Intermediate Accounting 8th Edition Spiceland Solutions Manual 1

Intermediate Accounting 8th Edition
Spiceland Solutions Manual

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Chapter 5 Revenue Recognition and Profitability Analysis
QUESTIONS FOR REVIEW OF KEY TOPICS

Question 5–1
The five key steps in applying the core revenue recognition principle are:
1. Identify the contract with a customer.
2. Identify the performance obligation(s) in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize revenue when (or as) each performance obligation is satisfied.
Question 5–2
A performance obligation is satisfied at a single point in time when control is
transferred to the buyer at a single point in time. This often occurs at delivery. Five
key indicators are used to decide whether control of a good or service has passed from
the seller to the buyer. The customer is more likely to control a good or service if the
customer has:
1. An obligation to pay the seller.
2. Legal title to the asset.
Intermediate Accounting, 8/e 5-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3. Physical possession of the asset.
4. Assumed the risks and rewards of ownership.
5. Accepted the asset.
Management should evaluate these indicators individually and in combination to

decide whether control has been transferred.
Question 5–3
A performance obligation is satisfied over time if at least one of the following three
criteria is met:
1. The customer consumes the benefit of the seller’s work as it is performed,
2. The customer controls the asset as it is created, or
3. The seller is creating an asset that has no alternative use to the seller, and
the seller can receive payment for its progress even if the customer
cancels the contract.
5-2 Solutions Manual, Vol. 1, Chapter 5

Answers to Questions (continued)
Question 5–4
Services typically qualify for revenue recognition over time because the customer
consumes the benefit of the seller’s work as it is performed. However, for
convenience, even if the service qualifies for recognition of revenue over time, the
seller might wait to recognize revenue until the service has been completed because it
is more convenient to account for it that way. For example, if a service is delivered
over days or even weeks, the seller might just wait to recognize revenue until delivery
is complete rather than bothering with a more precise recognition of revenue over
time. This departure from GAAP is appropriate only if the amount of revenue
recognized under the departure is not materially different from the amount of revenue
that would be recognized if revenue was recognized over time.
Question 5–5
Sellers account for a promise to provide a good or service as a performance
obligation if the good or service is distinct from other goods and services in the
contract. The idea is to separate contracts into parts that can be viewed on a stand-
alone basis. That way the financial statements can better reflect the timing of the
transfer of separate goods and services and the profit earned on each one. Performance
obligations that are not distinct are combined and treated as a single performance
obligation.
A performance obligation is distinct if it is both:
1. Capable of being distinct. The customer could use the good or service on its
own or in combination with other goods and services it could obtain
elsewhere, and
2. Separately identifiable from other goods or services in the contract. The good
or service is not highly interrelated with other goods and services in the
contract.

Question 5–6
If an arrangement has multiple performance obligations, the seller allocates the
transaction price in proportion to the stand-alone selling prices of the goods or services
underlying those performance obligations. If the seller can’t observe actual stand-
alone selling prices, the seller should estimate them.
Question 5–7
A contract specifies the legal rights and obligations of the seller and the customer.
For a contract to exist for purposes of revenue recognition, it must:
1. Have commercial substance, affecting the risk, timing or amount of the
seller’s future cash flows,
2. Be approved by both the seller and the customer, indicating commitment to
fulfilling their obligations,
3. Specify the seller and customer’s rights regarding the goods or services to be
transferred, and
4. Specify payment terms.
5. Be probable that the seller will collect the amount it is entitled to receive.
We normally think of a contract as being specified in a written document, but

contracts can be oral rather than written. Contracts also can be implicit based on the
typical business practices that a company follows. The key is that, implicitly or
explicitly, the arrangement be substantive and specify the legal rights and obligations
of a seller and a customer.
Question 5–8
If a seller grants a customer the option to acquire additional goods or services, that
option gives rise to a performance obligation only if the option provides a material
right to the customer that the customer would not receive without entering into the
contract. If the option provides a material right, the customer in effect pays the seller
in advance for future goods or services, and the seller recognizes revenue when those
future goods or services are transferred or when the option expires.

Question 5–9
Variable consideration is included in the contract’s transaction price when the
seller believes it is probable that it won’t have to reverse (adjust downward) a
significant amount of revenue in the future because of a change in that variable
consideration. The seller estimates the variable consideration as either the expected
value or the most likely amount to be received, and includes that amount in the
contracts transaction price.
Question 5–10
A seller is constrained to recognize only the amount of revenue for which the seller
believes it is probable that a significant amount of revenue won’t have to be reversed
(adjusted downward) in the future because of a change in that variable consideration.
Indicators that variable consideration should be constrained include limited other
evidence on which to base an estimate, dependence of the variable consideration on
factors outside the seller’s control, and a long delay between when the estimate must
be made and when the uncertainty is resolved.
Question 5–11
A right to return unsatisfactory merchandise is not a performance obligation.
Rather, it represents a potential inability to satisfy the original performance obligation
to provide satisfactory goods. We view a right of return as a particular type of variable
consideration. A seller usually can estimate the returns that will result for a given
volume of sales based on past experience. Accordingly, the seller usually recognizes
revenue upon delivery, but then reduces revenue and accounts receivable to reflect the
estimated returns. However, if a seller can’t estimate returns with reasonable accuracy,
the constraint on variable consideration applies, and the seller must postpone
recognizing any revenue until returns can be estimated.

Question 5–12
A principal has primary responsibility for delivering a product or service and
obtains control of the goods or services before they are transferred to the customer. A
principal recognizes as revenue the amount received from a customer. An agent
doesn’t primarily deliver goods or services, but acts as a facilitator that earns a
commission for helping sellers to transact with buyers, and recognizes as revenue only
the commission it receives for facilitating the sale.
Question 5–13
In general, the “time value of money” refers to the fact that money to be received
in the future is less valuable than the same amount of money received now. If you
have the money now, you can invest it to earn a return so the money can grow to a
larger amount in the future.
If payment occurs either before or after delivery, conceptually the arrangement
includes a financing component. However, when delivery and payment occur
relatively near each other, the financing component is not significant and can be
ignored. As a practical matter, sellers can assume the financing component is not
significant if the period between delivery and payment is less than a year. However,
if the financing component is significant, sellers must take it into account, both when
a prepayment occurs and when an account receivable occurs. We discuss accounting
for the time value of money in Chapter 6, and apply it to many future chapters.
Question 5–14
If a seller purchases distinct goods or services from their customer and pays more
than fair value for those goods or services, the excess payments are viewed as a refund
of part of the price of the goods and services that the customer purchased from the
seller. The excess payments are subtracted from the amount the seller is entitled to
receive from the customer when calculating the transaction price of the sale to the
customer.

Question 5–15
1. Adjusted market assessment approach: Under this approach, the seller
estimates what it could sell the product or services for in the market in which it
normally sells products. The seller likely would consider prices charged by
competitors for similar products.
2. Expected cost plus margin approach: Under this approach, the seller estimates
its costs of satisfying the performance obligation and then adds an appropriate
profit margin to determine the revenue it would anticipate receiving for satisfying
the performance obligation.
3. Residual approach: Under this approach, the seller subtracts from the total
transaction price the sum of the known or estimated stand-alone selling prices of
the other performance obligations that are included in the contract to arrive at an
estimate of an unknown or highly uncertain stand-alone selling price.
Question 5–16
Some licenses transfer a right to use the seller’s intellectual property as it exists
when the license is granted. For these licenses, subsequent activity by the seller
doesn’t affect the benefit that the customer receives. If a license transfers such a
right of use, revenue is recognized at the point in time the right is transferred.
Other licenses provide the customer with access to the seller’s intellectual
property with the understanding that the seller will undertake ongoing activities
during the license period that affect the benefit the customer receives. If a license
provides such a right of access to the seller’s intellectual property, the seller satisfies
its performance obligation over time as the customer receives benefits of the seller’s
ongoing activities, so revenue is recognized over the period of time for which access
is provided.

Question 5–17
In franchise arrangements, the franchisor typically has multiple performance
obligations. The franchisor grants to the franchisee a right to sell the franchisor’s
products and services and use its name for a specified period of time. The franchisor
also usually provides initial start-up services (such as identifying locations,
remodeling or constructing facilities, and selling equipment and training to the
franchisee). The franchisor also may provide ongoing products and services (such as
franchise-branded products and advertising and administrative services). So, a
franchise involves a license to use the franchisor’s intellectual property, but also
involves initial sales of products and services as well as ongoing sales of products and
services.
Question 5–18
A bill-and-hold arrangement exists when a customer purchases goods but requests
that the seller not ship the product until a later date. The key indicator of whether
control has passed from the seller to the customer for bill-and-hold arrangements is
whether the customer has physical possession of the asset. Since the customer doesn’t
have physical possession of the goods in a bill-and-hold arrangement, the customer
isn’t viewed as controlling the goods. That indicator normally overshadows other
control indicators in a bill-and-hold arrangement. Therefore, sellers usually conclude
that control has not been transferred and revenue is not recognized until actual delivery
to the customer occurs.

Question 5–19
Sometimes a company arranges for another company to sell its product under
consignment. The “consignor” physically transfers the goods to the other company
(the consignee), but the consignor retains legal title. If the consignee can’t find a buyer
within an agreed-upon time, the consignee returns the goods to the consignor.
However, if a buyer is found, the consignee remits the selling price (less commission
and approved expenses) to the consignor.
Because the consignor retains the risks and rewards of ownership of the product
and title does not pass to the consignee, the consignor does not record revenue (and
related costs) until the consignee sells the goods and title passes to the eventual
customer.
Question 5–20
Sometimes companies receive non-refundable prepayments from customers for
some future good or service. That is what occurs when a company sells a gift card.
The seller does not recognize revenue at the time the gift card is sold to the customer.
Instead, the seller records a deferred revenue liability in anticipation of recording
revenue when the gift card is redeemed. If the gift card isn’t redeemed, the seller
recognizes revenue when it expires or when, based on past experience, the seller has
concluded that customers will not redeem it.
Question 5–21
Bad debt expense must be reported clearly either on its own line in the income
statement or in the notes to the financial statements.
Question 5–22
If the customer makes payment to the seller before the seller has satisfied
performance obligations, the seller records a contract liability. If the seller satisfies a
performance obligation before the customer has paid for it, the seller records either a
contract asset or a receivable. The seller recognizes an accounts receivable if the seller
has an unconditional right to receive payment, which is the case if only the passage of
time is required before the payment is due. If instead the seller satisfies a performance
obligation but its right to payment depends on something other than the passage of
time (for example, the seller satisfying other performance obligations), the seller
recognizes a contract asset.

Question 5–23
If a long-term contract qualifies for revenue recognition over time, the seller
recognizes a portion of the project’s expected revenues and costs to each period in
which construction occurs, according to the percentage of the project completed to
date. If the contract does not qualify for revenue recognition over time, the seller
recognizes revenue and costs when the construction project is complete.
Question 5–24
The billings on construction contract account is a contra account to the
construction in progress asset. At the end of each reporting period, the balances in
these two accounts are compared. If the net amount is a debit, it is reported in the
balance sheet as a contract asset. Conversely, if the net amount is a credit, it is reported
as a contract liability.
Question 5–25
An estimated loss on a long-term contract must be fully recognized in the first
period the loss becomes evident, regardless of the revenue recognition method used.
Question 5–26
Receivables turnover ratio = Net sales

Average accounts receivable (net)
Inventory turnover ratio = Cost of goods sold

Average inventory
Asset turnover ratio = Net sales

Average total assets
Activity ratios are designed to provide information about a company’s

effectiveness in managing assets. Activity or turnover of certain assets measures the
frequency with which those assets are replaced. The greater the number of times an
asset turns over, the less cash a company must devote to that asset, and the more cash
it can commit to other purposes.

Question 5–27
Profit margin on sales = Net income

Net sales
Return on assets = Net income

Return on shareholders' = Net income

equity Average shareholders' equity
A fundamental element of an analyst’s task is to develop an understanding of a

firm’s profitability. Profitability ratios provide information about a company’s ability
to earn an adequate return relative to sales or resources devoted to operations.
Resources devoted to operations can be defined as total assets or only those assets
provided by owners, depending on the evaluation objective.
Question 5–28
Return on equity = Profit margin X Asset turnover X Equity multiplier
Net income = Net income X Total sales X Avg. total assets

Avg. total equity Total sales Avg. total assets Avg. total equity
The DuPont framework shows return on equity as being driven by profit margin
(reflecting a company’s ability to earn income from sales), asset turnover (reflecting
a company’s effectiveness in using assets to generate sales), and the equity multiplier
(reflecting the extent to which a company has used debt to finance its assets).

APPENDIX QUESTIONS FOR REVIEW OF KEY
TOPICS
Question 5–29
The realization principle requires that two criteria be satisfied before revenue can
be recognized:
1. The earnings process is judged to be complete or virtually complete.
2. There is reasonable certainty as to the collectibility of the asset to be
received (usually cash).
Question 5–30
At the time production is completed, there usually exists significant uncertainty
as to the collectibility of the asset to be received. We don’t know if the product will
be sold, nor the selling price, nor the buyer if eventually the product is sold. Because
of these uncertainties, revenue recognition usually is delayed until the point of product
delivery.
Question 5–31
If the installment sale creates a situation where there is significant uncertainty
concerning cash collection and it is not possible to make an accurate assessment of
future bad debts, revenue and cost recognition should be delayed beyond the point of
delivery.
Question 5–32
The installment sales method recognizes gross profit by applying the gross profit
percentage on the sale to the amount of cash actually received each period. The cost
recovery method defers all gross profit recognition until cash has been received equal
to the cost of the item sold.
Question 5–33
Deferred gross profit is a contra installment receivable account. The balance in
this account is subtracted from gross installment receivables to arrive at installment
receivables, net. The net amount of the receivables represents the portion of remaining
payments that represent cost recovery.

Question 5–34
The completed contract method recognizes revenue, cost of construction, and
gross profit at the end of the contract, after the contract has been completed. The cost
recovery method will recognize an amount of revenue equal to the amount of cost that
can be recovered, which typically is an amount that exactly offsets costs until all costs
have been recovered, and then will recognize the remaining revenue and gross profit.
Therefore, revenue and cost are recognized earlier under the cost recovery method
than under the completed contract method, but gross profit recognition is delayed until
late in the contract for both approaches. Assuming that the final costs are incurred just
prior to completion of the contract, both approaches should recognize gross profit at
the same time.
Question 5–35
This guidance requires that if an arrangement includes multiple elements, the
revenue from the arrangement should be allocated to the various elements based on
the relative fair values of the individual elements. If part of an arrangement does not
qualify for separate accounting, revenue recognition is delayed until revenue is
recognized for the other parts.
Question 5–36
IFRS has less specific guidance for recognizing revenue for multiple-deliverable
arrangements. IAS No. 18 simply states that: “…in certain circumstances, it is
necessary to apply the recognition criteria to the separately identifiable components
of a single transaction in order to reflect the substance of the transaction” and gives a
couple of examples, whereas U.S. GAAP provides more restrictive guidance
concerning how to allocate revenue to various components and when revenue from
components can be recognized.

Answers to Questions (concluded)
Question 5–37
Specific guidelines for revenue recognition of the initial franchise fee are
provided by FASB ASC 952–605–25–1. A key to these guidelines is the concept
of substantial performance. It requires that substantially all of the initial services of
the franchisor required by the franchise agreement be performed before the initial
franchise fee can be recognized as revenue. The term “substantial” requires
professional judgment on the part of the accountant. In situations when the initial
franchise fee is collectible in installments, even after substantial performance has
occurred, the installment sales or cost recovery method should be used for profit
recognition, if a reasonable estimate of uncollectibility cannot be made.

BRIEF EXERCISES
Brief Exercise 5–1
In 2016 Apache has transferred the land, and the construction company has an
obligation to pay Apache. Apache’s performance obligation has been satisfied, and
revenue and a related accounts receivable of $3,000,000 can be recognized
Under accrual accounting, revenue is recorded when goods and services are
transferred to customers (2016), not necessarily when cash changes hands in future
periods.

A performance obligation is satisfied over time if at least one of the following three
criteria is met:
3. The seller is creating an asset that has no alternative use to the seller, and the
seller can receive payment for its progress even if the customer cancels the
contract.
Under Estate’s construction agreement with CyberB, if for any reason

Estate can’t complete construction, CyberB would own the partially completed
building. Therefore, criterion 2 is satisfied, and revenue should be recognized as the
building is being constructed.

This contract qualifies for revenue recognition over time, because the performance
obligation (to provide technology consulting services upon request) is consumed by
the customer as the seller’s work is performed. Therefore, Varga should recognize
revenue of $4,000 ($6,000 × 8/12 months) in 2016.
Journal entries (not required):
May 1, 2016
Cash 6,000
Deferred revenue 6,000
December 31, 2016 adjusting entry

Service revenue ($6,000 x 8/12) 4,000

Based on relative stand-alone selling prices, the software comprises 70% of the
total fair values ($70,000 ÷ [$30,000 + 70,000]), and the technical support comprises
30% ($30,000 ÷ [$30,000 + 70,000]). Therefore, Sarjit would recognize
$56,000 ($80,000  70%) in revenue when the software is delivered and defer the
remaining $24,000 ($80,000  30%) to be recognized evenly over the next six months
as the technical support service is provided.
$80,000
Transaction Price
70% 30%
$56,000 $24,000
Software Technical Support Service
The journal entry is recorded as follows:
Cash 80,000
Sales revenue (for software) 56,000
Deferred revenue (for tech support) 24,000

Number of performance obligations in the contract: 1.
Access to eLean services is one performance obligation. Registration on the

website is not a performance obligation, but rather is part of the activity eLean must
provide to satisfy its performance obligation of providing access to eLean’s on-line
services. The $50 payment is an upfront payment that is part of the total transaction
price associated with the service, and the monthly payments are the other component.

We need to consider three aspects of the vacuum contract: delivery of the vacuum,
the one-year quality-assurance warranty, and the option to purchase the three-year
extended warranty. Delivery of the vacuum cleaner is a performance obligation. The
one-year warranty that is included as part of the purchase (the quality-assurance
warranty) is not a performance obligation, but rather is part of the obligation to deliver
a vacuum of appropriate quality. The option to purchase a three-year extended
warranty is not a performance obligation within the contract to purchase a vacuum,
because customers can purchase that warranty for the same amount at other times, so
the opportunity to buy it at the same time that they buy the vacuum does not present a
material right.

We need to consider three aspects of the vacuum contract: delivery of the vacuum,
the one-year quality-assurance warranty, and the option to purchase the three-year
extended warranty. Delivery of the vacuum cleaner is a performance obligation. The
one-year warranty that is included as part of the purchase (the quality-assurance
warranty) is not a performance obligation, but rather it is part of the obligation to
deliver a vacuum of appropriate quality. The option to purchase the extended
warranty, though, is a performance obligation within the contract to purchase a
vacuum. Customers can purchase that warranty at a 20% discount if they do so when
they buy the vacuum, so the opportunity to buy the extended warranty constitutes a
material right. Also, the option is capable of being distinct, as it could be sold or
provided separately, and it is separately identifiable, as the vacuum could be sold
without the option to purchase an extended warranty, so the option is distinct, and
qualifies as a performance obligation.

