Included in this folder you will find a power point presentation that outlines the basics of the new Revenue Recognition Standard. Included in these slides are specific examples that show you how the new standard should be applied. Once you have reviewed these slides and have been introduced to the terminology, you will be asked to answer some short questions (multiple choice and fill-in-the-blank) to test your knowledge on this new standard.

CASE 2 Revenue Recognition ASU No. 2014-09 \"Revenue from Contracts with Customers\" Effective December 15, 2016 Revenues Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations Measuring and reporting revenue is a critical aspect of financial reporting Revenue recognition criteria ensure appropriateness of the timing and amount of revenue reported How much? Revenue recognitio n When? Revenue Recognition Prior GAAP: The realization principle required that revenue be recognized when both: - - The earnings process is virtually complete, and There is reasonable certainty as to the collectibility of the assets to be received. Problems with applying the realization principle: - Revenue recognition was poorly tied to the FASB's conceptual framework. Revenue Recognition New revenue recognition standard by FASB: - - Accounting Standards Update (ASU) No. 2014-09: \"Revenue from Contracts with Customers\" The ASU is almost completely converged with the IFRS version, IFRS No. 15. Core Principle: Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to Five Steps to Revenue Recognition Single/Multiple POs* Five Steps to Recognizing Transactions: 1. 2. 3. 4. Revenue Identify the contract with the customer Identify the performance obligation(s) Determine the transaction price Allocate the transaction price 5. Recognize revenue when (or as) each performance obligation is satisfied Legal rights of both the seller and customer are established Performance obligation Single Multiple Amount seller is entitled to receive from customer Amount seller is entitled to receive from customer No allocation required Allocate a portion to each performance obligation At a point in time Over a period of time At whatever time is appropriate for each performance obligation POs* - Performance Recognizing Revenue at a Single Point in Time Indicators are used to determine when control has transferred from the seller to the customer - Control means that the customer has direct influence over the use of the good or service and obtains its benefits A customer is more likely to control a good or service if the customer has: - An obligation to pay the seller - Legal title to the asset Example 1: Recognizing Revenue at a TrueTechSingle Pointthe Tri-Box, a Industries sells in Time gaming console that allows users to play video games individually or in multiplayer environments over the Internet. A Tri-Box is only a gaming module and includes no other goods or services. When should TrueTech recognize revenue for the following sale of 1,000 Tri-Boxes to CompStores? December 20, 2015: CompStores orders 1,000 Tri-Boxes at a price of $240 each, Recognizing Revenue at a Single Point in Time (continued) January 1, 2016: TrueTech delivers 1,000 Tri-Boxes to CompStores, and title to the Tri-Boxes transfers to CompStores. Journal Entry Accounts receivable ($240 1,000) revenue Sales Debit Credit 240,000 240,000 Recognizing Revenue at a Single Point in Time (continued) January 25, 2016: TrueTech receives $240,000 from CompStores. Journal Entry Cash Accounts receivable Debit Credit 240,000 240,000 Recognizing Revenue over a Period of Time Revenue is recognized over a period of time if one of the following three conditions hold: - The customer consumes the benefit of the seller's work as it is performed (example: a daily cleaning service) - The customer controls the asset as it is created (example: a building extension) - The seller is creating an asset that has no alternative use to the seller and the seller has the legal right to receive payment for Example 2: Recognizing Revenue over a TrueTech Industries sells one-year Period of Time subscriptions to the Tri-Net multi-user platform of Internet-based games. TrueTech Entry at contract Debit Credit Journal sells 1,000 subscriptions for $60 inception each on January 1, 2016. Cash ($60 1,000) 60,000 Deferred revenue 1/1 60,000 Deferred Revenue 60,000 Recognizing Revenue over a Periodmonths following the sale, of Time At the end of each of the 12 (continued) TrueTech would record the following entry to recognize Tri-Net subscription revenue: Journal Entry each month Deferred revenue ($60,000 12) Service revenue 1/1 1/31 2/28 ... 