Revenue Recognition

Easy Test

Easy Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. A typical manufacturing company recognizes revenue

a. when the customer obtains control of the goods
b. over the time the service is provided
c. when the customer pays for the goods
d. when the customer places an order
A. A manufacturing company produces goods sold to customers. Revenue is recorded for goods provided when title transfers and the customer obtains control of the goods.

2. Revenue should be recognized when the seller is entitled to payment and

a. the seller owes the buyer the primary service
b. the seller is certain the buyer will not return the goods
c. the buyer has paid the seller
d. the performance obligation is complete
D. Revenue is recognized when the performance obligation is complete and the seller is entitled to payment.

3. Which of the following is not considered for revenue recognition?

a. when the seller receives cash
b. when the seller is entitled to receive cash
c. when the buyer takes control of the goods
d. when the seller provides the service to the buyer
A. A cash exchange is not required for revenue recognition. The criteria is the seller must be entitled to and reasonable expects to collect the cash, the buyer takes control of the goods or the service was provided.

4. What is the second step in the revenue recognition process

a. determine the amount paid to the seller
b. allocate the transaction price
c. identify the performance obligations
d. recognize revenue when the performance obligation is satisfied
C. The process follows: 1) Identify the contract with the customer (legal rights of the seller & customer), 2) Identify the performance obligations in the contract: single or multiple,3) Determine the transaction price: entitled to receive from the customer,4) Allocate the transaction price to each performance obligation, and 5) Recognize revenue when each performance obligation is satisfied.

5. Which of the following is NOT evidence that control has passed to the buyer?

a. The buyer is not yet obligated to pay the seller
b. The buyer has legal title to the asset
c. The seller has physical possession of the asset
d. The buyer is entitled to substantially all of the economic benefit

A. A buyer is obligated to pay the seller when control has passed to the buyer. Evidence of control included title has passed, physical possession, and the ability to receive substantially all of the economic benefit from the asset or the service.

6. A franchisor should record franchise fee revenue when

a. cash is received from the franchisee
b. the franchisee begins operationsIncorrect
c. the franchisor and franchisee agree on the services to be provided
d. service is provided
D. Franchise fees are often received in return for services. Franchise fees follow the same general revenue recognition principles and revenue is recorded when the performance obligation is met.

7. Sales Returns are reported on the income statement

a. as a reduction to sales
b. as an operating expense
c. at the time of the return
d. only if the goods are returned to inventory for a future sale
A. Sales returns reduce sales reported on the income statement. “Net sales” indicates the company has made an estimate that reduced sales.

8. Unearned Franchise Revenue is recorded when

a. the service has been provided
b. cash is received and the service has not been provided
c. cash is not yet received and the service has been provided
d. cash has been received and the service has been provided
B. Unearned revenue is recorded when cash is received before the service is provided. Unearned means the service has not yet been provided.

9. A good or service is distinct when

a. The customer could use the good or service on its own or in combination with other goods or service obtained elsewhere
b. The obligation is not highly interrelated with other goods or services in the contract
c. goods and services are not sold in a bundle
d. more than one of the above answers is correct
D. A separate performance obligation exists when the goods or services meets both of the criteria stated in a. and b.

10. Which of the following are required for an agreement to be a contract for revenue recognition purposes?

a. the agreement must be in writing
b. both parties must sign the agreement
c. a receipt of an asset is expected
d. the seller must explicitly state the service
C. A contract does not have to be in writing or signed. The contract may be implicit based on typical business practices. The provider must expect to be entitled to and receive payment for meeting the performance obligation.

11. Hilton Road LLC provided legal services to Agee, Inc. between February 1st and July 30th of the current year. Agee, Inc. paid a retainer fee of $12,000 on February 1st when the two parties signed the contract. Additionally, Agee, Inc. paid $150 an hour for 20 hours of work each month, for a total of $18,000.

A. Determine the amount of revenue that Hilton Road LLC will report for April of the current year.
B. Determine the amount of unearned revenue that Hilton Road LLC will report on the April 30 balance sheet.


$12,000           =        $2,000 each month revenue earned
6 months

$150 x 20 hours = $3,000 during April 

Total Revenue for April $5,000

B. Retainer fee is earned at a rate of $2,000 each month February to April is 3 months earned

Total revenue is $6,000
Total unearned revenue is $6,000 on April 30

12. Better Buy, Inc. began selling 2-year extended warranties for laptops and tablets for 20% of the price of the laptop or tablet in March of the current year. Approximately 30% of customers purchase an extended warranty. Sales of extended warranties (for cash) during March and April of the current year totaled $260,000 and $310,000, respectively. Better Buy, Inc. paid to replace $32,000 of laptops and tablets under warranty in April.

Record the journal entries related to revenue from extended warranties for Better Buy, Inc. for March and April.

The extended warranties are a separate performance obligation. Revenue is recorded over the period of time the service is provided (2 years).


Cash                                     $260,000
           Unearned Revenue                $260,000
Unearned Revenue           $10,833
            Warranty Revenue               $10,833
                                 ($260,000 / 24 mo.)



Cash                                       $310,000
           Unearned Revenue           $310,000
Unearned Revenue            $23,750
           Warranty Revenue            $23,750
($260,000 / 24 mo.) + ($310,000 / 24 mo.)
           $10,833 + $12,917 = $23,750

13. DellSoft, Inc. provides packaged software along with a 3-year service contract that includes annual software updates to customers for $10,000. The stand-alone fair market value of the software and service updates is $2,500 and $12,500, respectively. Customers must pay for the bundle upon receipt of the software. Control is considered to have passed to the customer when the customer achieves a successful implementation.

Record all required journal entries for the successful implementation of packaged software to one customer.

The software and the updates are separate performance obligations. The value of each performance obligation is allocated based on stand-alone fair market values:

1st: Allocate the total revenue to each component:

Software 2,500 = 16.67% x 10,000 = 1,667
Service 12,500 = 83.33% x 10,000 = 8,333
Total 15,000 10,000

Record the cash received for the bundle of goods and services:

Cash                               10,000
         Unearned software revenue          10,000


Record revenue earned after implementation of the software:

Unearned revenue                  $1,667
         Software revenue                  $1,667


1/3rd is recorded to revenue each year as the service is provided:

Current year:

Unearned revenue                  $2,778
         Software revenue                  $2,778

($8,333 / 3 years = $2,778 earned each year)