Intermediate Accounting I Exam 2 with 100% Verified Answers| Verified & Updated

Intermediate Accounting I Exam 2 with 100% Verified Answers| Verified & Updated What are the two basic principles in recording revenue? - (1) When? - At the time goods and services are provided to customers and (2) How much? - The amount the company is entitled to receive. FASB's five steps for revenue recognition - -Step 1: Identify the contract with a customer -Step 2: Identify the performance obligations in the contract -Step 3: Determine the transaction price -Step 4: Allocate the transaction price to each performance obligation -Step 5: Record revenue when (or as) each performance obligation is satisfied What is the core revenue recognition principle? - Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services. Performance Obligations - promises to transfer goods or services to a customer Performance obligations are satisfied when the seller transfers _______ of goods or services to the customer. - Control How do you determine if their is a contract? - -Legal rights of the buyer and seller have been established. -a seller must believe collectibillity is probable for a contract to exist for purposes of revenue recognition Transaction price - the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services Indicators that control has been transferred from the seller to the customer - -an obligation to pay the seller -Legal title to the asset -Physical possession of the asset -Assumed the risks and rewards of ownership -accepted the asset Revenue is recognized when performance obligations are satisfied, not when cash is received. (T/F) - T Which of the following services are more than likely performed over a period of time? -Lending money -Performing audits -Giving consulting advice - All of them What are the three criteria for recognizing revenue over time? - 1. The customer consumes the benefits of the sellers work as it is performed as when a company performs cleaning services for a customer over a period of time, or 2. The customer controls the asset as it is created, as when a contractor builds an extension onto a customers existing building, or 3. The seller is creating an asset that has no alternate use to the seller, and the seller has the legal right to receive payment for progress to date, as when a company manufactures customized fighter jets for the US air force What are the two methods used to measure progress towards completion? - -Input based method (measured as the proportion of effort expended thus far relative to the total effort expended to fulfill the performance obligation) -Output based method (measured as the proportion of goods and services transferred to date) Promises to provide goods and services are considered performance obligations if the goods and services are ________. - distinct What two things make a good or service distinct? - 1. Capable of being distinct (the customer could use the good or service on its own or in combination with other goods or services it could obtain elsewhere) 2. Separately identifiable from other goods or services in the contract (the promise to transfer goods and services are distinct in the context of the contract, because the seller is promising to provide goods or services separately as opposed to providing a combined good or service for which the individual goods or services are inputs.) What are some situations that affect transaction price? - 1. Variable Consideration and the constraint on its recognitions 2. Sales with a right of return (a particular type of variable consideration) 3. identifying whether the seller is acting as principal or agent 4. the time value of money 5. prepayments by the seller to the customer Variable Consideration - When does a contract not exist? - 1. neither the seller nor the customer has performed any obligations under the contract 2. both the seller and the customer can terminate the contract without penalty A prepayment is a performance obligation (T/F). - F. A prepayment is not a performance obligation Quality assurance warranty - obligation by the seller to make repairs or replace products that are later demonstrated to be defective for some period of time after the sale. A quality assurance warranty is not a performance obligation (T/F). - T Extended Warranty - additional coverage that you can buy to pay for repairs or replacements needed beyond the original warranty period Extended Warranties are a separate performance obligation (T/F). - T