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Exam 4: Revenue Recognition

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Question 41

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Which statement best describes a franchise arrangement?

A) An arrangement in which one party licenses its business practices to another party.
B) An arrangement in which one party exchanges goods or services with another party with little or no consideration.
C) An arrangement in which one party provides goods to another party to sell on its behalf and will accept all goods that are not sold.
D) An arrangement in which one party allows the purchaser to make payments over an extended period of time.

E) A) and B)
F) B) and C)

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Question 42

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Southtel is a builder of large digital networks. In the midst of the high-tech euphoria, the company bid and won a $48,000,000 contract to build a network for the country of Elbonia. Details on the project over the last three years are as follows: Required: Calculate the amount of revenue, cost of goods sold (COGS), and gross profit (or loss)to be recognized in each of the three years. The company uses the percentage of completion method to account for long-term contracts. Record your answer in the following table.

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Question 43

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An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

Aurora Gold Company produced 650,000 ounces of gold in 2012. Average sales price was $870/oz. The price was $870/oz at the start of the year and $870/oz at the end of the year. Production cost averaged $588/oz, which has been stable for several years. The company had 50,000 ounces in inventory at the beginning of the year, and 20,000 ounces at the end of the year. Required: a)Calculate Aurora Gold's revenue, cost of goods sold, and gross profit, assuming the company recognizes revenue at the point of sale/delivery. b)Determine the amount that should be shown as ending inventory on Aurora's 2012 balance sheet.

McNicols started selling franchise locations in April 2012. The franchisee pays continuing fees based on annual sales. The initial fee relates to finding a store location and training the franchisee at McNicols' training facility over a 2-year period. Required: a)Explain how McNicols should account for the initial fee. b)Assume that management estimates that 40% of the value of services related to the initial fee is fulfilled in the first year of signing the franchise agreement. Provide the journal entries to record this revenue in fiscal 2012 and in 2013. c)Explain how McNicols should account for the ongoing fees. d)Provide the journal entries to record the ongoing fees in fiscal 2012 and 2013.

Soorya Manufacturing makes educational toys that are sold to retailers on the following terms: Each type of toy has a fixed wholesale price, is shipped F.O.B. shipping point, and payment is due 45 days after the shipment. The retailer may return a maximum of 45% of an order at the retailer's expense up to 6 months after delivery. Sales are made only to retailers that have a good credit rating. In Soorya's 11 years of existence, the company has experienced a return rate of approximately 15%, a bad debt expense of 5% of sales and an average collection period of 90 days. Soorya provides a bonus to its senior managers based on annual revenues, net of returns. Required: a. Identify three different revenue recognition points that Soorya could use to record revenue. b. What revenue recognition criteria should Soorya use to determine when revenue should be recorded? c. Discuss the pros and cons for 2 alternative recognition points mentioned in point (a). Remember to support your reasoning with case facts. d. Recommend the recognition point that Soorya should use in its financial statements.

Discuss where judgment needs to be applied in the residual value and relative fair value methods.

Early in 2012, Forest Ltd. signed a contract to construct a warehouse. Forest's management estimated the gross profit on the contract to be $740,000, as indicated by the following: At the end of 2012, the status of the work on the contract was as follows: How much revenue can be recognized on this contract for 2012, assuming that Forest uses the Percentage of completion basis for long-term construction contracts (round to nearest dollar) ?

In the chart below, identify the revenue recognition method that you feel is most appropriate and also explain why.

Explain whether each of the following transactions would be accounted for as a change in accounting policy, change in accounting estimate or as an error correction. Assume all transactions are material.

Apartment King (AK)is building a luxury condominium for a contract price of $68,000,000. This is estimated to be a three-year project with an estimated cost of $54,000,000. AK uses the percentage of completion method of revenue recognition, using the cost-to-cost method of estimating the percentage complete. The following is the best available information at the end of each year: Required: a. Calculate the amount of gross profit to be recognized in Year 1, Year 2, and Year 3. Show computations in tabular form provided below. b. Prepare all the journal entries required in Year 2. c. Prepare the journal entry required in Year 3 to close the accounts related to the project. d. At the end of Year 2, if the estimated cost to complete is $28 million (instead of $27 million), how much gross profit would be recognized in Year 2?

Nichols Construction Company (NCC) entered into a contract to build a shopping complex for $1,900,000. Construction commenced on July 1, 2011, with a planned completion date of December 31, 2013. A summary of the related accounting information is provided below: How much would the balance in accounts receivable be on the balance sheet of NCC at the end of 2012 if NCC uses the percentage of completion method?

Which statement is correct about multiple deliverable sales arrangements?

Simply Manufacturers has signed an order to supply 10,000 chairs at a price to be determined in the future. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

A city transit authority issues 200,000 monthly passes at $80 each for sale at various retailers. Retailers act as consignees for these passes. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

Which of the following methods of revenue recognition would be selected when a vendor has another firm acting as its selling agent?

Which statement is correct about multiple deliverable sales arrangements?

Nova Construction Company (NCC) entered into a contract to build a school for $1,800,000. Construction commenced on May 1, 2011, with a planned completion date of December 31, 2013. A summary of the related accounting information is provided below: How much gross profit would be recognized in fiscal 2011 if NCC uses the percentage of completion method?

Discuss advantages and disadvantages of using the cash basis to recognize revenues. Provide three valid reasons in your discussion.

Jennifer Furnishings frequently has sales involving "no down payment and no payments for three months." Three months after the purchase date, customers make four equal monthly payments (i.e., they make equal payments 3, 4, 5, and 6 months after purchase). Each payment is one-quarter of the purchase price. The company has a December 31 year-end. During 2012, the company made the following sales on installment plans. Jennifer makes 15% gross profit on these sales. Required: Using the installment sales method a)Determine the balance of installment accounts receivable at December 31, 2012. b)Determine the amount of deferred gross profit as at December 31, 2012. (Round to the nearest whole dollar.) c)Determine the sales revenue to recognize in 2012 for installment sales made in the year.