An entity sells inventory for US $80, 000 that had an inventory cost of U'; $40, 1: X11 i1: i The terms of the sale involve payments receivable of US $10, 000 in the first year, 11F; $45, 000 in the second year, and US $25, 000 in the third year. The buyer of the inventory is a new firm with no credit history. If the cost-recovery method of revenue recognition is used, the amount of gross profit to be recognition in the second year is
Answer(s): C
The profit recognized in the second year equals the cumulative payments received minus the seller's cost, or US $15, 000 [($10, 000 + $45, 000) - $40, 000].
When a right of return exists, an entity may recognize revenue from a sale of goods at the time of sale only if
Answer(s): A
One condition for condition of revenue from the sale of goods is the transfer of the significant risks and rewards of ownership. Retention of significant risk may occur when, for example, the buyer may rescind the purchase for a reason stipulated in the contract and the buy, is uncertain about the probability of return. However if the entity can reliably estimate future returns and recognize a liability for returns based on experience and other pertinent information, revenue may be recognized at the time of sale if the other conditions for revenue recognition are also met.
If receivables transferred with recourse qualify for derecognition, the proceeds from the transfer are
Answer(s): D
The entity derecognizes financial assets if it has transferred substantially all of the risks and rewards of ownership. Derecognition also is appropriate when the entity neither has transferred nor retained substantially all the risks and rewards of ownership, providing the entity does not have control. After derecognition, periodic profit or loss will include the difference between the carrying amount transferred and the proceeds, plus or minus any prior adjustment r fl ling the fair value of the asset that had been reported in equity. If a new financial asset is created or a financial liability is assumed, the calculation is adjusted for the fair value of the asset or liability. Thus, the proceeds of the sale are reduced by the fair value of the resource obligationa new financial liability). When the transfer does not meet these criteria, the transfer is accounted for as a collateralized borrowing.
A transferor entity most likely should continue to recognize a transferred financial asset if the
An entity derecognizes a financial asset if it has transferred substantially all of the risks and rewards of ownership. Derecognition also is appropriate when the entity neither has transferred nor retained substantially all the risks and rewards of ownership, providing the entity does not have control. A transferor does not derecognizes the financial asset if it is entitled and obligated to repurchase or redeem the asset, and the terms of this transaction in effect allow the transferee to obtain a lender's return on the assets it receives in exchange ft r the transferred financial asset.
Derivatives that are not hedging instruments are always classified in which category of financial instruments?
Financial assets or liabilities at fair value through profit or loss include those held for trading. Regardless of intent, a financial asset is held for trading if it is included in a portfolio with a recent pattern of short-term profit taking. Derivatives also are deemed to be held for trading unless they are designated and effective as hedging instruments.
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