On February 1. Year 1. a computer software firm agrees to program a software package. Twelve payments of US $1 0.000 on the first of each month are to be made, with the first payment March 1. Year 1 The software is accepted by the client June 1. Year 2. How much Year 1 revenue should be recognized?
Answer(s): A
Recognition of an element of financial statementse.g. income. which includes revenue and gains) requires that two criteria be met. It must be probable that any future economic benefit associated with the item will flow to or from the entity, and the cost or value of the item must be measurable with reliability_ The usual procedures for income recognition. e.g., that income be earned, reflect these criteria. Thus, income is recognized when an increase in future economic benefits is associated with an increase in an asset or a decrease in a liability. However. the entity has not substantially completed what it must do to be entitled to the benefits represented by the advance payment, and the receipt of future economic benefits is not sufficiently certain to merit income recognition. Accordingly, a liability should be recognized because the entity has a current obligation arising from a past event that will require an outflow of economic benefits, that is, to deliver the software or to refund the customer's money. Thus, a liability for US $100, 000 and revenue of US $0 should be recognized for Year I NOTE: This analysis assumes that the sale of the software is a sale either of goods or of services for which the appropriate conditions have not been met. Under IRS 18. Revenue Recognition, revenue is recognized for a sale of goods when the entity has transferred the significant risks and rewards of ownership, the entity has neither continuing managerial involvement to a extent associated with ownership nor effective control over the goods, the amount can be reliably measured, it is probable that the economic benefits will flow to the entity, and transaction costs can be reliably measured. For a sale of services, revenue is recognized when revenue can be reliably measured, it is probable that the economic benefits will flow to the entity, the stage of completion can be reliably measured, and the costs incurred and the costs to complete can be reliably measured.
A building contractor has a fixed-price contract to construct a large building. It is estimated that the building will take 2 years to complete. Progress billings will be sent to the customer at quarterly intervals. Which of the following describes the preferable point for revenue recognition for this contract if the outcome of the contract can be estimated reliably?
Answer(s): B
Under the percentage-of-completion method, revenues and expenses are recognize based on the stage of completion at the balance sheet date if the outcome of the contract can be estimated reliably. For a fixed-price contract, the outcome can be estimated reliably if1) total revenue can be measured reliably.2) it is probable that the economic benefits of the contract will flow to the enterprise.3) contract costs to complete and stage of completion can be measured reliably, and4) contract costs can be clearly identified and measured reliably so that actual and estimated costs can be compared.
An airline should recognize revenue from airline tickets in the period when
Answer(s): D
Recognition of an element of financial statementse.g.. income, which includes revenue and gains) requires that two criteria be met. It must be probable that any future economic benefit associated with the item will flow to or from the enterprise, and the cost or value of the item must be measurable with reliability_ The usual procedures for income recognition, e.g.. that income be earned, reflect these criteria. Thus. income is recognized when an increase in future economic benefits is associated with an increase in an asset or a decrease in a liability. The recognition criteria are not met with respect to the collections from sales of airline tickets until the receipt of future -gnomic benefits is sufficiently certain. Such certainty exists when the airline performs the contracted-for service, that is, when the related flights occur. The critical event in the earning process for the airline is the delivery of the service to the customer. which occurs when the related flight takes place
A company provides fertilization, insect control, and disease control services for a variety of trees, plants, and shrubs on contract basis. For US $50 per month, the company will visit the subscriber's premises and apply appropriate. If the subscriber has any problem between the regularity scheduled application dates, the company's personal will promptly make additional service calls to correct the situation. Some subscribers elect to pay for an entire year because the company offers an annual price of 115 $540 if paid in advance. For a subscriber who pays the annual fee in advance, the company should recognize the related revenue.
Income, which includes revenue and gains, should not be recognized until an increase in future economic benefits related to an increase in an asset or a decrease in a liability is sufficiently certain and can be measure I reliably. I-he most common time at which these two conditions are met is when the product or merchandise is delivered services are rendered to customers. In the situation presented the performance of the servicemonthly spraying) is so significant to creating a sufficient certainty of an increase in future economic benefits that revenue should not be recognized until delivery occurs.
A company uses the percentage-of-completion method and reports the foil wing:The contract price is US $1.000. What is the profit recognized in Year 2?
Answer(s): C
At the end of Year 1. total cost was expected to be US $400$100 incurred + $300 estimated cost to complete), and estimated total profit was US $600$1, 000 price $400 estimated total cost. Hence, the amount of profit recognized in Year 1 was US $150 [$600 e$100 incurred $400 estimated total cost)]. The project was completed in Year 2 at an additional cost of US $200. Actual profit was therefore US $700 $1.000 $300 actual total cost). Profit recognized in Year 2 is US $5: 1$700 total - $150 recognized in Year 1).
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