12/31 12/31 Deferred Revenue 60,000 5000 5000 ... 5000 -0- 1/1 1/31 2/28 ... 12/31 12/31 Debit Credit 5,000 5,000 S ervice Revenue -0- 5,000 5,000 ... 5,000 60,000 Estimating Progress Toward Completion To recognize revenue over time, a seller needs to estimate progress towards completion Output-based estimate - Measured as the proportion of the goods or services transferred to date Input-based estimate - Measured as the proportion of effort expended thus far relative to the total effort expected to satisfy the performance Recognizing Revenue for Contracts that Contain Multiple Performance Obligations If we suspect a contract has multiple performance obligations, steps 2 and 4 of the revenue recognition process come into play. - Step 1: Identify the contract - Step 2: Identify the performance obligation(s) - Step 3: Determine the transaction price - Step 4: Allocate the transaction price to each performance obligation Recognizing Revenue for Contracts that Contain Multiple Performance Obligations Step 2: Identify the performance obligation(s) - The goal is to separate the contract into parts that can be viewed on a stand-alone basis. - Goods and services are viewed as separate performance obligations if they are distinct. - A good or service is distinct if it is both: Example 3: Recognizing Revenue for Contracts that Contain Multiple Performance Obligations TrueTech Industries manufactures the Tri-Box System, a multiplayer gaming system allowing players to compete with each other over the Internet. The Tri-Box System includes the physical Tri-Box module as well as a one-year subscription to the Tri-Net multiuser platform of Internet-based games and other applications. TrueTech sells individual one-year subscriptions to the Tri-Net platform for $60. TrueTech sells individual Tri-Box modules for Recognizing Revenue for Contracts that Contain Multiple Performance Obligations (continued) Step 1: Identify the contract: Yes Step 2: Identify the performance obligation(s) - A good or service is distinct if it is both: Capable of being distinct Separately identifiable from other goods or services in the contract A Tri-Box System contains two distinct goods and services: - Tri-Box module Recognizing Revenue for Contracts that Contain Multiple Performance Obligations (continued) Step 1: Identify the contract: Yes Step 2: Identify the performance obligation(s): (1) Tri-Box module and (2) Tri-net subscription Step 3: Determine the transaction Transaction price = $250 per system 1,000 price systems = $250,000 Recognizing Revenue for Contracts that Contain Multiple Performance Obligations (continued) Step 1: Identify the contract: Yes Step 2: Identify the performance obligation(s): 1) Tri-Box module and (2) Trinet subscription $250 Transaction Price Step 3: Determine the transaction price: $250,000 80% 20% Step 4: Allocate the transaction $50 price $200 to each performance obligation Subscriptions Tri-Box Module Tri-Net Recognizing Revenue for Contracts that Contain Multiple Performance Obligations (continued) Step 5: Recognize revenue when (or as) each performance obligation is satisfied On January 1, 2016, TrueTech records the revenue from the Tri-Box modules (that performance obligation is satisfied) but defers revenue for the Tri-Net subscriptions. Debit Credit Journal Entry Accounts Receivable Sales Revenue ($250,000 80%) Deferred Revenue ($250,000 20%) Deferred Revenue 50,000 250,000 200,000 50,000 Tri-Box modules Tri-Net subscriptions Recognizing Revenue for Contracts that Contain Multiple Performance Obligations (continued) Step 5: Recognize revenue when (or as) each performance obligation is satisfied In each of the 12 months following the sale, TrueTech records the following entry to recognize Tri-Net Debit Credit Journal Entry subscription revenues. Deferred Revenue ($50,000 12) 4,167 Service Revenue 4,167 1/1 1/31 2/28 ... 12/31 12/31 Deferred Revenue 50,000 4,167 4,167 ... 4,167 -0- S ervice Revenue 1/1 -0- 1/31 4,167 2/28 4,167 ... ... 