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Exam 5: Income Measurement

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Question 1

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Prepare Terra's June 30 journal entry to account for the revenue earned from June 1 - June 30,as well as any necessary adjustments to revenue.

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At the end of June,Terra earns monthly s...

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Question 2

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GAAP that covers revenue recognition for multiple-element arrangements requires that a seller recognize revenue for a particular part if:

A) The part has value on a stand-alone basis.
B) Customer acceptance of the part is not contingent on successful delivery of a later part.
C) The part constitutes at least a "preponderance of the fair value" of the total arrangement.
D) Both the part has value on stand-alone basis and customer acceptance of the part is not contingent on successful delivery of a later part are required.

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Question 3

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When revenue is recognized over time versus upon completion of the contract,different amounts of total profit or loss are recognized for a particular contract.

In a consignment arrangement,revenue typically should not be recognized until sale to a third party occurs,even though there has been a physical transfer of goods to the consignee,because the consignor still retains legal title to the goods.

Under the realization principle,revenue should not be recognized until the earnings process is deemed virtually complete and:

Which of the following is one of the steps for recognizing revenue?

No allocation of contract price is required if the transaction involves a performance obligation to be satisfied over time.

Which of the following is least likely to be a reason why a long-term construction contract would qualify for revenue recognition over time?

Use the following to answer questions Excerpts from Dowling Company's December 31,2016 and 2015,financial statements and key ratios are presented below (all numbers are in millions) : -Dowling's 2016 average collection period is (rounded) :

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?

The following disclosure note appeared in a recent annual report to stockholders of Dell Inc. ,the computer manufacturer: "Net revenue includes sales of hardware,software and peripherals,and services (including extended service contracts and professional services).These products and services are sold either separately or as part of a multiple-element arrangement.Dell allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element,which is generally based on the relative list price of each element.For sales of extended warranties with a separate contract price,Dell defers revenue equal to the separately stated price.Revenue associated with undelivered elements is deferred and recorded when delivery occurs.Product revenue is recognized,net of an allowance for estimated returns,when both title and risk of loss transfer to the customer,provided that no significant obligations remain.Revenue from extended warranty and service contracts,for which Dell is obligated to perform,is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed.Revenue from sales of third-party extended warranty and service contracts,for which Dell is not obligated to perform,is recognized on a net basis at the time of sale." Briefly explain why Dell Computer recognizes revenue at different times for (a)product sales, (b)extended warranty and service contracts for which Dell is obligated to perform,and (c)extended warranty and service contracts for which a third party is obligated to perform.

Use of the installment sales method requires that firms track the gross profit percentage associated with a particular sale.

Johnson sells $100,000 of product to Robbins,and also purchases $10,000 of advertising services from Robbins.The advertising services have a fair value of $8,000.Johnson should record revenue on its sale of product to Robbins of:

Assume that Steffi paid the $50,000 in cash when she signed the agreement.RS can recognize revenue associated with the $50,000:

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

Squeaky Shine provides car washing services in Jersey City,New Jersey.A three-month pass for automatic car wash sells for $60,which entitles the customer for an unlimited number of car washes during the contract period.Squeaky Shine estimates that pass holders wash their cars equally throughout the three-month period.On December 1st,customers purchased $1,260 of the three-month passes,with purchases of the passes occurring evenly throughout December. Required: 1)Prepare the journal entries that Squeaky Shine would record on December 1 and on December 31,2016,with respect to this transaction. 2)State the account titles and amounts that will be included in Squeaky Shine's 2016 income statement and balance sheet.

In 2017,Indiana incurred additional costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project.Indiana:

Prepare Portelli's April 30 journal entry to account for the revenue earned in April.

Consider the following three scenarios: I.ABC Lawncare performed lawn maintenance services for Drake Inc.on June 1^st,and received payment of $500 for those services. II.On June 1st,Melly Corp received payment for 100 pounds of raw material to be delivered to Drake Inc.in 6 months III.Lodo,LLC collected cash on June 1st for services rendered on May 1st. Given these scenarios,revenue can not be recognized on June 1^st for

Colombo Coffee sells gift cards that can be used at its 55 branches.During 2015,customers purchased $25,000 of gift cards,of which $3,000 were redeemed during 2016.It is estimated that a balance of $1,500 of cards sold in 2015 remains unused as of the end of 2016,and Colombo determines that this amount will never be redeemed,based on historical experience.During 2016,Colombo further sold $32,000 of gift cards,of which $26,000 were redeemed and $6,000 remain unused but may be used by customer in 2017. Required: How much gift card revenue should Colombo recognize in 2016?