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CHAPTER 18
Revenue Recognition
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics Questions
Brief Exercises Exercises Problems
Concepts for Analysis
- Current Environment; 5-Step Model.
- Contracts. 7 1, 2, 3, 4 1, 2, 3 1, 2 1
- Performance Obligations 9, 10, 11 5, 19, 20
- Transaction Price 8, 12, 18 6, 7, 8 4, 6, 7 4, 5 1
- Variable Consideration; Time value; Non-Cash consideration, consideration paid to customer
- Allocate transaction price to performance obligations.
- Satisfying Performance Obligations – transfer control: Returns; repurchases; Bill and Hold; Principal-agent; consignments; Warranties; Upfront fees.
- Presentation, Contract modifications Contract Costs, Collectibility.
*9. Long-Term Contracts 34, 35, 36, 37
*10. Franchising. 38, 39 25 38, 39 12
*This material is dealt with in an Appendix to the chapter.
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives Questions
Brief Exercises Exercises Problems
Concepts for Analysis
- Understand the fundamental concepts related to revenue recognition and measurement.
- Understand and apply the five-step revenue process.
- Apply the five-step process to major revenue recognition issues.
- Describe presentation and disclosure regarding revenue.
*5. Apply the percentage-of- completion method for long-term contracts.
*6. Apply the completed-contract method for long- term contracts.
*7. Identify the proper accounting for losses on long- term contracts.
*8. Explain revenue recognition for franchises.
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item Description Level of Difficulty Time
- E18-1 Fundamentals of Revenue Recognition Simple 10- (minutes)
- E18-2 Fundamentals of Revenue Recognition Moderate 10-
- E18-3 Existence of a Contract. Moderate 10–
- E18-4 Determine Transaction Price Moderate 20-
- E18-5 Determine Transaction Price Moderate 20-
- E18-6 Determine Transaction Price Moderate 20-
- E18-7 Determine Transaction Price Moderate 15–
- E18-8 Determine Transaction Price Moderate 15–
- E18-9 Determine Transaction Price. Moderate 20–
- E18-10 Allocate Transaction Price. Complex 25-
- E18-11 Allocate Transaction Price. Moderate 20-
- E18-12 Allocate Transaction Price. Simple 10-
- E18-13 Allocate Transaction Price. Moderate 25-
- E18-14 Allocate Transaction Price. Moderate 25-
- E18-15 Allocate Transaction Price. Simple 10-
- E18-16 Sales with Returns Moderate 20-
- E18-17 Sales with Returns Moderate 15-
- E18-18 Sales with Allowances Moderate 20-
- E18-19 Sales with Returns. Moderate 15–
- E18-20 Sales with Returns. Moderate 25-
- E18-21 Sales with Returns. Moderate 15–
- E18-22 Sales with Repurchase. Moderate 20–
- E18-23 Repurchase Agreement Moderate 10–
- E18-24 Bill and Hold. Moderate 10–
- E18-25 Consignment Sales. Moderate 5–
- E18-26 Warranty Arrangement. Moderate 10–
- E18-27 Warranty Arrangement. Moderate 15–
- E18-28 Existence of a Contract. Moderate 10–
- E18-29 Contract Modification. Moderate 20–
- E18-30 Contract Modification Moderate 20–
- E18-31 Contract Costs. Simple 10–
- E18-32 Contract Costs, Collectibility. Moderate 20–
- *E18-33 Recognition of Profit on Long-Term Contracts. Moderate 20–
- *E18-34 Analysis of Percentage-of-Completion Financial Statements. Simple 10–
- *E18-35 Gross Profit on Uncompleted Contract. Moderate 10–
- *E18-36 Recognition of Revenue on Long-Term Contract and Entries. Moderate 15– - Moderate 15– Term Contracts.
