & 8000 & \\\hline \mathrm{Cr} & \text { Note receivable } & & 4967 \\\hline \mathrm{Cr} & \text { Interest revenue } & & 3033 \\\hline\\\hline {30 \text { June } 2015} & & \\\hline \mathrm{Dr} & \text { Cash } & 8000 & \\\hline \mathrm{Cr} & \text { Note receivable } & & 5464 \\\hline \mathrm{Cr} & \text { Interest revenue } & & 2536 \\\hline\end{array}$

C) $\begin{array}{|c|l|r|r|}\hline 1 \text { July } 2013 \\\hline \mathrm{Dr} & \text { Note receivable } & 20000 & \\\hline \mathrm{Cr} & \text { Sales } & & 20000 \\\hline & & & \\\hline 30 \text { June } 2014 & & \\\hline \mathrm{Dr} & \text { Cash } &8000 & \\\hline \mathrm{Cr} & \text { Note receivable } & & 2000\\\hline \mathrm{Cr} & \text { Interest revenue } & & 6000\\\hline\\\hline 30 \text { June } 2015 & & \\\hline \mathrm{Dr} & \text { Cash } & 8000 & \\\hline \mathrm{Cr} & \text { Note receivable } & & 1800 \\\hline \mathrm{Cr} & \text { Interest revenue } & & 6200 \\\hline\end{array}$

D) $\begin{array}{l}1 \text { July } 2013\\\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Note receivable } & 30326 & \\\hline \mathrm{Cr} & \text { Sales } & & 30326 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cost of sales } & 20000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 20000 \\\hline\\\hline{30 \text { June } 2014} & & \\\hline \mathrm{Dr} & \text { Cash } & 8000 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 4967 \\\hline \mathrm{Cr} & \text { Note receivable } & & 3033 \\\hline\\\hline 30 \text { June } 2015 & & \\\hline \mathrm{Dr} & \text { Cash } & 8000 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 5464 \\\hline \mathrm{Cr} & \text { Note receivable } & & 2536 \\\hline\end{array}\end{array}$

Question 31

In the situation that a debtor becomes unable to pay and the amount has not been anticipated through a provision for doubtful debts,what is the entry to record the bad debt?

A)Dr Debtors; Cr Provision for doubtful debts
B)Dr Provision for doubtful debts; Cr Debtors
C)Dr Bad debts expense; Cr Cash
D)Dr Bad debts expense; Cr Debtors

Question 32

Hillier Construction Ltd commenced the construction of a building on 1 July 2013.It has a fixed-price contract for total revenues of $45 million.The expected completion date is 30 June 2016.The expected total cost to Hillier Construction at the beginning of the project is $35 million.The following information relates only to the construction of this building: $$\begin{array} { | l | r | r | r | } \hline \text { For the year ending } 30 \text { June } & \begin{array} { r } 2014 \\( \$ 000 )\end{array} & \begin{array} { r } 2015 \\( \$ 000 )\end{array} & \begin{array} { r } 2016 \\( \$ 000 )\end{array} \\\hline \text { Costs for the year } & 12500 & 15000 & 10000 \\\hline \text { Costs incurred to date } & 12500 & 27500 & 37500 \\\hline \text { Estimated costs to complete } & 23000 & 8500 & - \\\hline \text { Progress billings during the year } & 10000 & 12000 & 23000 \\\hline \text { Cash collected during the year } & 10000 & 11000 & 24000 \\\hline\end{array}$$ Hillier Construction uses the percentage-of-completion method based on cost to account for its construction contracts.What are the journal entries for the year ended 30 June 2014 (rounded to the nearest $000)?

