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Exam 5: Revenue Recognition

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Question 61

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Assume that a customer enrolls in AAA's Premier Membership, which provides 12 months of roadside assistance for $120. On August 1, 2018, a customer purchases a contract that runs from that date through July 31, 2019. Given that roadside assistance requests occur equally throughout the contract period, AAA uses "proportion of time" as its measure of progress toward completion. Required: 1) Prepare the journal entries that AAA would record on August 1 and on December 31, 2018, with respect to this transaction. 2) State the amounts included in relevant accounts in AAA's 2018 income statement and balance sheet.

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2) $50 is included as revenu...

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Question 62

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The probability that the customer will pay the seller does not affect whether a contract exists for purposes of revenue recognition.

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Question 63

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If the seller is an agent, the seller typically is vulnerable to risk associated with delivering the product or service.

In 2018, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions) : -How much cash remains to be collected by CCC on the project?

Which of the following is an example of a variable consideration?

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2017, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2017, $300,000 in 2018, and $300,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2018, $400,000 in 2019, and $400,000 in 2020 associated with those sales. In 2020, Lake also repossessed $200,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $75,000 at the time they were repossessed. - In 2019, Lake would recognize realized gross profit of:

Companies recognize revenue only when:

On December 28, 2018, Omega Steel, Inc. sold $100,000 of steel sheets to a car manufacturer. Due to holidays, Omega was unable to find a truck driver to deliver the product. Delivery was finally made on January 5, 2019. Required: How much revenue should Omega recognize in 2018 for the sale to the car manufacturer? Explain your answer.

Which of the following is most true regarding consignment arrangements?

The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS. -Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS has no experience estimating uncollectible accounts associated with these sorts of notes. RS can recognize:

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2017. Collections on this sale were $20,000 in 2017, $15,000 in 2018, and $20,000 in 2019 -. In its 2018 year-end balance sheet, Reliable would report installment receivables (net) of:

Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti's contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio's new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus. -Assume Brunetti uses the "expected value" approach, but is very uncertain of that estimate due to a lack of experience with similar arrangements. What would be the appropriate transaction price?

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. -Prepare the journal entry to recognize the sale of a new membership. Clearly identify revenue or deferred revenue associated with each performance obligation.

Goods or services are distinct if they are either capable of being distinct or are separately identifiable.

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2017, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2017, $300,000 in 2018, and $300,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2018, $400,000 in 2019, and $400,000 in 2020 associated with those sales. In 2020, Lake also repossessed $200,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $75,000 at the time they were repossessed. - In its December 31, 2018, balance sheet, Lake would report:

When the expected collection of accounts receivable is difficult to estimate, companies must use the cost recovery method.

Sellers recognize revenue for gift cards at the point in time control of the gift card is transferred to the customer.

Mary signed up and paid $1200 for a 6 month ceramics course on June 1^st with Choplet Ceramics. As of August 1^st, Choplet's accounting records would indicate:

What is the objective of disclosures about revenue recognition? Indicate at least two common types of important revenue recognition disclosures.

FlexMotors, Inc. manufactures a variety of electronic drills and grass cutters. Recently, it introduced a new line of handheld drills that generates much less noise and consumes much less energy, but carries a much higher price tag. The company is currently considering whether it should record $1.2 million of revenue upon shipment. Under the contract, FlexMotors is obligated to accept any products from the distributors if they are not sold within 6 months. The company is confident that the new model will sell, but is unable to accurately estimate returns, because it has never sold anything quite like it. Required: How much revenue should FlexMotors recognize upon shipment to distributors?