Revenue Recognition
Self Test
Financial Accounting
Revenue Recognition
Self Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. Revenue must be recognized
b. when a performance obligation is met
c. when cash is received
d. according to the principle of relevance
Answer
B. A performance obligation must be met for revenue to be earned. Additionally, the seller must believe the buyer will pay amounts the seller is entitled to receive.
2. Which of the following does the SEC require for public companies to recognize revenue?
a. Persuasive evidence that an arrangement exists
b. Delivery has not yet occurred or service has not been rendered
c. Sellers price to the buyer is not fixed and determinable
d. Collection is an issue
Answer
A. The SEC requires all of the above factors to be considered before revenue is recorded. Remove the “not” out b. and c. and add a “not to d.
3. Which of the following is not included in the general rules for recognizing revenues?
b. recognize service revenue after the critical service has been performed
c. recognize revenue from the sale of goods when control transfers
d. recognize revenue over time when service is provided over time
Answer
A. Revenue is recognized when the performance obligation is met, the seller is entitled to be paid, and collection is probable. All of the others are general rules for recognizing revenue.
4. Revenue is recognized when customers have a right of return
b. in the period the goods are provided
c. in the period the goods are returned
d. the customer pays for the goods or services
Answer
B. Revenue is recognized when the performance obligation is met. Expected returns are estimated and the seller must reduce sales in the period the revenue is recorded.
5. The account “sales returns” is a
a. contra asset account
b. contra revenue account
c. revenue account
d. reduction to accounts receivable
Answer
B. “Sales returns” is a contra revenue account that reduces revenues reported on the income statement.
6. The account “allowance for returns” is a
b. contra revenue account
c. revenue account
d. reduction to accounts receivable
Answer
D. “Allowance for returns” is a contra asset account that is reported as a reduction to accounts receivable.
7. Revenue from consignment sales is recorded in the period the
b. goods are sold to the end user
c. goods are returned from the consignee
d. when cash is collected from the consignee
Answer
B. Consignment goods are held by another party until sold to the customer. Revenue is recorded when the end customer takes control of the goods.
8. Service revenue is typically recorded
b. over the period of time the service is provided
c. when cash is collected from the customer
d. either a. or b.
Answer
D. Most services are provided over time and service revenue is recorded in the time period the service is provided. Revenue is earned when the performance obligation is met (nothing more is owed) and the seller is entitled to payment.
9. Software sold in a bundle with other goods and services must be recorded
b. when the customer orders the software
c. when the cash is collected from the customer and they are satisfied
d. when the last performance obligation is met
Answer
A. Software is often sold as a bundle of goods; software, installation, service, etc. Revenue for providing individual products and services is recognized when each individual performance obligation is met. The amount is based on the fair market values of the goods or services provided. Revenue is not recorded at the time of an order or when cash is collected.
10. Franchise revenue is earned
b. when the customer receives the services provided by the franchisee
c. only over the time the franchisee operates their business
d. when cash is received
Answer
B. Franchise revenue is effectively service revenue. Service revenues are earned when the service is provided.
11. Cash received from a franchisee before the goods or services are provided is recorded to the account
b. sales revenues
c. unearned franchise fees
d. prepaid expenses
Answer
C. Unearned revenue, a liability, is recorded when a franchisee pays the franchisor before the franchisee receives the goods or services.
12. Franchise fees are commonly paid to the franchisor
b. over the time the franchisee earns revenue
c. as services are provided
d. all of the above
Answer
D. A franchisee pays the franchisor based on the terms of the franchise agreement. All of the listed ways are common payment terms stated in a franchise agreement. Terms of payment often vary based on the type of goods or services the franchisor provides to the franchisee.
13. An extended product warranty sold separately is recorded as revenue
a. at the time the customer purchases the product
b. as part of the price of the product sold to the buyer
c. over the time the warranty is provided to the customer
d. when the customer pays for the warranty
Answer
C. An extended warranty sold separately is a separate performance obligation. Therefore, the sale of the warranty is recorded separately from the sale of goods. The performance obligation is met over the time the warranty is provided.
14. Which of the following approaches is NOT an acceptable option for determining the amount of a performance obligation that is part of a bundle and does not have a stand-alone sales price?
a. adjusted market assessment approach
b. expected cost plus margin approach
c. residual approach
d. net realizable approach
Answer
D. FASB provides all of the above options to determine a stand-alone price except the net realizable value approach (which is related to valuing inventory).
15. A company that facilitates a sale and is not responsible for providing the service that is a performance obligation should report revenue as a(n) ____________, at the __________ amount.
b. principle, gross
c. agent, net
d. agent, gross
Answer
C. The company that facilitates the sale of the goods or services and is not responsible for providing the goods or services to the customer is an agent. Agents record revenue at the net amount they expect to receive from the principle.