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. At the end of the contract, Velocity either will give Burger Boy a refund of $20,000 or will be entitled to an additional $20,000 bonus, depending on whether sales at Burger Boy at yearend have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $20,000 bonus and calculates the contract price based on the expected value of future payments to be received. After four months, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $20,000. Required: 1. Prepare the journal entry to record revenue each month for the first four months of the contract. 2. Prepare the journal entry that the Velocity Company would record after four months to recognize the change in estimate associated with the reduced likelihood that the $20,000 bonus will be received. 3. Prepare the journal entry to record the revenue each month for the second four months of the contract. 4. Prepare the journal entry after eight months to record receipt of the $20,000 cash bonus.
> 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
> Assume the same facts as P 5–6. Required: 1. Assume that Super Rise anticipates it will earn the performance bonus, but is highly uncertain about its estimate given unfamiliarity with the building and uncertainty about its access to the elevators and rel
> Since 1970, Super Rise, Inc., has provided maintenance services for elevators. On January 1, 2018, Super Rise obtains a contract to maintain an elevator in a 90-story building in New York City for 10 months and receives a fixed payment of $80,000. The co
> On January 1, Revis Consulting entered into a contract to complete a cost reduction program for Green Financial over a six-month period. Revis will receive $20,000 from Green at the end of each month. If total cost savings reach a specific target, Revis
> Supply Club, Inc., sells a variety of paper products, office supplies, and other products used by businesses and individual consumers. During July 2018 it started a loyalty program through which qualifying customers can accumulate points and redeem those
> Assume the same facts as in P5–2, except that customers must pay $75 to purchase the extended warranty if they don’t purchase it with the $50 coupon that was included in the Protab Package. Creative estimates that 40%
> Assume that Pfizer, a large research-based pharmaceutical company, enters into a contract with a start-up biotechnology company called HealthPro and promises to: 1. Grant HealthPro the exclusive rights to use Pfizer’s Technology A for the life of its pat
> Creative Computing sells a tablet computer called the Protab. The $780 sales price of a Protab Package includes the following: • One Protab computer. • A 6-month limited warranty. This warranty guarantees that Creative
> Fit & Slim (F&S) is a health club that offers members various gym services. Required: 1. Assume F&S offers a deal whereby enrolling in a new membership for $700 provides a year of unlimited access to facilities and also entitles the member to receive a
> Olive Branch Restaurant Corporation sells franchises throughout the western states. On January 30, 2018, the company entered into the following franchise agreement with Jim and Tammy Masters: 1. The initial franchise fee is $1.2 million. $200,000 is paya
> [This is a variation of P 5–10 modified to focus on IFRS.] Required: Complete the requirements of P 5–10 assuming that Westgate Construction reports under IFRS and concludes that the percentage-of-completion method is
> Mulcahey Builders (MB) remodels office buildings in low-income urban areas that are undergoing economic revitalization. MB typically accepts a 25% down payment when they complete a job and a note that requires that the remainder be paid in three equal in
> On August 31, 2018, the Silva Company sold merchandise to the Bendix Corporation for $500,000. Terms of the sale called for a down payment of $100,000 and four annual installments of $100,000 due on each August 31, beginning August 31, 2019. Each install
> Ajax Company appropriately accounts for certain sales using the installment sales method. The perpetual inventory system is used. Information related to installment sales for 2018 and 2019 is as follows: Required: 1. Calculate the amount of gross profi
> Reagan Corporation computed income from continuing operations before income taxes of $4,200,000 for 2018. The following material items have not yet been considered in the computation of income: 1. The company sold equipment and recognized a gain of $50,0
> Citation Builders, Inc., builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging from 10–20 homes and are typically so
> Assume the same facts as in E 5–10. In E 5–10 Rocky Guide Service provides guided 1–5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $1,000 per tour day, and shor
> Consider each of the following scenarios separately: Scenario 1: Crown Construction Company entered into a contract with Star Hotel for building a highly sophisticated, customized conference room to be completed for a fixed price of $400,000. Nonrefundab
> Rocky Guide Service provides guided 1–5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $1,000 per tour day, and shortly after the end of each month Rocky learns wh
> Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that it will receive a flat fee of $50,000 and an additional $20,000 if Bran reaches a prespecified target amount
> On May 1, 2018, Meta Computer, Inc., enters into a contract to sell 5,000 units of Comfort Office Keyboard to one of its clients, Bionics, Inc., at a fixed price of $95,000, to be settled by a cash payment on May 1. Delivery is scheduled for June 1, 2018
> A New York City daily newspaper called “Manhattan Today” charges an annual subscription fee of $135. Customers prepay their subscriptions and receive 260 issues over the year. To attract more subscribers, the company offered new subscribers the ability t