12/31 4,167 12/31 50,000 Summary of Fundamental Issues Related to Recognizing Revenue Special Issues Step 1: Specific requirements for contract existence Step 2: Prepayments, warranties, customer options Step 3: Variable consideration, right of return, principal versus agent, time value of money, payments by seller Step 4: Various approaches to estimating stand-alone selling prices Special Issues for Step 1: Identify the Contract Contracts can be explicit or implicit, oral or written A contract only exists if it: - has commercial substance - has been approved by the seller and customer - specifies the rights of the seller and customer - specifies payment terms Special Issues for Step 2: Identify the Performance Not performance obligations: Obligation(s) Prepayments (part of the transaction price) Quality-assurance warranties (part of the performance obligation to deliver goods and services that are free of defects) Right of return (part of the performance obligation to deliver acceptable goods and services) Example: Special Issues for Step 2: As a promotion, TrueTech Industries offers a 50% coupon Identify with thePerformanceat its the purchase of a Tri-Box for a gaming headset normal price of $240. The headset costs $120 without a Obligation(s)coupon must be coupon (and $60 with a coupon), and the exercised within one year of the Tri-Box purchase. TrueTech estimates that 80% of customers will take advantage of the coupon. How would TrueTech account for the cash sale of 100 Tri-Boxes sold under this promotion on January 1, 2016? Estimated stand-alone selling price of the coupon: = $120 50% = Discount $60 Estimated stand-alone selling price$60 80% = = $48 Special Issues for Step 2: Identify the Performance Total ofObligation(s) prices =(continued) $48 = stand-alone selling $240 + $288 Tri-Box: $240/$288 = 83.33% , or 5/6$240 100 = $20,000 Coupon: $48/$288 = 16.67%, or $240 100 = 1/6 4,000 Journal Entry Cash ($240 100) Sales revenue Deferred revenue coupons Debit $24,000 24,000 Credit 20,000 4,000 Example: Special Issues for Step 2: How would TrueTech account for this arrangement Identify the Performance if it normally sells a headset at a 15% discount off Obligation(s) its $120 list price? (Assume all other facts are unchanged.) right that TrueTech is offering with The material the coupon is the extra discount that customers wouldn't ordinarily receive. If they normally receive 15%, the extra discount is 50% - 15% = 35%. Estimated stand-alone selling price of the coupon: Extra discount = $120 35% = $42 $42 Estimated stand-alone selling price = 80% = $33.60 Special Issues for Step 2: Identify the Performance Total of stand-alone selling prices = (continued) $33.6 = Obligation(s) $240 + $273.6 Tri-Box: $240/$273.6 = 87.72% $240 100 = $21,053 Coupon: $33.6/$273.6 = 12.28% $240 100 = Journal Entry Cash ($240 100) Sales revenue Deferred revenue coupons $24,000 Debit 24,000 2,947 Credit 21,053 2,947 Special Issues for Step 3: Determine the Transaction Price Estimating the transaction price involves a variety of considerations, including: Estimating variable consideration and determining whether it is constrained Identifying whether the seller is acting as a principal or an agent Considering the time value of money Accounting for payments by the seller to the customer Special Issues for Step 3: Determine the Transaction Price Variable Consideration: Part of the transaction price depends on the outcome of some future event. Examples: Entertainment and media - Royalties Health care - Medicare and Medicaid reimbursements Manufacturing - Volume discounts and product returns Construction - Incentive payments Telecommunications - Rebates Special Issues for Step 3: Determine the Transaction Price One type of variable consideration is provided by a right of return Exists when the customer can return the good if not satisfied or unable to resell it Viewed as a failure to satisfy the original performance obligation The seller reduces revenue by the estimated returns, and either: records a liability for cash the seller anticipates refunding to customers, or Special Issues for Step 3: Determine the Transaction Price Right of Return Assume that TrueTech sold 1,000 TriBoxes to CompStores for $240 each. TrueTech estimates that CompStores will Debit Journal Entry return five percent of the Tri-Boxes Credit Cash ($240 240,000 purchased. 