INTERMEDIATE ACCOUNTING, 11TH EDITION
COMPREHENSIVE FINAL EXAMINATION QUESTIONS Based
on the Textbook by J. David Spiceland, Mark W. Nelson,
Wayne B. Thomas, and Jennifer Winchel ISBN:
9781264134526 | Chapters 1–21 | Detailed Answers with
Rationales
1. Under the new revenue recognition standard (ASC 606), which of the
following is NOT one of the five steps for recognizing revenue from contracts
with customers?
- A) Identify the contract with the customer
- B) Identify the performance obligations in the contract
- C) Determine the transaction price
- D) Recognize revenue when cash is received
Answer: D
Rationale: The five steps of ASC 606 are: (1) Identify the contract with the
customer; (2) Identify the performance obligations; (3) Determine the
transaction price; (4) Allocate the transaction price to the performance
obligations; and (5) Recognize revenue when (or as) the entity satisfies a
performance obligation. Recognizing revenue when cash is received is the
cash basis of accounting, which is not permitted under accrual accounting or
ASC 606.
,2. Which of the following best describes the conceptual framework's hierarchy
of qualitative characteristics of useful financial information?
- A) Relevance and faithful representation are fundamental characteristics,
with enhancing characteristics including comparability, verifiability,
timeliness, and understandability
- B) Relevance and comparability are fundamental characteristics, with
enhancing characteristics including faithful representation, verifiability,
timeliness, and understandability
- C) Faithful representation and verifiability are fundamental characteristics,
with enhancing characteristics including relevance, comparability, timeliness,
and understandability
- D) Comparability and understandability are fundamental characteristics,
with enhancing characteristics including relevance, faithful representation,
verifiability, and timeliness
Answer: A
Rationale: The conceptual framework identifies relevance and faithful
representation as the two fundamental qualitative characteristics. The
enhancing characteristics are comparability, verifiability, timeliness, and
understandability. Relevance includes predictive value, confirmatory value,
and materiality. Faithful representation includes completeness, neutrality,
and freedom from error.
,3. When a company sells goods with a right of return, under ASC 606, revenue
is recognized for:
- A) The total transaction price, with a refund liability recorded for expected
returns
- B) The amount of consideration the company expects to be entitled to, with
a refund liability and an asset for the right to recover returned goods
- C) The full transaction price, with returns recognized when they occur
- D) No revenue until the return period expires
Answer: B
Rationale: Under ASC 606, when goods are sold with a right of return, the
company recognizes revenue for the amount of consideration it expects to be
entitled to (i.e., the transaction price minus the expected refunds). A refund
liability is recognized for the expected refunds, and an asset (right to recover
returned goods) is recognized for the expected cost of recovering the goods.
This approach provides a more accurate representation of the transaction.
4. A company enters into a contract to provide a three-year software license
with ongoing support. The license is a right to access the software as it exists,
and the support is provided throughout the license period. Under ASC 606,
how should revenue be recognized?**
- A) Recognize the entire transaction price at the inception of the contract
- B) Recognize revenue for the license at the inception and recognize support
revenue over the three-year period
- C) Recognize revenue for the license over the three-year period and
recognize support revenue at the inception
, - D) Recognize all revenue over the three-year period on a straight-line basis
Answer: D
Rationale: Under ASC 606, a license that provides a right to access the
intellectual property (as it exists) is a performance obligation satisfied over
time. The support is also a performance obligation satisfied over time. Since
both are satisfied over the same three-year period, revenue for both should
be recognized over the three-year period, typically on a straight-line basis
unless another method better depicts the pattern of transfer.
5. A company sells a product for $1,000 with a one-year warranty. The
warranty is not sold separately and is included in the price. Under ASC 606,
the warranty is considered:
- A) A separate performance obligation because it provides the customer with
assurance that the product functions as intended
- B) Not a separate performance obligation because it provides assurance that
the product functions as intended
- C) A separate performance obligation only if the customer pays extra for it
- D) Not a performance obligation because warranties are always excluded
from revenue recognition
Answer: B
Rationale: Under ASC 606, a warranty that provides assurance that the
product functions as intended (an assurance-type warranty) is not a separate
performance obligation. Instead, it is accounted for as a cost of providing the
product, and a liability is recognized for the expected cost of warranty claims.
If the warranty provides additional services beyond assurance (a service-type
warranty), it would be a separate performance obligation.