In addition to the subscription, the renewal option is a performance obligation

because it provides a material right that allows the customer to renew at a better price
than could be obtained without the right. The renewed protection is capable of being
distinct, as it could be sold or provided separately, and it is separately identifiable, as
the customer can use the renewed protection on its own. Therefore, the renewed
protection is distinct, and qualifies as a performance obligation.
Brief Exercise 5-9

The separate goods and services that Precision Equipment has agreed to provide
(equipment, customized software package, and consulting services) might be capable
of being distinct, but they are not separately identifiable. In the context of the contract,
the goods and services are highly dependent on and interrelated with each other. The
contractor’s role is to integrate and customize them to create one automated assembly
line.
Brief Exercise 5-10

Lego enters into a contract to design and construct a specific building. Each smaller
component of the construction contract, though capable of being distinct, is not
separately identifiable because each component is highly interrelated with each other,
and providing them to the customer requires the seller to integrate the components
into a combined item (garage).

Brief Exercise 5-11
A right of return is not a performance obligation. Instead, the right of return

represents a potential failure to satisfy the original performance obligation to deliver
goods to the customer. Because the total amount of cash received from the customer
depends on the amount of returns, a right of return is a type of variable consideration.
Aria should estimate sales returns and reduce revenue by that amount in order to
arrive at “net revenue,” which would be the transaction price (the amount to be
recorded as revenue on the seller’s books). The total net revenue in this situation is
$280,233:
Revenue $288,900 ($90 × 3,210 units)
Sales returns 8,667 ($288,900 × 3%)
Net revenue $280,233

The expected value would be calculated as follows:
Possible Amounts Probabilities Expected Amounts

$35,000 ($25,000 fixed fee + 10,000 bonus) × 50% = $17,500
$25,000 ($25,000 fixed fee + 0 bonus) × 50% = 12,500
Expected contract price at inception $30,000
Or, alternatively:
$25,000 + ($10,000 × 50%) = $30,000

Brief Exercise 5-13
When a contract includes variable consideration, sellers are constrained to
recognize only the amount of revenue they believe is probable that they won’t have to
reverse (adjust downward) in the future if the variable consideration changes. In this
case, factors outside the seller’s control (stock market volatility) make the seller’s
estimate of variable consideration very uncertain, so the amount of revenue that
Continental will recognize during the year is limited to the fixed annual management
fee, which is $1.5 million (1% of the client’s $150 million total assets under
management). Therefore, Continental would use $1.5 million as its estimate of the
transaction price. Any performance bonus earned by Continental will be recognized
as revenue if and when it is earned.

Finerly should recognize $0 of revenue upon delivery to distributors. Given the
uncertainty about estimated returns, Finerly can’t argue that it is probable that it won’t
have to reverse (adjust downward) a significant amount of revenue in the future
because of a change in returns. Therefore, Finerly won’t recognize revenue until it
either can better estimate returns or sales to end consumers occur. Essentially, because
Finerly can’t estimate returns, it treats this transaction as if it is placing those goods
on consignment with independent distributors.

Amazon will recognize revenue of $150, its commission on the sale. In this
transaction, Amazon never has primary responsibility for delivering a product or
service, and it is not vulnerable to risks associated with holding inventory or delivering
the product or service. Therefore, Amazon serves as an agent, and will only recognize
revenue on the transaction equal to the amount of the commission it receives.

If a seller is purchasing distinct goods or services from a customer at the fair value
of those goods or services, we account for that purchase as a separate transaction.
Otherwise, excess payments by the seller are treated as a refund of the customer’s
purchase. If the payments are made (or are expected to be made) at the time of the
original sale, the transaction price of the customer’s purchase is reduced immediately
by the refund. If payment is not expected at the time of the sale, revenue is recorded
based on the full transaction price, and any subsequent payment by the seller above
fair value results in a reduction of the transaction price at that time.
There is no indication that Lewis’ payment to AdCo for $10,000, which is $2,500
more than the fair value of those services ($7,500), was expected at the time of the
original sale. Therefore, the original sale would be recorded based on the full
transaction price of $60,000. The overpayment of $2,500 reduces the $60,000
transaction price of the goods sold by Lewis to AdCo at the time the $10,000 is paid,
resulting in a downward adjustment of revenue of $2,500 at that time and net revenue
over the period of $60,000 – 2,500 = $57,500.

Under the adjusted market assessment approach, O’Hara would base its estimate
of the stand-alone selling price of the club-fitting services on the prices charged by
other vendors for those services, adjusted as necessary. Because O’Hara typically
charges 10% more than what other vendors charge, O’Hara would estimate the stand-
alone selling price of the club-fitting service to be $110 × 110% = $121.

Under the expected cost plus margin approach, O’Hara would base its estimate of
the stand-alone selling price of the club-fitting service on the $60 cost it incurs to
provide the services, plus its normal margin of $60 × 30% = $18. Therefore, O’Hara
would estimate the stand-alone selling price of the club-fitting services to be $60 + 18
= $78.

Under the residual approach, O’Hara would base its estimate of the stand-alone
selling price of the club-fitting services on the total selling price of the contract
($1,500) minus the observable stand-alone selling price of clubs ($1,400). Therefore,
O’Hara would estimate the stand-alone selling price of the club-fitting services to be
$1,500 – 1,400 = $100.

The software license is a right of use, since Saar’s activities during the license
period (which for this software does not have an end date) will not affect the value of
the software to Kim. Therefore, Saar can recognize the entire $100,000 upon transfer
of the right. However, the license to use the Saar name is an access right, with Saar’s
ongoing activity affecting the benefit that Kim receives, so Saar should recognize
revenue as that access is consumed over 36 months. Since Kim uses the Saar name
for four months in 2016 (September through December), Saar should recognize
revenue of 4 ÷ 36 = 1/9 of $90,000, or $10,000, for that access right in 2016. In total,
Saar recognizes revenue of $100,000 + 10,000 = $110,000 in 2016.

Because Carlos had completed training and was open for business on August 1,
2016, TopChop apparently has satisfied its performance obligation with respect to the
initial training, equipment and furnishings, so it would recognize $50,000 of revenue
in 2016. In addition, since Carlos was a franchisee for the last six months of 2016,
TopChop should recognize 6 ÷ 12 = 50% of a yearly fee of $30,000, or $15,000. In
total, TopChop recognizes revenue from Carlos of $50,000 + 15,000 = $65,000 in
2016.

$0. Prior to delivery, Dowell maintains control of the inventory and should not
recognize revenue.

$250, equal to revenue for the sale of one painting. Kerianne has a
consignment arrangement with Holmstrom, so should not recognize transfer of
paintings to Holmstrom as sales. Kerianne would recognize Holmstrom’s
commission of $250 × 20% = $50 as an expense.

GoodBuy should not recognize revenue when it sells the $1,000,000 of gift cards,
because it has not yet satisfied its performance obligation to deliver goods upon
redemption of the cards. GoodBuy should recognize revenue of $840,000 for
redemptions, as well as $30,000 for gift cards that it estimates will never be redeemed,
totaling $870,000.

Contract asset: $0.
Contract liability: $2,000.
Accounts receivable: $0.
Holt has a contract liability, deferred revenue, of $2,000. It never has a contract
asset because it hasn’t satisfied a performance obligation for which payment depends
on something other than the passage of time. It does not have an accounts receivable
for the $3,000 until it delivers the furniture to Ramirez.

For long-term contracts, we view a company as having a contract asset if CIP >
Billings, so Cady has a contract asset for the first construction job of $6,000 ($20,000
CIP less $14,000 billings). For long-term contracts, we view a company as having a
contract liability if Billings > CIP, so Cady has a contract liability for the second
construction job of $2,000 ($5,000 billings less $3,000 CIP).

Total estimated cost to complete = $6 million + 9 million = $15 million
% of completion = $6 million  $15 million = 40%
First year revenue = $20,000,000 x 40% = $8,000,000
First year gross profit = $8,000,000 – $6,000,000 = $2,000,000
Note: We can also determine first year gross profit as follows:

Total estimated gross profit ($20 million – 15 million) = $5,000,000
multiplied by the % of completion 40%
Gross profit recognized the first year $2,000,000

Assets:
Accounts receivable ($7 million – 5 million) $2,000,000
Cost plus profit ($6 million + 2 million*)
in excess of billings ($7 million) 1,000,000
* First year gross profit = $8,000,000 – 6,000,000 = $2,000,000

No revenue or gross profit recognized until project completed in year 2.
Year 2 revenue $20,000,000

Less: Costs in year 1 (6,000,000)
Costs in year 2 (10,000,000)
Year 2 gross profit $ 4,000,000

Receivables
Inventory turnover
turnover
ratio
ratio = Cost Net
of goods
sales sold
Average
Average
accounts
inventory
receivable (net)
Receivables
Inventory turnover
turnoverratio
ratio = $400,000*
$600,000
[$100,000
[$80,000 + 120,000]
60,000] ÷÷22
= 5.45 times
5.71

The anticipated loss of $3 million ($30 million contract price less total estimated
costs of $33 million) must be recognized in the first year applying either method.
*$600,000 – 200,000

Profit margin = Net income

Sales
= $65,000
$420,000
= 15.48%
Return on assets = Net income

= $65,000
$800,000
= 8.13%
Return on shareholders’
equity = Net income
Average shareholders’ equity
= $65,000
$522,500*
= 12.44%
Shareholders’ equity, beginning of period $500,000

Add: Net income 65,000
Deduct: Dividends (20,000)
Shareholders’ equity, end of period $545,000
*Average shareholders’ equity = ($500,000 + 545,000)  2 = $522,500

Return on = Profit × Asset turnover × Equity multiplier

equity margin
Net income = Net income × Total sales × Avg. total assets

Avg. total Total sales Avg. total assets Avg. total equity
equity
Return on shareholders’
equity = Net income
= $65,000
$522,500
= 12.44%
Profit margin = Net income
Sales
= $65,000
$420,000
= 15.48%
Asset turnover = Sales
= $420,000
$800,000
= 0.525 times
Equity multiplier = Average total assets
= $800,000
$522,500
= 1.53
Check: ROE = 15.48% profit margin × 0.525 times asset turnover × 1.53 equity
multiplier = 12.43 (difference due to rounding)

Inventory turnover ratio = Cost of goods sold  Average inventory
6.0 = x  $75,000
Cost of goods sold = $75,000 × 6.0 = $450,000
Sales – Cost of goods sold = Gross profit

$600,000 – 450,000 = $150,000

APPENDIX BRIEF EXERCISES
2016 Gross profit = $3,000,000 – $1,200,000 = $1,800,000
2016 Gross profit percentage = Gross profit  Sales:
$1,800,000
= 60%
$3,000,000
2016 gross profit = 2016 cash collection of $150,000 x 60% = $90,000

2017 gross profit = 2017 cash collection of $150,000 x 60% = $90,000

Initial deferred gross profit ($3,000,000 – 1,200,000) $1,800,000
Less gross profit recognized in 2016 ($150,000 x 60%) (90,000)
Less gross profit recognized in 2017 ($150,000 x 60%) (90,000)
Deferred gross profit at the end of 2017 $1,620,000

No gross profit will be recognized in either 2016 or 2017. Gross profit will not
be recognized until the entire $1,200,000 cost of the land is recovered. In this case, it
will take eight payments to recover the cost of the land ($1,200,000  $150,000 = 8),
so gross profit recognition will equal 100% of the cash collected beginning with the
ninth installment payment.

Year 1:
Revenue: $6 million
Cost: 6 million
Gross profit: $0
Year 2:
Revenue: $14 million ($20 million total – 6 million in year 1)
Cost: 10 million
Gross profit: $ 4 million

Orange has separate sales prices for the two parts of LearnIt-Plus, so that vendor-
specific objective evidence (VSOE) allows them to allocate revenue to those parts
according to their relative selling prices. LearnIt will be allocated $200 x [$150 ÷
($150 + 100)] = $120, and that revenue will be recognized upon delivery of the LearnIt
software. LearnIt Office Hours will be allocated $200 x [$100 ÷ ($150 + 100)] = $80,
and that revenue will be deferred and recognized over the life of the one-year period
in which the Office Hours are delivered.
If LearnIt were not sold separately, Orange would not have VSOE for all of the
parts of the contract. In that case, revenue would be delayed until the later part was
delivered. In this case, the $200 would be deferred and recognized over the life of the
one-year period in which the Office Hours are delivered.

Orange has separate sales prices for the two parts of LearnIt-Plus, so the company
can base its estimates of the fair value of those parts according to their relative selling
prices. LearnIt will be allocated $200 x [$150 ÷ ($150 + 100)] = $120, and that revenue
will be recognized upon delivery of the LearnIt software. LearnIt Office Hours will
be allocated $200 x [$100 ÷ ($150 + 100)] = $80, and that revenue will be deferred
and recognized over the life of the one-year period in which the Office Hours are
delivered.
If LearnIt were not sold separately, the accounting would be the same. Orange
would estimate the fair value of LearnIt Office Hours to be $100 and allocate revenue
in the same fashion as it did when that product was sold separately. (VSOE is not
required under IFRS).

Specific conditions for revenue recognition of the initial franchise fee are
provided by FASB ASC 952–605–25–1. A key to these conditions is the concept of
substantial performance. It requires that substantially all of the initial services of the
franchisor required by the franchise agreement be performed before the initial
franchise fee can be recognized as revenue. The term “substantial” requires
professional judgment on the part of the accountant. Often, substantial performance is
considered to have occurred when the franchise opens for business.
Continuing franchise fees are recognized over time as the services are performed.

EXERCISES
Exercise 5–1
The FASB Accounting Standards Codification® represents the single source of
authoritative U.S. generally accepted accounting principles.
Requirement 1
Regarding the five steps used to apply the revenue recognition principle, the
appropriate citation is:
FASB ASC 606–10–05–4: “Revenue from Contracts with Customers–Overall–

Overview and Background–General.”
Requirement 2
Regarding indicators that control has passed from the seller to the buyer, such
that it is appropriate to recognize revenue at a point in time, the appropriate citation
is:

–Recognition–Performance Obligations Satisfied at a Point in Time.”
Requirement 3
Regarding circumstances under which sellers can recognize revenue over time,
the appropriate citation is:

–Recognition–Performance Obligations Satisfied Over Time.”

Exercise 5–2
Requirement 1
Ski West should recognize revenue over the ski season. Ski West fulfills its
performance obligation over time as it delivers the service to its pass holders by
providing access to its ski lifts.
Requirement 2
November 6, 2016 To record the cash collection.

Cash ................................................................................ 450
Deferred revenue ........................................................ 450
December 31, 2016 To recognize revenue earned in December (no

revenue earned in November, as season starts on December 1).
Deferred revenue ($450 x 1/5) ......................................... 90
Service revenue ........................................................... 90
Requirement 3
$90 is included in revenue in Ski West’s 2016 income statement. The $360
remaining balance in deferred revenue is included in the current liability section of
Ski West’s 2016 balance sheet.

Exercise 5–3
VP first must identify each performance obligation’s share of the sum of the stand-
alone selling prices of all performance obligations:
$1,700
TV: $1,700 + 100 + 200 = 85%
$100
Remote: $1,700 + 100 + 200 = 5%
$200
Installation: = 10%
$1,700 + 100 + 200
100%
VP would allocate the total selling price of the package ($1,900) based on stand-
alone selling prices, as follows:
TV: $1,900 × 85% = $1,615
Remote: $1,900 × 5% = 95
Installation: $1,900 × 10% = 190
$1,900
$1,900
Transaction Price
85% 5% 10%
$1,615 $95 $190

TV Remote Installation

Exercise 5–4
Requirement 1
Regarding the basis upon which a contract’s transaction price allocated to its
performance obligations, the appropriate citation is:
Measurement–Allocating the Transaction Price to Performance Obligations.”
Requirement 2
Regarding indicators that a promised good or service is separately identifiable,
the appropriate citation is:
Recognition–Identifying Performance Obligations—Distinct Goods or
Services.”
Requirement 3
Regarding circumstances under which an option is viewed as a performance
obligation, the appropriate citation is:
FASB ASC 606–10–55–42: “ Revenue from Contracts with Customers–Overall–
Implementation Guidance and Illustrations–Customer Options for Additional
Goods or Services.”

Exercise 5-5
Requirement 1
Delivery of gold is one performance obligation. The additional insurance is a

second performance obligation. The insurance service is capable of being distinct
because the bank could choose to receive similar services from another insurance
provider, and it is separately identifiable, as it is not highly interrelated with the other
performance obligation of delivering gold, and the seller’s role is not to integrate and
customize them to create one service or product. So, the insurance qualifies as a
performance obligation. The receipt of cash prior to delivery is not a performance
obligation, but rather gives rise to deferred revenue associated with performance
obligations to be satisfied in the future.
Requirement 2
Value of the gold bars:
$1,440/unit 100 units = $ 144,000
Stand-alone selling price of the insurance:
$60  100 units = 6,000
Total of stand-alone prices $150,000
Gold Examiner first identifies each performance obligation’s share of the sum of
the stand-alone selling prices of all deliverables:
$144,000
Gold bars: $144,000 + 6,000 = 96%
$6,000
Insurance: = 4%
$144,000 + 6,000
100%

Exercise 5-5 (concluded)
Gold Examiner then allocates the total selling price based on stand-alone selling
prices, as follows:
$147,000
Transaction Price
96% 4%
$141,120 $5,880
Gold Insurance
Entry on March 1, 2016:

Cash 147,000
Deferred revenue–gold bars 141,120
Deferred revenue–insurance 5,880
Requirement 3
Entry on March 30, 2016:

Deferred revenue–gold bars 141,120
Sales revenue 141,120
Gold Examiner recognizes only the portion of revenue associated with passing of
the legal title. The revenue associated with insurance coverage will be earned only
when that performance obligation is satisfied.
Requirement 4
Entry on April 1, 2016:
Deferred revenue–insurance 5,880
Service revenue 5,880

Exercise 5–6
Requirement 1
The delivery of SunBoots is one performance obligation. The discount coupon for
additional future purchases is a second performance obligation because it provides a
material right to the customer that the customer would not receive otherwise. That
right to receive a discount is both capable of being distinct, as it could be could be
sold or provided separately, and it is separately identifiable, as it is not highly
interrelated with the other performance obligation of delivering SunBoots, and the
seller’s role is not to integrate and customize them to create one product. So, the
discount coupon is distinct and qualifies as a performance obligation.
Requirement 2
If Clarks can’t estimate the stand-alone selling price of SunBoots, it will use the
residual method to calculate that price as the amount of the total transaction price
minus the value of the discount.
Cash (1,000 x $70) 70,000

Sales revenue (to balance) 64,000
Deferred revenue (discount option) 6,000*
*(1,000 pairs  $100 average purchase price × 30% discount  20% of customers estimated
to redeem coupon)

Exercise 5–7
Requirement 1
The amount of revenue Manhattan Today should recognize upon receipt of the
subscription fee: $0.
Even though Manhattan Today received payments from customers for an annual
subscription, payment of the subscription activity does not transfer goods or services
to customers. Therefore, the annual fee is viewed as a prepayment for future delivery
of goods or services and would be recognized as deferred revenue – subscription (a
liability) when received. Later, when newspapers are delivered, deferred revenue –
subscription will be reduced and revenue recognized.
Requirement 2
Delivering newspapers is one performance obligation. The coupon for a 40%
discount on a carriage ride qualifies as a second performance obligation. First, it is an
option that conveys a material right to the recipient (as opposed to just a general
marketing offer). Second, it is both capable of being distinct, as it could be sold or
provided separately, and it is separately identifiable, as it is not highly interrelated
with the other performance obligation of delivering newspapers, so it is distinct and
qualifies as a performance obligation. The seller’s role is not to integrate and
customize them to create one product. The seller will record deferred revenue –
coupon for that performance obligation and recognize revenue when either the
coupons are exercised or Manhattan Today estimates that they will not be redeemed.

