CPA Financial Accounting and Reporting (FAR) : Revenue Recognition
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Example Questions
Example Question #1 : Revenue Recognition
The Martino Corporation, in attempt to raise revenues, begins selling goods with an automatic right to return within six months if not completely satisfied. On November 1, $35,000 worth of goods with a cost of $22,000 are sold. Company officials expect that 15% of the goods sold will be returned before the expiration date in the following year. How much gross profit should be recognized on this sale in the current year?
$22,000
$29,750
$11,050
$13,000
$11,050
Because the company can reasonably estimate that 15% of goods will be returned, it should record an allowance and therefore only record 85% of its gross profit on these sales (100% - 15%). Final GP should thus be $13K ($35K sales - $22K expenses) x 85%.
Example Question #2 : Revenue Recognition
A company sends 14,000 units of its product to a customer on December 27, Year 3. The buyer has the right to return any merchandise within 90 days for a full refund. Which of the following would require the company to recognize the sale of goods in Year 4 rather than Year 3?
The company cannot reasonably estimate the number of goods that will be returned
None of the above
The company can reasonably estimate that 15% of goods will be returned
Return of the goods is not contingent on resale
None of the above
None of these scenarios would require the company to postpone recognition of the sale to Year 4.
Example Question #3 : Revenue Recognition
Bloom’s Gift Shop, a retail store, sold gift certificates that are redeemable in merchandise. On October 1, Year 2, a customer buys $1,000 of gift certificates from Bloom’s Gift Shop. The gift certificates expire 1 year after the date of purchase. Which of the following is correct?
On October 31, Year 2, Bloom should record a debit to prepaid expenses of $1,000
On October 31, Year 2, Bloom should record a credit to revenue of $1,000
On October 31, Year 2, Bloom should record a credit to deferred revenue of $1,000
On December 31, Year 2, revenue should be recorded for November and December
On October 31, Year 2, Bloom should record a credit to deferred revenue of $1,000
When gift cards are purchased, the company will credit deferred revenue. When gift cards are redeemed, the company will debit deferred revenue for the amount redeemed and credit revenue.
Example Question #4 : Revenue Recognition
Which expression best describes accrual basis revenue recognition?
Revenue is recognized when earned
Revenue is recognized immediately per transaction
A firm should recognize revenue when pledged
Revenue is recognized when received
Revenue is recognized when earned
Revenue is recognized when earned under accrual basis. Under cash basis, revenue is recognized when cash is received.
Example Question #1 : Revenue Recognition
When the total consideration for a contract with multiple embedded obligations reflects a discount, the best way to assign that discount is to:
Allocate it proportionally to all obligations within the contract
Assign it to the obligation with the highest stand alone price
Reduce the smallest obligation be the full amount of the discount
Assign it equally across all obligations
Allocate it proportionally to all obligations within the contract
Any discount that exists in a contract should be allocated proportionally across all obligations within the contract.
Example Question #5 : Revenue Recognition
Equipment is bought by ABC Company for $550,000 on January 1, Year 1. After 3 years, $270,000 worth of depreciation has been recorded. At that time the asset has a fair market value of $310,000 and it is exchanged for a similar asset with a fair market value of $300,000. ABC also receives $10,000 in the exchange. What amount of gain should ABC realize as a result of this transaction?
$0
$10,000
$30,000
$20,000
$30,000
The company will recognize a gain in the amount of the difference between the book value of the asset given up ($550K purchase price - $270K accumulated depreciation = $280K) and the fair value of the asset given up of $310K. $310K - $280K = $30K gain. Note that only 3.2% of this gain would actually be recognized ($10K cash received / total consideration of $310K).
Example Question #6 : Revenue Recognition
Under the completed contract revenue recognition method per US GAAP, a company would recognize recorded progress billings:
When collected
Neither
Both
When they exceed recorded costs
Neither
When a company uses the US GAAP completed contract method, revenue is recognized when the job is completed.
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