1,000) Sales revenue Sales returns ($240,000 5%) Refund liability 240,000 12,000 12,000 Special Issues for Step 3: Determine the Transaction Price Is the Seller a Principal or Agent? Principal Performance obligation Recording revenue To deliver goods and services (so is vulnerable to risks associated with holding inventory) Total sales price paid by customers Also recognizes cost of goods sold Agent To facilitate a transaction between a principal and a customer Only the commission it receives on the transaction Example: Special Issues for Step 3: Determine the Transaction Price: Principal or Agent Mike buys a Tri-Box module from an online retailer for $290. Let's consider accounting for that sale by two retailers: PrinCo and AgenCo: PrinCo purchases Tri-Box modules directly from TrueTech for $240, has the modules shipped to its distribution center PrinCo (Principal): and then ships individual AgenCo (Agent): in Kansas, Records Gross Revenue Records Net Revenue modules to buyers when a sale is made. $290 Revenue $50 Revenue PrinCo offers occasional priceofdiscounts 0 Less: Cost of goods sold 240 Less: Cost goods sold Gross profit $ 50 Gross profit $50 according to its marketing strategy. Special Issues for Step 3: Determine the Transaction Price Time Value of Money Sellers account for the time value of money if a contract includes a significant financing component. In that case, the contract contains: The cash price of the good or service, and A financing component, and recognizes: interest revenue (in the case of a receivable, because loaning money to the customer) interest expense (in the case of a prepayment, because borrowing money from the customer) Special Issues for Step 5: Recognize Revenue When (Or As) Each Performance Obligation Is Satisfied Some common arrangements can have complicated revenue recognition timing: - Licenses - Franchises - Bill-and-hold arrangements - Consignment arrangements - Gift cards Special Issues for Step 5: Licenses A license transfers a right of use if the seller's activities during the license period are not expected to affect the intellectual property being licensed to the customer. Example: a music download. Revenue is recognized at the start of the license period, when the right is transferred. A license provides a right of access to the seller's intellectual property if the seller's ongoing activities affect the benefit the customer receives. Example: an NFL trademark granted to a Special Issues for Step 5: Bill-and-Hold Sales A bill-and-hold sale is an arrangement where a customer purchases goods but requests that the seller not ship the product until a later date. Since the customer doesn't have physical possession of the asset until the seller has delivered it, transfer of control has not occurred, so revenue typically should not be recognized until actual delivery Special Issues for Step 5: Consignment Arrangements The \"consignor\" physically transfers the goods to the other company, the consignee, but the consignor retains legal title. If a buyer is found, the consignee remits the selling price less commission and approved expenses to the consignor. If the consignee can't find a buyer within an agreed-upon time, the consignee returns the goods to the consignor. Special Issues for Step 5: Gift Cards Sales of gift cards are recognized as deferred revenue, and then revenue is recognized when a gift card is redeemed or the likelihood of redemption is viewed as remote. Presentation and Disclosure Income statement Bad debt expense Interest revenue/expense Balance sheet Contract liabilities Contract assets Accounts receivable Disclosure notes Nature, amount, timing, and uncertainty of revenue and cash flows Outstanding performance obligations, Summary of Fundamental and Special Issues Related to Recognizing Revenue Fundamental Issues (Part A) A contract establishes the legal rights and obligations of the Step 1 seller and customer Identify the contract with respect to one or more performance obligations. A performance obligation is a promise to transfer a good or service that is distinct, Step 2 which is the case if the good ntify the performance obligation(s) or service is both (a) capable of being distinct and (b) separately identifiable. Special Issues (Part B) A contract exists if it (a) has commercial substance, (b) has been approved by both the seller and the customer, (c) specifies the seller's and customer's rights and obligations, (d) specifies payment terms, and (e) is probable that the seller will collect the amounts it is entitled to receive. A contract does not exist if (a) neither the seller nor the customer has performed any obligations under the contract, and (b) both the seller and the customer can The following do terminate the contract without penalty. The following do qualify as performance not qualify as obligations: performance Extended obligations: warranties Quality Customer options assurance for additional warranties goods and services Customer that provide a prepayments Summary of Fundamental and Special Issues Related to Recognizing