Exercise 5–7 (concluded)
Requirement 3
Value of the coupon: 40% discount  $125 carriage fee = $ 50
Estimated redemption  30%
Stand-alone selling price of coupon $ 15
Stand-alone selling price of a normal subscription 135
Total of stand-alone prices $150
Manhattan Today must identify each performance obligation’s share of the sum of
the stand-alone selling prices of all deliverables:
$15
Coupon: $15 + 135 = 10%
$135
Subscription: = 90%
$15 + 135
100%
Manhattan Today allocates the total selling price based on stand-alone selling
prices, as follows:
$130
Transaction Price
90% 10%
$117 $13
Subscription Coupon
Upon receiving the fee for 10 subscriptions, the journal entry should be:
Cash ($130  10) 1,300

Deferred revenue – subscription ($117  10) 1,170
Deferred revenue – coupon ($13  10) 130

Exercise 5-8
Requirement 1
Delivery of keyboards is one performance obligation. The special discount coupon
is a second performance obligation, as it provides a material right that the customer
would not receive otherwise. In this particular instance, the customer has the right to
receive a 25% discount, which is a 20% discount in addition to the normal 5% discount
offered to other customers. The coupon is both capable of being distinct, as it could
be sold or provided separately, and it is separately identifiable, as it is not highly
interrelated with the other performance obligation of delivering keyboards, and the
seller’s role is not to integrate and customize them to create one product. So, it is
distinct and qualifies as a performance obligation.
Requirement 2
When two or more performance obligations are associated with a single transaction
price, the transaction price must be allocated to the performance obligations on the
basis of respective stand-alone selling prices (estimated if not directly available).
Meta’s estimated stand-alone selling price of the discount option is:
Value of the discount:
(25% discount – 5% normal discount)  $20,000 = $ 4,000
Stand-alone selling price of discount: $ 2,000
Stand-alone selling price of the keyboards:
$19.6  5,000 keyboards = 98,000
Meta first must identify each performance obligation’s share of the sum of the
stand-alone selling prices of all deliverables:
$2,000
Discount: $2,000 + 98,000 = 2%
$98,000
Keyboards: = 98%
$2,000 + 98,000
100%

Meta then allocates the total selling price based on stand-alone selling prices, as
follows:
$95,000
Transaction Price
98% 2%
$93,100 $1,900
Keyboards Discount
The journal entry to record the sale is:
Cash 95,000
Deferred revenue–keyboards 93,100
Deferred revenue–discount option 1,900
The deferred revenue for the keyboards will become earned June 1st.
The deferred revenue for the option to exercise the discount coupon is earned
when the coupon either is exercised or expires in six months.
Requirement 3
All customers are eligible for a 5% discount on all sales. Therefore, the 5%
discount option issued to Bionics, Inc. does not give any material right to the customer,
so it is not a performance obligation in the contract, and Meta would account for both
(a) the delivery of keyboards and (b) the 5% coupon as a single performance
obligation.
Cash 95,000
Deferred revenue–keyboards 95,000

Exercise 5–9
Requirement 1
The expected value would be calculated as follows:

$70,000 ($50,000 fixed fee + 20,000 bonus) × 20% = $14,000
$50,000 ($50,000 fixed fee + 0 bonus) × 80% = 40,000
Expected contract price at inception $54,000
Or, alternatively: $50,000 + ($20,000 × 20%) = $54,000
Requirement 2
The most likely amount is the flat fee of $50,000, because there is a greater chance
of not qualifying for the bonus than of qualifying for the bonus, so that is the
transaction price.
Requirement 3
Because Thomas is very uncertain of its estimate, Thomas can’t argue that it is
probable that it won’t have to reverse (adjust downward) a significant amount of
revenue in the future because of a change in returns. Therefore, Thomas would not
include the bonus estimate in the transaction price, and the transaction price would be
the flat fee of $50,000.

Exercise 5-10
Requirement 1
During the July 1 – July 15 period, Rocky estimates a less than 50% chance it will
earn the bonus, so using the “most likely amount” approach, it assumes no bonus, and
estimates its revenue as $1,000 per day × 10 days = $10,000
Accounts receivable 10,000

Service revenue ($1,000 × 10 days) 10,000
Requirement 2
During the July 16 – July 31 period, Rocky earns guide revenue of another 15 days
× $1,000 per day = $15,000. In addition, because Rocky estimates a greater than 50%
chance it will earn the bonus, using the “most likely amount” approach, it estimates a
bonus receivable of $100 per day × (10 days + 15 days) = $2,500.
Accounts receivable ($1,000 ×15 days) 15,000

Bonus receivable ($100 × 25 days) 2,500
Service revenue (to balance) 17,500
Requirement 3
On August 5, Rocky learns that it won’t receive a bonus, and receives only the
$25,000 balance in accounts receivable. Rocky must reduce its bonus receivable to
zero and record the offsetting adjustment in revenue.
Cash ($1,000 × 25 days) 25,000

Service revenue ($100 × 25 days) 2,500

Bonus receivable 2,500

Exercise 5-11
Requirement 1
Rocky’s normal guide revenue is 10 days × $1,000 per day = $10,000. Rocky
also estimates that there is a 30% chance it will earn the bonus, so its estimate of the
expected value of the bonus revenue earned to date is:

$1,000 ($100 bonus × 10 days) × 30% = $300
$0 ($0 bonus × 10 days) × 70% = -0-
Expected bonus as of July 15 $300
Or, alternatively: $100 × 10 days × 30% = $300.

Rocky’s July 15 journal entry would be:
Accounts receivable ($1,000 ×10 days) 10,000
Bonus receivable ($100 × 30% × 10 days) 300
Requirement 2
During the July 16 – July 31 period, Rocky earns another 15 days × $1,000/day
= $15,000 of its normal guiding revenue. In addition, because Rocky now believes
there is an 80% chance it will earn the bonus, its estimate of the expected value of the
bonus revenue earned to date (based on all 25 days guided during July) is:

$2,500 ($100 bonus × 25 days) × 80% = $2,000
$0 ($0 bonus × 25 days) × 20% = -0-
Expected bonus as of July 31 $2,000
Or, alternatively: $100 × 25 days × 80% = $2,000.

With $300 of bonus receivable and revenue already recognized, Rocky must
recognize an additional $2,000 – $300 = $1,700 of bonus receivable and bonus
revenue. Rocky’s July 31 journal entry would be:
Accounts receivable ($1,000 × 15 days) 15,000

Bonus receivable ([$100 × 80% × 25 days] – $300) 1,700
Service revenue (to balance) 16,700
Requirement 3
On August 5, Rocky learns that it won’t receive a bonus, and receives only the
$25,000 balance in accounts receivable. Rocky also must reduce its bonus receivable
to zero and record the offsetting adjustment in revenue.
Cash ($1,000 × 25) 25,000

Service revenue ($100 × 80% × 25 days) 2,000


Exercise 5–12
Requirement 1
Record revenue upon sale:
Requirement 2
Because the advertising services have a fair value ($5,000) that is less than the
amount paid by Furtastic to Willett ($12,000), the remaining amount ($7,000) is
viewed as a refund, reducing revenue by that amount.
Advertising expense 5,000
Sales revenue 7,000
Cash 12,000
Requirement 3
Record receipt of cash:
Cash 150,000
Requirement 4
It is probable that Willett will pay by Furtastic, so the relatively low likelihood of
bad debts does not affect Furtastic’s recognition of revenue on the Willet sale. If
Furtastic had considered it less than probable that it would collect its receivable from
Willet, it would not have a contract on June 1 for purposes of revenue recognition,
and would not recognize revenue until payment actually occurred on June 30.

Exercise 5–13
Requirement 1
Under the adjusted market assessment approach, VP would base its estimate of the
stand-alone selling price of the installation service on the prices charged by other
vendors for that service, adjusted as necessary. Given that the other vendors are
similar to VP, no adjustment is necessary. Therefore, VP would estimate the stand-
alone selling price of the installation service to be $150, the amount charged by
competitors for that service.
Requirement 2
Under the expected cost plus margin approach, VP would base its estimate of the
stand-alone selling price of the installation service on the $100 cost it incurs to provide
the service, plus its normal margin of 40% × $100 = $40. Therefore, VP would
estimate the stand-alone selling price of the installation service to be $100 + 40 =
$140.
Requirement 3
Under the residual approach, VP would base its estimate of the stand-alone selling
price of the installation service on the total selling price of the package ($1,900) less
the observable stand-alone selling prices of the TV ($1,750) and universal remote
($100). Therefore, VP would estimate the stand-alone selling price of the installation
service to be $1,900 – ($1,750 + 100) = $50.

Exercise 5–14
Requirement 1
Regarding the alternative approaches that can be used to estimate variable
consideration, the appropriate citation is:
Measurement–Variable Consideration.”
Requirement 2
Regarding the alternative approaches that can be used to estimate the stand-alone
selling price of performance obligations that are not sold separately, the appropriate
citation is:
Measurement–Allocation Based on Standalone Selling Prices.”
Requirement 3
Regarding the timing of revenue recognition with respect to licenses, the
appropriate citation is:
FASB ASC 606–10–55–58-60: “Revenue from Contracts with Customers–
Overall–Implementation Guidance and Illustrations–Determining the Nature of
the Entity’s Promise.”

Exercise 5–15
Requirement 1
Total amount of franchise agreement $ 600,000
Less: stand-alone selling price of training (15,000)
Less: stand-alone selling price of building and equip. (450,000)
Stand-alone selling price of five-year right 135,000
Requirement 2
As of July 1, 2016, Monitor has not fulfilled any of its performance obligations, so
the entire $600,000 franchise fee is recorded as deferred revenue.
Cash 75,000
Notes receivable 525,000
Requirement 3
On September 1, 2016, Monitor has satisfied its performance obligations with
respect to training and certifying Perkins and delivering an equipped Monitor Muffler
building. Therefore, Monitor should recognize revenue of $15,000 + 450,000 =
$465,000 on that date. In addition, by December 31, 2016, Monitor has earned 4
months of revenue (September – December) associated with the five-year right it
granted to Perkins, so Monitor should recognize revenue of $135,000 × (4 ÷ (5 × 12))
= $9,000 associated with that right. Total revenue recognized for the year ended
December 31, 2016, is $465,000 + 9,000 = $474,000.

Exercise 5–16
Requirement 1
Regarding disclosures that are required with respect to performance obligations
that the seller is committed to satisfying but that are not yet satisfied, the appropriate
citation is:
Disclosure–Performance Obligations.”
Requirement 2
Regarding disclosures that are required with respect to uncollectible accounts
receivable, also called impairment losses on receivables, the appropriate citation is:
FASB ASC 606–10–50–4b: “Revenue from Contracts with Customers–Overall–
Disclosure–Contracts with Customers.”
Requirement 3
Regarding disclosures that are required with respect to contract assets and
contract liabilities, the appropriate citation is:
Disclosure–Contract Balances.”

Exercise 5–17
Requirement 1
2016 2017
Contract price $2,000,000 $2,000,000
Actual costs to date 300,000 1,875,000
Estimated costs to complete 1,200,000 -0-
Total estimated costs 1,500,000 1,875,000
Gross profit (estimated in 2016) $ 500,000 $ 125,000
Revenue recognition:
2016: $ 300,000
= 20% × $2,000,000 = $400,000
$1,500,000
2017: $2,000,000 – 400,000 = $1,600,000
Gross profit recognition:
2016: $400,000 – 300,000 = $100,000
2017: $1,600,000 – 1,575,000 = $25,000
Note: We also can calculate gross profit directly using the percentage of
completion:
2016: $ 300,000
= 20% × $500,000 = $100,000
$1,500,000
2017: $125,000 – 100,000 = $25,000
Requirement 2
2016: $0 (contract not yet completed)
2017: $2,000,000 – 1,875,000 = $125,000

Requirement 3
Balance Sheet
At December 31, 2016
Current assets:
Accounts receivable $ 130,000
Costs and profit ($400,000*) in excess
of billings ($380,000) 20,000
* Costs ($300,000) + profit ($100,000)
Requirement 4
Balance Sheet
Current assets:
Current liabilities:
Billings ($380,000) in excess of costs ($300,000) $ 80,000

Exercise 5–18
Requirement 1
($ in millions) 2016 2017 2018
Contract price $220 $220 $220
Actual costs to date 40 120 170
Estimated costs to complete 120 60 -0-
Total estimated costs 160 180 170
Estimated gross profit (actual in 2018) $ 60 $ 40 $ 50
2016: $40
= 25% × $220 = $55
$160
2017: $120
= (66.67% × $220) – $55 = $91.67
$180
2018: $220 – ($55 + $91.67) = $73.33
Gross profit (loss) recognition:

2016: $55 – 40 = $15
2017: $91.67 – 80 = $11.67

2018: $73.33 – 50 = $23.33
Note: We also can calculate gross profit directly using the percentage of
completion:
2016: $40
= 25% × $60 = $15
$160
2017: $120
= 66.67% × $40 = $26.67 – 15 = $11.67
$180
2018: $220 – 170 = $50 – (15 + 11.67) = $23.33

Requirement 2
Year Revenue Gross profit (loss)

recognized recognized
2016 -0- -0-
2017 -0- -0-
2018 $220 $50
Requirement 3
2017 Revenue recognition:

$120
= (60% × $220) – $55 = $77
$200
2017 Gross profit (loss) recognition:

$77 – 80 = $(3)
Note: Also can calculate gross profit directly using the percentage of completion:
$120
= 60% × $20* = $12 – 15 = $(3) loss
$200
*$220 – ($40 + 80 + 80) = $20

Exercise 5–19
Requirement 1
2016 2017 2018
Contract price $8,000,000 $8,000,000 $8,000,000
Actual costs to date 2,000,000 4,500,000 8,300,000
Estimated costs to complete 4,000,000 3,600,000 -0-
Total estimated costs 6,000,000 8,100,000 8,300,000
Estimated gross profit (loss)
(actual in 2018) $2,000,000 $ (100,000) $ (300,000)
2016: $2,000,000
= 33.3333% × $8,000,000 = $2,666,667
$6,000,000
2017: $4,500,000
= (55.5556% × $8,000,000) – $2,666,667 = $1,777,778
$8,100,000
2018: $8,000,000 – ($2,666,667 + 1,777,778) = $3,555,555

2016: $2,666,667 – 2,000,000 = $666,667
2017: $(100,000) – 666,667 = $(766,667)
2018: $(300,000) – (100,000) = $(200,000)

Exercise 5–19 (continued)
Requirement 2
2016 2017
Construction in progress 2,000,000 2,500,000
Various accounts 2,000,000 2,500,000
To record construction costs
Accounts receivable 2,500,000 2,750,000
Billings on construction contract 2,500,000 2,750,000
To record progress billings
Cash 2,250,000 2,475,000
To record cash collections
Construction in progress 666,667
Cost of construction 2,000,000
Revenue from long-term contracts 2,666,667
To record gross profit
Cost of construction (1) 2,544,445
Revenue from long-term contracts 1,777,778
To record expected loss
(1) Revenue recognized in 2017 $1,777,778

Plus: Loss recognized in 2017 (prior page) 766,667
Cost of construction, 2017 $2,544,445
Requirement 3
2016 2017
Balance Sheet
Current assets:
Accounts receivable $250,000 $525,000
Costs and profit ($2,666,667*) in
excess of billings ($2,500,000) 166,667
Billings ($5,250,000) in excess
of costs less loss ($4,400,000**) $850,000
* Costs ($2,000,000) + profit ($666,667)

** Costs ($2,000,000 + 2,500,000) – loss ($100,000 = $766,667 – 666,667)

Exercise 5–20
Requirement 1

2016 -0- -0-
2017 -0- $(100,000)
2018 $8,000,000 (200,000)
Total $8,000,000 $(300,000)
Requirement 2
2016 2017
Construction in progress 2,000,000 2,500,000
Various accounts 2,000,000 2,500,000
Billings 2,500,000 2,750,000
Cash 2,250,000 2,475,000
Loss on long-term contract 100,000
To record expected loss

Requirement 3
Balance Sheet 2016 2017

Current assets:
Accounts receivable $250,000 $525,000
Billings ($2,500,000) in excess of costs
($2,000,000) $500,000
Billings ($5,250,000) in excess of costs less
loss ($4,400,000*) $850,000
* Costs ($2,000,000 + 2,500,000) – loss ($100,000)

Note: Billings in excess of costs is a contract liability, similar to deferred profit.

