Chapter 15

Student: ___________________________________________________________________________

1. Unearned revenues are assets treated as liabilities, as these are received by a

business for services to be performed at a future date.

True False

2. Construction costs plus gross profit earned to date from a construction contract are
accumulated in the construction in progress account less progress billings and these
are disclosed in the liability section of the statement of financial position.

True False

3. When the outcome of a construction contract can be estimated reliably, contract

revenue and contract costs associated with the construction contract shall be
recognised as revenue and expenses respectively by reference to the stage of
completion of the contract activity at the reporting date.

True False

4. When it is probable that total contract costs will exceed total contract revenue, the
expected loss should not be recognised as an expense until the future economic
sacrifice eventuates.

True False

5. If the borrower prepays interest, the inflow of future economic benefits represented
by the prepayment would not constitute an item of revenue to the lender because
the lender has a present obligation to the borrower to provide finance for the period
to which the prepayment relates.

True False

6. If a company sells its product but gives the buyer the right to return the product, IASB
(2011) requires revenue from the sales transaction to be recognised at the time of
sale.

True False

7. Under the AASB (IASB) Conceptual Framework an increase in economic benefits in

the form of the reduction of a liability that is not a contribution by equity participants
and results in an increase in equity during the reporting period, is income.

True False
8. The AASB (IASB) Conceptual Framework now divides revenues into 'income' and
'gains'.

True False

9. Transactions that result in an inflow of economic benefits such as the purchase of

assets can be classified as a gain.

True False

10. Gains that result from revaluation of long-term assets are included in income.

True False

11. IASB (2011) requires revenues to be measured in terms of historical cost to improve
reliability.

True False

12. Accounting standards require that the provision for doubtful debts should be shown
as a deduction from the class of assets to which it relates. The net expense in relation
to bad and doubtful debts must also be disclosed.

True False

13. When the gross method is used to record the interest inherent in a sales transaction,
it is typical for the accrued interest to be offset against the note receivable.

True False

14. In most cases dividend revenue should not be recognised until the dividend proposed
has been ratified by the shareholders at the annual general meeting.

True False

15. Gains never arise from the ordinary activities of an entity.

True False

16. Where the percentage-of-completion method is based on costs, costs that relate to
the contract activity generally and are not normally related to specific contracts, such
as finance costs, should be allocated across the projects currently in progress.

True False

17. Gains must be reported net of related expenses.

True False
18. When making a provision for doubtful debts, debtors' subsidiary ledgers are not
adjusted, as the provision is made in anticipation of likely non-recoverability of
amounts owing, although the identity of who will not pay is unknown.

True False

19. With the percentage-of-completion method of accounting for construction contracts,

profit is recognised in proportion to the work performed in each reporting period.

True False

20. Transfer of ‘control' of the asset is central to the recognition of revenue under the
new accounting standard IASB (2011).

True False

21. Interest revenue is derived from borrowing resources from another entity.

True False

22. Revenues may be generated by:

A. holding and disposing of inventory in the normal course of

business.
B. having a liability
forgiven.
C. receiving a
donation.
D. all of the given
answers.

23. The general rule under modified historical-cost accounting is that holding gains on
non-current assets should be:

A. treated as revenue in the period that the fair value of the asset
changes.
B. deferred and amortised over the life of the asset (effectively decreasing
depreciation expense).
C. recognised as part of income and hence, of total
comprehensive income
D. never
recognised.
24. Under the AASB (IASB) Conceptual Framework income is now subdivided into:

A. revenues, which only include sales, fees, interest, dividends, royalties and rent;
gains, which are no different in nature to revenue.
B. gains, which are regarded as constituting a separate element in the framework;
revenues, which may only arise in the course of the ordinary activities of the entity.
C. revenues, which arise in the course of the ordinary activities of the entity; gains,
which may or may not arise in the course of the ordinary activities of the entity.
D. increases in equity referred to as gains; reductions in liabilities which are classified
as revenues.
25. The following is a diagram of the earnings cycle as presented by Coombes and Martin
(1982).

Because of uncertainty and depending on which measurement model is being

applied, revenue recognition will take place at a limited number of points in the
earnings cycle. In traditional historical-cost accounting, in most cases, at which point
in the cycle above have revenues been recognised?

A. Point
5
B. Point
8
C. Point
7
D. Point
9
26. The following is a diagram of the earnings cycle as presented by Coombes and Martin
(1982).

In the traditional historical-cost accounting model, at what point has revenue been
recognised for long-term construction contracts in the building industry?

A. Point
8
B. Point
4
C. Point
6
D. Point
5
27. The following is a diagram of the earnings cycle as presented by Coombes and Martin
(1982).

For products such as precious metals or agricultural products revenue is recognised

at which point in the earnings cycle shown above?

A. Point
1
B. Point
4
C. Point
6
D. Point
7
28. Revenue recognition under IASB (2011) requires that:

A. the entity has transferred to the buyer the significant risks and rewards of
ownership.
B. the entity retains neither continuing managerial involvement to the degree
normally associated with ownership nor effective control over the goods.
C. the costs incurred or to be incurred can be measured
reliably.
D. there should be a direct function of the transfer of control of the goods and
services to the customer.

29. Kringle Company has agreed to provide services to North to South Ltd in exchange
for a piece of equipment and a cash payment. The equipment is currently recorded in
North to South's books at $73 000 but independent assessors have set the fair value
at $65 000. The cash payment of $20 000 will be received 12 months after
completion of the services. Kringle should record revenue as:

A. $85
000
B. $65 000 in the current period, $20 000 next
period
C. $93
000
D. $65 000 plus the present value of the $20 000 cash
component

30. An entity shall recognise revenue from a contract when:

A. the entity has satisfied the performance

obligation.
B. the goods or service have been transferred to the
customer.
C. the customer obtains control of the goods or
service.
D. All of the given answers are necessary for recognition of revenue from
a contract.
31. When goods are sold 'free on board' (f.o.b.) shipping point, the revenue should be
recognised when:

A. the goods are completed and ready to be

transported.
B. the goods are received by the
purchaser.
C. the goods are received by the common
carrier.
D. None of the given answers are correct, there is no revenue involved for goods sold
on terms 'free on board'.

32. When the collectability of an amount that has been recorded as revenue becomes
uncertain, the appropriate accounting treatment is to:

A. recognise as an expense the amount in respect of which recovery has ceased to

be probable.
B. calculate the discounted present value of the amount expected to be received and
adjust the recorded revenue accordingly.
C. adjust the amount of revenue originally
recognised.
D. make no adjustment as the amount and timing of the uncollectible amount
is uncertain.
33. Vettori Ltd has the following information from an aged debtors listing for the current
period.

Based on experience in the industry, Vettori Ltd uses the following basis for
estimating uncollectible amounts:

Assuming that the current balance in the provision for doubtful debts is zero, what is
the entry to record the provision for this period? What is the entry to record the
writing off of a bad debt of $1000 when a debtor goes bankrupt?

A.

B.
 C.

D.

34. In the situation that a debtor becomes unable to pay and the amount has not been
anticipated through a provision for doubtful debts, what is the entry to record the bad
debt?

A. Dr Debtors; Cr Provision for doubtful

debts
B. Dr Provision for doubtful debts; Cr
Debtors
C. Dr Bad debts expense; Cr
Cash
D. Dr Bad debts expense; Cr
Debtors

35. Daniel Ltd sells one of its properties to a financing company with an attached call
option, which allows Daniel Ltd to reacquire the property at a future date for $400
000. The current market value at the time of the sale is $300 000, but the financing
company pays $350 000 for it. It is expected that the market value of the property
will exceed $400 000 before the option expires. What is the appropriate treatment of
this sale?

A. Record the revenue and make appropriate note disclosures about the call option
and its associated risks.
B. Set-off the call option and the building—reporting changes in the difference
between their current values as revenues or expenses as appropriate.
C. No entry would be required as the call option is off balance sheet and the building
has not effectively been sold.
D. Record the inflow of cash and a
liability.
36. There are various appropriate accounting treatments when a sale is made subject to
a right of return. These methods include:

A. recording the sale and accounting for the returns as they occur in
future periods.
B. recording the cash received as held in trust until all return privileges
have expired.
C. recording the sale but reducing sales by an estimate of the
future returns.
D. recording the sale and accounting for the returns as they occur in future periods
and recording the sale but reducing sales by an estimate of the future returns.