Revenue Fundamental Issues (Part A) The transaction price is the amount the Step 3 seller is entitled to Estimate the transaction price receive from the customer. Allocate the transaction price to performance obligations based on Step 4 relative stand alone Allocate the transaction price selling prices of the goods or services in each performance obligation. Special Issues (Part B) Adjust transaction price for: Variable consideration (estimated as either the expected value or the most likely amount). Constraint: Variable consideration is recognized only to the extent it is probable that a significant reversal will not occur in the future. Whether the seller is acting as a principal or agent A significant financing component Any payments by the seller to the customer Various approaches are available to estimate stand-alone selling prices: Adjusted market assessment approach Expected cost plus margin approach Residual approach Fundamental Issues (Part A) Recognize revenue Recognize revenue at a single point in time when control passes to the customer, which is more likely if the customer has: Obligation to pay the seller. Legal title to the asset. Possession of the asset. Assumed the risk and rewards of ownership. Accepted the asset. over a period of time if: Customer consumes benefit as work performed, Customer controls asset as it is created, or Seller is creating an asset that has no alternative use and the seller has right to receive payment for work completed. Special Issues (Part B) Must determine the timing of revenue recognition for: Licenses (if the seller's activity over the license period is expected to affect the benefits the customer receives, recognize revenue over time; otherwise, recognize revenue at the time license is transferred). Franchises (initial fees recognized when goods and services are transferred; continuing fees recognized over time). Bill-and-hold arrangements (typically do not transfer control, so recognize upon delivery of goods to customer). Consignment arrangements (do not transfer control, so recognize after sale to end customer Accounting for Long-Term Contracts Steps 2 and 5 are critical for long-term contracts. Step 2: Identify the performance obligations Usually have a single performance obligation, because don't meet the \"separately identifiable\" criterion necessary for goods and services to be viewed as distinct. Step 5: Recognize revenue when (or as) each performance obligation is Example: Accounting for a Profitable Long-Term Contract At the beginning of 2016, the Harding Construction Company received a contract to build an office building for $5 million. Harding will construct the building according to specifications provided by the buyer, and the project is estimated to take three years to complete. According to the contract, Harding will bill the buyer in installments over the construction period according to a prearranged schedule. Information related to the contract is as follows: 2016 2017 2018 Construction costs incurred during the year $1,500,000 Construction costs incurred in prior years -0- Cumulative actual construction costs 1,500,000 Estimated costs to complete at end of year 2,250,000 Total estimated and actual construction costs $3,750,000 $1,000,000 $1,600,000 1,500,000 2,500,000 2,500,000 4,100,000 1,500,000 -0- $4,000,000 $4,100,000 Billings made during the year Cash collections during year $2,000,000 $1,800,000 1,400,000 2,600,000 $1,200,000 1,000,000 Recognizing Revenue Over Time According to Percentage of Completion Revenue recognized this = period ( ) Total Percentag estimate e d completed revenue to date Cumulative revenue to be recognized to date - Revenue recognized in prior periods Recognizing Revenue Over Time According to Percentage of Completion 2016 Construction costs: Construction costs incurred during the year Construction costs incurred in prior years Actual costs to date Estimated remaining costs to complete Total cost (estimated + actual) Contract price Multiplied by: Percentage of completion Actual costs to date Total cost (est. + actual) Cumulative revenue to be recognized to date $1,500,00 0 -0- $1,500,00 0 2,250,000 $3,750,00 0 $5,000,00 0 $1,500,00 0 $3,750,00 = 40% 0 2017 $1,000,00 0 1,500,000 $2,500,00 0 1,500,000 $4,000,00 0 $5,000,00 0 $2,500,00 0 $4,000,00 = 62.5% 0 2018 $1,600,00 0 2,500,000 $4,100,00 0 -0- $4,100,00 0 $5,000,00 0 $4,100,00 0 $4,100,00 = 100% 0 $2,000,00 $3,125,00 $5,000,00 Recognizing Revenue Over Time According to Percentage of Completion ( continued) 