Exercise 5–21
SUMMARY
Revenue Recognized Over Time Revenue Recognized Upon Completion
Situation 2016 2017 2018 2016 2017 2018
1 $166,667 $233,333 $100,000 $0 $0 $500,000
2 $166,667 $(66,667) $100,000 $0 $0 $200,000
3 $166,667 $(266,667) $(100,000) $0 $(100,000) $(100,000)
4 $125,000 $375,000 $0 $0 $0 $500,000
5 $125,000 $(125,000) $200,000 $0 $0 $200,000
6 $(100,000) $(100,000) $(100,000) $(100,000) $(100,000) $(100,000)
Situation 1 - Revenue Recognized Over Time

2016 2017 2018
Contract price $5,000,000 $5,000,000 $5,000,000
Estimated costs to complete 3,000,000 900,000 -0-
Estimated gross profit
(actual in 2018) $ 500,000 $ 500,000 $ 500,000
Gross profit (loss) recognized:
2016:
Revenue = $1,500,000
= 33.3333% × $5,000,000 = $1,666,667
$4,500,000
Gross Profit = 1,666,667 – 1,500,000 = $166,667
Note: We can calculate gross profit directly as
$1,500,000
= 33.3333% × $500,000 = $166,667
$4,500,000
2017:
Revenue = $3,600,000
= 80.0% × $5,000,000 = $4,000,000 – 1,666,667
$4,500,000 = $2,333,333
Gross Profit = 2,333,333 – 2,100,000 = $233,333

Note: We can calculate gross profit directly as:
$3,600,000
= 80.0% × $500,000 = $400,000 – 166,667 = $233,333
$4,500,000
2018:
Revenue = $5,000,000 – 4,000,000 = $1,000,000
Gross Profit = $1,000,000 – 900,000 = $100,000
Situation 1 - Revenue Recognized Upon Completion

Year Gross profit recognized
2016 -0-
2017 -0-
2018 $500,000
Total gross profit $500,000

2016 2017 2018
Contract price $5,000,000 $5,000,000 $5,000,000
(actual in 2018) $ 500,000 $ 200,000 $ 200,000

2016:
Revenue = $1,500,000
= 33.3333% × $5,000,000 = $1,666,667
$4,500,000
Gross Profit = $1,666,667 – 1,500,000 = $166,667
Note: We can calculate gross profit directly as
$1,500,000
= 33.3333% × $500,000 = $166,667
$4,500,000
2017:
Revenue = $2,400,000
= 50.0% × $5,000,000 = $2,500,000 – 1,666,667
$4,800,000
= $833,333
Gross Profit = 833,333 – 900,000 = $(66,667)
Note: We can calculate gross profit directly as:

$2,400,000
= 50.0% × $200,000 = $100,000 – 166,667 = $(66,667)
$4,800,000
2018:
Revenue = $5,000,000 – $2,500,000 = $2,500,000
Gross Profit = $2,500,000 – $2,400,000 = $100,000
2016 -0-
2017 -0-
2018 $200,000

2016 2017 2018
Contract price $5,000,000 $5,000,000 $5,000,000
(actual in 2018) $ 500,000 $ (100,000) $ (200,000)
2016:
Revenue = $1,500,000
= 33.3333% × $5,000,000 = $1,666,667
$4,500,000
Gross Profit = $1,666,667 – 1,500,000 = $166,667
Note: can calculate gross profit directly as
$1,500,000
= 33.3333% × $500,000 = $166,667
$4,500,000
2017:
Overall loss of $5,000,000 – 5,100,000 = $(100,000)
Gross profit = $(100,000) – 166,667 = $(266,667)
2018:
Overall loss of $5,000,000 – 5,200,000 = $(200,000)
Gross profit = $(200,000) – (100,000) = $(100,000)

Year Gross profit (loss) recognized
2016 -0-
2017 $(100,000)
2018 (100,000)
Total project loss $(200,000)

2016 2017 2018
Contract price $5,000,000 $5,000,000 $5,000,000
Actual costs to date 500,000 3,500,000 4,500,000
Estimated costs to complete 3,500,000 875,000 -0-
(actual in 2018) $1,000,000 $ 625,000 $ 500,000
2016:
Revenue = $ 500,000
= 12.5% × $5,000,000 = $625,000
$4,000,000
Gross Profit = $625,000 – 500,000 = $125,000
$500,000
= 12.5% × $1,000,000 = $125,000
$4,000,000

2017:
Revenue = $3,500,000
= 80% × $5,000,000 = $4,000,000 – 625,000
$4,375,000 = $3,375,000
Gross Profit = $3,375,000 – 3,000,000 = $375,000

$3,500,000
= 80.0% × $625,000 = $500,000 – 125,000 = $375,000
$4,375,000
2018:
Revenue = $5,000,000 – 4,000,000 = $1,000,000
Gross Profit = $1,000,000 – 1,000,000 = $ - 0 –

2016 -0-
2017 -0-
2018 $500,000

2016 2017 2018
Contract price $5,000,000 $5,000,000 $5,000,000
(actual in 2018) $1,000,000 $ -0- $ 200,000

2016:
Revenue = $ 500,000
= 12.5% × $5,000,000 = $625,000
$4,000,000
Gross Profit = $625,000 – 500,000 = $125,000
$500,000
= 12.5% × $1,000,000 = $125,000
$4,000,000
2017: $0 – 125,000 = $(125,000)
2018: $200,000 – 0 = $200,000

2016 -0-
2017 -0-
2018 $200,000

2016 2017 2018
Contract price $5,000,000 $5,000,000 $5,000,000
(actual in 2018) $ (100,000) $ (200,000) $ (300,000)

2016: $(100,000)
2017: $(200,000) – (100,000) = $(100,000)
2018: $(300,000) – (200,000) = $(100,000)

2016 $(100,000)
2017 (100,000)
2018 (100,000)

Exercise 5–22
Requirement 1
Construction in progress = Costs incurred + Profit recognized
$100,000 = ? + $20,000
Actual costs incurred in 2016 = $80,000
Requirement 2
Billings = Cash collections + Accounts receivable
$94,000 = ? + 30,000
Cash collections in 2016 = $64,000
Requirement 3
Let A = Actual cost incurred + Estimated cost to complete
Actual cost incurred

× (Contract price – A) = Profit recognized
A
$80,000
($1,600,000 – A) = $20,000
A
$128,000,000,000 – 80,000A = $20,000A
$100,000A = $128,000,000,000
A = $1,280,000
Estimated cost to complete = $1,280,000 – 80,000 = $1,200,000

Requirement 4
$80,000
= 6.25%
$1,280,000
Alternatively, Requirement 4 can be answered as follows:

Contract price $1,600,000
Less: Total estimated cost 1,280,000
Estimated gross profit $ 320,000
Proportion of gross profit recognized to date:

$20,000
= 6.25%
$320,000

Average inventory
= $1,840,000
[$690,000 + 630,000] ÷ 2
= 2.79 times
Exercise 5–23
Requirement 1
Requirement 2
By itself, this one ratio provides very little information. In general, the higher the
inventory turnover, the lower the investment must be for a given level of sales. It
indicates how well inventory levels are managed and the quality of inventory,
including the existence of obsolete or overpriced inventory.
However, to evaluate the adequacy of this ratio it should be compared with some
norm such as the industry average. That indicates whether inventory management
practices are in line with the competition.
It’s just one piece in the puzzle, though. Other points of reference should be
considered. For instance, a high turnover can be achieved by maintaining too low
inventory levels and restocking only when absolutely necessary. This can be costly in
terms of stockout costs.
The ratio also can be useful when assessing the current ratio. The more liquid
inventory is, the lower the norm should be against which the current ratio should be
compared.

Inventory
Receivables
Average
Asset turnover
collection
turnover
turnover
ratioperiod
ratio
ratio = $4,800,000
$8,000,000
365
[$4,300,000
[$900,00013.33
[$700,000 ++ 500,000]
700,000]
3,700,000]
÷ 2÷ 2
= 13.33
27.4
26 times
days
times
Exercise 5–24
Turnover ratios for Anderson Medical Supply Company for 2016:
The company turns its inventory over 6 times per year compared to the industry
average of 5 times per year. The asset turnover ratio also is slightly better than the
industry average (2 times per year versus 1.8 times). These ratios indicate that
Anderson is able to generate more sales per dollar invested in inventory and in total
assets than the industry averages. However, Anderson takes slightly longer to collect
its accounts receivable (27.4 days compared to the industry average of 25 days).

Exercise 5–25
Requirement 1
a. Profit margin on sales $180 ÷ $5,200 = 3.5%
b. Return on assets $180 ÷ [($1,900 + 1,700) ÷ 2] = 10%
c. Return on shareholders’ equity $180 ÷ [($550 + 500) ÷ 2] = 34.3%
Requirement 2
Retained earnings beginning of period $100,000
Add: Net income 180,000
280,000
Less: Retained earnings end of period 150,000
Dividends paid $130,000
Exercise 5–26
Requirement 1
a. Profit margin on sales $180 ÷ $5,200 = 3.46%
b. Asset turnover $5,200 ÷ [($1,900 + 1,700) ÷ 2] = 2.89
c. Equity multiplier [($1,900 + 1,700) ÷ 2] ÷ [($550 + 500) ÷ 2] = 3.43
d. Return on shareholders’ equity $180 ÷ [($550 + 500) ÷ 2] = 34.3%
Requirement 2
Profit margin × Asset turnover × Equity multiplier = ROE
3.46% × 2.89 × 3.43 = 34.3%

APPENDIX EXERCISES
Exercise 5–27
Requirement 1
2016 cost recovery %:
$234,000
= 65% (gross profit % = 35%)
$360,000
$245,000
= 70% (gross profit % = 30%)
$350,000
2016 gross profit:

Cash collection from 2016 sales of $150,000 x 35% = $52,500
2017 gross profit:

Cash collection from 2016 sales of $100,000 x 35% = $35,000
+ Cash collection from 2017 sales of $120,000 x 30% = 36,000
Total 2017 gross profit $71,000

Requirement 2
2016 deferred gross profit balance:
2016 initial gross profit ($360,000 – 234,000) $126,000
Less: Gross profit recognized in 2016 (52,500)
Balance in deferred gross profit account $ 73,500
2017 deferred gross profit balance:

2016 initial gross profit ($360,000 – 234,000) $126,000
Gross profit recognized in 2017 (35,000)
2017 initial gross profit ($350,000 – 245,000) 105,000

Balance in deferred gross profit account $107,500

Exercise 5–28
2016
Installment receivables ................................................... 360,000
Inventory ..................................................................... 234,000
Deferred gross profit ................................................... 126,000
To record installment sales
2016
Cash ................................................................................ 150,000
Installment receivables ............................................... 150,000
To record cash collections from installment sales
2016
Deferred gross profit ....................................................... 52,500
Realized gross profit ................................................... 52,500
To recognize gross profit from installment sales
2017
Inventory ..................................................................... 245,000
2017
Cash ................................................................................ 220,000
2017

Exercise 5–29
Requirement 1
Year Income recognized
2016 $180,000 ($300,000 – 120,000)
2017 -0-
2018 -0-
2019 -0-
Total $180,000
Requirement 2
Cost recovery %:
$120,000
------------- = 40% (gross profit % = 60%)
$300,000
Year Cash Collected Cost Recovery(40%) Gross Profit(60%)

2016 $ 75,000 $ 30,000 $ 45,000
2017 75,000 30,000 45,000
2018 75,000 30,000 45,000
2019 75,000 30,000 45,000
Totals $300,000 $120,000 $180,000
Requirement 3
Year Cash Collected Cost Recovery Gross Profit

2016 $ 75,000 $ 75,000 -0-
2017 75,000 45,000 $ 30,000
2018 75,000 -0- 75,000
2019 75,000 -0- 75,000
Totals $300,000 $120,000 $180,000

Exercise 5–30
Requirement 1
July 1, 2016
Sales revenue .............................................................. 300,000
To record installment sale
Cost of goods sold .......................................................... 120,000

Inventory ..................................................................... 120,000
To record cost of installment sale
Cash ................................................................................ 75,000

To record cash collection from installment sale
July 1, 2017
Cash ................................................................................ 75,000

Requirement 2
July 1, 2016
Inventory ..................................................................... 120,000
Cash ................................................................................ 75,000


To recognize gross profit from installment sale
July 1, 2017
Cash ................................................................................ 75,000


Requirement 3
July 1, 2016
Inventory ..................................................................... 120,000
Cash ................................................................................ 75,000

July 1, 2017
Cash ................................................................................ 75,000


Exercise 5–31
Requirement 1
Cost of goods sold ($1,000,000 – 600,000) $400,000
Add: Gross profit if using cost recovery method 100,000
Cash collected $500,000
Requirement 2
Gross profit percentage = $600,000 ÷ $1,000,000 = 60%
Cash collected × Gross profit percentage = Gross profit recognized
$500,000 × 60% = $300,000 gross profit

Exercise 5–32
October 1, 2016
Installment receivable ...................................................... 4,000,000
Inventory ..................................................................... 1,800,000
Deferred gross profit ................................................... 2,200,000
To record the installment sale
Cash ................................................................................ 800,000

Installment receivable ................................................. 800,000
To record the cash down payment from installment sale
Deferred gross profit ($800,000 x 55%*)....................... 440,000

October 1, 2017
Repossessed inventory (fair value) ................................ 1,300,000
Deferred gross profit (balance) ....................................... 1,760,000
Loss on repossession (difference) .................................. 140,000
Installment receivable (balance) ................................. 3,200,000
To record the default and repossession ......................
*$2,200,000  $4,000,000 = 55% gross profit percentage

Exercise 5–33
Requirement 1
April 1, 2016
Installment receivables ................................................... 2,400,000
Land ............................................................................ 480,000
Gain on sale of land .................................................... 1,920,000
April 1, 2016
Cash ................................................................................ 120,000
April 1, 2017
Cash ................................................................................ 120,000
Requirement 2
April 1, 2016
Installment receivables ................................................... 2,400,000
Land ............................................................................ 480,000
Deferred gain .............................................................. 1,920,000

When payments are received, gain on sale of land is recognized, calculated by

applying the gross profit percentage ($1,920,000 ÷ $2,400,000 = 80%) to the cash
collected (80% x $120,000).
April 1, 2016
Cash ................................................................................ 120,000
Deferred gain .................................................................. 96,000

Gain on sale of land (80% x $120,000) .......................... 96,000
To recognize profit from installment sale
April 1, 2017
Cash ................................................................................ 120,000
Deferred gain .................................................................. 96,000

Gain on sale of land (80% x $120,000) .......................... 96,000
To recognize profit from installment sale

Exercise 5–34
The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. Regarding circumstances
indicating when the installment method or cost recovery method is appropriate for
revenue recognition, the appropriate citation is:
FASB ASC 605–10–25–4: “Revenue Recognition–Overall–Recognition–

Installment and Cost Recovery Methods of Revenue Recognition.” (Note: ASC
605–10–25–3 also provides some guidance, as it indicates when installment
method is not acceptable).

Exercise 5–35
2016:
Revenue: $40
Cost: 40
Gross profit: $0
2017:
Revenue: $80
Cost: 80
Gross profit: $0
2018:
Revenue: $100 ($220 contract price – 40 – 80)
Cost: 50
Gross profit: $ 50

Exercise 5–36
As written, the question implies that there is no VSOE (vendor specific sales price
evidence), because the question refers to the prices as estimated. Under the
assumption that there is no VSOE, the correct answer to this problem is as follows:
Requirement 1
Revenue should be recognized at date of shipment of the upgrade, which
occurs on January 1, 2017, because there is no vendor-specific evidence with which
to allocate transaction price to the various software deliverables.
Requirement 2
July 1, 2016
Cash ................................................................................ 243,000
Deferred revenue ........................................................ 243,000
To record sale of software
If instead the Exercise had said that Easywrite sold each of those components
separately for the amounts listed, Easywrite would have VSOE for each component,
and the correct answer would be:
Requirement 1
Revenue should be recognized as follows:
Software – date of shipment, July 1, 2016
Technical support – evenly over the 12 months of the agreement
Upgrade – date of shipment, January 1, 2017
The amounts are determined by an allocation of total contract price in

proportion to the individual fair values of the components if sold separately:
Software $210,000 ÷ $270,000 x $243,000 = $189,000
Technical support $ 30,000 ÷ $270,000 x $243,000 = 27,000
Upgrade $ 30,000 ÷ $270,000 x $243,000 = 27,000
Total $243,000

Requirement 2
July 1, 2016
Cash ................................................................................ 243,000
Revenue ...................................................................... 189,000
Deferred revenue ($27,000 + 27,000) ............................. 54,000
To record sale of software

Exercise 5–37
Requirement 1
Conveyer ($20,000 ÷ 50,000) x $45,000 = $18,000

Labeler ($10,000 ÷ 50,000) x $45,000 = 9,000
Filler ($15,000 ÷ 50,000) x $45,000 = 13,500
Capper ($5,000 ÷ 50,000) x $45,000 = 4,500
Total $45,000
Requirement 2
All $45,000 of revenue is delayed until installation of the conveyer,

because the usefulness of the other elements of the multi-part arrangement
is contingent on its delivery.

Exercise 5–38
Requirement 1
Conveyer ($20,000 ÷ 50,000) x $45,000 = $18,000

Labeler ($10,000 ÷ 50,000) x $45,000 = 9,000
Filler ($15,000 ÷ 50,000) x $45,000 = 13,500
Capper ($5,000 ÷ 50,000) x $45,000 = 4,500
Total $45,000
Requirement 2
Under IFRS, it’s likely that Richardson would recognize revenue the same
as in Requirement 1, because (a) revenue for each part can be estimated
reliably and (b) the receipt of economic benefits is probable.

Exercise 5–39
October 1, 2016
Cash (10% × $300,000) ...................................................... 30,000
Notes receivable.............................................................. 270,000
Unearned revenue – franchise fee .............................. 300,000
To record franchise agreement and down payment
January 15, 2017

Unearned revenue – franchise fee .................................. 300,000
Franchise fee revenue ................................................. 300,000
To recognize franchise fee revenue

CPA / CMA REVIEW
QUESTIONS
CPA Exam Questions
1. b. The earnings process is completed upon delivery of the product. Therefore,
in 2017, revenue for 50,000 gallons at $3 each is recognized on January 15.
The payment terms do not affect revenue recognition.
2. b. The $3,000 transaction price would be divided between the paint and the
labor. The paint’s percentage of the sum of the stand-alone selling prices
is $1,200 ÷ ($1,200 + $2,800) = 30%, so the paint would be allocated
$3,000 × 30% = $900.
3. b. Because Triangle can’t estimate the stand-alone sales price of the additional
guided tours, it would use the residual method to allocate transaction price
to that performance obligation, so the basic Bahama Get-Away portion
would be assigned an amount of the transaction price equal to its stand-
alone selling price of $2,000.
4. c. The contract has two performance obligations. Delivery of the washing

machine is a performance obligation. So is the option to purchase a dryer,
as it includes a discount that is greater than the customer could normally
obtain. The quality-assurance warranty is not a performance obligation, but
rather is simply an aspect of fulfilling the obligation to deliver a washing
machine of appropriate quality. The coupon for the extended warranty is
not a performance obligation, as it only offers a right that customers would
have absent the coupon.
5. c. The expected value is $165,000 (75% × ($10,000 × 12 + $60,000)) + (25% ×

($10,000 × 12)). After eight months, Mowry would have recognized 8/12
of that amount, or $110,000.
6. d. Construction-in-progress represents the costs incurred plus the cumulative

pro-rata share of gross profit when revenue is recognized over time on
long-term contracts.