- *E18-38 Franchise Entries. Moderate 20–
- *E18-39 Franchise fee, initial down payment. Moderate 15–
- P18-1 Allocate Transaction Price, Upfront Fees. Moderate 30–
- P18-2 Allocate Transaction Price, Modification of Contract. Moderate 20–
- P18- 3 Allocate Transaction Price, Discounts, Time Value. Moderate 30 – (minutes)
- P18- 4 Allocate Transaction Price, Discounts, Time Value. Complex 35 –
- P18- 5 Allocate Transaction Price, Returns, and Consignments Complex 35 –
- P18- 6 Warranty, Customer Loyalty Program. Moderate 25 –
- P18- 7 Customer Loyalty Program Moderate 30 –
- P18- 8 Time Value, Gift cards, Discounts. Moderate 30 –
- *P18- 9 Recognition of Profit on Long-Term Contract. Complex 30 –
- *P18- 10 Long-Term Contract with Interim Loss. Moderate 20 –
- *P18- 11 Long-Term Contract with an Overall Loss. Complex 40 –
- *P18- 12 Franchise Revenue. Moderate 35 –
- CA18- 1 Five-Step Revenue Process. Moderate 20 –
- CA18- 2 Satisfying Performance Obligations. Moderate 20 –
- CA18- 3 Recognition of Revenue—Theory. Moderate 25 –
- CA18- 4 Recognition of Revenue—Theory. Moderate 25 –
- CA18- 5 Discounts Complex 20 –
- CA18- 6 Recognition of Revenue from Subscriptions. Complex 35 –
- CA18- 7 Revenue Recognition—Bonus points. Moderate 25 –
- CA18- 8 Revenue Recognition—Membership Fees, Ethics. Moderate 20 –
- *CA18- 9 Long-term Contract—Percentage-of-Completion. Moderate 20 –
ANSWERS TO QUESTIONS
1. Most revenue transactions pose few problems for revenue recognition. This is because, in many cases, the transaction is initiated and completed at the same time. However, due to the complexity of some transactions, many believe the revenue recognition process is increasingly complex to manage, more prone to error, and more material to financial statements compared to any other area of financial reporting. In addition, even with the many standards, no comprehensive guidance was provided for service transactions. As a result, the FASB and IASB have indicated that the present state of reporting for revenue is unsatisfactory and the Boards issued a standard, “Revenue from Contracts with Customers”. This new standard provides a new approach for how and when companies should report revenue. The standard is comprehensive and applies to all companies. As a result, comparability and consistency in reporting revenue should be enhanced.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
2. GAAP had numerous standards related to revenue recognition, but many believed the standards were often inconsistent with one another.
LO: 1, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
3. The revenue recognition principle indicates that revenue is recognized in the accounting period when a performance obligation is satisfied. That is, a company recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it receives, or expects to receive, in exchange for those goods or services.
LO: 1, 2, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
4. The five steps in the revenue recognition process are: 1. Identify the contract(s) with customers. 2. Identify the separate performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the separate performance obligations. 5. Recognize revenue when each performance obligation is satisfied.
LO: 1, 3, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
5. Change in control is the deciding factor in determining when a performance obligation is satisfied. Control is transferred when the customer has the ability to direct the use of and obtain substantially all the remaining benefits from the asset or service. Control is also indicated if the customer has the ability to prevent other companies from directing the use of, or receiving the benefit, from the asset or service.
LO: 1, 2, Bloom: K, Difficulty: Moderate, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
6. Revenues are recognized generally as follows:
(a) Revenue from selling products—date of delivery to customers. (b) Revenue from services performed—when the services have been performed (performance obligation satisfied). (c) Revenue from permitting others to use company assets—as time passes or as the assets are used. (d) Revenue from disposing of assets other than products—at the date of sale.
LO: 2, Bloom: C, Difficulty: Moderate, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
Questions Chapter 18 (Continued)
12. The transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring goods and services. The transaction price in a contract is often easily obtained because the customer agrees to pay a fixed amount to the company over a short period of time. In other contracts, companies must consider the following factors (1) Variable consideration, (2) Time value of money, (3) Noncash consideration, and (4) Consideration paid or payable to customer.