37. When goods are sold on extended credit there is an implicit financing arrangement
contained in the sale agreement. In order to separate the financing element from the
sale, it is necessary to calculate the applicable interest rate inherent in the
agreement. What advice does IASB (2011) provide about this?

A. The implicit rate of interest is the more clearly determinable of either: (a) the
prevailing rate of a similar instrument of an issuer with a similar credit rating; or
(b) a rate of interest that discounts the nominal amount of the instrument to the
current cash sales price of the goods or services.
B. The implicit rate of interest is the internal rate of return implicit in the contract
such that the sales price is equal to the fair market value of the asset.
C. The implicit rate of interest is the more reliably determinable of either: (a) the
prevailing rate of a debt instrument of an issuer adjusted to the organisation-
specific, risk adjusted rate of the issuer; or (b) a rate of interest that discounts the
sales price to the fair market value of the goods or services.
D. The implicit rate of interest is the internal rate of return implicit in the contract
such that the sales price is equal to the fair market value of the asset. This rate
may have to be adjusted to take account of the risk of the issuer if it is significantly
different to the market-determined interest rate for similar entities.
38. On 1 July 2013 Bryson Ltd sells a machine to Adams Ltd in exchange for a promissory
note that requires Adams Ltd to make five payments of $8000, the first to be made
on 30 June 2014. The machine cost Bryson Ltd $20 000 to manufacture. Bryson Ltd
would normally sell this type of machine for $30 326 for cash or short-term credit.
The implicit interest rate in the agreement is 10%. What are the appropriate journal
entries to record the sale agreement and the first two instalments using the net-
interest method?

A.

B.
C.

D.
39. On 1 July 2013 Bigwell Ltd sells a machine to Archer Ltd in exchange for a promissory
note that requires Archer Ltd to make five payments of $8000, the first to be made
on 30 June 2014. The machine cost Bigwell Ltd $20 000 to manufacture. Bigwell Ltd
would normally sell this type of machine for $30 326 for cash or short-term credit.
The implicit interest rate in the agreement is 10%. What are the appropriate journal
entries to record the sale agreement and the first two instalments using the gross
method?

A.
B.

C.
D.
40. Magazines Galore receives subscription money in advance, and has received $50 000
from customers on 1 February to cover the next ten issues of Wheels Galore. There
are ten issues a year—one at the end of each month except for January and
December. What are the appropriate accounting entries to record the receipt of the
subscription money and (assuming no monthly entries have been made) the
adjusting entry at 30 June (after June's issue has been mailed to subscribers)?

A.

B.

C.

D.
41. The percentage-of-completion method that may be used to account for construction
contracts can be justified on the basis that:

A. The contractor will be continuously working and therefore

earning revenue.
B. In most long-term construction projects, payments are made periodically
throughout the life of the contract allowing revenue to be recognised.
C. It is unreasonable to expect a contractor to record revenue only when construction
is completed.
D. The contracting firm has a basis for measuring completion at particular
interim dates.

42. In the case of a fixed price contract, AASB 111 specifies four conditions that must all
be met in order for the percentage-of-completion method to be applied. These
conditions include:

A. Costs related to the contract can be clearly identified and

measured reliably.
B. It is probable that the economic benefits arising from the contract will flow to
the contractor.
C. The entity commissioning the work has a good credit rating and is able to
pay its debts.
D. Costs related to the contract can be clearly identified and measured reliably and it
is probable that the economic benefits arising from the contract will flow to the
contractor.

43. IASB (2011) specifies the accounting treatment in the case that the outcome of a
construction contract cannot be reliably assessed. The treatment specified is:

A. (a) Contract costs must be deferred and matched against revenues in the financial
year in which they are recognised where it is not probable that the costs will be
recovered in the current period; and (b) where it is probable that the costs will be
recovered in the current period, revenue must be recognised only to the extent of
the costs incurred.
B. (a) Construction costs must be recognised as a contra asset in the financial year in
which they are incurred and set-off against the receivable recorded on the
contract; and (b) where the receivable is less than the accrued costs, the
difference must be written off as an expense in the period.
C. (a) Contract costs must be recognised as an expense in the financial year in which
they are incurred; and (b) where it is probable that the costs will be recovered,
revenue must be recognised only to the extent of the costs incurred.
D. (a) Construction costs must be accrued and reported as a deferred asset to the
extent that it is considered probable that the costs will be recovered; and (b)
revenue may be recognised only to the extent of the costs incurred.
44. The percentage of completion can be measured in a number of ways, including:

A. physical estimates or surveys of the work performed

to date.
B. the work plan basis, which uses the project management plan to calculate the
percentage of the construction completed.
C. the billings basis, using the proportion that progress billings to date bear to the
total estimated billings for the contract.
D. physical estimates or surveys of the work performed to date and the billings basis,
using the proportion that contract costs incurred for work performed to date bear
to the estimated total contract costs.

45. When the cost basis is used to calculate the percentage of completion, cost items
that may need adjustment include:

A. discounts for the bulk purchase of construction

materials.
B. gains and losses on foreign currency
translation.
C. materials delivered and paid for, but not
yet used.
D. interest charges on late payments for materials and other items used in the
construction project.

46. Using the cost method to calculate the percentage of completion, the formula for the
current period revenue or gross profit to be recognised is:

A. costs incurred to the end of the current period divided by most recent estimate
of total costs.
B. estimated total revenue or gross profit from the contract multiplied by (costs
incurred to the end of the current period divided by most recent estimate of total
costs) less (total revenue or gross profit recognised in prior periods).
C. costs incurred to the end of the current period divided by most recent estimate of
total costs multiplied by (total revenue or gross profit recognised in prior periods).
D. estimated total revenue or gross profit from the contract divided by (costs incurred
to the end of the current period multiplied by most recent estimate of total costs)
less (total revenue or gross profit recognised in prior periods).
47. Hillier Construction Ltd commenced the construction of a building on 1 July 2013. It
has a fixed-price contract for total revenues of $45 million. The expected completion
date is 30 June 2016. The expected total cost to Hillier Construction at the beginning
of the project is $35 million. The following information relates only to the construction
of this building:

Hillier Construction uses the percentage-of-completion method based on cost to

account for its construction contracts. What is the gross profit to be recognised in
each of the 3 years (rounded to the nearest $000)?

A.

B.

C.

D.
48. Hillier Construction Ltd commenced the construction of a building on 1 July 2013. It
has a fixed-price contract for total revenues of $45 million. The expected completion
date is 30 June 2016. The expected total cost to Hillier Construction at the beginning
of the project is $35 million. The following information relates only to the construction
of this building:

Hillier Construction uses the percentage-of-completion method based on cost to

account for its construction contracts. What are the journal entries for the year ended
30 June 2014 (rounded to the nearest $000)?

A.

B.
C.

D.
49. Undersea Construction Ltd commenced the construction of a tunnel under a major
river for public transport on 1 July 2014. It has a fixed-price contract for total
revenues of $36 million. The expected completion date is 30 June 2017. The expected
total cost to Undersea Construction at the beginning of the project is $28 million. The
following information relates only to the construction of the tunnel:

Undersea Construction uses the percentage-of-completion method based on cost to

account for its construction contracts. What is the gross profit to be recognised in
each of the 3 years (rounded to the nearest $000)?

A.

B.

C.

D.
50. Russell Ltd commenced the construction of a bridge on 1July 2013. It has a fixed-
price contract for total revenues of $35million. The expected completion date is 30
June 2016. The expected total cost to Russell Ltd at the beginning of the project is
$29 million. The following information relates only to the construction of the bridge:

Russell Ltd uses the percentage-of-completion method based on cost to account for
its construction contracts. What is the gross profit to be recognised in each of the 3
years (rounded to the nearest $000)?

A.

B.

C.

D.
51. Russell Ltd commenced the construction of a bridge on 1July 2013. It has a fixed-
price contract for total revenues of $35 million. The expected completion date is 30
June 2016. The expected total cost to Russell Ltd at the beginning of the project is
$29 million. The following information relates only to the construction of the bridge:

Russell Ltd uses the percentage-of-completion method based on cost to account for
its construction contracts. Assuming that the entries for 2014 have been made, what
are the journal entries for the year ended 30 June 2015 (rounded to the nearest
$000)?