CPA Review Questions (continued)
7. c.
2016 actual costs $20,000

Total estimated costs ÷ 60,000
Ratio = 1/3
Contract price x 100,000
Revenue 33,333
2016 actual costs –20,000
Gross profit $13,333
8. d. Since the total cost of the contract, $3,100,000 ($930,000 + 2,170,000), is

projected to exceed the contract price of $3,000,000, the excess cost of
$100,000 must be recognized as a loss in 2016.
Appendix CPA Exam Questions

9. d. The deferred gross profit in the balance sheet at December 31, 2017, should
be the balances in the accounts receivable accounts on that date for 2016
and 2017 sales multiplied by the appropriate gross profit percentage:
Accounts receivable: sales in 2016 2017

Total sales $ 600,000 $900,000
Less: Collections to date (300,000) (300,000)
Less: Write-offs to date (200,000) (50,000)
Accounts receivable balance 100,000 550,000
× Gross profit rate × 30% × 40%
Deferred gross profit $ 30,000 $220,000
The combined deferred gross profit in the balance sheet is $250,000

($30,000 + 220,000).

CPA Review Questions (concluded)
10. a.
Year of sale
2016 2017
a. Gross profit realized $240,000 $200,000
b. Percentage 30% 40%
c. Collections on sales (a/b) $800,000 $500,000
Sales 1,000,000 2,000,000
Balance uncollected
at December 31 $200,000 $1,500,000
The total uncollected balance is $1,700,000 ($200,000 + 1,500,000).
11. c. “Cash collection is at least reasonably possible” is not a requirement for

revenue recognition under IFRS.
12. a. Under the cost recovery approach, an amount of revenue is recognized

that is equal to cost incurred, so long as cost incurred is probable to be
recovered. Since $1,000,000 of cost was incurred, $1,000,000 of
revenue is recognized.
13. a. IFRS does not provide extensive guidance determining how contracts are
to be separated into components for purposes of revenue recognition.

CMA Exam Question
1. b. Given that one-third of all costs have already been incurred ($6,000,000),
the company should recognize revenue equal to one-third of the contract
price, or $8,000,000. Revenues of $8,000,000 minus costs of $6,000,000
equals a gross profit of $2,000,000.
Appendix CMA Exam Question
2. c. Revenue is recognized when (1) realized or realizable and (2) earned. On

May 28, $500,000 of the sales price was realized while the remaining
$500,000 was realizable in the form of a receivable. The revenue was
earned on May 28 when the title of the goods passed to the purchaser. The
cost-recovery method is not used because the receivable was not deemed
uncollectible until June 10.

PROBLEMS
Problem 5-1
Requirement 1
a. Number of performance obligations in the contract: 2.
The unlimited access to facilities and classes for one year is one performance
obligation. Because the discount voucher provides a material right to the customer
that the customer would not receive otherwise (a 25% discount rather than a 10%
discount), it is a second performance obligation. The discount voucher is capable
of being distinct because it could be sold or provided separately, and it is separately
identifiable, as it is not highly interrelated with the other performance obligation
of providing access to Fit & Slim’s facilities, and the seller’s role is not to integrate
and customize them to create one product or service. So, the discount coupon
b. To allocate the contract price to the performance obligations, we should first

consider that Fit & Slim would offer a 10% discount on the yoga course to all
customers as part of its normal promotion strategy. So, a 25% discount provides a
customer with an incremental value of 15% (25% – 10%). Thus, the estimated
stand-alone selling price of the course voucher provided by Fit & Slim is $30 ($500
initial price of the course  15% incremental discount  40% likelihood of
exercising the option).
F&S’s estimated stand-alone selling price of the discount option is:

Value of the yoga discount voucher:
(25% discount – 10% normal discount)  $500 = $ 75
Stand-alone selling price of yoga discount voucher: $ 30
Stand-alone selling price of gym membership: 720
Total of stand-alone prices $750

Problem 5-1 (continued)
F&S must identify each performance obligation’s share of the sum of the stand-
alone selling prices of all deliverables:
$30
Yoga discount voucher: $30 + 720 = 4%
$720
Gym membership: = 96%
$30 + 720
100%
F&S then allocates the total selling price based on stand-alone selling prices, as
follows:
$700
Transaction Price
96% 4%
$672 $28
Gym membership Yoga discount voucher
Cash 700
Deferred revenue—membership fees 672
Deferred revenue—yoga coupon 28

Problem 5-1 (concluded)
Requirement 2
a. Number of performance obligations in the contract: 1.
The access to the gym for 50 visits is one performance obligation. The option to
pay $15 for additional visits does not constitute a material right because it requires
the same fee as would normally be paid by nonmembers. Therefore, it is not a
performance obligation in the contract.
(Note: It could be argued that the coupon book actually includes 50 performance
obligations – one for each visit to the gym. That would end up producing a very
similar accounting outcome, as the $500 cost of the book would be allocated to the
50 visits with revenue recognized for each visit.)
b. Since the option to visit on additional days is not a performance obligation, F&S
should not allocate any of the contract price to the option. Therefore, the entire
$500 payment is allocated to the 50 visits associated with the coupon book.
c. Cash 500
Deferred revenue–coupon book 500

Problem 5–2
Requirement 1
Delivery of a Protab computer is one performance obligation.
The option to purchase a Probook at a 50% discount is a second performance
obligation because it provides a material right to the customer that the customer would
not receive otherwise. The option is capable of being distinct because it could be sold
or provided separately, and it is separately identifiable, as it is not highly interrelated
with the other performance obligation of delivering a Protab computer, and the seller’s
role is not to integrate and customize them to create one product. So, the discount
coupon qualifies as a performance obligation.
The 6-month quality assurance warranty is not a performance obligation. It is not
sold separately and is simply a cost to assure that the product is of good quality. The
seller will estimate and recognize an expense and related contingent warranty liability
in the period of sale. Accounting for warranties is covered in Chapter 13.
The coupon providing an option to purchase an extended warranty does not provide
a material right to the customer because the extended warranty costs the same whether
or not it is purchased along with the Protab. Therefore, that option does not constitute
a performance obligation within the contract to purchase a Protab package.

Requirement 2
Allocation of purchase price to performance obligations:
Allocation of
Percentage of the sum total
Stand-alone of the stand-alone transaction
selling price of selling prices of the price to each
Performance the performance performance performance
obligation: obligation: obligations: obligation:
Protab tablet $76,000,0001 95%3 $74,100,0005
Option to
purchase a 4,000,0002 5%4 3,900,0006
Probook
Total $80,000,000 100.00% $78,000,000
1
$76,000,000 = $760/unit × 100,000 units.
2
$4,000,000 = 50% discount × $400 normal Probook price × 100,000 discount
coupons issued × 20% probability of redemption.
3
95% = $76,000,000 ÷ $80,000,000
4
5% = $4,000,000 ÷ $80,000,000
5
$74,100,000 = 95.00% × ($780 × 100,000 units)
6
$3,900,000 = 5.00% × ($780 × 100,000 units)

Requirement 3
Creative then allocates the total selling price based on stand-alone selling prices,
as follows:
$78,000,000
Transaction Price
95% 5%
$74,100,000 $3,900,000
Protab computers Probook discount vouchers

Cash ($780 × 100,000 units) 78,000,000
Sales revenue 74,100,000
Deferred revenue–discount option 3,900,000

Problem 5–3
Requirement 1
Delivery of a Protab computer is one performance obligation.
The option to purchase a Probook at a 50% discount is a second performance
obligation because it provides a material right to the customer that the customer would
not receive otherwise. The option is capable of being distinct because it could be sold
or provided separately, and it is separately identifiable, as it is not highly interrelated
with the other performance obligations in the contract, so the discount coupon
The 6-month quality assurance warranty is not a performance obligation. It is not
sold separately and is simply a cost to assure that the product is of good quality. The
seller will estimate and recognize an expense and related contingent warranty liability
in the period of sale. Accounting for warranties is covered in Chapter 13.
The option to purchase the extended warranty provides a material right to the
customer, as the extended warranty costs less when purchased with the coupon that
was included in the Protab Package ($50) than it does when purchased separately
($75), so it is a third performance obligation. The option is capable of being distinct
because it could be sold or provided separately, and it is separately identifiable, as it
is not highly interrelated with the other performance obligations in the contract, and
the seller’s role is not to integrate and customize them to create one product or service.
So, the discount coupon qualifies as a performance obligation.

Requirement 2
Allocation of purchase price to performance obligations:
Percentage of the Allocation of

sum of the stand- total transaction
Stand-alone alone selling prices price to each
selling price of of the performance performance
Performance the performance obligations (to two obligation:
obligation: obligation: decimal places):
Protab tablet $76,000,0001 93.83%4 $73,187,4007
Option to purchase
Probook 4,000,0002 4.94%5 3,853,2008
Option to purchase
extended warranty 1,000,0003 1.23%6 959,4009
Total $81,000,000 100.00% $78,000,000
1
$76,000,000 = $760/unit × 100,000 units.
2
$4,000,000 = 50% discount × $400 normal Probook price × 100,000 discount
coupons issued × 20% probability of redemption.
3
$1,000,000 = ($75 price of warranty sold separately minus $50 price of warranty
sold at time of software purchase) × 100,000 units sold × 40% probability of exercise
of option.
4
93.83% = $76,000,000 ÷ $81,000,000
5
4.94% = $4,000,000 ÷ $81,000,000
6
1.23% = $1,000,000 ÷ $81,000,000
7
$73,187,400 = 93.83% × ($780 × 100,000 units)
8
$3,853,200 = 4.94% × ($780 × 100,000 units)
9
$959,400 = 1.23% × ($780 × 100,000 units)

Requirement 3
Creative then allocates the total selling price based on stand-alone selling prices,
as follows:
$78,000,000
Transaction Price
93.83% 4.94% 1.23%
$73,187,400 $3,853,200 $959,400

Protab computers Probook discount vouchers Extended warranty

Cash ($800 × 100,000 units) 78,000,000
Sales revenue 73,187,400
Deferred revenue–discount option 3,853,200
Deferred revenue–extended warranty 959,400

Problem 5-4
Requirement 1
The delivery of Supply Club’s normal products is one performance obligation. The
promise to redeem loyalty points represent a material right to customer that they would
not receive otherwise, so that loyalty points represent a second performance
obligation. The loyalty program really provides customers with a discount option on
future purchases. That option is capable of being distinct because it could be sold or
provided separately, and it is separately identifiable, as it is not highly interrelated
with the other performance obligation of delivering products under normal sales
agreements (the customer can redeem loyalty points for future purchases). Therefore,
the promise to redeem loyalty points qualifies as a performance obligation.
Because there are two performance obligations associated with a single transaction
price ($135,000), the transaction price must be allocated between the two performance
obligations on the basis of stand-alone prices.
Supply Club’s estimated stand-alone selling price of the loyalty points is:
Value of the loyalty points:
125,000 points  $0.20 discount per point = $ 25,000
Stand-alone selling price of loyalty points: $ 15,000
Stand-alone selling price of purchased products: 135,000
Supply Club must identify each performance obligation’s share of the sum of the
stand-alone selling prices of all deliverables:
$15,000
Loyalty points: = 10%
$15,000 + 135,000
$135,000
Purchased products: = 90%
$15,000 + 135,000
100%

Supply Club then allocates the total selling price based on stand-alone selling
prices, as follows:
$135,000
Transaction Price
90% 10%
$121,500 $13,500
Purchased products Loyalty points
The journal entry to record July sales would be:
Cash ($135,000 × 80%) 108,000

Accounts receivable ($135,000 × 20%) 27,000
Deferred revenue–loyalty points 13,500
Requirement 2
Cash ($60,000 × 75% × 80%)* 36,000
Accounts receivable ($60,000 × 25% × 80%)* 12,000
Deferred revenue–loyalty points** 10,800
Sales revenue (to balance) 58,800
*
Sales are discounted by 20% when points are redeemed, so only 80% of each
dollar sold is received. 75% of sales are for cash, and 25% are on credit.
**
Supply Club expected that 60% of the 125,000 awarded points would eventually
be redeemed. 60% × 125,000 = 75,000. Therefore, the 60,000 August
redemptions constitute 60,000 ÷ 75,000 = 80% of total redemptions expected.
Because Supply Club assigned $13,500 of deferred revenue to the July loyalty
points, Supply Club should recognize revenue of $13,500 × 80% = $10,800.

Problem 5–5
Requirement 1
The contract requires 6 payments of $20,000, plus or minus $10,000 at the end of
the contract. So the contract will provide either [(6  $20,000) + $10,000] =
$130,000, or [(6  $20,000) – $10,000] = $110,000.
Revis would estimate the expected value of the transaction price as follows:
Possible Expected
Prices Probability Consideration
$130,000 ([$20,000  6] + $10,000) 80% $104,000

$110,000 ([$20,000  6] – $10,000) 20% 22,000
Expected value of contract price at inception $126,000
Each month Revis will recognize $21,000 ($126,000 ÷ 6) of revenue, recording the
following journal entry:
Cash 20,000
Requirement 2
After six months the bonus receivable will have accumulated to $6,000 (6 
$1,000). If Revis receives the bonus, it will record the following entry:
Cash 10,000

Requirement 3
If Revis pays the penalty, it will record the following entry:

Cash 10,000

Problem 5–6
Requirement 1
Cash 80,000
Because Super Rise believes that unexpected delays are likely and that it will not
earn the $40,000 bonus, Super Rise is not likely to receive the bonus. Thus, the
$40,000 is not included in the transaction price, and only the fixed payment of $80,000
is recognized as deferred revenue.
Requirement 2
Deferred revenue ($80,000 ÷ 10) 8,000

Bonus receivable ($40,000 ÷ 10) 4,000
Super Rise earns revenue of $12,000 associated in the month of January. Because
Super Rise believes it is likely to receive the bonus, it will estimate the transaction
price to be $120,000 ($80,000 fixed payment + $40,000 bonus), and will recognize
1/10 of that amount each month.
Requirement 3

Bonus receivable [($40,000 ÷ 10) × 5] 20,000
Super Rise earns revenue of $8,000 in each month, including May, based on the
original transaction of $80,000 ($80,000 ÷ 10 months). However, no bonus receivable
had been recognized prior to May because unexpected delays were considered likely
and thus no bonus was expected. In May, Super Rise concludes it is likely to receive
the bonus, so it will revise the transaction price to $120,000 ($80,000 fixed payment
+ $40,000 contingent bonus). This means Super Rise must record additional revenue
of $20,000 to adjust revenue to the appropriate amount [($40,000 bonus receivable ÷
10 months) × 5 months], and recognize a receivable for that amount.
Problem 5–7
Requirement 1

Cash 80,000
Because Super Rise has high uncertainty about its bonus estimate, it can’t argue
that it is probable that it won’t have to reverse (adjust downward) a significant amount
of revenue in the future because of a change in its estimate. Therefore, the $40,000 is
not included in the transaction price, and only the fixed payment of $80,000 is
recognized as deferred revenue.
Requirement 2

Bonus receivable [($40,000 ÷ 10) × 5] 20,000
Super Rise earns revenue of $8,000 in the month of May based on the original
transaction of $80,000 ($80,000 ÷ 10 months). In addition, now that Super Rise can
make an accurate estimate, it can argue that it is probable that it won’t have to reverse
(adjust downward) a significant amount of revenue in the future because of a change
in its estimate. Therefore, Super Rise will revise the transaction price to $120,000
($80,000 fixed payment + $40,000 contingent bonus). This means Super Rise must
record additional revenue of $20,000 to adjust revenue to the appropriate amount
[($40,000 bonus receivable ÷ 10 months) × 5 months], and recognize a receivable for
that amount.

Problem 5-8
Requirement 1
At the contract’s inception, Velocity calculates the transaction price to be the
expected value of the two possible eventual prices:
Possible Expected
Prices Probabilities Consideration
$500,000 ([$60,000  8] + $20,000) 80% $400,000

$460,000 ([$60,000  8] – $20,000) 20% 92,000
Expected value at contract inception: $492,000
Because its consulting services are provided evenly over the eight months,
Velocity will recognize revenue of $61,500 ($492,000 ÷ 8 months = $61,500).
Because Velocity is guaranteed to receive only $60,000 per month ($1,500 less than
the revenue recognized), it will recognize a bonus receivable of $1,500 in each month
to reflect the expected value of the bonus amount to be received at the end of the
contract. Therefore, Velocity’s journal entry to record the revenue each month for the
first four months is as follows:


Problem 5–8 (continued)
Requirement 2
By the end of the fourth month, the bonus receivable account would have a balance
of $6,000 (4  $1,500), equal to half of the expected value of the bonus of $12,000
($492,000 – [8  $60,000]). After four months, the estimated likelihood of receiving
the bonus is revised so the estimated transaction price decreases:
Possible Expected
Prices Probabilities Consideration
$500,000 ([$60,000  8] + $20,000) 60% $300,000

$460,000 ([$60,000  8] – $20,000) 40% 184,000
Transaction price after four months: $484,000
So, after four months, the bonus receivable account should have a balance of
$2,000, which is half of the new expected value of the bonus of $4,000 ($484,000 –
[8  $60,000]). Because the bonus receivable account was increased to $6,000 in the
first four months, an adjustment of $4,000 is needed to reduce the bonus receivable
down to $2,000:

This entry reduces the bonus receivable from $6,000 to $2,000, with the offsetting
debit being a reduction in revenue. Over the remaining four months, the bonus
receivable will increase by $500 each month, accumulating to $4,000 by the end of
the contract.

Problem 5–8 (concluded)
Requirement 3
Because services are provided evenly over the eight months, Velocity would
recognize revenue of $60,500 ($484,000 ÷ 8 months) in each of months five through
eight. Because Velocity received $60,000 per month ($500 less than the revenue
recognized), Velocity would recognize a bonus receivable of $500 each month to
reflect the additional service revenue in excess of its unconditional right to $60,000.
The journal entry would be:

Bonus receivable 500
Requirement 4
At the end of contract, Velocity learns that it will receive the bonus of $20,000. It
already has recognized revenue of $4,000 associated with the bonus. Therefore, when
Velocity receives the cash bonus, it will recognize additional revenue of $16,000.
Cash 20,000

Problem 5-9
Requirement 1
authoritative U.S. generally accepted accounting principles. Regarding accounting for
sales-based royalties from licenses, the appropriate citation is:
Implementation Guidance and Illustrations–Sales-Based or Usage-Based
Royalties.”
That citation requires that both of the following two events have occurred:
1. The sales that utilize the intellectual property have occurred.