COMPREHENSIVE FINAL EXAMINATION QUESTIONS Based
on the Textbook by J. David Spiceland, Mark W. Nelson,
Wayne B. Thomas, and Jennifer Winchel ISBN:
9781264134526 | Chapters 1–21 | Detailed Answers with
Rationales
1. Under the new revenue recognition standard (ASC 606), which of the
following is NOT one of the five steps for recognizing revenue from contracts
with customers?
- A) Identify the contract with the customer
- B) Identify the performance obligations in the contract
- C) Determine the transaction price
- D) Recognize revenue when cash is received
Answer: D
Rationale: The five steps of ASC 606 are: (1) Identify the contract with the
customer; (2) Identify the performance obligations; (3) Determine the
transaction price; (4) Allocate the transaction price to the performance
obligations; and (5) Recognize revenue when (or as) the entity satisfies a
performance obligation. Recognizing revenue when cash is received is the
cash basis of accounting, which is not permitted under accrual accounting or
ASC 606.
,2. Which of the following best describes the conceptual framework's hierarchy
of qualitative characteristics of useful financial information?
- A) Relevance and faithful representation are fundamental characteristics,
with enhancing characteristics including comparability, verifiability,
timeliness, and understandability
- B) Relevance and comparability are fundamental characteristics, with
enhancing characteristics including faithful representation, verifiability,
timeliness, and understandability
- C) Faithful representation and verifiability are fundamental characteristics,
with enhancing characteristics including relevance, comparability, timeliness,
and understandability
- D) Comparability and understandability are fundamental characteristics,
with enhancing characteristics including relevance, faithful representation,
verifiability, and timeliness
Answer: A
Rationale: The conceptual framework identifies relevance and faithful
representation as the two fundamental qualitative characteristics. The
enhancing characteristics are comparability, verifiability, timeliness, and
understandability. Relevance includes predictive value, confirmatory value,
and materiality. Faithful representation includes completeness, neutrality,
and freedom from error.
,3. When a company sells goods with a right of return, under ASC 606, revenue
is recognized for:
- A) The total transaction price, with a refund liability recorded for expected
returns
- B) The amount of consideration the company expects to be entitled to, with
a refund liability and an asset for the right to recover returned goods
- C) The full transaction price, with returns recognized when they occur
- D) No revenue until the return period expires
Answer: B
Rationale: Under ASC 606, when goods are sold with a right of return, the
company recognizes revenue for the amount of consideration it expects to be
entitled to (i.e., the transaction price minus the expected refunds). A refund
liability is recognized for the expected refunds, and an asset (right to recover
returned goods) is recognized for the expected cost of recovering the goods.
This approach provides a more accurate representation of the transaction.
4. A company enters into a contract to provide a three-year software license
with ongoing support. The license is a right to access the software as it exists,
and the support is provided throughout the license period. Under ASC 606,
how should revenue be recognized?**
- A) Recognize the entire transaction price at the inception of the contract
- B) Recognize revenue for the license at the inception and recognize support
revenue over the three-year period
- C) Recognize revenue for the license over the three-year period and
recognize support revenue at the inception
, - D) Recognize all revenue over the three-year period on a straight-line basis
Answer: D
Rationale: Under ASC 606, a license that provides a right to access the
intellectual property (as it exists) is a performance obligation satisfied over
time. The support is also a performance obligation satisfied over time. Since
both are satisfied over the same three-year period, revenue for both should
be recognized over the three-year period, typically on a straight-line basis
unless another method better depicts the pattern of transfer.
5. A company sells a product for $1,000 with a one-year warranty. The
warranty is not sold separately and is included in the price. Under ASC 606,
the warranty is considered:
- A) A separate performance obligation because it provides the customer with
assurance that the product functions as intended
- B) Not a separate performance obligation because it provides assurance that
the product functions as intended
- C) A separate performance obligation only if the customer pays extra for it
- D) Not a performance obligation because warranties are always excluded
from revenue recognition
Answer: B
Rationale: Under ASC 606, a warranty that provides assurance that the
product functions as intended (an assurance-type warranty) is not a separate
performance obligation. Instead, it is accounted for as a cost of providing the
product, and a liability is recognized for the expected cost of warranty claims.
If the warranty provides additional services beyond assurance (a service-type
warranty), it would be a separate performance obligation.