2016 2017 2018 Cumulative revenue to be recognized to date $2,000,00 $3,125,00 $5,000,00 0 0 0 Revenue recognized in prior periods -0- (2,000,00 (3,125,00 0) 0) Revenue recognized in the current period $2,000,00 $1,125,00 $1,875,00 0 0 0 Recognition of Revenue and Cost of Construction in Each 2016 Period Revenue recognized ($5,000,000 40%) $ 2,000,000 Construction in progress Gross profit (1,500,000) $ 500,000 2017 Revenue recognized to date ($5,000,000 62.5%) Less: Revenue recognized in 2016 Revenue recognized Cost of construction Gross profit $3,125,000 2,000,000 $ 1,125,000 (1,000,000) $ 125,000 2018 Revenue recognized to date ($5,000,000 100%) Less: Revenue recognized in 2016 and Revenue recognized 2017 Cost of construction Gross profit $5,000,000 3,125,000 $ 1,875,000 (1,600,000) $ Some Important Changes in Revenue Recognition GAAP Resulting from ASU No. 2014-09 Previous GAAP New GAAP Under the ASU Key concept underlying revenue recognition The realization principle: Recognize revenue when both the earnings process is complete and there is reasonable certainty as to collectibility of the asset(s) to be received. The core revenue recognition principle: Recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services. Role of collectibility in determining whether revenue is recognized. Defer revenue recognition if cash collection is not reasonably certain. Use installment method or costrecovery method to tie revenue recognition to subsequent cash collection. Defer revenue recognition until cash collection is probable. Installment and cost-recovery methods eliminated. Criteria for recognizing revenue over time Depends on the earnings process. Depends on characteristics of the For long-term contracts, recognizing contract and of the performance revenue over time is generally obligations being satisfied. required unless reliable estimates of progress towards completion can't be made. Some Important Changes in Revenue Recognition GAAP Resulting from ASU No. 2014-09 (con Previous GAAP New GAAP Under the ASU Accounting for multiple performance obligations Depends on the industry. Sometimes performance obligations are ignored (e.g., \"free\" smartphones in cell phone contracts); sometimes revenue recognition is constrained (e.g., software for which there is not sufficient evidence of stand-alone prices). Regardless of industry, apply criteria for determining whether goods and services are distinct to identify performance obligations, allocate transaction price to performance obligations, and recognize revenue when each is satisfied. Treatment of customer options for additional goods or services Depends on the industry. Sometimes treated as a separate deliverable (e.g., software upgrades), other times ignored (e.g., frequent flyer miles). Regardless of industry, treat an option as a separate performance obligation if it provides a material right to the customer that the customer would not have otherwise. Treatment of variable consideration Typically only recognize revenue associated with variable consideration when uncertainty has been resolved. Include estimated variable consideration in the transaction price, but only to the extent it is probable that a significant revenue reversal will not be required in the future. Treatment of time value of money Interest revenue recognized for longterm receivables but interest expense typically not recognized for long-term prepayments. Interest revenue or interest expense recognized for both long-term receivables and long-term prepayments if amount is significant. The Realization Principle Core Revenue Recognition Principle Under ASU 2014-09 Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services. QUESTION 1 1. Which of the following is not an indicator that control of a good has passed from the seller to the buyer? buyer has legal title buyer has an unconditional obligation to pay buyer has scheduled delivery buyer has assumed the risks and rewards of ownership 1 points QUESTION 2 1. Which of the following is an indicator that revenue for a service should be recognized over time? The seller is enhancing an asset that the buyer controls as the service is performed. The seller is providing continuous effort to the buyer. The seller can estimate the percent of work completed. The sales price is fixed and determinable. 