Question: A construction company entered into a fixed-

> Prepare a time diagram for the present value of a four-year ordinary annuity of $200. Assume an interest rate of 10% per year.

> Fran Smith has two investment opportunities. The interest rate for both investments is 8%. Interest on the first investment will compound annually while interest on the second will compound quarterly. Which investment opportunity should Fran choose? Why?

> On July 1, 2018, the Foster Company sold inventory to the Slate Corporation for $300,000. Terms of the sale called for a down payment of $75,000 and three annual installments of $75,000 due on each July 1, beginning July 1, 2019. Each installment also wi

> Charter Corporation, which began business in 2018, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales during 2018 and 2019: Required: Prepare summary journal entries for 2

> Charter Corporation, which began business in 2018, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales made during 2018 and 2019: Required: 1. How much gross profit should

> In 2018, Long Construction Corporation began construction work under a three-year contract. The contract price is $1,600,000. Long recognizes revenue over time according to percentage of completion for financial reporting purposes. The financial statemen

> Brady Construction Company contracted to build an apartment complex for a price of $5,000,000. Construction began in 2018 and was completed in 2020. The following is a series of independent situations, numbered 1 through 6, involving differing costs for

> On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2018, costs of $2,000,000 were incurred, with estimated costs of $4,000,000 yet to be incurred. Billings o

> On February 1, 2018, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2018, costs of $2,000,000 were incurred with estimated costs of $4,000,000 yet to be incurred. Billings of

> On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $220 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs inc

> Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,000,000. The project began in 2018 and was completed in 2019. Data relating to the contract are summarized below: Required: 1. Compute the amount of revenue and

> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Required: Determine the specific citation for accounting for each of the following items: 1. What disclosures are required with respect to performance obligations that

> Assume McDonald’s enters into a contract to sell Billy Bear dolls for Toys4U Stores. Based on the contract, McDonald’s displays the dolls in selected stores. Toys4U is not paid until the dolls have been sold by McDonald’s, and unsold dolls are returned t

> Monitor Muffler sells franchise arrangements throughout the United States and Canada. Under a franchise agreement, Monitor receives $600,000 in exchange for satisfying the following separate performance obligations: (1) Franchisees have a five-year right

> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Required: Determine the specific citation for accounting for each of the following items: 1. What alternative approaches can be used to estimate variable consideration

> Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home

> Furtastic manufactures imitation fur garments. On June 1, 2018, Furtastic made a sale to Willett’s Department Store under terms that require Willett to pay $150,000 to Furtastic on June 30, 2018. In a separate transaction on June 15, 2018, Furtastic purc

> Saar Associates sells two licenses to Kim & Company on September 1, 2018. First, in exchange for $100,000, Saar provides Kim with a copy of its proprietary investment management software, which Saar does not anticipate updating and which Kim can use perm

> O’Hara Associates sells golf clubs, and with each sale of a full set of clubs provides complementary club-fitting services. A full set of clubs with the fitting services sells for $1,500. O’Hara sells the same clubs without the fitting service for $1,400

> O’Hara Associates sells golf clubs, and with each sale of a full set of clubs provides complementary club fitting services. A full set of clubs with the fitting services sells for $1,500. O’Hara estimates that it incurs $60 of staff compensation and othe

> O’Hara Associates sells golf clubs, and with each sale of a full set of clubs provides complementary club-fitting services. A full set of clubs with the fitting services sells for $1,500. Similar club-fitting services are offered by other vendors for $11

> Lewis Co. sold merchandise to AdCo for $60,000 and received $60,000 for that sale one month later. One week prior to receiving payment from AdCo, Lewis made a $10,000 payment to AdCo for advertising services that have a fair value of $7,500. After accoun

> Assume that Amazon.com sells the MacBook Pro, a computer 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 us

> An article published in Accounting Horizons describes various techniques that companies use to manage their earnings. Required: In your library, on the Internet, or from some other source, locate the article “How Are Earnings Managed? Evidence from Audi

> Finerly Corporation sells cosmetics through a network of independent distributors. Finerly shipped cosmetics to its distributors and is considering whether it should record $300,000 of revenue upon shipment of a new line of cosmetics. Finerly expects the

> In January 2018, Continental Fund Services, Inc., enters into a one-year contract with a client to provide investment advisory services. The company will receive a management fee, prepaid at the beginning of the contract, that is calculated as 1% of the

> Leo Consulting enters into a contract with Highgate University to restructure Highgate’s processes for purchasing goods from suppliers. The contract states that Leo will earn a fixed fee of $25,000 and earn an additional $10,000 if Highgate achieves $100

> Aria Perfume, Inc., sold 3,210 boxes of white musk soap during January of 2018 at the price of $90 per box. The company offers a full refund to unsatisfied customers for any product returned within 30 days from the date of purchase. Based on historical e

> On January 1, 2018, Lego Construction Company signed a contract to build a custom garage for a customer and received $10,000 in advance for the job. The new garage will be built on the customer’s land. To complete this project, Lego must first build a co

> Precision Equipment, Inc., specializes in designing and installing customized manufacturing equipment. On February 1, 2018, it signs a contract to design a fully automated wristwatch assembly line for $2 million, which will be settled in cash upon comple

> McAfee sells a subscription to its antivirus software along with a subscription renewal option that allows renewal at half the prevailing price for a new subscription. How many performance obligations exist in this contract?

