ACCT3302 Financial Statement Analysis

Week 4 Chapter 3 Tutorial Questions

E3-2 Latter Corporation received an order from Murray, Inc. for electronic components.
Because Murray is struggling financially, Latter called the company and said it will get ready
to fulfill the order, but it will not ship the order until payment is received by cashier’s check.
Does Latter have a contract with Murray that is subject to the 5-step revenue recognition
model?

No. While Latter Corporation has a performance obligation to provide electronic

components to Murray, Inc., there is no penalty upon cancelling the order as no deposit was
paid. Therefore, until Latter Corporation receives the money (via the cashier’s check) and
shipped the order, no contract is formed for the purposes of revenue recognition.

E3-5 For each of the following independent scenarios, determine whether Van Allen
Corporation is a principal or an agent for purposes of applying the 5-step revenue recognition
model.

1. Van Allen is a broker facilitating the sale of goods and will receive a commission of
10% of the purchase price, which will be withheld from the proceeds at the closing of the
transaction and paid to Van Allen.
2. Van Allen is an art dealer. It displays artists’ works in its gallery and sells the works
at prices determined by the artists. When a piece sells, Van Allen remits to the artist the
sales proceeds less a fee, which is the greater of 15% of the purchase price or $300.
3. Van Allen is an art dealer. Van Allen pays a “base purchase price” to the artist for
each piece it acquires. It displays the artists’ works in its gallery and sells the works at
prices it negotiates with customers. When a piece sells, Van Allen remits an additional
payment to the artist if the sales proceeds exceed three times the original base purchase
price. The additional payment is 25% of the amount by which the sales proceeds exceed
the base purchase price.

1. Agent. Van Allen is merely facilitating the sale of goods (and not the making the actual
sale of goods themselves)
2. Agent. Van Allen is merely providing a venue/service for sellers to sell their goods (and
not making the actual sale of goods themselves)
3. Principal. Van Allen owns (previously acquired) the artwork which is being sold.

E3-12 On November 1, 2019, Gerakos Corporation sold software and a six-month technical
support contract to a customer for $80,000. Gerakos sells the same software without technical
support for $60,000. It sells technical support for $30,000. Gerakos allocates the transaction
price based on relative stand-alone values. What amount of revenue does Gerakos recognize
in 2019 and in 2020?

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2019 Revenue = (60,000 / (30,000 + 60,000)) * 80,000 = $53,333.33
2020 Revenue = (30,000 / (30,000 + 60,000)) * 80,000 = $26,666.67

E3-13 On November 1, 2019, Gerakos Corporation sold software and a six-month technical
support contract to a customer for $80,000. Gerakos sells the same software without technical
support for $60,000. It does not sell technical support separately. Gerakos uses the residual
method to allocate the transaction price. What amount of revenue does Gerakos recognize in
2019 and in 2020?

2019 Revenue = $60,000

2020 Revenue = 80,000 – 60,000 = $20,000

E3-18 On October 1, 2018, Bullseye Company sold 250,000 gallons of diesel fuel to
Schmidt Co. at $3 per gallon. On November 8, 2018, 150,000 gallons were delivered; on
December 27, 2018. another 50,000 gallons were delivered; and on January 15, 2019, the
remaining 50,000 gallons were delivered. Payment terms are 10% due on October 1, 2018,
50% due on first delivery; 20% due on the next delivery; and the remaining 20% due on final
delivery.

1. Do each of the three deliveries represent a distinct performance obligation, or is there

a single performance obligation requiring three deliveries?
2. What amount of revenue should Bullseye recognize from this sale during 2018?

1. There is a single performance obligation of delivering 250,000 gallons of diesel fuel,

requiring three deliveries.
2. 2019 Revenue = 250,000 * 3 * 80% = $600,000. This is because revenue is recognised
when the contract obligation is fulfilled (i.e., the goods sold are delivered). At the end of
2018, 200,000 gallons (80%) of the “goods” have been delivered.

P3-13 Gallemore Corporation entered into a contract to sell a machine to Christiansen

Corporation for $2 million. Christiansen pays for the equipment, but asks Gallemore to delay
shipment under a “bill-and-hold” arrangement. Gallemore agrees.

Under each of the following independent scenarios, determine whether Gallemore may
recognize sales revenue.

1. Because the machine Gallemore ordered is a standard model and Gallemore has many
identical units, it does not physically set aside a machine for Christiansen, but rather notes
that it should not let its inventory fall to zero, so that it will be able to ship a machine to
Christiansen immediately upon demand.
2. Gallemore moves a machine to a separate area of the warehouse and labels it “SOLD
TO CHRISTIANSEN CORPORATION.” The warehouse manager is informed that if
need be, he can sell the machine to someone else, as long as he is sure he can replace
Christiansen’s unit in the warehouse within 24 hours.

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3. Gallemore moves a machine to a separate area of the warehouse and labels it “SOLD
TO CHRISTIANSEN CORPORATION.” The warehouse manager is informed that the
company must be ready to ship the machine on one hour notice, so that under no
circumstances should the machine be moved out of the warehouse, even if it means losing
a sale to another party.

1. Gallermore may not recognise sales revenue as the product was not identified separately as
belonging to the customer. Gallermore would recognise sales revenue if/when the item has
shipped.
2. Gallermore may not recognise sales revenue as Gallermore still retains the ability to
transfer the product to another customer. Gallermore would recognise sales revenue if/when
the item has shipped.
3. Gallermore would recognise sales revenue as all conditions for revenue recognition had
been met.

P3-18 On July 1, 2019, Grams Construction, Inc. agreed to construct a factory for a
customer. The contract called for payments to Grams totalling $2 million.
Grams has correctly determined that it is appropriate to recognize revenue over time,
and it uses its costs as a measure of completion. The same cost information is used to
determine the portion of the contract price Grams is entitled to receive.
The following information describes the costs incurred and expected remaining costs
at December 31, 2019 and 2020.

Dec. 31,
2019 Dec. 31, 2020 Dec. 31, 2021
Total cost incurred $  40,000   $115,000 $128,000
Estimated remaining costs   85,000     15,000  
   Estimated total costs $125,000   $130,000 $128,000

The factory is completed on January 31, 2021. Determine the amount of revenue Grams
reports related to the above factory in 2019, 2020, and 2021.

2019 Revenue

- Percentage of Completion Ratio (2019) = 40,000 / 128,000 = 31.25%

- Revenue Recognised (2019) = 2,000,000 * 31.25% = $625,000

2020 Revenue

- Percentage of Completion Ratio (2020) = 115,000 / 128,000 = 89.84%

- Cumulative Revenue = 2,000,000 * 89.84% = $1,796,875
- Prior Cumulative Revenue = $625,000
- Revenue Recognised (2020) = 1,796,875 – 625,000 = $1,171,875

2021 Revenue

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- Percentage of Completion Ratio (2021) = 128,000 / 128,000 = 100%
- Cumulative Revenue = 2,000,000 * 100% = $2,000,000
- Prior Cumulative Revenue = $1,796,875
- Revenue Recognised (2021) = 2,000,000 – 1,796,875 = $203,125