1 points QUESTION 3 1. Allen Co. wrote a contract that involves two performance obligations. Product A has a stand alone selling price of $100, and product B has a standalone selling price of $200. The price for the combined product is $240. How much of the transaction price would be allocated to the performance obligation for delivering product A? $40 $60 $80 $100 1 points QUESTION 4 1. Hooper Inc. offers a discount on an extended warranty on its eyePhone when the warranty is purchased at the time the eyePhone is purchased. The warranty normally has a price of $300, but Hooper offers it for $240 when purchased along with an eyePhone. Hooper anticipates a 75% chance that a customer will purchase the extended warranty along with the eyePhone. Assume Hooper sells 1,000 eyePhones with the extended warranty discount offer. What is the total standalone selling price that Hooper would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 eyePhone contracts? $240,000 $60,000 $45,000 $ 0 1 points QUESTION 5 1. On October 1, 2016, Acme Fuel Co. sold 100,000 gallons of heating oil to Sparky Co. at $3 per gallon. Fifty thousand gallons were delivered on December 15, 2016, and the remaining 50,000 gallons were delivered on January 15, 2017. Payment terms were 50% due on October 1, 2016, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale during 2017? $75,000 $150,000 $225,000 $300,000 1 points QUESTION 6 1. Elmo Painting Service signed a contract charging a customer $3,000 to paint the customer's house. The contract includes all paint and all painting labor. Elmo would charge $1,200 for the paint if sold separately and $2,800 for the labor if done using the customer's paint. How much of the transaction price would Elmo allocate to its performance obligation to provide paint to the customer? $ 0 $900 $1,200 $3,000 1 points QUESTION 7 1. Triangle Travel offers their normal Bahama GetAway travel package for $2,000, and offers their special Bahama Elite package (with additional guided tours) for $2,500. Triangle hasn't offered the Elite package previously, is is unsure what it would charge for the additional guided tours absent the basic Bahama GetAway package. How much of the Elite transaction price should Triangle assign to the basic Bahama GetAway portion of the Elite package? $ 0 $1,250 $2,000 $2,500 1 points QUESTION 8 1. Perkins Appliances offers a contract in which customers receive the following: a new Perkins Pro washing machine a warranty that protects against product defects for the first six months of use an option to purchase a Perkins Pro dryer for a 30% discount (Perkins typically discounts that brand of dryer 10%), and a coupon to purchase an extended warranty for $150 (extended warranties regularly sell for $150) How many performance obligations are included in the contract? 1 2 3 4 1 points QUESTION 9 1. Braun Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Braun has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale. Braun most likely should recognize revenue: When Braun delivers a computer to a customer, ignoring potential returns. When Braun delivers a computer to a customer, in an amount that is reduced by the expected returns. When a customer returns a computer. When Braun receives cash from the customer 1 points QUES TION 10 1. Clayton Consulting operates a website that links experienced statisticians with businesses that need data analyzed. Statisticians post their rates, qualifications, and references on the website, and Clayton receives 25% of the fee paid to the statisticians in exchange for identifying potential customers. Lovelace Associates contacts Clayton and arranges to pay a consultant $4,500 in exchange for analyzing some data. Clayton's income statement would include the following with respect to this transaction: Revenue of $4,500 Revenue of $4,500, and cost of services of $3,375 Revenue of $1,125 Revenue of $5,625 and cost of services of $4,500 1 points QUESTION 11 1. Assume that Amazon.com sells the MacBook Pro, a computer brand produced by Apple, for a retail price of $1,500. Amazon arranges its operations such that customers receive products directly from Apple Stores rather than Amazon. Customers purchase from Amazon using credit cards, and Amazon forwards cash to Apple equal to the retail price minus a $150 commission that Amazon keeps. In this arrangement, how much revenue will Amazon recognize for the sale of one MacBook Pro? $ [Blank_1] *Do not include any $ signs in your response. 