2. The performance obligation to which the royalty has been allocated has
been satisfied.
Therefore, Tran can’t recognize revenue for sales-based royalties on the Lyon license
until sales have actually occurred.
Requirement 2
If Tran accounts for the Lyon license as a right of use that is conveyed on April 1,
2016, Tran can recognize revenue of $500,000 on that date, because that is the date
upon which Tran transfers to Lyon the right to use its intellectual property. The
journal entry would be:
Cash 500,000
License revenue 500,000
Requirement 3
Tran recognizes revenue for sales-based royalties in the period in which
uncertainty is resolved. Tran earned $1,000,000 of royalties on Lyon’s sales in 2016,
so it should recognize revenue in that amount. The journal entry would be:
Cash 1,000,000
License revenue 1,000,000

Requirement 4
If Tran accounts for the Lyon license as an access right for the period from April
1, 2016, through March 31, 2021, Tran cannot recognize any revenue on April 1, 2016,
because it fulfills its performance obligation over the access period and no time has
yet passed. Instead, Tran must recognize deferred revenue of $500,000. The journal
entry would be:
Cash 500,000
As of December 31, 2016, Tran has partially fulfilled its performance obligation
to provide access to its intellectual property. Given that the access right covers a five-
year period (from April 1, 2016, through March 31, 2021), and Tran provided access
for nine months of 2016 (from April 1, 2016, through December 31, 2016), Tran has
provided 15% [9 ÷ (5 × 12)] of the access right during 2016, and should recognize
15% × $500,000 = $75,000 of revenue. Tran also should recognize revenue for the
$1,000,000 of royalties arising from Lyon’s sales in 2016. So, total revenue
recognized in 2016 is $75,000 + 1,000,000 = $1,075,000. The journal entry would
be:
Cash 1,075,000
License revenue 1,075,000

Problem 5–10
Requirement 1
2016 2017 2018
Contract price $10,000,000 $10,000,000 $10,000,000
(actual in 2018) $ 2,000,000 $ 2,000,000 $ 1,800,000
2016: $2,400,000
= 30.0% × $10,000,000 = $3,000,000
$8,000,000
2017: $6,000,000
= 75.0% × $10,000,000 – 3,000,000 = $4,500,000
$8,000,000
2018: $10,000,000 – 7,500,000 = $2,500,000

2016: $3,000,000 – 2,400,000 = $600,000
2017: $4,500,000 – 3,600,000 = $900,000
2018: $2,500,000 – 2,200,000 = $300,000
2016: $2,400,000
= 30.0% × $2,000,000 = $600,000
$8,000,000
2017: $6,000,000
= 75.0% × $2,000,000 = $1,500,000 – 600,000 = $900,000
$8,000,000
2018: $1,800,000 – 1,500,000 = $300,000

Requirement 2
2016 2017 2018

Construction in progress 2,400,000 3,600,000 2,200,000
Various accounts 2,400,000 3,600,000 2,200,000
Accounts receivable 2,000,000 4,000,000 4,000,000
Billings on construction 2,000,000 4,000,000 4,000,000
contract
Cash 1,800,000 3,600,000 4,600,000
Construction in progress 600,000 900,000 300,000
(gross profit)
Cost of construction 2,400,000 3,600,000 2,200,000
(cost incurred)
Revenue from long-term 3,000,000 4,500,000 2,500,000
contracts
Requirement 3

Current assets:
Accounts receivable $ 200,000 $600,000
Construction in progress $3,000,000 $7,500,000
Less: Billings (2,000,000) (6,000,000)
Costs and profit in excess
of billings 1,000,000 1,500,000
Note: Construction in progress in excess of billings is a contract asset; Billings

in excess of construction in progress is a contract liability.

Requirement 4
2016 2017 2018
Costs incurred during the year $2,400,000 $3,800,000 $3,200,000
Estimated costs to complete
as of year-end 5,600,000 3,100,000 -
2016 2017 2018
Contract price $10,000,000 $10,000,000 $10,000,000
(actual in 2018) $ 2,000,000 $ 700,000 $ 600,000
2016: $2,400,000
= 30.0% × $10,000,000 = $3,000,000
$8,000,000
2017: $6,200,000
= 66.6667% × $10,000,000 – 3,000,000 = $3,666,667
$9,300,000
2018: $10,000,000 – 6,666,667 = $3,333,333
2016: $3,000,000 – 2,400,000 = $600,000
2017: $3,666,667 – 3,800,000 = $(133,333)
2018: $3,333,333 – 3,200,000 = $133,333

2016: $2,400,000
= 30.0% × $2,000,000 = $600,000
$8,000,000
2017: $6,200,000
= 66.6667% × $700,000 = $466,667 – 600,000 = $(133,333)
$9,300,000
2018: $600,000 – 466,667 = $133,333
Requirement 5
2016 2017 2018
as of year-end 5,600,000 4,100,000 -
2016 2017 2018
Contract price $10,000,000 $10,000,000 $10,000,000
(actual in 2018) $ 2,000,000 $ (300,000) $ (100,000)
2016: $2,400,000
= 30.0% × $10,000,000 = $3,000,000
$8,000,000
2017: $6,200,000
= 60.19417% × $10,000,000 – 3,000,000 = $3,019,417
$10,300,000
2018: $10,000,000 – 6,019,417 = $3,980,583


2016: $3,000,000 – 2,400,000 = $600,000
2017: $(300,000) – 600,000 = $(900,000)

2018: $(100,000) – (300,000) = $200,000

Problem 5–11
Requirement 1
Year Revenue Gross profit
2016 -0- -0-
2017 -0- -0-
2018 $10,000,000 $1,800,000
Total $10,000,000 $1,800,000
Requirement 2
2016 2017 2018

contract
Cash 1,800,000 3,600,000 4,600,000
Construction in progress 1,800,000
(gross profit)
Cost of construction 8,200,000
(costs incurred)
Revenue from long-term 10,000,000
contracts (contract price)

Requirement 3

Current assets:
Accounts receivable $ 200,000 $ 600,000
Less: Billings (2,000,000) (6,000,000)
Costs in excess of billings 400,000 -0-
Note: Construction in progress in excess of billings is a contract asset.

Requirement 4
2016 2017 2018
as of year-end 5,600,000 3,100,000 -
Year Revenue Gross profit

2016 -0- -0-
2017 -0- -0-
2018 $10,000,000 $600,000
Total $10,000,000 $600,000
Requirement 5
2016 2017 2018
as of year-end 5,600,000 4,100,000 -

2016 -0- -0-
2017 -0- $(300,000)
2018 $10,000,000 200,000
Total $10,000,000 $(100,000)

Problem 5–12
Requirement 1
2016 2017 2018
Contract price $4,000,000 $4,000,000 $4,000,000
(actual in 2018) $ 500,000 $ (200,000) $ (250,000)
2016 -0-
2017 $(200,000)
2018 (50,000)
Requirement 2
2016: Revenue: (10% × $4,000,000) – 350,000 cost = $50,000
2017: $(200,000) – 50,000 = $(250,000)
2018: $(250,000) – (200,000) = $(50,000)
Requirement 3

Current assets:
Costs less loss ($2,300,000*) in
excess of billings ($2,170,000) $ 130,000
Billings ($720,000) in excess
of costs and profit ($400,000) $ 320,000
*Cumulative costs ($2,500,000) less cumulative loss recognized ($200,000) = $2,300,000

Problem 5–13
Requirement 1
Recognizing revenue upon completion of long-term construction contracts is
equivalent to recognizing revenue at the point in time at which deliver occurs.
Recognizing revenue over time requires assigning a share of the project’s expected
revenues and costs to each construction period. The share is estimated based on the
project's costs incurred each period as a percentage of the project's total estimated
costs.
Requirement 2
2016 2017
Contract price $20,000,000 $20,000,000
Actual costs to date 4,000,000 13,500,000
Estimated costs to complete 12,000,000 4,500,000
Estimated gross profit $ 4,000,000 $ 2,000,000
a. Revenue recognition: If revenue is recognized upon project completion, Citation

would not report any revenue in the 2016 or 2017 income statements.
b. Gross profit recognition:

If revenue is recognized upon project completion, Citation would not report gross
profit until the project is completed. Citation would have to report an overall
gross loss on the contract in whatever period it first revises the estimates to
determine that an overall loss will eventually occur. Citation never estimates the
Altamont contract will earn a gross loss, so never has to recognize one.

c.
Balance Sheet
Current assets:
Costs ($4,000,000*) in excess
of billings ($2,000,000) 2,000,000
* If revenue is recognized upon project completion, this account would only

include costs of $4,000,000
Requirement 3
2016 2017
Contract price $20,000,000 $20,000,000
Estimated gross profit $ 4,000,000 $ 2,000,000
a. Revenue recognition:
2016:
$ 4,000,000
Revenue: = 25% × $20,000,000 = $5,000,000
$16,000,000
2017:
$13,500,000
Revenue: = 75% × $20,000,000 = $15,000,000
$18,000,000
Less: 2016 revenue 5,000,000
2017 revenue $10,000,000

2016: Gross Profit: $5,000,000 – 4,000,000 = $1,000,000
2017: Gross Profit: $10,000,000 – 9,500,000 = $500,000

c.
Balance Sheet
Current assets:
Costs and profit ($5,000,000*) in excess
of billings ($2,000,000) 3,000,000
* Costs ($4,000,000) + profit ($1,000,000)
Requirement 4
2016 2017
Contract price $20,000,000 $20,000,000
Estimated gross profit $ 4,000,000 ($ 2,500,000)
a. Revenue recognition:
Total revenue recognized to date = (percentage complete)(total revenue)

= ($13,500,000 ÷ 22,500,000) x ($20,000,000)
= (60%) x ($20,000,000)
= $12,000,000
Revenue recognized in 2017 = total – revenue recognized in prior periods

= $12,000,000 – 5,000,000 = $7,000,000
2017: Overall loss of ($2,500,000) – previously recognized gross profit of

$1,000,000 = $3,500,000.

c.
Balance Sheet
Current assets:
Accounts receivable $ 1,600,000
Billings ($12,000,000) in excess of costs and
profit ($11,000,000*) 1,000,000
* 2016 costs ($4,000,000) + 2016 profit ($1,000,000) + 2017 costs

($9,500,000) – 2017 loss ($3,500,000)
Requirement 5
Citation should recognize revenue at the time of delivery, when the homes are
completed and title is transferred to the buyer. Recognizing revenue over time is not
appropriate in this case, because the criteria for revenue recognition over time are not
met. Specifically, the customers are not consuming the benefit of the seller’s work as
it is performed (criterion 1 in Illustration 5-5), the customer does not control the asset
as it is created (criterion 2), and the homes have an alternative use to the seller and
seller does not have the right to receive payment for progress to date (criterion 3).
Until completion of the home, transfer of title does not occur and the full sales price
is not received, so control of the homes has not passed from Citation to the buyers.
Requirement 6
Income statement:
Sales revenue (3 x $600,000) $1,800,000
Cost of goods sold (3 x $450,000) 1,350,000
Gross profit $ 450,000
Balance sheet:
Current assets:
Inventory (work in process) $2,700,000
Customer deposits (or deferred revenue) $300,000*
*$600,000 x 10% = $60,000 x 5 = $300,000

Problem 5–14
1. Inventory turnover ratio $6,300 ÷ [($800 + 600) ÷ 2] = 9.0
2. Average days in inventory 365 ÷ 9.0 = 40.56 days
3. Receivables turnover ratio $9,000 ÷ [($600 + 400) ÷ 2] = 18.0
4. Average collection period 365 ÷ 18.0 = 20.28 days
5. Asset turnover ratio $9,000 ÷ [($4,000 + 3,600) ÷ 2] = 2.37
6. Profit margin on sales $300 ÷ $9,000 = 3.33%
7. Return on assets $300 ÷ [($4,000 + 3,600) ÷ 2] = 7.89%
or: 3.33% x 2.37 times = 7.89%
8. Return on shareholders’ equity $300 ÷ [($1,500 + 1,350) ÷ 2] = 21.1%
9. Equity multiplier [($4,000 + 3,600) ÷ 2] ÷ [($1,500 + 1,350) ÷ 2] = 2.67
10. DuPont framework 3.33% x 2.37 x 2.67 = 21.1%

Receivables turnover = Net sales
Accounts receivable
J&J = $41,862 = 6.37 times
$6,574
Pfizer = $45,188 = 5.15 times
$8,775
Average collection period = 365

Receivables turnover
J&J = 365 = 57 days
6.37
Pfizer = 365 = 71 days
5.15
Problem 5–15
Requirement 1
On average, J&J collects its receivables in 14 days less than Pfizer.

Rate of5–15
Problem return on assets =
(continued) Net income
Total assets
Inventory turnover = Cost of goods sold
J&J = $7,197
Inventories
= 14.9%
$48,263
J&J = $12,176 = 3.39 times
Pfizer = $1,639
$3,588 = 1.4%
$116,775
Pfizer = $9,832 = 1.68 times
$5,837
Average days in inventory = 365

Inventory turnover
J&J = 365 = 108 days
3.39
Pfizer = 365 = 217 days
1.68
On average, J&J sells its inventory twice as fast as Pfizer.
Requirement 2
The return on assets indicates a company's overall profitability, ignoring specific
sources of financing. In this regard, J&J’s profitability is significantly higher than
that of Pfizer.

Requirement 3
Profitability can be achieved by a high profit margin, high turnover, or a
combination of the two.
Rate of return on assets = Profit margin  Asset

on sales turnover
= Net income  Net sales

Net sales Total assets
J&J = $ 7,197  $41,862

$41,862 $48,263
= 17.19%  0.867 times

= 14.9%
Pfizer = $ 1,639  $45,188

$45,188 $116,775
= 3.63%  0.387 times

= 1.4%
No, the combinations of profit margin and asset turnover are not similar. J&J’s
profit margin is much higher than that of Pfizer, as is its asset turnover. These
differences combine to produce a significantly higher return on assets for J&J.

Equity
Rate ofmultiplier
return on = Total
Net income
Assets
shareholders’ equity Shareholders’ equity
J&J = $48,263
$7,197 = 26.8%
1.80
$26,869
Pfizer = $116,775
$1,639 = 2.5%
1.79
$65,377
Requirement 4
J&J provided a much greater return to shareholders.
Requirement 5
The two companies have virtually identical equity multipliers, indicating that they
are using leverage to the same extent to earn a return on equity that is higher than
their return on assets.

Problem 5–16
a. Times interest earned ratio = (Net income + Interest + Taxes) ÷ Interest = 17
(Net income + $2 + 12) ÷ $2 = 17
Net income + $14 = 17 x $2
Net income = $20
b. Return on assets = Net income ÷ Total assets = 10%

Total assets = $20 ÷ 10% = $200
c. Profit margin on sales = Net income ÷ Sales = 5%
Sales = $20 ÷ 5% = $400
d. Gross profit margin = Gross profit ÷ Sales = 40%
Gross profit = $400 x 40% = $160
Cost of goods sold = Sales – Gross profit = $400 – 160 = $240
e. Inventory turnover ratio = Cost of goods sold ÷ Inventory = 8
Inventory = $240 ÷ 8 = $30
f. Receivables turnover ratio = Sales ÷ Accounts receivable = 20
Accounts receivable = $400 ÷ 20 = $20
g. Current ratio = Current assets ÷ Current liabilities = 2.0
Acid-test ratio = Quick assets ÷ Current liabilities = 1.0
Current assets ÷ 2 = Current liabilities
Quick assets ÷ 1 = Current liabilities
Current assets ÷ 2 = Quick assets ÷ 1
Current assets = 2 x Quick assets
Cash + Accts. rec. + Inventory = 2 x (Cash + Accounts receivable)
Cash + $20 + 30 = (2 x Cash) + (2 x $20)
Cash + $50 = Cash + Cash + $40
Cash = $10
h. Acid-test ratio = (Cash + Accounts receivable) ÷ Current liabilities = 1.0
Current liabilities = ($10 + 20) ÷ 1.0 = $30

CADUX CANDY COMPANY
Balance Sheet
Assets
Current assets:
Cash $ 10
Accounts receivable (net) 20
Inventories 30
Total current assets 60
Property, plant, and equipment (net) 140
Total assets $200
Liabilities and Shareholders’ Equity

Current liabilities $ 30
Long-term liabilities 70
Shareholders’ equity 100
Total liabilities and shareholders' equity $200
i. Noncurrent assets = Total assets – Current assets

= $200 – ($10 + 20 + 30) = $140
j. Return on shareholders’ equity = Net income ÷ Shareholders’ equity = 20%
Shareholders’ equity = $20 ÷ 20% = $100
k. Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1.0

Total liabilities = $100  1.0 = $100
Long-term liabilities = Total liabilities – Current liabilities = $100 – 30 = $70

Rate of return on assets = Net income
Total assets
Metropolitan = $ 593.8 = 14.8%
$4,021.5
Republic = $ 424.6 = 10.6%

$4,008.0
Problem 5–17
Requirement 1
The return on assets indicates a company's overall profitability, ignoring specific
sources of financing. In this regard, Metropolitan’s profitability exceeds that of
Republic.
Requirement 2
Profitability can be achieved by a high profit margin, high turnover, or a
combination of the two.
Rate of return on assets = Profit margin x Asset

on sales turnover
= Net income x Net sales

Net sales Total assets
Metropolitan = $ 593.8 x $5,698.0

$5,698.0 $4,021.5
= 10.4% x 1.42 times = 14.8%
Republic = $ 424.6 x $7,768.2

$7,768.2 $4,008.0
= 5.5% x 1.94 times = 10.7%
Republic’s profit margin is much less than that of Metropolitan, but partially
makes up for it with a higher turnover.

Equity
Rate ofmultiplier
return on = Net
Totalincome
assets
shareholders’ equity Shareholders’ equity
Metropolitan = $4,021.5
$593.8 = 34.6%
2.34
$144.9 + 2,476.9 – 904.7
Republic = $4,008.0
$424.6 = 43.6%
4.12
$335.0 + 1,601.9 – 964.1
Requirement 3
Republic provides a greater return to common shareholders.
Requirement 4
When the return on shareholders’ equity is greater than the return on assets,
management is using debt funds to enhance the earnings for stockholders. Both firms
do this. Republic’s higher leverage has been used to provide a higher return to
shareholders than Metropolitan, even though its return on assets is less. Republic
increased its return to shareholders 4.07 times (43.6% ÷ 10.7%) the return on assets.
Metropolitan increased its return to shareholders 2.34 times (34.6% ÷ 14.8%) the
return on assets.

Current ratio = Current assets
Current liabilities
Metropolitan = $1,203.0 = 0.94

$1,280.2
Republic = $1,478.7 = 0.83

$1,787.1
Acid-test ratio = Quick assets

Current liabilities
Metropolitan = $1,203.0 – 466.4 – 134.6 = 0,47

$1,280.2
Republic = $1,478.7 – 635.2 – 476.7 = 0.21

$1,787.1
Requirement 5
The current ratios of the two firms are comparable and within the range of the
rule-of-thumb standard of 1 to 1. The more robust acid-test ratio reveals that
Metropolitan is more liquid than Republic.

Times turnover
Receivables interest ratio = Net income plus
Sales
interest plus taxes
earned ratio Accounts
Interest
receivable
Metropolitan = $593.8
$5,698.0
+ 56.8 + 394.7
= 13.5 times = 18.4 times
$422.7
$56.8
Republic = $424.6
$7,768.2
+ 46.6
= 23.9
+ 276.1
times = 16.0 times
$325.0
$46.6
Inventory
Metropolitan = $2,909.0 = 6.2 times

$466.4
Republic = $4,481.7 = 7.1 times

$635.2
Requirement 6
Republic’s receivables turnover is more rapid than Metropolitan’s, perhaps

suggesting that its relative liquidity is not as bad as its acid-test ratio indicated.
Requirement 7
Both firms provide an adequate margin of safety.