LO: 2, Bloom: K, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
13. Variable consideration (when the price of a good or service is dependent on future events), includes such elements as price or volume discounts, rebates, credits, performance bonuses, or royalties. A company estimates the amount of variable consideration it will receive from the contract to determine the amount of revenue to recognize. Companies use either (1) the expected value, which is a probability weighted amount, or (2) the most likely amount in a range of possible amounts to estimate variable consideration. Companies select among these two methods based on which approach better predicts the amount of consideration to which a company is entitled.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
14. The transaction price should include management’s estimate of the amount of consideration to which the entity will be entitled. Given the multiple outcomes and probabilities available based on prior experience, the probability-weighted method is the most predictive approach for estimating the variable consideration. In this situation: 25% chance of $421,000 if by February 1 (25% X $421,000) = $ 105, 25% chance of $414,000 if by February 8 (25% X $414,000) = 103, 25% chance of $407,000 if by February 15 (25% X $407,000) = 101, 25% chance of $400,000 if after February 15 (25% X $400,000) = 100, $ 410, Thus, the total transaction price is $410,500 based on the probability-weighted estimate.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
15. Allee should only allocate variable consideration to the performance obligation if it is reasonably assured that it will be entitled to that amount. In this case, it does not have experience with similar contracts and is not able to estimate the cumulative amount of revenue. Allee should not recognize revenue at this time. Allee is constrained in recognizing variable consideration as there might be a significant reversal of revenue previously recognized.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
16. In measuring the transaction price, companies make the following adjustment for:
(a) Time value of money - When a sales transaction involves a significant financing component (that is, interest is accrued on consideration to be paid over time), the fair value (transaction price) is determined either by measuring the consideration received or by discounting the payment using an imputed interest rate. The imputed interest rate is the more clearly determinable of either (1) the prevailing rate for a similar instrument of an issuer with a similar credit rating, or (2) a rate of interest that discounts the nominal amount of the instrument to the current sales price of the goods or services. The company will report the effects of the financing either as interest expense or interest revenue.
Questions Chapter 18 (Continued)
(b) When noncash consideration is involved, revenue is generally recognized on the basis of the fair value of what is received. If the fair value cannot be determined, then the company should estimate the selling price of the goods delivered or services performed and recognize this amount as revenue. In addition, companies sometimes receive contributions (donations, gifts). A contribution is often some type of asset (such as securities, land, buildings or use of facilities) but it could be the forgiveness of debt. Similarly, this consideration should be recognized as revenue based on the fair value of the consideration received.
LO: 2, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
17. Any discounts or volume rebates should reduce consideration received and reduce revenue recognized.
LO: 2, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
18. If an allocation of transaction price to various performance obligations is needed, the allocation is based on what the company could sell the good or service on a standalone basis (referred to as the standalone selling price). If this information is not available, companies should use their best estimate of what the good or service might sell for as a standalone unit. The three approaches for estimating standalone selling price are (1) Adjusted market assessment approach; (2) Expected cost plus a margin approach, and (3) Residual approach.
LO: 2, Bloom: K, Difficulty: Moderate, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
19. Since each element sells separately and has a separate standalone selling price, the equipment, installation, and training are three separate performance obligations. The total revenue of $80,000 should be allocated to the three performance obligations based on their relative standalone selling price. Thus, the total estimated selling price is $100,000 ($90, + $7,000 + $3,000). The allocation is as follows. Equipment ($90,000 ÷ $100,000) X $80,000 = $72,000. Installation ($7,000 ÷ $100,000) X $80,000 = $5,600. Training ($3,000 ÷ $100,000) X $80,000 = $2,400.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
20. A company satisfies its performance obligation when the customer obtains control of the good or service. Indications that the customer has obtained control are:
- The company has a right to payment for the asset.
- The company transferred legal title to the asset.
- The company transferred physical possession of the asset.
- The customer has the significant risks and rewards of ownership.
- The customer has accepted the asset.
LO: 2, Bloom: K, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
Questions Chapter 18 (Continued)
25. Bill-and-hold sales result when the buyer is not yet ready to take delivery but the buyer takes title and accepts billing. Revenue is recognized at the time title passes, if all of the following criteria are met and the control provisions related to revenue recognition are met:
(a) The reason for the bill-and-hold arrangement must be substantive. (b) The product must be identified separately as belonging to the customer. (c) The product currently must be ready for physical transfer to the customer. (d) The seller cannot have the ability to use the product or to direct it to another customer.