A) $$\begin{array} { | r | l | r | r | } \hline & & \$ 000 & \$ 000 \\\hline \mathrm { Dr } & \text { Construction expenses } & 12500 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 10000 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction in progress } & 3345 & \\\hline \mathrm { Cr } & \text { Gross profit on construction contract } & & 3345 \\\hline\end{array}$$
B) $$\begin{array} { | r | l | r | r | } \hline & & \$ 000 & \$ 000 \\\hline \mathrm { Dr } & \text { Construction in progress } & 12500 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 10000 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction in progress } & 3571 & \\\hline \mathrm { Dr } & \text { Construction expenses } & 12500 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 16071 \\\hline\end{array}$$
C) $$\begin{array} { | r | l | r | r | } \hline & & \$ 000 & \$ 000 \\\hline \mathrm { Dr } & \text { Construction in progress } & 12500 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 10000 & \\\hline \mathrm { Cr } & \text { Billings on construction in progress } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction in progress } & 3345 & \\\hline \mathrm { Dr } & \text { Construction expenses } & 12500 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 15845 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | r | r | } \hline & & \$ 000 & \$ 000 \\\hline \mathrm { Dr } & \text { Construction in progress } & 12500 & \\\hline \mathrm { Cr } & \text { Materials, cash, etc. } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accounts receivable } & 10000 & \\\hline \mathrm { Cr } & \text { Billings on construction in progress } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cash } & 10000 & \\\hline \mathrm { Cr } & \text { Accounts receivable } & & 10000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Construction expenses } & 12500 & \\\hline \mathrm { Cr } & \text { Revenue from long-term contract } & & 12500 \\\hline\end{array}$$

Question 33

Magazines Galore receives subscription money in advance,and has received £50 000 from customers on 1 February to cover the next ten issues of Wheels Galore.There are ten issues a year-one at the end of each month except for January and December.What are the appropriate accounting entries to record the receipt of the subscription money and (assuming no monthly entries have been made)the adjusting entry at 30 June (after June's issue has been mailed to subscribers)?

A) $$\begin{array}{l}1 \text { February }\\\begin{array} { | c | l | c | c | } \hline \mathrm { Dr } & \text { Cash at bank } & 50000 & \\\hline \mathrm { Cr } & \text { Subscription revenue } & & 50000 \\\hline\\\hline { 30 \text { June } } & & \\\hline \mathrm { Dr } & \text { Subscription revenue } & 25000 & \\ \hline \mathrm { Cr } & \text { Subscriptions received in advance } && 25000 \\\hline\end{array}\end{array}$$
B) $$\begin{array} { | c | l | c | c | } \hline { \text { 1 February } } & \\\hline \mathrm { Dr } & \text { Subscriptions received in advance } & 50000 & \\\hline \mathrm { Cr } & \text { Cash at bank } & & 50000 \\\hline{ 30 \text { June } } & & \\\hline \mathrm { Dr } & \text { Subscription revenue } & 25000 & \\\hline \mathrm { Cr } & \text { Subscriptions received in advance } & & 25000 \\\hline\end{array}$$

C) $$\begin{array}{l}1 \text { February }\\\begin{array} { | c | l | c | c | } \hline \mathrm { Dr } & \text { Cash at bank } & 50000 & \\\hline \mathrm { Cr } & \text { Subscription revenue } & & 50000 \\\hline { 30 \text { June } } & & \\\hline \mathrm { Dr } & \text { Subscription revenue } & 20000 & \\\hline \mathrm { Cr } & \text { Subscriptions received in advance } && 20000 \\\hline\end{array}\end{array}$$

D) $$\begin{array}{l}1 \text { February }\\\begin{array} { | c | l | c | c | } \hline \mathrm { Dr } & \text { Cash at bank } & 50000 & \\\hline \mathrm { Cr } & \text { Subscriptions received in advance } & & 50000 \\\hline { 30 \text { June } } & & \\\hline \mathrm { Dr } & \text { Subscriptions received in advance } & 25000 & \\\hline \mathrm { Cr } & \text { Subscription revenue } & & 25000 \\\hline\end{array}\end{array}$$

Question 34

An entity shall recognise revenue from a contract when:

A)the entity has satisfied the performance obligation.
B)the goods or service have been transferred to the customer.
C)the customer obtains control of the goods or service.
D)All of the given answers are necessary for recognition of revenue from a contract.

Question 35

Which of the following is an example of a situation in which an entity does not retain the control of the asset?