APPENDIX PROBLEMS
Problem 5–18
REAGAN CORPORATION
Income Statement
For the Year Ended December 31, 2016
Income before income taxes and
extraordinary item ...................................... [1] $3,680,000
Income tax expense ...................................... 1,472,000
Income before extraordinary item ................ 2,208,000
Extraordinary item:
Gain from settlement of lawsuit (net of
$400,000 tax expense) ................................. 600,000
Net income .................................................... $2,808,000
Income before extraordinary item ................ 2.21
Extraordinary gain ........................................ 0.60
Net income .................................................... $ 2.81
[1] Income from continuing operations before income taxes:

Unadjusted $4,200,000
Add: Gain from sale of equipment 50,000
Deduct: Inventory write-off (400,000)
Depreciation expense (2016) (50,000)
Overstated profit on installment sale (120,000) *
Adjusted $3,680,000
*Profit recognized ($400,000 – 240,000) $160,000
Profit that should have been recognized
(gross profit ratio of 40% x $100,000) (40,000)
Overstated profit $120,000

Problem 5–19
Requirement 1
2016 cost recovery % :
$180,000
= 60% (gross profit % = 40%)
$300,000
$280,000
= 70% (gross profit % = 30%)
$400,000
2016 gross profit:
Cash collection from 2016 sales = $120,000 x 40% = $48,000
2017 gross profit:
Cash collection from 2016 sales = $100,000 x 40% = $ 40,000
+ Cash collection from 2017 sales = $150,000 x 30% = 45,000
Total 2017 gross profit $85,000
Requirement 2
2016
Inventory ..................................................................... 180,000
Cash ................................................................ 120,000



2017
Inventory ..................................................................... 280,000
Cash ................................................................................ 250,000


Requirement 3
Date Cash Collected Cost Recovery Gross Profit
2016
2016 sales $120,000 $120,000 -0-
2017
2016 sales $100,000 $ 60,000 $40,000
2017 sales 150,000 150,000 -0-
2017 totals $250,000 $210,000 $40,000

2016
Inventory ..................................................................... 180,000
Cash ................................................................................ 120,000

To record cash collection from installment sales
2017
Inventory ..................................................................... 280,000
Cash ................................................................................ 250,000

To record cash collection from installment sales


Problem 5–20
Requirement 1
Total profit = $500,000 – 300,000 = $200,000
Installment sales method: Gross profit % = $200,000 ÷ $500,000 = 40%
8/31/16 8/31/17 8/31/18 8/31/19 8/31/20
Cash collections $100,000 $100,000 $100,000 $100,000 $100,000
a. Point of delivery method $200,000 -0- -0- -0- -0-
b. Installment sales method

(40% x cash collected) $ 40,000 $ 40,000 $ 40,000 $ 40,000 $40,000
c. Cost recovery method -0- -0- - 0 - $100,000 $100,000

Requirement 2
Point of Installment
Delivery Sales Cost Recovery
Installment receivable 500,000
Cost of goods sold 300,000
Inventory 300,000
To record sale on 8/31/16
Installment receivable 500,000 500,000

Inventory 300,000 300,000
Deferred gross profit 200,000 200,000
To record sale on 8/31/16
Cash 100,000 100,000 100,000

Installment receivable 100,000 100,000 100,000
(Entry made each Aug. 31)
Deferred gross profit 40,000

Realized gross profit 40,000
(Entry made each Aug. 31)
Deferred gross profit 100,000

Realized gross profit 100,000
(Entry made 8/31/19 &
8/31/20)

Requirement 3
Point of Installment Cost

Delivery Sales Recovery
December 31, 2016
Assets
Installment receivables 400,000 400,000 400,000
Less: Deferred gross profit (160,000) (200,000)
Installment receivables, net 240,000 200,000
December 31, 2017

Assets
Installment receivables 300,000 300,000 300,000
Less: Deferred gross profit (120,000) (200,000)
Installment receivables, net 180,000 100,000

Problem 5–21
Requirement 1
All jobs consist of four equal payments: one payment when the job is completed and
three payments over the next three years.
Bluebird:
Job completed in 2014, so down payment made in 2014, another payment in 2015,
and two payments remain. $400,000 gross receivable at 1/1/2016 implies
payments of ($400,000  2) = $200,000 in 2016 and 2017. Four payments of
$200,000 implies total revenue of 4 x $200,000 = $800,000 on the job. Twenty-
five percent gross profit ratio implies cost of 75% x $800,000 = $600,000.
Cost recovery method gross profit: Payments in 2014 and 2015 have already
recovered $400,000 of cost, so cost remaining to be recovered as of 1/1/2016 is
$600,000 total – $400,000 already recovered = $200,000. Therefore, the entire
2016 payment of $200,000 will be applied to cost recovery, and no gross profit is
recognized in 2016.
Installment sales method gross profit: $200,000 payment x 25% gross profit ratio
= $50,000 of gross profit recognized in 2016.
PitStop:
Job completed in 2013, so down payment made in 2013, another payment in 2014,
another in 2015, and one payment remains. $150,000 gross receivable at 1/1/2016
implies a single payment of $150,000 in 2016. Four payments of $150,000 implies
total revenue of 4 x $150,000 = $600,000 on the job. Thirty-five percent gross
profit ratio implies cost of 65% x $600,000 = $390,000.
Cost recovery method gross profit: Payments in 2013, 2014, and 2015 of a total of
$450,000 have already recovered the entire $390,000 of cost and allowed
recognition of $60,000 of gross profit. Therefore, the entire 2016 payment of
$150,000 will be applied to gross profit.
Installment sales method gross profit: $150,000 payment x 35% gross profit ratio
= $52,500 of gross profit recognized in 2016.

Totals:
Cost recovery method: $0 (Bluebird) + 150,000 (PitStop) = $150,000.
Installment sales method: $50,000 (Bluebird) + 52,500 (PitStop) = $102,500.
Requirement 2
If Dan is focused on 2016, he would not be happy with a switch to the installment
sales method, because that would produce gross profit of only $102,500, which is
$47,500 less than he would show under the cost recovery method. It is true that the
installment sales method recognizes gross profit faster than does the cost recovery
method, but the installment sales method also recognizes gross profit more evenly
than does the cost recovery method. The timing of these jobs is such that 2016 is a
year in which almost all of the gross profit associated with the PitStop job gets
recognized, so 2016 looks more profitable under the cost recovery method.

Problem 5–22
Requirement 1

2016 -0-
2017 -0-
2018 $1,800,000
Total gross profit $1,800,000
Requirement 2
2016 2017 2018


contract
Cash 1,800,000 3,600,000 4,600,000

Construction in progress 1,800,000

(gross profit)
Cost of construction 2,400,000 3,600,000 2,200,000
(costs incurred)
Revenue from long-term 2,400,000 3,600,000 4,000,000
contracts (contract price)

Requirement 3

Current assets:
Accounts receivable $ 200,000 $ 600,000
Less: Billings (2,000,000) (6,000,000)
Costs in excess of billings 400,000 -0-
Requirement 4
2016 2017 2018
as of year-end 5,600,000 3,100,000 -

2016 -0-
2017 -0-
2018 $600,000
Requirement 5
2016 2017 2018
as of year-end 5,600,000 4,100,000 -

2016 -0-
2017 $(300,000)
2018 200,000

Problem 5–23
Requirement 1
a. January 30, 2016
Cash ............................................................................... 200,000

Notes receivable ............................................................. 1,000,000
Unearned revenue – franchise fee ............................. 1,200,000
b. September 1, 2016
Unearned revenue – franchise fee ................................. 1,200,000

Franchise fee revenue ................................................ 1,200,000
c. September 30, 2016
Accounts receivable ($40,000 x 3%) ................................ 1,200

Service revenue .......................................................... 1,200
d. January 30, 2017
Cash ................................................................................ 100,000

Notes receivable ......................................................... 100,000

Requirement 2
a. January 30, 2016
Cash ............................................................................... 200,000

Notes receivable ............................................................. 1,000,000
Deferred franchise fee revenue ................................... 1,200,000
b. September 1, 2016
Deferred franchise fee revenue ....................................... 200,000

Franchise fee revenue (cash collected)........................... 200,000
c. September 30, 2016
Accounts receivable ($40,000 x 3%) ................................ 1,200

Service revenue .......................................................... 1,200

d. January 30, 2017
Cash ................................................................................ 100,000

Notes receivable ......................................................... 100,000
Deferred franchise fee revenue ....................................... 100,000

Franchise fee revenue ................................................ 100,000
Requirement 3
Balance Sheet
Current assets:
Installment notes receivable $ -0-
($1,000,000) less deferred franchise fee
revenue ($1,000,000)
Unearned franchise fee revenue $200,000
Explanation: Revenue recognition on the entire note receivable is deferred. In

addition, $200,000 of unearned revenue must be shown as a liability.

CASES
Research Case 5–1
(Note: This case requires the student to reference a journal article.)
1.
Abuse Explanation
1. Cutoff manipulation The company either closes their books early (so some
current-year revenue is postponed until next year) or
leaves them open too long (so some next-year
revenue is included in the current year).
2. Deferring too much The company has an arrangement under which
or too little revenue revenue should be deferred, but it doesn’t defer the
revenue. Or, a company could defer too much
revenue to shift income into future periods.
3. Bill-and-hold sale The company records sales even though it hasn’t yet
delivered the goods to the customer.
4. Right-of-return sale The company sells to distributors or other customers
and can’t estimate returns with sufficient accuracy
due to the nature of the selling relationship.
2. Manipulating estimates of percentage complete in order to manipulate gross

profit recognition.
3. These abuses tended to increase income (75% of the time), consistent with
management generally having an incentive to increase income.
4. The auditors tended to require adjustment (56% of the time), consistent with
auditors being concerned about income-increasing earnings management.

Judgment Case 5–2
Determining whether Toys4U satisfies the performance obligation requires the
company to consider indicators of whether McDonald’s has obtained control of the
dolls. Management should evaluate these indicators individually and in combination
to decide whether control has been transferred. The indicators include, but are not
limited to the following:
1. The customer has accepted the asset. There is no acceptance provision

indicated, but given that McDonald’s returns unsold dolls to Toys4U, it does
not appear that McDonald’s has irrevocably accepted the dolls.
2. The customer has legal title. The facts do not state whether title transfers.
3. The customer has physical possession of goods. McDonald’s has possession

of the dolls.
4. The customer has the risks and rewards of ownership. Given that
McDonald’s returns unsold dolls to Toys4U, McDonald’s does not appear to
be holding the risks of ownership.
5. The customer has an obligation to pay the seller. In this case, McDonald’s
does not pay Toys4U until the dolls are sold, so McDonald’s is conditionally
(not unconditionally) obliged to pay for the toys.
In this case, Toys4U has not transferred control upon delivery because
McDonald’s has not accepted the asset, does not have the risks and rewards of
ownership, and does not have an obligation to pay Toys4U unless the dolls are sold.
Therefore, Toys4U has not satisfied its performance obligation. This is essentially a
consignment arrangement, and Toys4U should not recognize revenue until
McDonald’s sells dolls to customers.

Judgment Case 5–3
In this case, Kerry obtained the access code for Level I on December 1, meaning
that Kerry has obtained the control of the right to use the software for Level I on that
date. On that date Cutler should recognize $50 of revenue for Level I.
Tom passed the Level I test on December 10 and Kerry purchased access to
Level II on the same day. However, Kerry received the access code for Level II on
December 20, so control over the Level II software was not transferred to Kerry until
December 20. Cutler should recognize $30 of revenue for Level II on December 20.

Ethics Case 5–4
Discussion should include these elements.
Facts:
Horizon Corporation, a computer manufacturer, reported profits from 2011
through 2014, but reported a $20 million loss in 2015 due to increased competition.
The chief financial officer (CFO) circulated a memo suggesting the shipment of
computers to J.B. Sales, Inc., in 2016 with a subsequent return of the merchandise to
Horizon in 2017. Horizon would record a sale for the computers in 2016 and avoid an
inventory write-off that would place the company in a loss position for that year.
The CFO is clearly asking Jim Fielding to recognize revenue in 2016 that he
knows will be reversed as a sales return in 2017.
Ethical Dilemma:
Is Jim's obligation to challenge the memo of the CFO and provide useful
information to users of the financial statements greater than the obligation to prevent
a company loss in 2016 that may lead to bankruptcy?
Who is affected?
Jim Fielding
CFO and other managers
Other employees
Shareholders
Potential shareholders
Creditors
Auditors

Judgment Case 5-5
Scenario 1: The terms of the contract and all the related facts and circumstances
indicate that Star controls the room as it is built. Crown is entitled to receive
payments throughout the contract as evidenced by the required progress payments
(with no refund of payment for any work performed to date) and by the requirement
to pay for any partially completed work in the event of contract termination.
Consequently, Crown’s performance obligation is to provide Star with construction
services, and Crown would recognize revenue over time throughout the
construction process.
indicate that Star does not obtain control of the gym until it is delivered. If the
contract is terminated prior to completion, Crown retains the equipment, suggesting
that Crown retains control of the equipment throughout the job. Consequently,
Crown’s performance obligation is to provide Star with a completed gym, and
Crown would recognize revenue upon contract completion.
indicate that Coco has the ability to direct the use of, and receive the benefit from,
the consulting services as they are performed. The restaurant has an unconditional
obligation to pay throughout the contract as evidenced by the nonrefundable
progress payments, and the right to a report regardless of contract termination. Also,
the report has no alternate use to CostDriver. Therefore, the CostDriver Company’s
performance obligation is to provide the restaurant with services continuously
during the three months of the contract, and CostDriver should recognize revenue
over the life of the contract.
indicate that Edwards, the customer, obtains control of the apartment upon
completion of the contract. Edwards obtains title and physical possession of the
apartment only on completion of the contract. Consequently, the Tower’s
performance obligation is to provide the customer with a completed apartment, and
the Tower should not recognize revenue until delivery of the apartment.

Judgment Case 5-6
The license granted by Pfizer is not a performance obligation, because it is not
separately identifiable. The only way to exploit the license is by utilizing ongoing
R&D services from Pfizer. The license does not provide utility on its own or together
with other goods or services that HealthPro has received previously from Pfizer or that
are available from other entities. Rather, the license requires Pfizer’s R&D services
and proprietary expertise to be valuable. Therefore, Pfizer would combine the license
with the R&D services to HealthPro and account for them as a single performance
obligation.

Communication Case 5–7
The critical question that student groups should address is how to account for
punches in the punch card and the option to possibly receive a free ice cream cone that
it provides. Students should benefit from participating in the process, interacting first
with other group members, then with the class as a whole.
The preferred solution should include the idea that the sale of an ice cream cone to
a person who has a card involves two performance obligations:
1. Providing the ice cream cone
2. Eventually providing an additional ice cream cone, if and when a customer
reaches 10 punches on a card and redeems the card for the free cone.
Students should recognize that each punch on the punch card contributes to an
option to receive a future ice cream cone. That option is capable of being distinct
because it could be sold or provided separate from selling a cone, and it is separately
identifiable, as it is not highly interrelated with selling a cone (for example, cones
certainly could be sold without offering the punch card program, and in fact that is
how Jerry’s currently does business). Therefore, each punch on the punch card is
distinct from the cone that is sold at the same time, and each punch qualifies as a
performance obligation.
Students also should recognize that not all cards will be redeemed for ice cream
cones. Some may be lost, and some may never fill up with the required 10 punches.
Therefore, Jerry must estimate the chance that a punch results in a future ice cream
cone. He likely would come up with some estimate. For example, he might conclude
that half of all punches end up unused, such that a punch on average leads to Jerry
providing 1/20 of a free future cone. In that case, the revenue for each cone should be
allocated to the two performance obligations based on their stand-alone selling prices,
and a journal entry is recorded upon sale of a cone as follows:
Cash xxx
Sales Revenue xxx
Deferred revenue, punch cards xxx

Case 5–7 (concluded)
In the future, when a card is redeemed, the deferred revenue account would be
reduced and revenue recognized for deferred revenue related to ten punches.
Sales of ice cream cones to people who do not have cards have only a single
performance obligation – to deliver the ice cream cone – and so can be accounted for
in the same manner as they were previously.
Other solutions that are likely to emerge:
1. Treat providing the occasional free cone as a cost of doing business and
don’t view provision of that cone as a separate performance obligation. The
idea here is that the deferral of revenue associated with the free cones is
time-consuming and is not likely to provide a material amount of additional
information to financial statement users. This approach would be an
immaterial departure from GAAP.
2. Ignore revenue recognition and instead accrue an estimated cost. This
solution views the free ice cream cone as a promotional expense. The
estimated cost of the free cone should be expensed as the 10 required cones
are sold. A corresponding liability is recorded which should increase to an
amount equal to the cost of the free cone. When the free cone is awarded, the
liability and inventory are reduced. This approach ignores the idea that there
is a revenue-recognition aspect to the promise of free cones, so is not
correct.
It’s important that each student actively participate in the process. Domination by one
or two individuals should be discouraged. Students should be encouraged to contribute
to the group discussion by (a) offering information on relevant issues, and (b)
clarifying or modifying ideas already expressed, or (c) suggesting alternative
direction.

Judgment Case 5-8
When other parties are involved in providing goods or services to a seller’s
customer, the seller must determine whether its performance obligation is to provide
the goods or services, making the seller a principal, or the seller arranges for another
party to provide those goods or services, making the seller an agent. That
determination affects whether the seller recognizes revenue in the amount of
consideration received in exchange for those goods or services (if principal) or in the
amount of any fee or commission received in exchange for arranging for the other
party to provide the goods or services (if agent).
Requirement 1
AuctionCo is a principal because it obtained control of the used bicycle before the
bicycle was sold. Therefore, AuctionCo should recognize revenue of $300.
Requirement 2
AuctionCo is an agent because it never controlled the product before it was sold.
Therefore, AuctionCo should recognize revenue for the commission fees of $100
received upon sending $200 to the original owner.
Requirement 3
If AuctionCo must pay the bicycle owner the $200 price regardless of whether the
bicycle is sold, then AuctionCo would appear to have purchased the bicycle and
should be treated as a principal.

