BUS 321 MIDTERM 2 QUESTIONS WITH VERIFIED
ANSWERS
What is revenue? - Answers - Inflows or other enhancements of assets or settlements
of liabilities from delivering or producing goods, rendering services or other activities
that constitutes the entity's ongoing major or central operations
What are the 5 steps in revenue recognition? - Answers - 1. Identify the contract with a
customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to each performance obligation
5. Recognize revenue as performance obligations are satisfied
What is a performance obligation? - Answers - Promises to transfer goods or services to
a customer
When are performance obligations satisfied? - Answers - When the seller transfers
control of the goods or services to the customer
When is the customer more likely to control a good or service? - Answers - When the
customer has:
1. An obligation to pay the seller
2. Legal title to the asset
3. Physical possession of the asset.
4. Assumed the risks and rewards of ownership
5. Accepted the assets (both for services & goods)
What are the criteria for recognition over time? - Answers - 1. The customer consumes
the benefit of the seller's work as it is performed
2. The customer controls the asset as it is created
3. The seller is creating an asset that has no alternative use to the seller, and the seller
has the legal right to receive payment for progress to date.
When do we recognize revenue over time? - Answers - When at least one of the three
criteria is met
What are the two ways that progress toward completion can be determined? - Answers
- Output-based and input based
, Explain the difference between output-based and input-based estimates of progress
towards the completion - Answers - Output-based: The proportion of the goods or
services transferred to date
Input-based: The proportion of effort expended thus far relative to the total expected
effort to satisfy the performance obligation
What must a good or service fulfil to be counted as an individual performance
obligation? - Answers - It must be distinct:
1. Demonstrate capability of being distinct
2. Being separately identifiable from other goods or services in the contract, within the
CONTEXT of the contract.
When is a good capable of being distinct? - Answers - When it can be used on its own
or in combination with other goods obtained elsewhere
What does separately identifiable from other goods or services in the contract refer to? -
Answers - Whether the promised goods are distinct in the context of the contract: is the
obligation to combine the inputs or not? Do we have customization? Do they modify
each other? Integration?
How do we estimate the stand-alone selling price? - Answers - Either we take the list
price, and if that is impossible, we take either:
1. Adjusted market assessment approach
2. Expected cost plus margin approach
3. Residual approach
In what context can we apply the residual approach in determining the stand-alone
selling price? - Answers - When the price is unknown or highly uncertain.
What two methods can be used to determine variable consideration? - Answers - a)
Expected value
b) Most likely amount
What is a sales returns account? - Answers - A contra-revenue account which reduces
the sales with the estimated amount to be returned
How does agent report revenue? - Answers - It reports the commission as revenue
What two types of intellectual property exists? - Answers - Functional (right of use) -
such as games
Symbolic (brand names, logos)
ANSWERS
What is revenue? - Answers - Inflows or other enhancements of assets or settlements
of liabilities from delivering or producing goods, rendering services or other activities
that constitutes the entity's ongoing major or central operations
What are the 5 steps in revenue recognition? - Answers - 1. Identify the contract with a
customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to each performance obligation
5. Recognize revenue as performance obligations are satisfied
What is a performance obligation? - Answers - Promises to transfer goods or services to
a customer
When are performance obligations satisfied? - Answers - When the seller transfers
control of the goods or services to the customer
When is the customer more likely to control a good or service? - Answers - When the
customer has:
1. An obligation to pay the seller
2. Legal title to the asset
3. Physical possession of the asset.
4. Assumed the risks and rewards of ownership
5. Accepted the assets (both for services & goods)
What are the criteria for recognition over time? - Answers - 1. The customer consumes
the benefit of the seller's work as it is performed
2. The customer controls the asset as it is created
3. The seller is creating an asset that has no alternative use to the seller, and the seller
has the legal right to receive payment for progress to date.
When do we recognize revenue over time? - Answers - When at least one of the three
criteria is met
What are the two ways that progress toward completion can be determined? - Answers
- Output-based and input based
, Explain the difference between output-based and input-based estimates of progress
towards the completion - Answers - Output-based: The proportion of the goods or
services transferred to date
Input-based: The proportion of effort expended thus far relative to the total expected
effort to satisfy the performance obligation
What must a good or service fulfil to be counted as an individual performance
obligation? - Answers - It must be distinct:
1. Demonstrate capability of being distinct
2. Being separately identifiable from other goods or services in the contract, within the
CONTEXT of the contract.
When is a good capable of being distinct? - Answers - When it can be used on its own
or in combination with other goods obtained elsewhere
What does separately identifiable from other goods or services in the contract refer to? -
Answers - Whether the promised goods are distinct in the context of the contract: is the
obligation to combine the inputs or not? Do we have customization? Do they modify
each other? Integration?
How do we estimate the stand-alone selling price? - Answers - Either we take the list
price, and if that is impossible, we take either:
1. Adjusted market assessment approach
2. Expected cost plus margin approach
3. Residual approach
In what context can we apply the residual approach in determining the stand-alone
selling price? - Answers - When the price is unknown or highly uncertain.
What two methods can be used to determine variable consideration? - Answers - a)
Expected value
b) Most likely amount
What is a sales returns account? - Answers - A contra-revenue account which reduces
the sales with the estimated amount to be returned
How does agent report revenue? - Answers - It reports the commission as revenue
What two types of intellectual property exists? - Answers - Functional (right of use) -
such as games
Symbolic (brand names, logos)