A)when the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions
B)when the entity provides a 30-day return from purchase with a full refund for the goods sold
C)when the buyer has the right to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return
D)when the goods are shipped subject to installation and the installation is a significant part of the contract that has not yet been completed by the entity

Question 36

In considering whether to recognise revenue when there are associated options:

A)The probability of the exercise of the options must be considered.
B)The probability of the exercise of the options must not be considered.
C)Put options will always give rise to revenue, whereas call options will not.
D)Call options will always give rise to revenue, whereas put options will not.

Question 37

IASB (2011)Revenue from Contracts with Customers specifies the accounting treatment in the case that the outcome of a construction contract cannot be reliably assessed.The treatment specified is:

A)(a) Contract costs must be deferred and matched against revenues in the financial year in which they are recognised where it is not probable that the costs will be recovered in the current period; and (b) where it is probable that the costs will be recovered in the current period, revenue must be recognised only to the extent of the costs incurred.
B)(a) Construction costs must be recognised as a contra asset in the financial year in which they are incurred and set-off against the receivable recorded on the contract; and (b) where the receivable is less than the accrued costs, the difference must be written off as an expense in the period.
C)(a) Contract costs must be recognised as an expense in the financial year in which they are incurred; and (b) where it is probable that the costs will be recovered, revenue must be recognised only to the extent of the costs incurred.
D)(a) Construction costs must be accrued and reported as a deferred asset to the extent that it is considered probable that the costs will be recovered; and (b) revenue may be recognised only to the extent of the costs incurred.

Question 38

Biological assets are:

A)recognised as income when sold.
B)to be valued at market value, with any increase being capitalised and amortised over the period until the asset is sold.
C)to be valued at market value, with any increase being treated as income.
D)to be valued at fair value, with any increase being treated as income.

Question 39

Transactions such as the purchase of assets or the issuance of debt are not considered income because:

A)they involve external parties.
B)they necessarily involve cash.
C)they do not result in an increase in equity.
D)they both result in an increase of the asset or liability concerned.

Question 40

The percentage of completion can be measured in a number of ways,including:

A)physical estimates or surveys of the work performed to date.
B)the work plan basis, which uses the project management plan to calculate the percentage of the construction completed.
C)the billings basis, using the proportion that progress billings to date bear to the total estimated billings for the contract.
D)physical estimates or surveys of the work performed to date and the billings basis, using the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.

Question 41

Discuss the different conditions detailed in IASB (2011)Revenue from Contracts with Customers that must be satisfied before the percentage-of-completion method can be used.

Question 42

Which of the following is not a step in recognising revenue according to IASB (2011)Revenue from Contracts with Customers?

A)Identify the contract with a customer.
B)Determine the transaction price.
C)Recognise revenue before title of the assets transfers to the customer.
D)Identify the separate performance obligations in a contract.

Question 43

IASB (2011)Revenue from Contracts with Customers requires an entity to recognise revenue for a performance obligation satisfied over time only if the entity can:

A)reasonably measure with complete satisfaction the performance obligation.
B)reasonably measure its expected revenue of the performance obligation.
C)reasonably measure its expected costs of the performance obligation.
D)reasonably measure its progress towards complete satisfaction of the performance obligation.

Question 44

Describe,with examples,how the recognition of revenue,at the time of sale,is affected when products require transportation.

Question 45

Explain the difference between revenue and gains as defined in the IASB Conceptual Framework.

Question 46

IASB and FASB initiated a joint project to clarify the principle for recognising revenue and develop a common revenue standard for IFRS and US GAAP so as to:

A)remove inconsistencies and weaknesses in existing revenue requirements.
B)provide a more robust framework for addressing revenue issues.
C)simplify the preparation of financial statements.
D)All of the given answers are correct.

Question 47

In accordance with IASB (2011)Revenue from Contracts with Customers discuss the five steps to recognising revenue.

Question 48

Which of the following statements is not an indicator of the transfer of the control of an asset to a customer?

A)The entity has a present right to payment for the asset.
B)The entity has transferred physical possession of the asset.
C)The customer has legal title to the asset.
D)When goods or services are exchanged or swapped for goods or services, the revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred.