A.
B.

C.

D.
52. Transactions such as the purchase of assets or the issuance of debt are not
considered income because:

A. they involve external

parties.
B. they necessarily involve
cash.
C. they do not result in an increase in
equity.
D. they both result in an increase of the asset or liability
concerned.

53. Biological assets are:

A. recognised as income when

sold.
B. to be valued at market value, with any increase being capitalised and amortised
over the period until the asset is sold.
C. to be valued at market value, with any increase being treated
as income.
D. to be valued at fair value, with any increase being treated
as income.

54. Which of the following is an example of a situation in which an entity does not retain
the control of the asset?

A. when the entity retains an obligation for unsatisfactory performance not covered
by normal warranty provisions
B. when the entity provides a 30-day return from purchase with a full refund for
the goods sold
C. when the buyer has the right to rescind the purchase for a reason specified in the
sales contract and the entity is uncertain about the probability of return
D. when the goods are shipped subject to installation and the installation is a
significant part of the contract that has not yet been completed by the entity
55. In relation to the expense associated with the creation of an allowance for doubtful
debts, the Australian Taxation Office:

A. never allows a deduction for taxation purposes for that

amount.
B. allows a deduction for taxation purposes for that amount when it is recognised as
an expense.
C. allows a deduction for taxation purposes
immediately.
D. allows a deduction for taxation purposes only when there is a bad debt written off
against a debtors account.

56. In considering whether to recognise revenue when there are associated options:

A. The probability of the exercise of the options must be

considered.
B. The probability of the exercise of the options must not be
considered.
C. Put options will always give rise to revenue, whereas call
options will not.
D. Call options will always give rise to revenue, whereas put
options will not.
57. The following journal entries were recorded by a vendor who sold goods and received
promissory notes on 1 July 2012 in exchange.

What is the interest rate implicit in the arrangement?

A. 29.6
%
B. 16
%
C. 10
%
D. 12
%
58. The following journal entries were recorded by a vendor who sold goods and received
promissory notes on 1 July 2012 in exchange.

Assuming that the issuer of the promissory notes intends to make three equal
payments of $5000 at the end of each of the 3 years, 30 June 2013, 30 June 2014
and 30 June 2015; what is the amount of interest revenue recorded by the vendor at
30 June 2015?

A. Ni
l
B. $53
6
C. $101
4
D. $144
1

59. A group of contracts shall be treated as:

A. a single contract if negotiated as a

package.
B. a single contract only when the contracts are performed
concurrently.
C. individual construction
contracts.
D. all of the given
answers.
60. Which of the following is not a disclosure requirement of IASB (2011)?

A. progress billings in excess of costs incurred on construction

contracts
B. If control of an asset is transferred to a customer before the customer pays
consideration this must be disclosed as a contract asset or receivable.
C. If alternative descriptions are used in the statement of financial position sufficient
information must be disclosed to the users to be able to distinguish between
receivables and contract assets.
D. The gross amount of work progress must be disclosed in the statement of
financial position.

61. Which of the following statements is not an indicator of the transfer of the control of
an asset to a customer?

A. The entity has a present right to payment for

the asset.
B. The entity has transferred physical possession of
the asset.
C. The customer has legal title to the
asset.
D. When goods or services are exchanged or swapped for goods or services, the
revenue is measured at the fair value of the goods or services received, adjusted
by the amount of any cash or cash equivalents transferred.

62. Which of the following statements is not in accordance with IASB (2011) Revenue
from Contracts with Customers with respect to revenue recognition when right of
return exists?

A. Revenue E Revenue recognition of the consideration for the transferred products to

which the entity is reasonably assured to be entitled.
B. when goods are sold or services are rendered recognition of a
refund liability
C. recognition of an asset for its right to recover products from customers on settling
the refund liability
D. All of the given answers are in accordance with the accounting
standard
63. Lonsdale Ltd sells mobile phones and provides a one-year warranty. Lonsdale is able
to recognise revenue at point-of-sale in accordance with IASB (2011) because:

A. this is industry
practice.
B. repairs are unlikely within a year of
sale.
C. cost of repairs can be estimated based on experience and this is recognised as
warranty expense in the year of sale.
D. cost of repairs can be estimated based on experience and this is recognised as
sales returns.

64. Which of the following statements is incorrect with respect to revenue recognition of
construction contracts?

A. The percentage-of-completion method is to be applied for fixed price contracts if

the recognition criteria are satisfied.
B. IASB (2011) requires individual construction contracts to be accounted for
separately and the requirements of the standard to be applied separately to each
contract.
C. The percentage-of-completion method should be used, provided certain conditions
are met that enable the outcome of the contract to be reliably measured.
D. Percentage-of-completion method requires contract revenue to be matched with
progress billings, resulting in the reporting of revenue, expenses and profit which
can be attributed to the amount billed to customers.

65. Werribee Direct Ltd is a mail order company that allows its customers to order online
and return the goods without obligations. Werribee Direct Ltd had experienced a high
ratio of returned merchandise from online sales. What is the appropriate accounting
treatment for this sale that is in accordance with IASB (2011) Revenue?

A. Record the sale only when the option to return has

expired.
B. Record the sale and reduce this by an estimate of future
returns.
C. Record the sale and account for returns as they
occur.
D. Record the sale as deferred revenue and recognise revenue progressively until
expiry of the option.
66. Bellarine Ltd is publisher of Mode magazine and its customers usually sign a three-
year subscription with an advance payment of $500. Mode magazine has 12 issues in
a year. What is the appropriate accounting treatment for this sale on the date of
signing that is in accordance with IASB (2011) Revenue?

A. Recognise revenue in full as this is an immaterial

amount.
B. Recognise the sale as a
provision.
C. Recognise the sale as unearned
revenue.
D. Disclose the sale in the notes as a
contingent item.

67. IASB and FASB initiated a joint project to clarify the principle for recognising revenue
and develop a common revenue standard for IFRS and US GAAP so as to:

A. remove inconsistencies and weaknesses in existing revenue

requirements.
B. provide a more robust framework for addressing
revenue issues.
C. simplify the preparation of financial
statements.
D. All of the given answers are
correct.

68. When a performance obligation is satisfied, an entity shall recognise revenue:

A. in full if it is an immaterial
amount.
B. when the asset is transferred and the customer gains control of
the asset.
C. when the entity retains
control.
D. when the risks and rewards are transferred to the
customer.
69. Which of the following is not a step in recognising revenue according to IASB (2011)?

A. Identify the contract with a

customer.
B. Determine the transaction
price.
C. Recognise revenue before title of the assets transfers to the
customer.
D. Identify the separate performance obligations in a
contract.

70. IASB (2011) requires an entity to recognise revenue for a performance obligation
satisfied over time only if the entity can:

A. reasonably measure with complete satisfaction the performance

obligation.
B. reasonably measure its expected revenue of the performance
obligation.
C. reasonably measure its expected costs of the performance
obligation.
D. reasonably measure its progress towards complete satisfaction of the
performance obligation.

71. In accordance with IASB (2011) discuss the five steps to recognising revenue.

72. Describe, with examples, how the recognition of revenue, at the time of sale, is
affected when products require transportation.
73. Discuss how the use of call and put options affect revenue recognition for sales of
merchandise with associated conditions.

74. What are the three conditions that must be met in order for revenue to be recognised
when the sale of a product gives the buyer the right to return the product?

75. Discuss the different conditions detailed in IASB (2011) that must be satisfied before
the percentage-of-completion method can be used.

76. Explain the difference between revenue and gains as defined in the AASB (IASB)
Conceptual Framework.
77. IASB and FASB initiated a joint project to address some inconsistencies of recognition
of revenue in contracts with customers with other accounting standards. Discuss two
of these inconsistencies.

78. Describe the output and input measures of performance that an entity is required to
use when measuring the progress to date on a construction contract.

79. Explain the accounting treatment when a third party supplies the awards under a
customer loyalty programme.
 Chapter 15 Key

1. Unearned revenues are assets treated as liabilities, as these are received by a

business for services to be performed at a future date.