> Clarks Inc., a shoe retailer, sells boots in different styles. In early November the company starts selling “Sun-Boots” to customers for $70 per pair. When a customer purchases a pair of SunBoots, Clarks also gives the customer a 30% discount coupon for
> On March 1, 2018, Gold Examiner receives $147,000 from a local bank and promises to deliver 100 units of certified 1-oz. gold bars on a future date. The contract states that ownership passes to the bank when Gold Examiner delivers the products to Brink’s
> Access the FASB Standards Codification at the FASB website (www.fasb.org). Required: Determine the specific citation for accounting for each of the following items: 1. On what basis is a contract’s transaction price allocated to its performance obligati
> 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
> Ski West, Inc., operates a downhill ski area near Lake Tahoe, California. An all-day adult lift ticket can be purchased for $85. Adult customers also can purchase a season pass that entitles the pass holder to ski any day during the season, which typical
> Access the FASB’s 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 are the five key steps to applying the revenue recognition principl
> Horizon Corporation manufactures personal computers. The company began operations in 2013 and reported profits for the years 2013 through 2016. Due primarily to increased competition and price slashing in the industry, 2017’s income statement reported a
> On October 1, 2018, the Submarine Sandwich Company entered into a franchise agreement with an individual. In exchange for an initial franchise fee of $300,000, Submarine will provide initial services to the franchisee to include assistance in design and
> Assume the same facts as in E 5–33, but that Richardson Systems reports under IFRS. How would your answers change? (Assume for requirement 2 that separate shipment is part of the normal course of Richardson’s operations, and successful customer installat
> Richardson Systems sells integrated bottling manufacturing systems that involve a conveyer, a labeler, a filler, and a capper. All of this equipment is sold separately by other vendors, and the fair values of the separate equipment are as follows: Convey
> Easywrite Software Company shipped software to a customer on July 1, 2018. The arrangement with the customer also requires the company to provide technical support over the next 12 months and to ship an expected software upgrade on January 1, 2019. The t
> Assume the same information as in E 5–18. In E 5–18 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 expect
> 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: Circumstances indicating when the installment method or cost recovery method
> On April 1, 2018, the Apex Corporation sold a parcel of underdeveloped land to the Applegate Construction Company for $2,400,000. The book value of the land on Apex’s books was $480,000. Terms of the sale required a down payment of $120,000 and 19 annual
> Sanchez Development Company uses the installment sales method to account for some of its installment sales. On October 1, 2018, Sanchez sold a parcel of land to the Kreuze Corporation for $4 million. This amount was not considered significant relative to
> Wolf Computer Company began operations in 2018. The company allows customers to pay in installments for many of its products. Installment sales for 2018 were $1,000,000. If revenue is recognized at the point of delivery, $600,000 in gross profit would be
> 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
> Cutler Education Corporation developed a software product to help children under age 12 learn mathematics. The software contains two separate parts: Basic Level (Level I) and Intermediate Level (Level II). Parents purchase each level separately and are e
> In May 2001, the Securities and Exchange Commission sued the former top executives at Sunbeam, charging the group with financial reporting fraud that allegedly cost investors billions in losses. Sunbeam Corporation is a recognized designer, manufacturer,
> 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 is also 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 provided Connect. This mater
> Companies often voluntarily provide non-GAAP earnings when they announce annual or quarterly earnings. Required: 1. What is meant by the term non-GAAP earnings in this context? 2. How do non-GAAP earnings relate to the concept of earnings quality?
> Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results. R
> The appearance of restructuring costs in corporate income statements increased significantly in the 1980s and 1990s and continues to be relevant today. Required: 1. What types of costs are included in restructuring costs? 2. When are restructuring costs
> The financial community in the United States has become increasingly concerned with the quality of reported company earnings. Required: 1. Define the term earnings quality. 2. Explain the distinction between permanent and temporary earnings as it relate
> You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recall from your auditing class that CPAs often use ratios to test the reasonableness of accounting numbers provided by the client. Since ratios reflect
> What is meant by a change in accounting principle? Describe the possible accounting treatments for a mandated change in accounting principle.
> You are a part-time financial advisor. A client is considering an investment in common stock of a waste recycling firm. One motivation is a rumor the client heard that the company made huge investments in a new fuel creation process. Unable to confirm th
> Ralph Lauren Corporation is a global leader in the design, marketing, and distribution of premium lifestyle products, including men’s, women’s and children’s apparel. Below are selected financial stat
> Refer to the income statement of Sherwin Williams Company in Illustration 4–2 of this chapter. In Illustration 4–2 Statement of Consolidated Income ($ in thousands, except per share data) __________________________Year ended December 31, 2015 Net sales