Question 49

Lonsdale Plc sells mobile phones and provides a one-year warranty.Lonsdale is able to recognise revenue at point-of-sale in accordance with IASB (2011)Revenue from Contracts with Customers because:

A)this is industry practice.
B)repairs are unlikely within a year of sale.
C)cost of repairs can be estimated based on experience and this is recognised as warranty expense in the year of sale.
D)cost of repairs can be estimated based on experience and this is recognised as sales returns.

Question 50

Werribee Direct Plc is a mail order company that allows its customers to order online and return the goods without obligations.Werribee Direct Plc had experienced a high ratio of returned merchandise from online sales.What is the appropriate accounting treatment for this sale that is in accordance with IASB (2011)Revenue?

A)Record the sale only when the option to return has expired.
B)Record the sale and reduce this by an estimate of future returns.
C)Record the sale and account for returns as they occur.
D)Record the sale as deferred revenue and recognise revenue progressively until expiry of the option.

Question 51

Describe the output and input measures of performance that an entity is required to use when measuring the progress to date on a construction contract.

Question 52

Which of the following statements is incorrect with respect to revenue recognition of construction contracts?

A)The percentage-of-completion method is to be applied for fixed price contracts if the recognition criteria are satisfied.
B)IASB (2011) Revenue from Contracts with Customers requires individual construction contracts to be accounted for separately and the requirements of the standard to be applied separately to each contract.
C)The percentage-of-completion method should be used, provided certain conditions are met that enable the outcome of the contract to be reliably measured.
D)Percentage-of-completion method requires contract revenue to be matched with progress billings, resulting in the reporting of revenue, expenses and profit which can be attributed to the amount billed to customers.

Question 53

When a performance obligation is satisfied,an entity shall recognise revenue:

A)in full if it is an immaterial amount.
B)when the asset is transferred and the customer gains control of the asset.
C)when the entity retains control.
D)when the risks and rewards are transferred to the customer.

Question 54

Bellarine Plc is publisher of Mode magazine and its customers usually sign a three-year subscription with an advance payment of €500.Mode magazine has 12 issues in a year.What is the appropriate accounting treatment for this sale on the date of signing that is in accordance with IASB (2011)Revenue?

A)Recognise revenue in full as this is an immaterial amount.
B)Recognise the sale as a provision.
C)Recognise the sale as unearned revenue.
D)Disclose the sale in the notes as a contingent item.

Question 55

IASB and FASB initiated a joint project to address some inconsistencies of recognition of revenue in contracts with customers with other accounting standards.Discuss two of these inconsistencies.

Question 56

Discuss how the use of call and put options affect revenue recognition for sales of merchandise with associated conditions.

Question 57

A group of contracts shall be treated as:

A)a single contract if negotiated as a package.
B)a single contract only when the contracts are performed concurrently.
C)individual construction contracts.
D)all of the given answers.

Question 58

Which of the following statements is not in accordance with IASB (2011)Revenue from Contracts with Customers with respect to revenue recognition when right of return exists?

A)Revenue E Revenue recognition of the consideration for the transferred products to which the entity is reasonably assured to be entitled.
B)when goods are sold or services are rendered recognition of a refund liability
C)recognition of an asset for its right to recover products from customers on settling the refund liability
D)All of the given answers are in accordance with the accounting standard

Question 59

What are the three conditions that must be met in order for revenue to be recognised when the sale of a product gives the buyer the right to return the product?

Question 60

Which of the following is not a disclosure requirement of IASB (2011)Revenue from Contracts with Customers?

A)progress billings in excess of costs incurred on construction contracts
B)If control of an asset is transferred to a customer before the customer pays consideration this must be disclosed as a contract asset or receivable.
C)If alternative descriptions are used in the statement of financial position sufficient information must be disclosed to the users to be able to distinguish between receivables and contract assets.
D)The gross amount of work progress must be disclosed in the statement of financial position.

Question 61

Explain the accounting treatment when a third party supplies the awards under a customer loyalty programme.