TRUE
Chapter - Chapter 15 #1
Difficulty: Easy
Section: 15.08 Unearned revenue

2. Construction costs plus gross profit earned to date from a construction contract
are accumulated in the construction in progress account less progress billings and
these are disclosed in the liability section of the statement of financial position.

FALSE
Chapter - Chapter 15 #2
Difficulty: Easy
Section: 15.09 Accounting for construction contracts

3. When the outcome of a construction contract can be estimated reliably, contract

revenue and contract costs associated with the construction contract shall be
recognised as revenue and expenses respectively by reference to the stage of
completion of the contract activity at the reporting date.

TRUE
Chapter - Chapter 15 #3
Difficulty: Easy
Section: 15.09 Accounting for construction contracts

4. When it is probable that total contract costs will exceed total contract revenue, the
expected loss should not be recognised as an expense until the future economic
sacrifice eventuates.

FALSE
Chapter - Chapter 15 #4
Difficulty: Easy
Section: 15.09 Accounting for construction contracts

5. If the borrower prepays interest, the inflow of future economic benefits

represented by the prepayment would not constitute an item of revenue to the
lender because the lender has a present obligation to the borrower to provide
finance for the period to which the prepayment relates.

TRUE
Chapter - Chapter 15 #5
Difficulty: Easy
Section: 15.07 Interest and dividends
6. If a company sells its product but gives the buyer the right to return the product,
IASB (2011) requires revenue from the sales transaction to be recognised at the
time of sale.

FALSE
Chapter - Chapter 15 #6
Difficulty: Medium
Section: 15.06 Accounting for sales with associated conditions

7. Under the AASB (IASB) Conceptual Framework an increase in economic benefits in

the form of the reduction of a liability that is not a contribution by equity
participants and results in an increase in equity during the reporting period, is
income.

TRUE
Chapter - Chapter 15 #7
Difficulty: Easy
Section: 15.02 Definition of income and revenue

8. The AASB (IASB) Conceptual Framework now divides revenues into 'income' and
'gains'.

FALSE
Chapter - Chapter 15 #8
Difficulty: Easy
Section: 15.02 Definition of income and revenue

9. Transactions that result in an inflow of economic benefits such as the purchase of

assets can be classified as a gain.

FALSE
Chapter - Chapter 15 #9
Difficulty: Easy
Section: 15.02 Definition of income and revenue

10. Gains that result from revaluation of long-term assets are included in income.

TRUE
Chapter - Chapter 15 #10
Difficulty: Easy
Section: 15.02 Definition of income and revenue

11. IASB (2011) requires revenues to be measured in terms of historical cost to

improve reliability.

FALSE
Chapter - Chapter 15 #11
Difficulty: Medium
Section: 15.04 Measurement of revenue
12. Accounting standards require that the provision for doubtful debts should be
shown as a deduction from the class of assets to which it relates. The net expense
in relation to bad and doubtful debts must also be disclosed.

TRUE
Chapter - Chapter 15 #12
Difficulty: Easy
Section: 15.05 Income and revenue recognition points

13. When the gross method is used to record the interest inherent in a sales
transaction, it is typical for the accrued interest to be offset against the note
receivable.

FALSE
Chapter - Chapter 15 #13
Difficulty: Easy
Section: 15.07 Interest and dividends

14. In most cases dividend revenue should not be recognised until the dividend
proposed has been ratified by the shareholders at the annual general meeting.

FALSE
Chapter - Chapter 15 #14
Difficulty: Easy
Section: 15.07 Interest and dividends

15. Gains never arise from the ordinary activities of an entity.

FALSE
Chapter - Chapter 15 #15
Difficulty: Easy
Section: 15.02 Definition of income and revenue

16. Where the percentage-of-completion method is based on costs, costs that relate to
the contract activity generally and are not normally related to specific contracts,
such as finance costs, should be allocated across the projects currently in
progress.

FALSE
Chapter - Chapter 15 #16
Difficulty: Medium
Section: 15.09 Accounting for construction contracts

17. Gains must be reported net of related expenses.

FALSE
Chapter - Chapter 15 #17
Difficulty: Easy
Section: 15.02 Definition of income and revenue
18. When making a provision for doubtful debts, debtors' subsidiary ledgers are not
adjusted, as the provision is made in anticipation of likely non-recoverability of
amounts owing, although the identity of who will not pay is unknown.

TRUE
Chapter - Chapter 15 #18
Difficulty: Easy
Section: 15.05 Income and revenue recognition points

19. With the percentage-of-completion method of accounting for construction

contracts, profit is recognised in proportion to the work performed in each
reporting period.

TRUE
Chapter - Chapter 15 #19
Difficulty: Easy
Section: 15.09 Accounting for construction contracts

20. Transfer of ‘control' of the asset is central to the recognition of revenue under the
new accounting standard IASB (2011).

TRUE
Chapter - Chapter 15 #20
Difficulty: Medium
Section: 15.03 Recognition criteria for revenue from contracts with customers

21. Interest revenue is derived from borrowing resources from another entity.

FALSE
Chapter - Chapter 15 #21
Difficulty: Easy
Section: 15.07 Interest and dividends

22. Revenues may be generated by:

A. holding and disposing of inventory in the normal course of

business.
B. having a liability
forgiven.
C. receiving a
donation.
D. all of the given
answers.
Chapter - Chapter 15 #22
Difficulty: Easy
Section: 15.02 Definition of income and revenue
23. The general rule under modified historical-cost accounting is that holding gains on
non-current assets should be:

A. treated as revenue in the period that the fair value of the asset
changes.
B. deferred and amortised over the life of the asset (effectively decreasing
depreciation expense).
C. recognised as part of income and hence, of total
comprehensive income
D. never
recognised.
Chapter - Chapter 15 #23
Difficulty: Easy
Section: 15.05 Income and revenue recognition points

24. Under the AASB (IASB) Conceptual Framework income is now subdivided into:

A. revenues, which only include sales, fees, interest, dividends, royalties and rent;
gains, which are no different in nature to revenue.
B. gains, which are regarded as constituting a separate element in the framework;
revenues, which may only arise in the course of the ordinary activities of the
entity.
C. revenues, which arise in the course of the ordinary activities of the entity; gains,
which may or may not arise in the course of the ordinary activities of the entity.
D. increases in equity referred to as gains; reductions in liabilities which are
classified as revenues.
Chapter - Chapter 15 #24
Difficulty: Easy
Section: 15.02 Definition of income and revenue
25. The following is a diagram of the earnings cycle as presented by Coombes and
Martin (1982).

Because of uncertainty and depending on which measurement model is being

applied, revenue recognition will take place at a limited number of points in the
earnings cycle. In traditional historical-cost accounting, in most cases, at which
point in the cycle above have revenues been recognised?

A. Point
5
B. Point
8
C. Point
7
D. Point
9
Chapter - Chapter 15 #25
Difficulty: Easy
Section: 15.05 Income and revenue recognition points
26. The following is a diagram of the earnings cycle as presented by Coombes and
Martin (1982).

In the traditional historical-cost accounting model, at what point has revenue

been recognised for long-term construction contracts in the building industry?

A. Point
8
B. Point
4
C. Point
6
D. Point
5
Chapter - Chapter 15 #26
Difficulty: Easy
Section: 15.05 Income and revenue recognition points
27. The following is a diagram of the earnings cycle as presented by Coombes and
Martin (1982).

For products such as precious metals or agricultural products revenue is

recognised at which point in the earnings cycle shown above?

