CHAPTER 5 Revenue Recognition and Profitability Analysis 277 Questions For Review of Key Topics Q 5–1 What are the five key steps a company follows to apply the core revenue recognition principle? Q 5–2 What indicators suggest that a performance obligation has been satisfied at a single point in time? Q 5–3 What criteria determine whether a company can recognize revenue over time? Q 5–4 We recognize service revenue either at one point in time or over a period of time. Explain the rationale for recognizing service revenue using these two approaches. Q 5–5 What characteristics make a good or service a performance obligation? Q 5–6 How does a seller allocate a transaction price to a contract’s performance obligations? Q 5–7 What must a contract include for the contract to exist for purposes of revenue recognition? Q 5–8 When a contract includes an option to buy additional goods or services, when does that option give rise to a performance obligation? Q 5–9 Is variable consideration included in the calculation of a contract’s transaction price? If so, how is the amount of variable consideration estimated? Q 5–10 How are sellers constrained from recognizing variable consideration, and under what circumstances does the constraint apply? Q 5–11 Is a customer’s right to return merchandise a performance obligation of the seller? How should sellers account for a right of return? Q 5–12 What is the difference between a principal and an agent for determining the amount of revenue to recognize? Q 5–13 Under what circumstances should sellers consider the time value of money when recognizing revenue? Q 5–14 When should a seller view a payment to its customer as a refund of part of the price paid by the customer for the seller’s products or services? Q 5–15 What are three methods for estimating stand-alone selling prices of goods and services that normally are not sold separately? Q 5–16 When is revenue recognized with respect to licenses? Q 5–17 In a franchise arrangement, what are a franchisor’s typical performance obligations? Q 5–18 When does a company typically recognize revenue for a bill-and-hold sale? Q 5–19 When does a consignor typically recognize revenue for a consignment sale? Q 5–20 When does a company recognize revenue for a sale of a gift card? Q 5–21 Must bad debt expense be reported on its own line on the income statement? If not, how should it be disclosed? Q 5–22 Explain the difference between contract assets, contract liabilities, and accounts receivable. Q 5–23 Explain how to account for revenue on a long-term contract over time as opposed to at a point in time. Under what circumstances should revenue be recognized at the point in time a contract is completed? Q 5–24 Periodic billings to the customer for a long-term construction contract are recorded as billings on construction contract. How is this account reported in the balance sheet? Q 5–25 When is an estimated loss on a long-term contract recognized, both for contracts that recognize revenue over time and those that recognize revenue at the point in time the contract is completed? Q 5–26 Show the calculation of the following activity ratios: (1) the receivables turnover ratio, (2) the inventory turnover ratio, and (3) the asset turnover ratio. What information about a company do these ratios offer? Q 5–27 Show the calculation of the following profitability ratios: (1) the profit margin on sales, (2) the return on assets, and (3) the return on shareholders’ equity. What information about a company do these ratios offer? Q 5–28 Show the DuPont framework’s calculation of the three components of return on shareholders’ equity. What information about a company do these ratios offer? Brief Exercises On July 1, 2016, Apache Company, a real estate developer, sold a parcel of land to a construction company for $3,000,000. The book value of the land on Apache’s books was $1,200,000. Terms of the sale required a down payment of $150,000 and 19 annual payments of $150,000 plus interest at an appropriate interest rate due on each July 1 beginning in 2017. How much revenue will Apache recognize for the sale (ignoring interest), assuming that it recognizes revenue at the point in time at which it transfers the land to the construction company? BE 5–1 Revenue recognition at a point in time ● LO5–2
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