1 points QUESTION 12 1. Which of the following is not true? License fees are recognized over time for any license that is viewed as providing a right of access. Licensing fees are recognized as revenue over time for any licenses for which the seller expects its ongoing activities to affect the benefits that the buyer receives from intellectual property. License fees are recognized as revenue at a point in time if the buyer expects that the seller's future activities will not affect the benefit the buyer derives from the intellectual property. Licensing fees always are recognized as revenue at the end of the license period, when the seller has completed its performance obligation to provide access to its intellectual property. 1 points QUESTION 13 1. Zack developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectiveness of irrigation. Sparky paid a licensing fee of $60,000 for a copy of the software. Although Sparky can use the software as long as it wants, Zack expects that Sparky will use the software for approximately 5 years. Zack will not have any continuing involvement with Sparky following transfer of the license. How much revenue should Zack recognize in the first year of the contract? $60,000 $15,000 $12,000 $ 0 1 points Q U E S T I O N 14 1. Sparky Associates sells two licenses to Kim & Company on September 1, 2016. First, in exchange for $100,000, Sparky provides Kim with a copy of its proprietary investment management software, which Sparky does not anticipate updating and which Kim can use permanently. Second, in exchange for $90,000, Sparky provides Kim with a threeyear right to market Ki'ms financial advisory services under the name of Sparky Associates, which Sparky advertises on an ongoing basis. How much revenue will Sparky recognize in 2016 under this arrangement? $[Blank_1] 1 points QUESTION 15 1. Alex Guerin is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Guerin recently transferred a painting on consignment to a local barbershop. After Guerin has transferred a painting to a barbershop, the painting: Should be counted in the barbershop's inventory, as the barbershop now possesses it. Should be counted in Guerin's inventory until the barbershop sells it. We lack sufficient information to know who should carry the painting in inventory. Should be counted in either Guerin's or the barbershop's inventory, depending on which incurred the cost of preparing the painting for display. 1 points Q U E S T I O N 16 1. Noah sells gift cards redeemable for Noah products either instore or online. During 2016, Noah sold $6,000,000 of gift cards, and $5,400,000 of the gift cards were redeemed for products. As of December 31, 2016, $450,000 of the remaining gift cards had passed the date at which Noah concludes that the cards will never be redeemed. How much gift card revenue should Noah recognize in 2016? $5,400,00 0 $5,550,00 0 $5,850,00 0 $6,000,00 0 1 points Q U E S T I O N 17 1. Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue over time according to percentage of completion. Here are some facts: COST INCURRED ESTIMATED ADDITIONAL DURING CURRENT YEAR COST TO COMPLETE $3,000,000 $6,000,000 2016 $5,000,000 $2,000,000 2017 $2,500,000 $ 0 2018 2. 3. What is Robertson's percentage completion in 2017? 50% 66.67% 80% 88.89% 1 points QUES TION 18 1. Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue over time according to percentage of completion. Here are some facts: COST INCURRED ESTIMATED ADDITIONAL DURING CURRENT YEAR COST TO COMPLETE $3,000,000 $6,000,000 2016 $5,000,000 $2,000,000 2017 $2,500,000 $ 0 2018 2. 3. How much Revenue should Robertson recognize in 2017? $5,000,000 $5,600,000 $8,000,000 $9,600,000 1 points QUESTION 19 1. The following data relates to a construction job started by Sparky Company during 2016: Total Contract Price Actual costs incurred during 2016 Estimated remaining costs Billed to customer during 2016 Received from customer during 2016 2. $100,000 20,000 40,000 30,000 10,000 Assuming that Sparky recognizes revenue over time according to percentage of completion, how much should Sparky recognize as gross profit for 2016? $26,667 $0 $13,333 $33,333 1 points QUESTION 20 1. Video Planet (VP) sells a big screen TV package consisting of a 60inch HDTV, a universal remote, and onsite installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer's home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60inch TV separately for $1,700, sells the remote separately for $100, and offers the installation service separately for $200. The entire package sells for $1,900. Determine how much revenue should be allocated to each of the following components: TV Remote Installation Service *Do not use $ signs or commas in your response. $ $ $