A. Point
1
B. Point
4
C. Point
6
D. Point
7
Chapter - Chapter 15 #27
Difficulty: Easy
Section: 15.05 Income and revenue recognition points
28. Revenue recognition under IASB (2011) requires that:

A. the entity has transferred to the buyer the significant risks and rewards of
ownership.
B. the entity retains neither continuing managerial involvement to the degree
normally associated with ownership nor effective control over the goods.
C. the costs incurred or to be incurred can be measured
reliably.
D. there should be a direct function of the transfer of control of the goods and
services to the customer.
Chapter - Chapter 15 #28
Difficulty: Easy
Section: 15.01 New requirements relating to revenue definition

29. Kringle Company has agreed to provide services to North to South Ltd in exchange
for a piece of equipment and a cash payment. The equipment is currently recorded
in North to South's books at $73 000 but independent assessors have set the fair
value at $65 000. The cash payment of $20 000 will be received 12 months after
completion of the services. Kringle should record revenue as:

A. $85
000
B. $65 000 in the current period, $20 000 next
period
C. $93
000
D. $65 000 plus the present value of the $20 000 cash
component
Chapter - Chapter 15 #29
Difficulty: Medium
Section: 15.04 Measurement of revenue

30. An entity shall recognise revenue from a contract when:

A. the entity has satisfied the performance

obligation.
B. the goods or service have been transferred to the
customer.
C. the customer obtains control of the goods or
service.
D. All of the given answers are necessary for recognition of revenue from
a contract.
Chapter - Chapter 15 #30
Difficulty: Easy
Section: 15.03 Recognition criteria for revenue from contracts with customers
31. When goods are sold 'free on board' (f.o.b.) shipping point, the revenue should be
recognised when:

A. the goods are completed and ready to be

transported.
B. the goods are received by the
purchaser.
C. the goods are received by the common
carrier.
D. None of the given answers are correct, there is no revenue involved for goods
sold on terms 'free on board'.
Chapter - Chapter 15 #31
Difficulty: Easy
Section: 15.05 Income and revenue recognition points

32. When the collectability of an amount that has been recorded as revenue becomes
uncertain, the appropriate accounting treatment is to:

A. recognise as an expense the amount in respect of which recovery has ceased to

be probable.
B. calculate the discounted present value of the amount expected to be received
and adjust the recorded revenue accordingly.
C. adjust the amount of revenue originally
recognised.
D. make no adjustment as the amount and timing of the uncollectible amount
is uncertain.
Chapter - Chapter 15 #32
Difficulty: Easy
Section: 15.05 Income and revenue recognition points
33. Vettori Ltd has the following information from an aged debtors listing for the
current period.

Based on experience in the industry, Vettori Ltd uses the following basis for
estimating uncollectible amounts:

Assuming that the current balance in the provision for doubtful debts is zero, what
is the entry to record the provision for this period? What is the entry to record the
writing off of a bad debt of $1000 when a debtor goes bankrupt?

A.

B.
 C.

D.

Chapter - Chapter 15 #33

Difficulty: Medium
Section: 15.05 Income and revenue recognition points

34. In the situation that a debtor becomes unable to pay and the amount has not been
anticipated through a provision for doubtful debts, what is the entry to record the
bad debt?

A. Dr Debtors; Cr Provision for doubtful

debts
B. Dr Provision for doubtful debts; Cr
Debtors
C. Dr Bad debts expense; Cr
Cash
D. Dr Bad debts expense; Cr
Debtors
Chapter - Chapter 15 #34
Difficulty: Easy
Section: 15.05 Income and revenue recognition points
35. Daniel Ltd sells one of its properties to a financing company with an attached call
option, which allows Daniel Ltd to reacquire the property at a future date for $400
000. The current market value at the time of the sale is $300 000, but the
financing company pays $350 000 for it. It is expected that the market value of the
property will exceed $400 000 before the option expires. What is the appropriate
treatment of this sale?

A. Record the revenue and make appropriate note disclosures about the call option
and its associated risks.
B. Set-off the call option and the building—reporting changes in the difference
between their current values as revenues or expenses as appropriate.
C. No entry would be required as the call option is off balance sheet and the
building has not effectively been sold.
D. Record the inflow of cash and a
liability.
Chapter - Chapter 15 #35
Difficulty: Medium
Section: 15.06 Accounting for sales with associated conditions

36. There are various appropriate accounting treatments when a sale is made subject
to a right of return. These methods include:

A. recording the sale and accounting for the returns as they occur in
future periods.
B. recording the cash received as held in trust until all return privileges
have expired.
C. recording the sale but reducing sales by an estimate of the
future returns.
D. recording the sale and accounting for the returns as they occur in future periods
and recording the sale but reducing sales by an estimate of the future returns.
Chapter - Chapter 15 #36
Difficulty: Easy
Section: 15.06 Accounting for sales with associated conditions
37. When goods are sold on extended credit there is an implicit financing arrangement
contained in the sale agreement. In order to separate the financing element from
the sale, it is necessary to calculate the applicable interest rate inherent in the
agreement. What advice does IASB (2011) provide about this?

A. The implicit rate of interest is the more clearly determinable of either: (a) the
prevailing rate of a similar instrument of an issuer with a similar credit rating; or
(b) a rate of interest that discounts the nominal amount of the instrument to the
current cash sales price of the goods or services.
B. The implicit rate of interest is the internal rate of return implicit in the contract
such that the sales price is equal to the fair market value of the asset.
C. The implicit rate of interest is the more reliably determinable of either: (a) the
prevailing rate of a debt instrument of an issuer adjusted to the organisation-
specific, risk adjusted rate of the issuer; or (b) a rate of interest that discounts
the sales price to the fair market value of the goods or services.
D. The implicit rate of interest is the internal rate of return implicit in the contract
such that the sales price is equal to the fair market value of the asset. This rate
may have to be adjusted to take account of the risk of the issuer if it is
significantly different to the market-determined interest rate for similar entities.
Chapter - Chapter 15 #37
Difficulty: Easy
Section: 15.07 Interest and dividends
38. On 1 July 2013 Bryson Ltd sells a machine to Adams Ltd in exchange for a
promissory note that requires Adams Ltd to make five payments of $8000, the first
to be made on 30 June 2014. The machine cost Bryson Ltd $20 000 to
manufacture. Bryson Ltd would normally sell this type of machine for $30 326 for
cash or short-term credit. The implicit interest rate in the agreement is 10%. What
are the appropriate journal entries to record the sale agreement and the first two
instalments using the net-interest method?

A.

B.
C.

D.

Chapter - Chapter 15 #38

Difficulty: Medium
Section: 15.07 Interest and dividends
39. On 1 July 2013 Bigwell Ltd sells a machine to Archer Ltd in exchange for a
promissory note that requires Archer Ltd to make five payments of $8000, the first
to be made on 30 June 2014. The machine cost Bigwell Ltd $20 000 to
manufacture. Bigwell Ltd would normally sell this type of machine for $30 326 for
cash or short-term credit. The implicit interest rate in the agreement is 10%. What
are the appropriate journal entries to record the sale agreement and the first two
instalments using the gross method?

A.
B.

C.
D.

Chapter - Chapter 15 #39

Difficulty: Medium
Section: 15.07 Interest and dividends
40. Magazines Galore receives subscription money in advance, and has received $50
000 from customers on 1 February to cover the next ten issues of Wheels Galore.
There are ten issues a year—one at the end of each month except for January and
December. What are the appropriate accounting entries to record the receipt of
the subscription money and (assuming no monthly entries have been made) the
adjusting entry at 30 June (after June's issue has been mailed to subscribers)?

A.

B.

C.

D.

Chapter - Chapter 15 #40

Difficulty: Easy
Section: 15.07 Interest and dividends
41. The percentage-of-completion method that may be used to account for
construction contracts can be justified on the basis that:

A. The contractor will be continuously working and therefore

earning revenue.
B. In most long-term construction projects, payments are made periodically
throughout the life of the contract allowing revenue to be recognised.
C. It is unreasonable to expect a contractor to record revenue only when
construction is completed.
D. The contracting firm has a basis for measuring completion at particular
interim dates.
Chapter - Chapter 15 #41
Difficulty: Easy
Section: 15.09 Accounting for construction contracts

42. In the case of a fixed price contract, AASB 111 specifies four conditions that must
all be met in order for the percentage-of-completion method to be applied. These
conditions include:

A. Costs related to the contract can be clearly identified and

measured reliably.
B. It is probable that the economic benefits arising from the contract will flow to
the contractor.
C. The entity commissioning the work has a good credit rating and is able to
pay its debts.
D. Costs related to the contract can be clearly identified and measured reliably and
it is probable that the economic benefits arising from the contract will flow to
the contractor.
Chapter - Chapter 15 #42
Difficulty: Easy
Section: 15.09 Accounting for construction contracts
43. IASB (2011) specifies the accounting treatment in the case that the outcome of a
construction contract cannot be reliably assessed. The treatment specified is:

