Accounting Rules

1. Which of the following is NOT a required element of a valid contract under ASC 606? a) Approval and commitment of the parties b) Identification of performance obligations c) Fixed price for goods or services d) Enforceable rights for payment Answer: c) Fixed price for goods or services Rationale: ASC 606 (Revenue Recognition) does not require a fixed price but requires that the transaction price can be estimated. ________________________________________ 2. When does revenue recognition occur under the five-step model of ASC 606? a) When the goods are shipped b) When performance obligations are satisfied c) When cash is received d) When the customer signs the contract Answer: b) When performance obligations are satisfied Rationale: Revenue is recognized when control of the promised goods or services is transferred to the customer, which typically occurs when performance obligations are satisfied. ________________________________________ 3. A company provides a service with multiple deliverables. Under ASC 606, how should revenue be allocated? a) Based on estimated profit margin b) According to the transaction price and standalone selling prices of each deliverable c) Evenly across all deliverables d) Based on the cost incurred for each deliverable Answer: b) According to the transaction price and standalone selling prices of each deliverable Rationale: Revenue must be allocated to each performance obligation based on its standalone selling price, in proportion to the total transaction price. ________________________________________ 4. A customer can benefit from the good or service either on its own or together with other readily available resources. This refers to which aspect of a performance obligation under ASC 606? a) Separability b) Distinctiveness c) Control d) Price variability Answer: b) Distinctiveness Rationale: A performance obligation is distinct if the customer can benefit from it on its own or with other resources. ________________________________________ 5. Under ASC 606, when is a contract modification considered a separate contract? a) When the modification is of minor importance b) When additional goods or services are distinct and priced at their standalone selling prices c) When the original terms are renegotiated d) When the contract term is extended without adding new services Answer: b) When additional goods or services are distinct and priced at their standalone selling prices Rationale: A contract modification is treated as a separate contract if it adds distinct goods or services and they are priced at standalone selling prices. ________________________________________ 6. Which method is preferred under ASC 606 for estimating variable consideration? a) Most likely amount b) Fixed contract price c) Expected value or most likely amount d) Actual cost Answer: c) Expected value or most likely amount Rationale: ASC 606 permits either the expected value or the most likely amount, depending on which better predicts the amount of consideration. ________________________________________ 7. For which of the following does the recognition of revenue require judgment in estimating progress toward completion? a) Point-in-time contracts b) Contracts with financing components c) Over-time contracts d) Contracts with fixed prices Answer: c) Over-time contracts Rationale: Revenue in over-time contracts is recognized based on progress toward completion, often requiring judgment in estimating progress. ________________________________________ 8. Under ASC 606, which of the following is considered when determining the transaction price? a) Market price fluctuations b) Variable consideration c) Cost of production d) Historical selling price Answer: b) Variable consideration Rationale: The transaction price includes fixed and variable amounts, including consideration affected by factors like discounts, rebates, and refunds. ________________________________________ 9. A company offers customers the right to return products. How should this be accounted for under ASC 606? a) Recognize full revenue when products are shipped b) Recognize revenue net of estimated returns c) Defer revenue until the return period expires d) Recognize revenue when cash is received Answer: b) Recognize revenue net of estimated returns Rationale: Revenue is recognized for products that are not expected to be returned, with a liability recorded for expected returns. ________________________________________ 10. Which method should be used to recognize revenue over time for a contract with significant milestones? a) Input method b) Milestone recognition method c) Output method d) Percentage-of-completion