LO: 3, Bloom: K, Difficulty: Moderate, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
26. In a principal-agent relationship, the principal’s performance obligation is to provide goods or perform services for a customer. The agent’s performance obligation is to arrange for the principal to provide these goods or services to a customer. In a principal-agent relationship, amounts collected on behalf of the principal are not revenue of the agent. The revenue for the agent is the amount of the commission it receives (usually a percentage of the selling price or total revenue).
LO: 3, Bloom: K, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
27. A sale on consignment is the shipment of merchandise from a manufacturer (or wholesaler) to a dealer (or retailer) with title to the goods and the risk of sale being retained by the manufacturer who becomes the consignor. The consignee (dealer) is expected to exercise due diligence in caring for the merchandise and the dealer has full right to return the merchandise. The consignee receives a commission upon the sale and remits the balance of the cash collected to the consignor. The consignor recognizes a sale and the related revenue upon notification of sale from the consignee and receipt of the cash. The consigned goods are carried in the consignor’s inventory, not the consignee’s, until sold.
LO: 3, Bloom: K, Difficulty: Simple, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
28. The two types of warranties are:
a. Warranties that the product meets agreed-upon specifications in the contract at the time the product is sold. This type of warranty is included in the sale price of the company’s product and is often referred to as an assurance-type warranty. b. Warranties that provide an additional service beyond the assurance-type warranty. This warranty is not included in the sale price of the product and is referred to as a service-type warranty. Companies do not record a separate performance obligation for assurance-type warranties. These types of warranties are nothing more than a quality guarantee that the good or service is free from defects at the point of sale. These types of obligations should be expensed in the period the goods are provided or services performed. In addition, the company should record a warranty liability. The estimated amount of the liability includes all the costs that the company will incur after sale and that are incident to the correction of defects or deficiencies required under the warranty provisions. Warranties that provide the customer a service beyond fixing defects that existed at the time of sale represent a separate service and are an additional performance obligation. As a result, companies should allocate a portion of the transaction price to this performance obligation. The company recognizes revenue in the period that the service type warranty is in effect.
LO: 3, Bloom: K, Difficulty: Moderate, Time: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
Questions Chapter 18 (Continued)
29. The total transaction price is $420 [$300 + ($5 X 24)]. That is, Campus Cellular is providing a service in the second year without receiving an upfront fee. Thus the upfront fee should be recognized as revenue over two periods. As a result, Campus Cellular recognizes revenue of $210 ($420 ÷ 2) in both year 1 and year 2.
LO: 3, Bloom: K, Difficulty: Moderate, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
30. Under the asset-liability model for recognizing revenue, companies recognize assets and liabilities according to the definitions of assets and liabilities in a revenue arrangement. For example, when a company has a right to consideration for meeting a performance obligation, it has a right to consideration from the customer and therefore has a contract asset. A contract liability is a company’s obligation to transfer goods or services to a customer for which the company has received consideration from the customer. Thus, if the customer performs first, by prepaying for the product, then the seller has a contract liability. Companies must present these contract assets and contract liabilities on their balance sheet. Contract assets are of two types: (a) Unconditional rights to receive consideration because the company has satisfied its performance obligation with the customer, and (b) Conditional rights to receive consideration because the company has satisfied one performance obligation, but must satisfy another performance obligation in the contract before it can bill the customer. Companies should report unconditional rights to receive consideration as a receivable on the balance sheet. Conditional rights on the balance sheet (e.g., unbilled receivables) should be reported separately as contract assets.
LO: 4, Bloom: K, Difficulty: Simple, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
31. A contract modification occurs if a company changes the contract terms during the term of the contract. When a contract is modified, the company must determine whether a new performance obligation has occurred or whether it is a modification of the existing performance obligation. If it is a modification of an existing performance obligation, then the change is generally reported prospectively or as a cumulative effect adjustment to revenue, depending on the circumstances. If the modification results in a separate performance obligation, then this performance obligation should be accounted for separately.