A. (a) Contract costs must be deferred and matched against revenues in the
financial year in which they are recognised where it is not probable that the
costs will be recovered in the current period; and (b) where it is probable that
the costs will be recovered in the current period, revenue must be recognised
only to the extent of the costs incurred.
B. (a) Construction costs must be recognised as a contra asset in the financial year
in which they are incurred and set-off against the receivable recorded on the
contract; and (b) where the receivable is less than the accrued costs, the
difference must be written off as an expense in the period.
C. (a) Contract costs must be recognised as an expense in the financial year in
which they are incurred; and (b) where it is probable that the costs will be
recovered, revenue must be recognised only to the extent of the costs incurred.
D. (a) Construction costs must be accrued and reported as a deferred asset to the
extent that it is considered probable that the costs will be recovered; and (b)
revenue may be recognised only to the extent of the costs incurred.
Chapter - Chapter 15 #43
Difficulty: Medium
Section: 15.09 Accounting for construction contracts

44. The percentage of completion can be measured in a number of ways, including:

A. physical estimates or surveys of the work performed

to date.
B. the work plan basis, which uses the project management plan to calculate the
percentage of the construction completed.
C. the billings basis, using the proportion that progress billings to date bear to the
total estimated billings for the contract.
D. physical estimates or surveys of the work performed to date and the billings
basis, using the proportion that contract costs incurred for work performed to
date bear to the estimated total contract costs.
Chapter - Chapter 15 #44
Difficulty: Easy
Section: 15.09 Accounting for construction contracts
45. When the cost basis is used to calculate the percentage of completion, cost items
that may need adjustment include:

A. discounts for the bulk purchase of construction

materials.
B. gains and losses on foreign currency
translation.
C. materials delivered and paid for, but not
yet used.
D. interest charges on late payments for materials and other items used in the
construction project.
Chapter - Chapter 15 #45
Difficulty: Easy
Section: 15.09 Accounting for construction contracts

46. Using the cost method to calculate the percentage of completion, the formula for
the current period revenue or gross profit to be recognised is:

A. costs incurred to the end of the current period divided by most recent estimate
of total costs.
B. estimated total revenue or gross profit from the contract multiplied by (costs
incurred to the end of the current period divided by most recent estimate of
total costs) less (total revenue or gross profit recognised in prior periods).
C. costs incurred to the end of the current period divided by most recent estimate
of total costs multiplied by (total revenue or gross profit recognised in prior
periods).
D. estimated total revenue or gross profit from the contract divided by (costs
incurred to the end of the current period multiplied by most recent estimate of
total costs) less (total revenue or gross profit recognised in prior periods).
Chapter - Chapter 15 #46
Difficulty: Medium
Section: 15.09 Accounting for construction contracts
47. Hillier Construction Ltd commenced the construction of a building on 1 July 2013. It
has a fixed-price contract for total revenues of $45 million. The expected
completion date is 30 June 2016. The expected total cost to Hillier Construction at
the beginning of the project is $35 million. The following information relates only
to the construction of this building:

Hillier Construction uses the percentage-of-completion method based on cost to

account for its construction contracts. What is the gross profit to be recognised in
each of the 3 years (rounded to the nearest $000)?

A.

B.

C.

D.

Chapter - Chapter 15 #47

Difficulty: Medium
Section: 15.09 Accounting for construction contracts
48. Hillier Construction Ltd commenced the construction of a building on 1 July 2013. It
has a fixed-price contract for total revenues of $45 million. The expected
completion date is 30 June 2016. The expected total cost to Hillier Construction at
the beginning of the project is $35 million. The following information relates only
to the construction of this building:

Hillier Construction uses the percentage-of-completion method based on cost to

account for its construction contracts. What are the journal entries for the year
ended 30 June 2014 (rounded to the nearest $000)?

A.

B.
C.

D.

Chapter - Chapter 15 #48

Difficulty: Hard
Section: 15.09 Accounting for construction contracts
49. Undersea Construction Ltd commenced the construction of a tunnel under a major
river for public transport on 1 July 2014. It has a fixed-price contract for total
revenues of $36 million. The expected completion date is 30 June 2017. The
expected total cost to Undersea Construction at the beginning of the project is $28
million. The following information relates only to the construction of the tunnel:

Undersea Construction uses the percentage-of-completion method based on cost

to account for its construction contracts. What is the gross profit to be recognised
in each of the 3 years (rounded to the nearest $000)?

A.

B.

C.

D.

Chapter - Chapter 15 #49

Difficulty: Medium
Section: 15.09 Accounting for construction contracts
50. Russell Ltd commenced the construction of a bridge on 1July 2013. It has a fixed-
price contract for total revenues of $35million. The expected completion date is 30
June 2016. The expected total cost to Russell Ltd at the beginning of the project is
$29 million. The following information relates only to the construction of the
bridge:

Russell Ltd uses the percentage-of-completion method based on cost to account

for its construction contracts. What is the gross profit to be recognised in each of
the 3 years (rounded to the nearest $000)?

A.

B.

C.

D.

Chapter - Chapter 15 #50

Difficulty: Medium
Section: 15.09 Accounting for construction contracts
51. Russell Ltd commenced the construction of a bridge on 1July 2013. It has a fixed-
price contract for total revenues of $35 million. The expected completion date is
30 June 2016. The expected total cost to Russell Ltd at the beginning of the project
is $29 million. The following information relates only to the construction of the
bridge:

Russell Ltd uses the percentage-of-completion method based on cost to account

for its construction contracts. Assuming that the entries for 2014 have been made,
what are the journal entries for the year ended 30 June 2015 (rounded to the
nearest $000)?

A.
B.

C.

D.

Chapter - Chapter 15 #51

Difficulty: Hard
Section: 15.09 Accounting for construction contracts
52. Transactions such as the purchase of assets or the issuance of debt are not
considered income because:

A. they involve external

parties.
B. they necessarily involve
cash.
C. they do not result in an increase in
equity.
D. they both result in an increase of the asset or liability
concerned.
Chapter - Chapter 15 #52
Difficulty: Easy
Section: 15.02 Definition of income and revenue

53. Biological assets are:

A. recognised as income when

sold.
B. to be valued at market value, with any increase being capitalised and amortised
over the period until the asset is sold.
C. to be valued at market value, with any increase being treated
as income.
D. to be valued at fair value, with any increase being treated
as income.
Chapter - Chapter 15 #53
Difficulty: Medium
Section: 15.05 Income and revenue recognition points

54. Which of the following is an example of a situation in which an entity does not
retain the control of the asset?

A. when the entity retains an obligation for unsatisfactory performance not

covered by normal warranty provisions
B. when the entity provides a 30-day return from purchase with a full refund for
the goods sold
C. when the buyer has the right to rescind the purchase for a reason specified in
the sales contract and the entity is uncertain about the probability of return
D. when the goods are shipped subject to installation and the installation is a
significant part of the contract that has not yet been completed by the entity
Chapter - Chapter 15 #54
Difficulty: Easy
Section: 15.01 New requirements relating to revenue definition
55. In relation to the expense associated with the creation of an allowance for doubtful
debts, the Australian Taxation Office:

A. never allows a deduction for taxation purposes for that

amount.
B. allows a deduction for taxation purposes for that amount when it is recognised
as an expense.
C. allows a deduction for taxation purposes
immediately.
D. allows a deduction for taxation purposes only when there is a bad debt written
off against a debtors account.
Chapter - Chapter 15 #55
Difficulty: Medium
Section: 15.05 Income and revenue recognition points

56. In considering whether to recognise revenue when there are associated options:

A. The probability of the exercise of the options must be

considered.
B. The probability of the exercise of the options must not be
considered.
C. Put options will always give rise to revenue, whereas call
options will not.
D. Call options will always give rise to revenue, whereas put
options will not.
Chapter - Chapter 15 #56
Difficulty: Easy
Section: 15.06 Accounting for sales with associated conditions
57. The following journal entries were recorded by a vendor who sold goods and
received promissory notes on 1 July 2012 in exchange.

What is the interest rate implicit in the arrangement?