> Assume the same facts as in BE 5–8 but that customers pay 20% less for the extended warranty if they buy it at the same time they buy a Tornado. How many performance obligations exist in the implied contract for the purchase of a vacuum cleaner? In BE 5

> Vroom Vacuums sells the Tornado vacuum cleaner. Each Tornado has a one-year warranty that covers any product defects. When customers purchase a Tornado, they also have the option to purchase an extended three-year warranty that covers any breakage or mai

> eLean is an online fitness community, offering access to workout routines, nutrition advice, and eLean coaches. Customers pay a $50 fee to become registered on the website, and then pay $5 per month for access to all eLean services. How many performance

> EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange C

> Tulane Tires wrote a contract for a $100,000 sale to the new Garden District Tour Company. Tulane only anticipates a slightly greater than fifty percent chance that Garden will be able to pay the amounts that Tulane is entitled to receive under the contr

> Sarjit Systems sold software to a customer for $80,000. As part of the contract, Sarjit promises to provide “free” technical support over the next six months. Sarjit sells the same software without technical support for $70,000 and a stand-alone six-mont

> On May 1, 2018,Varga Tech Services signed a $6,000 consulting contract with Shaffer Holdings. The contract requires Varga to provide computer technology support services whenever requested over the period from May 1, 2018, to April 30, 2019, with Shaffer

> Estate Construction is constructing a building for CyberB, an online retailing company. Under the construction agreement, if for any reason Estate can’t complete construction, CyberB would own the partially completed building and could hire another const

> On July 1, 2018, Apache Company, a real estate developer, sold a parcel of land to a construction company for $3,000,000. The book value of the land on Apache’s books was $1,200,000. Terms of the sale required a down payment of $150,000 and 19 annual pay

> Refer to the situation described in BE 5–35. What should be the balance in the deferred gross profit account at the end of 2019 applying the installment sales method? In BE 5–35 On July 1, 2018, Apache Company sold a parcel of undeveloped land to a cons

> On July 1, 2018, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000. The book value of the land on Apache’s books was $1,200,000. Terms of the sale required a down payment of $150,000 and 19 annual payments of $150,

> Refer to the situation described in BE 5–31. Assume that the building was completed during the second year, and construction costs incurred during the second year were $10 million. How much revenue and gross profit or loss will the company recognize in t

> Holt Industries received a $2,000 prepayment from the Ramirez Company for the sale of new office furniture. Holt will bill Ramirez an additional $3,000 upon delivery of the furniture to Ramirez. Upon receipt of the $2,000 prepayment, how much should Holt

> TopChop sells hairstyling franchises. TopChop receives $50,000 from a new franchisee for providing initial training, equipment and furnishings that have a stand-alone selling price of $50,000. TopChop also receives $30,000 per year for use of the TopChop

> ThyssenKrupp AG, headquartered in Germany, is one of the world’s largest technology companies, with almost 160,000 employees worldwide and primary segments in steel, technology, and capital goods and services. Required: 1. Access ThyssenKrupp’s most rec

> Collins, Inc., entered into a 10-year franchise agreement with an individual. For an initial franchise fee of $40,000, Collins agrees to assist in design and construction of the franchise location and in all other necessary start-up activities. Also, in

> Refer to the situation described in BE 5–39. How would your answer change if Orange reported under IFRS? In BE 5–39 Orange, Inc., sells a LearnIt-Plus software package that consists of their normal LearnIt math tutorial program along with a one-year sub

> Orange, Inc., sells a LearnIt-Plus software package that consists of their normal LearnIt math tutorial program along with a one-year subscription to the online LearnIt Office Hours virtual classroom. LearnIt-Plus retails for $200. When sold separately,

> Refer to the situation described in BE 5–35. How much gross profit will Apache recognize in both 2018 and 2019 applying the cost recovery method? In BE 5–35 On July 1, 2018, Apache Company sold a parcel of undeveloped land to a construction company for

> Briefly describe the guidelines provided by GAAP for the recognition of revenue by a franchisor for an initial franchise fee.

> Briefly describe how IFRS guidelines for recognizing revenue from multiple-deliverable arrangements differ from U.S. GAAP guidelines.

> Briefly describe the guidelines for recognizing revenue from the sale of software and other multiple deliverable arrangements.