LO: 4, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
32. (a) Companies divide fulfillment costs (contract acquisition costs) into two categories: (1) those that give rise to an asset, and (2) those that are expensed as incurred. Companies recognize an asset for the incremental costs, if these costs are incurred to obtain a contract with a customer. In other words, incremental costs are costs that a company would not incur if the contract had not been obtained (for example, selling commissions). Other examples are: (a) Direct labor, direct materials, and allocation of costs that relate directly to the contract (such as costs of contract management and supervision, insurance, and depreciation of tools and equipment), and (b) Costs that generate or enhance resources of the company that will be used in satisfying performance obligations in the future. Costs include intangible design or engineering costs that will continue to benefit in the future. Companies capitalize costs that are direct, incremental, and recoverable (assuming that the contract period is more than one year).
Questions Chapter 18 (Continued)
Therefore, if criterion 1 or 2 is met, then a company recognizes revenue over time if it can reasonably estimate its progress toward satisfaction of the performance obligations. That is, it recognizes revenues and gross profits each period based upon the progress of the construction—referred to as the percentage-of-completion method. The rationale for using percentage-of-completion accounting is that under most of these contracts the buyer and seller have enforceable rights. The buyer has the legal right to require specific performance on the contract. The seller has the right to require progress payments that provide evidence of the buyer’s ownership interest. As a result, a continuous sale occurs as the work progresses. Companies should recognize revenue according to that progression.
The right to payment for performance completed to date does not need to be for a fixed amount. However, the company must be entitled to an amount that would compensate the company for performance completed to date (even if the customer can terminate the contract for reasons other than the company’s failure to perform as promised). Alternatively, if the criteria for recognition over time are not met (e.g., the company does not have a right to payment for work completed to date), the company recognizes revenues and gross profit at a point in time, that is, when the contract is completed. This approach is referred to as the completed-contract method.
LO: 5, 6, Bloom: K, Difficulty: Moderate, Time: 5-8, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*35. Under the percentage-of-completion method, income is reported to reflect more accurately the production effort. Income is recognized periodically on the basis of the percentage of the job completed rather than only when the entire job is completed. The principal disadvantage of the completed-contract method is that it may lead to distortion of earnings because no attempt is made to reflect current performance when the period of the contract extends into more than one accounting period.
The percentage-of-completion method recognizes revenues, costs, and gross profit as a company makes progress toward completion on a long-term contract. To defer recognition of these items until completion of the entire contract is to misrepresent the efforts (costs) and accomplishments (revenues) of the accounting periods during the contract.
LO: 5, 6, Bloom: K, Difficulty: Simple, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*36. The methods used to determine the extent of progress toward completion are the cost-to-cost method and units-of-delivery method. Costs incurred and labor hours worked are examples of input measures, while tons produced, stories of a building completed, and miles of highway completed are examples of output measures.
LO: 7, Bloom: C, Difficulty: Moderate, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*37. The two types of losses that can become evident in accounting for long-term contracts are:
(1) A current period loss involved in a contract that, upon completion, is expected to produce a profit. (2) A loss related to an unprofitable contract.
The first type of loss is actually an adjustment in the current period of gross profit recognized on the contract in prior periods. It arises when, during construction, there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract. Under the percentage-of-completion method, the estimated cost increase necessitates a current period adjustment of previously recognized gross profit; the adjustment results in recording a current period loss. No adjustment is necessary under the completed-contract method because gross profit is only recognized upon completion of the contract.
Questions Chapter 18 (Continued)
Cost estimates at the end of the current period may indicate that a loss will result upon com- pletion of the entire contract. Under both percentage-of-completion and completed contract methods, the entire loss must be recognized in the current period.
LO: 7, Bloom: K, Difficulty: Moderate, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*38. It is improper to recognize the entire franchise fee as revenue at the date of sale when many of the services of the franchisor are yet to be performed.
LO: 8, Bloom: K, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
- 39. Continuing franchise fees should be reported as revenue when the performance obligations related to those fees have been satisfied by the franchisor. These revenues are generally recognized over time as the related product and services are provided. Continuing product sales would be accounted for in the same manner as would any other product sales.
LO: 8, Bloom: K, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 18-2 (continued)
The journal entry to record the sale and related cost of goods sold is as
follows.