A. 29.6
%
B. 16
%
C. 10
%
D. 12
%
Chapter - Chapter 15 #57
Difficulty: Easy
Section: 15.07 Interest and dividends
58. The following journal entries were recorded by a vendor who sold goods and
received promissory notes on 1 July 2012 in exchange.

Assuming that the issuer of the promissory notes intends to make three equal
payments of $5000 at the end of each of the 3 years, 30 June 2013, 30 June 2014
and 30 June 2015; what is the amount of interest revenue recorded by the vendor
at 30 June 2015?

A. Ni
l
B. $53
6
C. $101
4
D. $144
1
Chapter - Chapter 15 #58
Difficulty: Medium
Section: 15.07 Interest and dividends
59. A group of contracts shall be treated as:

A. a single contract if negotiated as a

package.
B. a single contract only when the contracts are performed
concurrently.
C. individual construction
contracts.
D. all of the given
answers.
Chapter - Chapter 15 #59
Difficulty: Medium
Section: 15.09 Accounting for construction contracts

60. Which of the following is not a disclosure requirement of IASB (2011)?

A. progress billings in excess of costs incurred on construction

contracts
B. If control of an asset is transferred to a customer before the customer pays
consideration this must be disclosed as a contract asset or receivable.
C. If alternative descriptions are used in the statement of financial position
sufficient information must be disclosed to the users to be able to distinguish
between receivables and contract assets.
D. The gross amount of work progress must be disclosed in the statement of
financial position.
Chapter - Chapter 15 #60
Difficulty: Hard
Section: 15.09 Accounting for construction contracts

61. Which of the following statements is not an indicator of the transfer of the control
of an asset to a customer?

A. The entity has a present right to payment for

the asset.
B. The entity has transferred physical possession of
the asset.
C. The customer has legal title to the
asset.
D. When goods or services are exchanged or swapped for goods or services, the
revenue is measured at the fair value of the goods or services received,
adjusted by the amount of any cash or cash equivalents transferred.
Chapter - Chapter 15 #61
Difficulty: Medium
Section: 15.03 Recognition criteria for revenue from contracts with customers
62. Which of the following statements is not in accordance with IASB (2011) Revenue
from Contracts with Customers with respect to revenue recognition when right of
return exists?

A. Revenue E Revenue recognition of the consideration for the transferred products

to which the entity is reasonably assured to be entitled.
B. when goods are sold or services are rendered recognition of a
refund liability
C. recognition of an asset for its right to recover products from customers on
settling the refund liability
D. All of the given answers are in accordance with the accounting
standard
Chapter - Chapter 15 #62
Difficulty: Hard
Section: 15.06 Accounting for sales with associated conditions

63. Lonsdale Ltd sells mobile phones and provides a one-year warranty. Lonsdale is
able to recognise revenue at point-of-sale in accordance with IASB (2011)
because:

A. this is industry
practice.
B. repairs are unlikely within a year of
sale.
C. cost of repairs can be estimated based on experience and this is recognised as
warranty expense in the year of sale.
D. cost of repairs can be estimated based on experience and this is recognised as
sales returns.
Chapter - Chapter 15 #63
Difficulty: Medium
Section: 15.09 Accounting for construction contracts
64. Which of the following statements is incorrect with respect to revenue recognition
of construction contracts?

A. The percentage-of-completion method is to be applied for fixed price contracts if

the recognition criteria are satisfied.
B. IASB (2011) requires individual construction contracts to be accounted for
separately and the requirements of the standard to be applied separately to
each contract.
C. The percentage-of-completion method should be used, provided certain
conditions are met that enable the outcome of the contract to be reliably
measured.
D. Percentage-of-completion method requires contract revenue to be matched with
progress billings, resulting in the reporting of revenue, expenses and profit
which can be attributed to the amount billed to customers.
Chapter - Chapter 15 #64
Difficulty: Medium
Section: 15.09 Accounting for construction contracts

65. Werribee Direct Ltd is a mail order company that allows its customers to order
online and return the goods without obligations. Werribee Direct Ltd had
experienced a high ratio of returned merchandise from online sales. What is the
appropriate accounting treatment for this sale that is in accordance with IASB
(2011) Revenue?

A. Record the sale only when the option to return has

expired.
B. Record the sale and reduce this by an estimate of future
returns.
C. Record the sale and account for returns as they
occur.
D. Record the sale as deferred revenue and recognise revenue progressively until
expiry of the option.
Chapter - Chapter 15 #65
Difficulty: Medium
Section: 15.06 Accounting for sales with associated conditions
66. Bellarine Ltd is publisher of Mode magazine and its customers usually sign a three-
year subscription with an advance payment of $500. Mode magazine has 12 issues
in a year. What is the appropriate accounting treatment for this sale on the date of
signing that is in accordance with IASB (2011) Revenue?

A. Recognise revenue in full as this is an immaterial

amount.
B. Recognise the sale as a
provision.
C. Recognise the sale as unearned
revenue.
D. Disclose the sale in the notes as a
contingent item.
Chapter - Chapter 15 #66
Difficulty: Medium
Section: 15.08 Unearned revenue

67. IASB and FASB initiated a joint project to clarify the principle for recognising
revenue and develop a common revenue standard for IFRS and US GAAP so as to:

A. remove inconsistencies and weaknesses in existing revenue

requirements.
B. provide a more robust framework for addressing
revenue issues.
C. simplify the preparation of financial
statements.
D. All of the given answers are
correct.
Chapter - Chapter 15 #67
Difficulty: Medium
Section: 15.08 Unearned revenue

68. When a performance obligation is satisfied, an entity shall recognise revenue:

A. in full if it is an immaterial
amount.
B. when the asset is transferred and the customer gains control of
the asset.
C. when the entity retains
control.
D. when the risks and rewards are transferred to the
customer.
Chapter - Chapter 15 #68
Difficulty: Medium
Section: 15.02 Definition of income and revenue
69. Which of the following is not a step in recognising revenue according to IASB
(2011)?

A. Identify the contract with a

customer.
B. Determine the transaction
price.
C. Recognise revenue before title of the assets transfers to the
customer.
D. Identify the separate performance obligations in a
contract.
Chapter - Chapter 15 #69
Difficulty: Medium
Section: 15.05 Income and revenue recognition points

70. IASB (2011) requires an entity to recognise revenue for a performance obligation
satisfied over time only if the entity can:

A. reasonably measure with complete satisfaction the performance

obligation.
B. reasonably measure its expected revenue of the performance
obligation.
C. reasonably measure its expected costs of the performance
obligation.
D. reasonably measure its progress towards complete satisfaction of the
performance obligation.
Chapter - Chapter 15 #70
Difficulty: Medium
Section: 15.08 Unearned revenue

71. In accordance with IASB (2011) discuss the five steps to recognising revenue.

Chapter - Chapter 15 #71

Difficulty: Medium
Section: 15.05 Income and revenue recognition points
72. Describe, with examples, how the recognition of revenue, at the time of sale, is
affected when products require transportation.

Where products require transportation, the revenues from manufacturing and

selling activities are commonly recognised at the time of sale, normally
determined by the shipping terms. That is, time of sale is commonly interpreted as
the time when title passes. If the goods are shipped on terms referred to as f.o.b.
shipping point (where f.o.b. stands for free on board), title passes to the buyer
when the seller delivers the goods to a common carrier (the ‘shipping point') who
acts as an agent for the buyer. Revenue would typically be recognised when the
goods reach the carrier. If the goods are shipped f.o.b. destination, title does not
pass until the buyer receives the goods from the common carrier (that is, at the
destination). In this case, revenue would not typically be recognised until the
goods reach their destination. ‘Shipping point' and ‘destination' are frequently
designated by a particular location, for example, f.o.b. Sydney, which would mean
the title passes from the seller to the purchaser when the goods arrive in Sydney.
For more information refer to ‘Revenue recognition at the time of sale'.

Chapter - Chapter 15 #72

Difficulty: Medium
Section: 15.05 Income and revenue recognition points
73. Discuss how the use of call and put options affect revenue recognition for sales of
merchandise with associated conditions.