> When percentage-of-completion accounting is not appropriate, U.S. GAAP requires the use of the completed contract method, while IFRS requires the use of the cost recovery method. Explain how the two methods affect recognition of revenue, cost of construc

> Refer to the situation described in BE 5–31. Assume that, during the first year the company billed its customer $7 million, of which $5 million was collected before year-end. What would appear in the year-end balance sheet related to this contract? In B

> Vodafone Group, Plc, headquartered in the United Kingdom, is one of the world’s largest telecommunications companies. Excerpts from the revenue recognition disclosure included in its 2015 annual report are reproduced below. Note A1: Significant accountin

> A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million. The company

> As of December 31, 2018, Cady Construction has one construction job for which the construction in progress (CIP) account has a balance of $20,000 and the billings on construction contract account has a balance of $14,000. Cady has another construction jo

> Explain why, in most cases, a seller recognizes revenue when it delivers its product rather than when it produces the product.

> GoodBuy sells gift cards redeemable for GoodBuy products either in store or online. During 2018, GoodBuy sold $1,000,000 of gift cards, and $840,000 of the gift cards were redeemed for products. As of December 31, 2018, $30,000 of the remaining gift card

> Assume the same facts as in BE 5-23 . How much revenue will Saar recognize in 2018 under this arrangement if Saar reports under IFRS? In BE 5-23 Assume the same facts as in BE 5-22 except that the trade name “Saar Associates” is not well known in the ma

> Periodic billings to the customer for a long-term construction contract are recorded as billings on construction contract. How is this account reported in the balance sheet?

> Explain how to account for revenue on a long-term contract over time as opposed to at a point in time. Under what circumstances revenue should be recognized at the point in time a contract is completed?

> Explain the difference between contract assets, contract liabilities, and accounts receivable.

> Assume the same facts as in BE 5-22 except that the trade name “Saar Associates” is not well known in the marketplace and the owner provides no advertising or other benefits to a licensee of the Saar Associates trade name during the license period. How m

> When does a company recognize revenue for a sale of a gift card?

> On October 1, 2018, the Marshall Company sold a large piece of machinery to the Hammond Construction Company for $80,000. The cost of the machine was $40,000. Hammond made a down payment of $10,000 and agreed to pay the remaining balance in seven equal m

> When does a consignor typically recognize revenue for a consignment sale?

> How might a license for symbolic intellectual property be treated differently under IFRS as compared to U.S. GAAP?

> When does a company typically recognize revenue for a bill-and-hold sale?

> In a franchise arrangement, what are a franchisor’s typical performance obligations?

> When is revenue recognized with respect to licenses?

> What are three methods for estimating stand-alone selling prices of goods and services that normally are not sold separately?

> When should a seller view a payment to its customer as a refund of part of the price paid by the customer for the seller’s products or services?

> Under what circumstances should sellers consider the time value of money when recognizing revenue?

> What is the difference between a principal and an agent for determining the amount of revenue to recognize?

> Is a customer’s right to return merchandise a performance obligation of the seller? How should sellers account for a right of return?

> Willingham Construction is in the business of building high-priced, custom, single-family homes. The company, headquartered in Anaheim, California, operates throughout the Southern California area. The construction period for the average home built by Wi

> How are sellers constrained from recognizing variable consideration, and under what circumstances does the constraint apply?

> Is variable consideration included in the calculation of a contract’s transaction price? If so, how is the amount of variable consideration estimated?

> When a contract includes an option to buy additional goods or services, when does that option give rise to a performance obligation?

> How might the definition of “probable” affect determining whether a contract exists under IFRS as compared to U.S. GAAP?

> What must a contract include for the contract to exist for purposes of revenue recognition?

> How does a seller allocate a transaction price to a contract’s performance obligations?

> What characteristics make a good or service a performance obligation?

> We recognize service revenue either at one point in time or over a period of time. Explain the rationale for recognizing service revenue using these two approaches.

> What criteria determine whether a company can recognize revenue over time?

> What indicators suggest that a performance obligation has been satisfied at a single point in time?

> Two accounting students were discussing the timing of revenue recognition for long-term construction contracts. The discussion focused on which method was most like the typical revenue recognition method of recognizing revenue at the point of product del

> What are the five key steps a company follows to apply the core revenue recognition principle?

> Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended January 30, 2016, are available in Connect. This material also is available under the Investor Relations li

> Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2015, are available in Connect. This m

> The birth of the Internet in the 1990s led to the creation of a new industry of online retailers such as Amazon, Overstock.com, and PCM, Inc., Many of these companies often act as intermediaries between the manufacturer and the customer without ever taki

> EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange C

> AuctionCo.com sells used products collected from different suppliers. Assume a customer purchases a used bicycle through AuctionCo.com for $300. AuctionCo.com agrees to pay the supplier $200 for the bicycle. The bicycle will be shipped to the customer by

> Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2018, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the pro

> [This is a variation of P 5–10 modified to focus on revenue recognition upon project completion.] Required: Complete the requirements of P 5–10 assuming that Westgate Construction’s contract with San

> In 2018, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2020. Information related to the contract is as follows: Westgate recognizes revenue over time acco

> Tran Technologies licenses its functional intellectual property to Lyon Industries. Terms of the arrangement require Lyon to pay Tran $500,000 on April 1, 2018, when Lyon first obtains access to Tran’s intellectual property, and then to pay Tran a royalt

> Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $60,000 at the beginning of each month. A