June 15, 2017
Accounts Receivable ....................................................... 2,
Sales Revenue .......................................................... 2,
Cost of Goods Sold .......................................................... 1,
Inventory ................................................................... 1,
After receiving the cash payment on July 15, 2017, Cosmo makes the
following entry.
July 15, 2017
Cash .................................................................................. 2,
Accounts Receivable ................................................ 2,
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 18-
There is one performance obligation in this situation which is the providing
of the licensed software and custom support together. Both the software
license and the custom customer support services are distinct, but they are
not distinct within the contract. It appears that Hillside’s objective is to
transfer a combined product. That is, the customer support services is
highly interrelated and interdependent with the licensed software and
therefore these customer support services should be combined with the
licensed software in determining the performance obligation.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 18-
Three performance obligations exist in this contract—manufacture of the 3-
D printer, installation services and the maintenance services. Destin does
clearly have a performance obligation for the manufacture of the 3-D
printer. Destin may or may not have a performance obligation for the
installation of the 3-D printer as installation can be done by another
company. In other words, there is no indication that customization is
required by Destin. Also Destin may or may not have a separate
performance obligation for the maintenance agreement as it can be
provided by other companies. In summary, there are three performance
obligations related to this contract some of which may end up being
performed by companies other than Destin.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
BRIEF EXERCISE 18-
Ismail accounts for the bundle of goods and services as a single
performance obligation because the goods or services in the bundle are
highly interrelated. Ismail also provides a significant service by integrating
the goods or services into the combined item (that is, the hospital) for
which the customer has contracted. In addition, the goods or services are
significantly modified and customized to fulfill the contract. In other words,
the company’s objective is to transfer a combined item. Revenue for the
performance obligation would be recognized over time by selecting an
appropriate measure of progress toward satisfaction of the performance
obligation.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
BRIEF EXERCISE 18-
January 2, 2017
Notes Receivable...................................................... 11,
Discount on Notes Receivable......................... 1,
Sales Revenue .................................................. 10,
Cost of Goods Sold ................................................. 6,
Inventory .......................................................... 6,
Revenue Recognized in 2017
Sales revenue ........................................................... $ 10,
Interest revenue ($11,000 – $10,000)....................... 1,
Total revenue .................................................... $ 11,
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 18-
Parnevik should record revenue of $660,000 on March 1, 2017, which is the
fair value of the inventory in this case. Parnevik is also financing this
purchase and records interest revenue on the note over the 5-year period.
In this case, the interest rate is imputed to be 10% ([$660,000/$1,062,937] =
.6209, which is the PV of $1 factor for n = 5, I = 10%). Parnevik records
interest revenue of $55,000 (10% X $660,000 X 10/12) at December 31, 2017.
(a) The journal entries to record Parnevik’s sale to Goosen Inc. and
related cost of goods sold is as follows.
March 1, 2017
Notes Receivable .............................................. 1,062,
Discount on Notes Receivable ................. 402,
Sales Revenue ........................................... 660,
Cost of Goods Sold .................................... ….. 400,
Inventory .................................................... 400,
BRIEF EXERCISE 18-10 (continued)
(b) Parnevik makes the following entry to record interest revenue for 2017.
December 31, 2017
Discount on Notes Receivable ........................ 55,
Interest Revenue
(10% X $660,000 X 10/12) ...................... 55,
As a practical expedient, companies are not required to reflect the time
value of money to determine the transaction price if the time period for
payment is less than a year.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
BRIEF EXERCISE 18-
January income ........................................................ $ 0
February income ($4,000 – $3,000) X 50% .............. $
March income ($4,000 – $3,000) X 30%) .................. $
April income ($4,000 – $3,000) X 20%) .................... $
LO: 2, 3, Bloom: AP, Difficulty: Moderate, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 18-
Manual reduces revenue by $6,600 ($110,000 X .06) because it is probable
that it will provide rebates amounting to 6%. As a result, Manual recognizes
revenue of $103,400 in the first quarter of the year.
LO: 2, 3, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 18-
July 10, 2017
Accounts Receivable .............................................. 700,
Sales Revenue ................................................. 700,
Cost of Goods Sold ................................................. 560,
Inventory .......................................................... 560,