Transactions involving the sale of assets with conditions attached should be

reviewed to assess whether control has actually passed from the seller to the
purchaser and whether it is probable that the inflow of economic benefits to the
seller will occur. For example, merchandise might be sold subject to reservation of
title, whereby a stipulation is placed in the sales contract to the effect that
ownership of the goods does not pass to the purchaser until the time of payment.
The seller, while possessing legal title to the merchandise and therefore the right
to reclaim the merchandise if the buyer defaults, has passed to the purchaser
effective control over the future economic benefits embodied in the transferred
merchandise. Recognition of the revenue would appear appropriate. Goods or
other assets might be sold subject to various other conditions, such as the
existence of put or call options, a related leaseback or the right to return the
assets.
Paragraphs B40 to B42 of the Exposure Draft Revenue from Contracts with
Customers (IASB, 2011) provide guidance that requires that where the original
owner of an asset has sold an asset, but also holds a call option that allows it to
acquire the asset at a future date at a price less than the original selling price,
then no revenue shall be recognised. However, should the option lapse, then
revenue can be recognised.
Similarly, if an entity sells an asset to another organisation and the other
organisation (customer) has a put option which requires the entity to acquire the
asset at a price in excess of the original sale price then no revenue shall be
recognised. See paragraphs B46 to B48 of IASB (2011).
For more information refer to ‘Accounting for sales with associated conditions'.

Chapter - Chapter 15 #73

Difficulty: Hard
Section: 15.06 Accounting for sales with associated conditions

74. What are the three conditions that must be met in order for revenue to be
recognised when the sale of a product gives the buyer the right to return the
product?

Chapter - Chapter 15 #74

Difficulty: Medium
Section: 15.06 Accounting for sales with associated conditions

75. Discuss the different conditions detailed in IASB (2011) that must be satisfied
before the percentage-of-completion method can be used.

Chapter - Chapter 15 #75

Difficulty: Medium
 Section: 15.09 Accounting for construction contracts

76. Explain the difference between revenue and gains as defined in the AASB (IASB)
Conceptual Framework.

As indicated in the AASB (IASB) Conceptual Framework, income can be subdivided

into ‘revenues' and ‘gains'. Specifically:
The definition of income encompasses both revenues and gains. Revenue arises in
the course of the ordinary activities of an entity and is referred to by a variety of
different names including sales, fees, interest, dividends, royalties and rent.
In relation to ‘gains', the AASB Conceptual Framework provides the following:
Gains represent other items that meet the definition of income and may, or may
not, arise in the course of the ordinary activities of an entity. Gains represent
increases in economic benefits and as such are no different in nature from
revenue. Hence they are not regarded as constituting a separate element in this
Framework.
Gains include, for example, those arising on the disposal of non-current assets.
The definition of income also includes unrealised gains, for example, those arising
on the revaluation of marketable securities and those resulting from increases in
the carrying amount of long-term assets. When gains are recognised in the income
statement, they are usually displayed separately because knowledge of them is
useful for the purpose of making economic decisions. Gains are often reported net
of related expenses.
For more information refer to ‘Definition of income and revenue'.

Chapter - Chapter 15 #76

Difficulty: Medium
Section: 15.02 Definition of income and revenue
77. IASB and FASB initiated a joint project to address some inconsistencies of
recognition of revenue in contracts with customers with other accounting
standards. Discuss two of these inconsistencies.

It was argued in IASB (2008) that the recognition of revenue for some transactions,
as required by IAS 18/AASB 118 and IAS 11/AASB 111, was inconsistent with the
definition and recognition criteria for revenue as provided in the IASB Conceptual
Framework. The recognition principles in these standards utilised recognition
criteria dependent upon whether the transaction transferred the ‘risks and rewards
of ownership' of the assets, rather than basing the recognition on the transfer of
control. ‘Control' is central to the definition of an asset. As paragraph 1.10 of IASB
(2008) stated:
Some criticise revenue recognition standards in IFRSs because an entity applying
those standards might recognise amounts in the financial statements that do not
faithfully represent economic phenomena. That can happen because, under
existing accounting standards, revenue recognition for the sale of a good depends
largely on when the risks and rewards of ownership of the good are transferred to
a customer. Therefore, an entity might recognise a good as inventory (because a
preponderance of risks and rewards may not have passed yet to the customer)
even after the
customer has obtained control over the good. That outcome is inconsistent with
the IASB's definition of an asset, which depends on control of the good, not the
risks and rewards of owning the good.
Adopting a view that revenue recognition should be consistent with the Conceptual
Framework, the IASB and FASB embrace a view, as reflected in IASB (2011), that
revenue recognition should be a direct function of whether goods and services
have been transferred to the control of the customer (and not be a function of who
holds the risks and rewards of ownership of the asset). As paragraph 6.7 of IASB
(2008) states: An entity satisfies a performance obligation when it transfers goods
and services to a customer. That principle, which the boards think can be applied
consistently to all contracts with customers, is the core of the boards' proposed
model for a revenue recognition standard. In further considering the ‘core'
requirement that revenue recognition should be directly linked to the transfer of
control of the underlying goods and services, paragraph 4.62 of IASB (2008)
refers.
This approach reinforces the perspective that, under current thinking, revenue
recognition from contracts with customers is very much linked to the transfer of
control of assets and not to the transfer of the risks and rewards of ownership as
has been the accepted position for many years. This is quite a significant shift in
thinking.
For more information refer to ‘New requirements relating to revenue definition'.

Chapter - Chapter 15 #77

Difficulty: Medium
Section: 15.01 New requirements relating to revenue definition
78. Describe the output and input measures of performance that an entity is required
to use when measuring the progress to date on a construction contract.

Paragraphs 41 to 46 of IASB (2011) describe output and input measures of

performance:
Output methods
41 Output methods recognise revenue on the basis of direct measurements of the
value to the customer of the goods or services transferred to date
42 If an entity has a right to invoice a customer in an amount that corresponds
directly with the value to the customer of the entity's performance completed to
date
43 A disadvantage of output methods is that they are often not directly
observable and the information required to apply them may not be available to
the entity without undue cost. Hence, an input method may be necessary.
Input methods
44 Input methods recognise revenue on the basis of the entity's efforts or inputs
to the satisfaction of a performance obligation relative to the total expected inputs
to the satisfaction of that performance obligation. If the entity's efforts or inputs
are expended evenly throughout the performance period, it may be appropriate
for an entity to recognise revenue on a straight-line basis.
45 A shortcoming of input methods is that there may not be a direct relationship
between the entity's inputs and the transfer of control of goods or services to the
customer because of inefficiencies in the entity's performance or other factors.
Hence, when using an input method, an entity shall exclude the effects of any
inputs that do not depict the transfer of control of goods or services to the
customer (for example, the costs of wasted materials, labour or other resources to
fulfil the contract that were not reflected in the price of the contract).
46 When applying an input method to a separate performance obligation that
includes goods that the customer obtains control of significantly before receiving
services related to those goods, the best depiction of the entity's performance
may be for the entity to recognise revenue for the transferred goods in an amount
equal to the costs of those goods if both of the following conditions are present at
contract inception: (a) the cost of the transferred goods is significant relative to
the total expected costs to completely satisfy the performance obligation; and (b)
the entity procures the goods from another entity and is not significantly involved
in designing and manufacturing the goods (but the entity is acting as a principal in
accordance with paragraphs B16–B19).
For more information refer to ‘Accounting for construction contracts'.

Chapter - Chapter 15 #78

Difficulty: Medium
Section: 15.09 Accounting for construction contracts
79. Explain the accounting treatment when a third party supplies the awards under a
customer loyalty programme.

Chapter - Chapter 15 #79

Difficulty: Medium
Section: 15.10 Customer loyalty programmes
 Chapter 15 Summary

Category # of Questions
Chapter - Chapter 15 79
Difficulty: Easy 39
Difficulty: Hard 5
Difficulty: Medium 35
Section: 15.01 New requirements relating to revenue definition 3
Section: 15.02 Definition of income and revenue 11
Section: 15.03 Recognition criteria for revenue from contracts with 3
customers
Section: 15.04 Measurement of revenue 2
Section: 15.05 Income and revenue recognition points 15
Section: 15.06 Accounting for sales with associated conditions 8
Section: 15.07 Interest and dividends 10
Section: 15.08 Unearned revenue 4
Section: 15.09 Accounting for construction contracts 22
Section: 15.10 Customer loyalty programmes 1