Real World Case 5–9
Requirement 2
Excerpt from Orbitz’s 2013 Annual Report:
Under the merchant model, we generate revenue for our services based on the
difference between the total amount the customer pays for the travel product and the
negotiated net rate plus estimated taxes that the supplier charges us for that product.
Customers generally pay us for reservations at the time of booking. Initially, we
record these customer receipts as accrued merchant payables and either deferred
income or net revenue, depending on the travel product. In the merchant model, we
do not take on credit risk with the customer, however we are subject to charge-backs
and fraud risk which we monitor closely; we have the ability to determine the price;
we are not responsible for the actual delivery of the flight, hotel room or car rental;
we take no inventory risk; we have no ability to determine or change the products or
services delivered; and the customer chooses the supplier. We recognize net revenue
under the merchant model when we have no further obligations to the customer. …
Under the retail model, we pass reservations booked by our customers to the travel
supplier for a commission. In the retail model, we do not take on credit risk with the
customer; we are not the primary obligor with the customer; we have no latitude in
determining pricing; we take no inventory risk; we have no ability to determine or
change the products or services delivered; and the customer chooses the supplier.
We recognize net revenue under the retail model when the reservation is made,
secured by a customer with a credit card and we have no further obligations to the
customer.

Case 5–9 (continued)
Excerpt from Priceline.com’s 2013 Annual Report:
The Name Your Own Price ® service connects consumers that are willing to accept a
level of flexibility regarding their travel itinerary with travel service providers that are
willing to accept a lower price in order to sell their excess capacity without disrupting
their existing distribution channels or retail pricing structures. The Company's Name
Your Own Price ® services use a unique pricing system that allows consumers to "bid"
the price they are prepared to pay when submitting an offer for a particular leisure
travel service. The Company accesses databases in which participating travel service
providers file secure discounted rates, not generally available to the public, to
determine whether it can fulfill the consumer's offer. The Company selects the travel
service provider and determines the price it will accept from the consumer. Merchant
revenues and cost of merchant revenues include the selling price and cost,
respectively, of the Name Your Own Price ® travel services and are reported on a
gross basis. …
Merchant Retail Services: Merchant revenues for the Company's merchant retail
services are derived from transactions where consumers book accommodation
reservations or rental car reservations from travel service providers at disclosed rates
which are subject to contractual arrangements. Charges are billed to consumers by the
Company at the time of booking and are included in deferred merchant bookings until
the consumer completes the accommodation stay or returns the rental car. Such
amounts are generally refundable upon cancellation, subject to cancellation penalties
in certain cases. Merchant revenues and accounts payable to the travel service provider
are recognized at the conclusion of the consumer's stay at the accommodation or return
of the rental car. The Company records the difference between the reservation price to
the consumer and the travel service provider cost to the Company of its merchant retail
reservation services on a net basis in merchant revenue.
Agency revenues are derived from travel-related transactions where the Company is
not the merchant of record and where the prices of the services sold are determined
by third parties. Agency revenues include travel commissions, global distribution
system ("GDS") reservation booking fees and customer processing fees, and are
reported at the net amounts received, without any associated cost of revenue. Such
revenues are generally recognized by the Company when the customers complete their
travel.

Case 5–9 (continued)
Requirement 3
a) Orbitz’s “merchant model” revenues:
This is reported net: “We recognize net revenue under the merchant model
when we have no further obligations to the customer.”
b) Orbitz’s “retail model” revenues:
This is reported net: “We recognize net revenue under the retail model when
the reservation is made, secured by a customer with a credit card and we have
no further obligations to the customer.”
c) Priceline.com’s “merchant revenues for ‘Name Your Own Price®’ services”:
This is reported gross: “Merchant revenues and cost of merchant revenues

include the selling price and cost, respectively, of the Name Your Own Price
travel services and are reported on a gross basis.”
d) Priceline.com’s “merchant retail services”:
This is reported net: “The Company records the difference between the
reservation price to the consumer and the travel service provider cost to the
Company of its merchant retail reservation services on a net basis in merchant
revenue.”
e) Priceline.com’s agency revenues:
This is reported net: “Agency revenues . . . are reported at the net amounts
received, without any associated cost of revenue.”

Requirement 4
Yes, it appears that relatively similar services can be accounted for as gross or net
depending on how they are structured. Priceline’s “Name your own Price®” service
appears similar to services that Orbitz might offer under its merchant model, yet
Priceline would recognize revenue gross and Orbitz would recognize revenue net. If
similar items are treated differently, comparability is reduced.

Research Case 5–10
Requirement 1
Implementation Guidance and Illustrations–Principal versus Agent Considerations.”
Requirement 2
Implementation Guidance and Illustrations–Principal versus Agent Considerations.”
The Codification lists the following indicators for use of the gross method:
1. Another party is primarily responsible for fulfilling the contract.
2. The entity does not have inventory risk before or after the goods have been
ordered by a customer, during shipping, or on return.
3. The entity does not have discretion in establishing prices for the other party’s
goods or services and, therefore, the benefit that the entity can receive from
those goods or services is limited.
4. The entity’s consideration is in the form of a commission.
5. The entity is not exposed to credit risk for the amount receivable from a
customer in exchange for the other party’s goods or services.
Requirements 3 and 4
For their AdSense program, Google’s 2013 10K states: “We recognize as
revenues the fees charged to advertisers each time a user clicks on one of the ads that
appears next to the search results or content on our websites or our Google Network
Members’ websites. For those advertisers using our cost-per-impression pricing, we
recognize as revenues the fees charged to advertisers each time their ads are displayed
on our websites or our Google Network Members’ websites. We report our Google
AdSense revenues on a gross basis principally because we are the primary obligor to
our advertisers.” That is consistent with the first indicator listed above, so Google’s
reasoning appears appropriate.

Requirement 1
A bill and hold strategy accelerates the recognition of revenue. In this case, sales
that would normally have occurred in 1998 were recorded in 1997. Assuming a
positive gross profit on these sales, earnings in 1997 is inflated.
Requirement 2
A customer would probably not be expected to pay for goods purchased using
this bill and hold strategy until the goods were actually received. Receivables would
therefore increase.
Requirement 3
Sales that would normally have been recorded in 1998 were recorded in 1997.
This bill and hold strategy shifted sales revenue and therefore earnings from 1998 to
1997.
Requirement 4
Earnings quality refers to the ability of reported earnings (income) to predict a
company’s future earnings. Sunbeam’s earnings management strategy produced a
1997 earnings figure that was not indicative of the company’s future profit-generating
ability.

Judgment Case 5–12
Bill’s argument is that recognizing revenue upon project completion is preferable
because it is analogous to point of delivery revenue recognition. That is, no revenue
is recognized until the completed product is delivered. John’s argument is that the
important factor is the process of satisfying the performance obligation and that
revenue should be recognized as the process takes place.
John’s argument is correct. In situations when the earnings process takes place
over long periods of time, like long-term construction contracts, it is preferable to
recognize revenue over time, rather than to wait until the contract has been completed.

Communication Case 5–13
Suggested Grading Concepts and Grading Scheme:
Content (70%)
________ 25 Income differences.
⎯ Revenue recognition over time recognizes gross profit during construction
based on an estimate of percent complete.
⎯ If a project doesn’t qualify for revenue recognition over time, no gross
profit is recognized until project completion.
⎯ Estimated losses are fully recognized in the first period an overall loss is
anticipated.
________ 20 Balance sheet differences.
⎯ The two approaches are similar. However, for profitable projects, the
construction in progress account during construction will have a higher
balance when revenue is recognized over time due to the inclusion of gross
profit.
________ 25 According to generally accepted accounting principles, revenue should be
recognized over time if:
3. The seller is creating an asset that has no alternative use to the seller, and the
seller can receive payment for its progress even if the customer cancels the
contract.
The second and third of these situations likely apply to Willingham’s construction
contracts, so those contracts probably require revenue recognition over time.
________
70 points
Writing (30%)
________ 6 Terminology and tone appropriate to the audience of a company
controller.
________ 12 Organization permits ease of understanding.
⎯ Introduction that states purpose.
⎯ Paragraphs that separate main points.
________ 12 English
⎯ Sentences grammatically clear and well organized, concise.
⎯ Word selection.
⎯ Spelling.
⎯ Grammar and punctuation.
________
30 points
Analysis Case 5–14

This case encourages students to obtain hands-on familiarity with an actual
annual report and library sources of industry data. They also must apply the techniques
learned in the chapter. You may wish to provide students with multiple copies of the
same annual reports and compare responses. Another approach is to divide the class
into teams who evaluate reports from a group perspective.

Apparently, a significant increase in assets occurred during the last quarter. Total
assets were $324 million and now they total $450 million, as can be calculated as
follows:
Return on shareholders’ equity = Net income ÷ Shareholders’ equity = 14%

Shareholders’ equity = $21 million ÷ 14% = $150 million
Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 2
Total liabilities = $150 million x 2 = $300 million
Total assets = Total liabilities + Shareholders’ equity
= $300 million + 150 million = $450 million

Balance Sheet
Assets
Cash $ 15,000 given
Accounts receivable (net) 12,000 (e)
Inventory 30,000 (d)
Prepaid expenses and other current assets 3,000 (i)
Current assets 60,000 (h)
Property, plant, and equipment (net) 140,000 (j)
$200,000 (b)
Liabilities and Shareholders’ Equity
Accounts payable $ 25,000 (g)
Short-term notes 5,000 given
Current liabilities 30,000 (f)
Bonds payable 20,000 (l)
Shareholders’ equity 150,000 (k)
$200,000 (b)
Income Statement
Sales $300,000 (a)
Cost of goods sold (180,000) (c)
Gross profit 120,000 (c)
Operating expenses (96,000) (o)
Interest expense (2,000) (m)
Tax expense (7,000) (n)
Net income $ 15,000 given
Integrating Case 5–16

Calculations ($ in 000s):
a. Profit margin on sales = Net income ÷ Sales = 5%
Sales = $15 ÷ 5% = $300
b. Return on assets = Net income ÷ Total assets = 7.5%
Total assets = $15 ÷ 7.5% = $200
c. Gross profit margin = Gross profit ÷ Sales = 40%
Gross profit = $300 x 40% = $120
Cost of goods sold = Sales – Gross profit = $300 – 120 = $180
d. Inventory turnover ratio = Cost of goods sold ÷ Inventory = 6
Inventory = $180 ÷ 6 = $30
e. Receivables turnover ratio = Sales ÷ Accounts receivable = 25
Accounts receivable = $300 ÷ 25 = $12
f. Acid-test ratio = Cash + AR + ST Investments ÷ Current liabilities = .9
Current liabilities = ($15 + 12 + 0) ÷ .9 = $30
g. Accounts payable = Current liabilities – Short-term notes = $30 – 5 = $25
h. Current ratio = Current assets ÷ Current liabilities = 2
Current assets = $30 x 2 = $60
i. Prepaid expenses and other current assets =
Current assets – (Cash + AR + Inventory) = $60 – (15 + 12 + 30) = $3
j. Property, plant, and equipment = Total assets – Current assets = $200 – 60 =
$140
k. Return on shareholders’ equity = Net income ÷ Shareholders’ equity =10%
Shareholders’ equity = $15 ÷ 10% = $150
l. Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1/3
Total liabilities = $150 x 1/3 = $50
Bonds payable = Total liabilities – Current liabilities = $50 – 30 = $20
m. Interest expense = 8% x (Short-term notes + Bonds )
Interest expense = 8% x ($5 + 20) = $2
n Times interest earned ratio = (Net income + Interest +Taxes) ÷ Interest = 12
Times interest earned ratio = ($15 + 2 + Taxes) ÷ 2 = $12
Times interest earned ratio = ($15 + 2 + Taxes) = $24
Tax expense = $24 – (15 + 2) = $7
o. Operating expenses = (Sales – Cost of goods sold – Interest expense – Tax
expense) – Net income = ($300 – 180 – 2 – 7) – 15 = $96

Air France–KLM Case
Requirement 1
a. AF’s balance sheet indicates current deferred revenue on ticket sales of
€2,371 million as of December 31, 2013.
b. The journal entry would be:

Deferred revenue on ticket sales 2,371
Sales revenue 2,371
c. This seems consistent with U.S. GAAP. A liability for deferred revenue is
recognized when tickets are purchased, and then the deferred revenue is
reduced and revenue is recognized when the transportation service is
provided.
Requirement 2
a. From note 4.7: “In accordance with the IFRIC 13, these ‘miles’ are
considered as distinct elements from a sale with multiple elements and one
part of the price of the initial sale of the airfare is allocated to these ‘miles’
and deferred until the Group’s commitments relating to these ‘miles’ has
been met.
The deferred amount due in relation to the acquisition of miles by members is

estimated:
- According to the fair value of the ‘miles,’ defined as the amount at which
the benefits can be sold separately.
- After taking into account the redemption rate, corresponding to the
probability that the miles will be used by members, using a statistical
method.”
b. Per the balance sheet, AF has a liability for “Frequent flyer programs” of
€755 million.
c. AF’s approach is consistent with ASU No. 2014-09, in that the transaction
price for airfare is allocated to the performance obligations of (1) providing
the airfare and (2) providing future airfare or other goods and services upon
redemption of miles. The revenue associated with AF miles is deferred and
recognized separately from the revenue associated with the flights that
customers use to earn the miles.
APPENDIX CASES
Requirement 1
The three methods that could be used to recognize revenue and costs for this
situation are (1) point of delivery, (2) the installment sales method, and (3) the cost
recovery method.
2016 gross profit under the three methods:
(1) point of delivery:
$80,000 – 40,000 = $40,000
(2) installment sales method:
$40,000
= 50% = gross profit %
$80,000
50% x $30,000 (cash collected) = $15,000
(3) cost recovery method:
No gross profit recognized since cost ($40,000) exceeds cash collected ($30,000).

Case 5-17 (concluded)
Requirement 2
Customers sometimes are allowed to pay for purchases in installments over long
periods of time. Uncertainty about collection of a receivable normally increases with
the length of time allowed for payment. In most situations, the increased uncertainty
concerning the collection of cash from installment sales can be accommodated
satisfactorily by estimating uncollectible amounts. In these situations, point of
delivery revenue recognition should be used.
If, however, the installment sale creates a situation where there is significant
uncertainty concerning cash collection making it impossible to make an accurate
assessment of future bad debts, revenue and cost recognition should be delayed. The
installment sales method and the cost recovery method are available to handle such
situations. These methods should be used only in situations involving exceptional
uncertainty. The cost recovery method is the more conservative of the two.

IFRS Case 5–18
Vodafone’s revenue recognition policies for products and services are similar to
revenue recognition policies in the U.S. Sales of products are recorded when goods
have been put at the disposal of the customers in accordance with agreed terms of
delivery and when the risks and rewards of ownership have been transferred to the
buyer. Sales of services are recognized as the services are provided. Revenue for
multiple-deliverable contracts is allocated to separate deliverables based on relative
fair values. The terminology is somewhat different, but the end results, as compared
to U.S. policies, should be similar in most cases.
IFRS Case 5–19

Requirement 1
Per the revenue recognition section of ThyssenKrupp’s 2013 annual report, note
1: Summary of Significant Accounting Policies:
Revenue recognition
…Construction contract revenue and expense are accounted for using the
percentage-of-completion method, which recognizes revenue as performance of the
contract progresses. The contract progress is determined based on the percentage of
costs incurred to date to total estimated cost for each contract after giving effect to the
most recent estimates of total cost.
…Where the income of a construction contract cannot be estimated reliably,
contract revenue that is probable to be recovered is recognized to the extent of contract
costs incurred. Contract costs are recognized as expenses in the period in which they
are incurred.
Requirement 2
Similar accounting would be used under U.S. GAAP.

Trueblood Accounting Case 5–20
A solution and extensive discussion materials can be obtained from the Deloitte
Foundation.

Foundation.

Foundation.

Requirement 3
The following is from the 2013 10K of Jack in the Box, Inc. The responses to
the question will vary if the company has since changed its revenue recognition policy.
a. These fees are first recorded as deferred revenue and then recognized as
revenue when the company has substantially performed all of its contractual
obligations and the restaurant is open for business. This policy agrees with
GAAP.
b. Continuing payments (“royalties”) are based on a percentage of sales.
Requirement 4
Answers to this question will, of course, vary because students will research
financial statements of different companies. Likely candidates for comparison include
most of the fast-food chains such as McDonald’s, and Wendy’s, and Arby’s.


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Intermediate Accounting 8th Edition

Spiceland Solutions Manual

Solution Manual: https://testbankpack.com/p/solution-manual-for-

Test Bank: https://testbankpack.com/p/test-bank-for-intermediate-

Chapter 5 Revenue Recognition and Profitability Analysis

QUESTIONS FOR REVIEW OF KEY TOPICS

Management should evaluate these indicators individually and in combination to

5-2 Solutions Manual, Vol. 1, Chapter 5

Intermediate Accounting, 8/e 5-3

We normally think of a contract as being specified in a written document, but

5-4 Solutions Manual, Vol. 1, Chapter 5

Intermediate Accounting, 8/e 5-5

5-6 Solutions Manual, Vol. 1, Chapter 5

Intermediate Accounting, 8/e 5-7

5-8 Solutions Manual, Vol. 1, Chapter 5

Intermediate Accounting, 8/e 5-9

Receivables turnover ratio = Net sales

Inventory turnover ratio = Cost of goods sold

Asset turnover ratio = Net sales

Activity ratios are designed to provide information about a company’s

5-10 Solutions Manual, Vol. 1, Chapter 5

Profit margin on sales = Net income

Return on assets = Net income

Return on shareholders' = Net income

A fundamental element of an analyst’s task is to develop an understanding of a

Net income = Net income X Total sales X Avg. total assets

Intermediate Accounting, 8/e 5-11

5-12 Solutions Manual, Vol. 1, Chapter 5

Intermediate Accounting, 8/e 5-13

5-14 Solutions Manual, Vol. 1, Chapter 5

Brief Exercise 5–2

Under Estate’s construction agreement with CyberB, if for any reason

Intermediate Accounting, 8/e 5-15

Journal entries (not required):

December 31, 2016 adjusting entry

5-16 Solutions Manual, Vol. 1, Chapter 5

The journal entry is recorded as follows:

Brief Exercise 5–5

Access to eLean services is one performance obligation. Registration on the

Intermediate Accounting, 8/e 5-17

Brief Exercise 5–7

5-18 Solutions Manual, Vol. 1, Chapter 5

In addition to the subscription, the renewal option is a performance obligation

Brief Exercise 5-9

Brief Exercise 5-10

Intermediate Accounting, 8/e 5-19

A right of return is not a performance obligation. Instead, the right of return

Brief Exercise 5–12

Possible Amounts Probabilities Expected Amounts

5-20 Solutions Manual, Vol. 1, Chapter 5

Brief Exercise 5–14

Brief Exercise 5–15

Intermediate Accounting, 8/e 5-21

Brief Exercise 5–17

5-22 Solutions Manual, Vol. 1, Chapter 5

Brief Exercise 5–19

Brief Exercise 5–20

Intermediate Accounting, 8/e 5-23

Brief Exercise 5–22

Brief Exercise 5–23

Brief Exercise 5–24

5-24 Solutions Manual, Vol. 1, Chapter 5

Contract liability: $2,000.

Accounts receivable: $0.