If a company establishes a bill-and-hold arrangement with a buyer, the physical location of the

purchased merchandise is with the

storage company.

seller.

transportation company.

buyer.

Solution

The seller keeps physical possession o fthe goods until such time in the future when the goods are
transferred to the customer

A transaction should be treated as a(n) ________ when a company has an obligation or right to
repurchase an asset for an amount greater than or equal to its selling price.

financing transaction

outright sale

bill-and-hold arrangement

put option

Solution

Such transactions are considered a financing transaction within the broader category of repurchase
agreements.

A contract will be considered a contract liability

if the value of the outstanding performance obligations exceeds the value of the consideration received.

In their financial statements, Harwood Industries needs to disclose information about contracts they
have with several customers. What type of information do they need to disclose?

both qualitative and quantitative information

neither qualitative nor quantitative information

JKJ Company is a public company that began work two years ago on a 10-year project. For this year a
percentage complete is not determinable. JKJ is confident however, that by the end of the contract
period, the project will at least breakeven. For this fiscal year, what method of revenue recognition will
JKJ follow for this project?

completed contract

zero-profit

percentage-of-complettion

earnings-based approach

quantitative information but not qualitative information

qualitative information but not quantitative information

Solution

Both qualitative and quantitative information will be useful to readers.

Warranties are recorded as liabilities and expenses if not sold separately, and as unearned revenues if
sold separately, under both IFRS and ASPE.

True

False

A transaction that involves an entity receiving something and also giving something up is referred to as a

Reciprocal transaction.

Which of the following is false regarding a type of contractual promise typically involved in a
performance obligation?

It may be a promise contingent upon recognition of revenue.

It may be an explicit promise.

It may be an implicit promise.

Unless otherwise noted, transactions are assumed to be

reciprocal and at arm's length.

reciprocal, but not necessarily at arm's length.

not necessarily reciprocal or at arm's length, but may be either or both.

at arm's length, but not necessarily reciprocal.

It may be a promise based on customary business practice.

At the point of sale, generally meaning delivery, companies commonly recognize revenues from
manufacturing and selling activities.

True

False

Solution

Revenue is recognized when the risks and rewards of ownership have transferred from the seller to the
buyer, which is generally when delivery of the goods occurs, which is also when control transfers.

Under which system of accounting standards are companies susceptible to pressure to report biased
revenue figures?

rules-based systems only

principles-based systems only

neither principles-based nor rules-based systems

both principles-based and rules-based systems

Solution

Pressure to bias revenue can be found in either princliples-based or rules-based systems.

Under the earnings approach to revenue recognition, which of the following products will not recognize
any revenue before the product is transferred to the customer?
pork bellies

diamonds

wheat

automobiles

Solution

The earnings approach might be used for commodities and natural resources with set market prices.
Commodities that have assured prices and ready markets, or biological items that appreciate in value as
they mature, are in this category. It is important to note that the earnings approach may only be used by
those companies following ASPE. Companies following IFRS must use the Asset-Liability Approach to
revenue recognition.

Pat entered into a contract to have new cabinets built in the family kitchen. At what point in the
revenue recognition process will the construction company recognize the revenue from this sale?

Step 1

Step 3

Step 5

Step 4

Solution

Once the cabinets are finished and installed, and Pat is happy with them revenue can be recognized.
(Step 5)

Which of the following occurs at the end of the revenue recognition process?

a change in control of the asset(s) occurs

a contract is agreed upon

a price for services rendered is determined

a contract is broken

Solution

Control of the asset changes from seller to buyer.

Identifying the contract with customers is the ________ step in the process for revenue recognition.

first

third

fourth

second

Solution

This is the initial step. The rest cannot proceed unless the contract is first identified.

Which of the following is true of a contract?

it is enforceable if each party can unilaterally terminate the contract

it must be in writing to be an enforceable contract

it is never either reciprocal or at arm's length

it is an agreement that creates enforceable rights and obligations

Solution

It is an agreement that creates enforceable rights and obligations. It need not be in writing.

Brentcliffe Inc. has contracted to sell 100 widgets to a customer for $10 per widget from January
through March. Midway through February, the customer, having already received 75 widgets, increased
the remainder of its order to 50 more. The price for each additional widget is $9. What will Brentcliffe
record as its total revenue when the contract is completed?

$1225

$1250

$1200

$1450

Solution
The additional 25 units over and above the original 100 units may be considered a contract
modification/new contract with those additional units charged at the new price. The original 100 units
would remain at their original selling price. Therefore, the total revenue will be: (100 x $10) + (25 x $9) =
$1225.

On January 15, Porton Company enters into a contract to build custom equipment for Rose Company.
The contract specified a delivery date of March 1. The equipment was NOT delivered until March 31. The
contract required full payment of $90,000, 30 days after delivery. When should this contract be
recorded?

January 15

March 1

March 31

April 30

A modification to a contract will be treated as a new contract if

the promised goods or services are distinct.

the price increase reflects the stand-alone selling price of the promised goods or services.

both A and B are true.

None of the choices is correct.

Solution

This would be a new contract if the goods or services promised are materially different and their price
reflects that difference.

When should multiple performance obligations that exist in a contract be accounted for as separate
performance obligations?

when each service is interdependent and interrelated

when the performance obligations are distinct and independent

when the product is distinct within the contract

when a determination cannot be made

Solution

They are a single performance when they are not separable and must be performed as a whole to
complete the contract.

What would a company recognize if a performance obligation involved the sale of a distinct asset that is
not part of their inventory, for a price above the assets' book value?

revenue from royalties

a loss on the disposal

a gain on the disposal

revenue from sales

Solution

A disposal for more than book value results in a gain; this is not revenue from normal or day-to-day
operations.

O'Neill Manufacturing ofrece un descuento por volumen del 4% a todos los clientes que compren al
menos $150,000 de su producto durante el año calendario. Durante los últimos cinco años, Murphy
Machining ha superado este monto de compra. Por lo tanto, cuando Murphy compró $60 000 de
producto el 1 de junio, O'Neill reconoció ingresos de solo $57 600. Si Murphy luego no cumple con el
umbral de descuento, ¿cuál de los siguientes asientos de diario debe hacer O'Neill para registrar el pago
de la venta del 1 de junio (suponga que la transacción original se cargó a Cuentas por cobrar)?

O’Neill Manufacturing offers a 4% volume discount to all customers who purchase at least $150,000 of
its product during the calendar year. For the past five years, Murphy Machining has exceeded this
purchase amount. Thus, when Murphy bought $60,000 of product on June 1, O’Neill recognized revenue
of only $57,600. If Murphy later fails to meet the discount threshold, which of the following journal
entries should O’Neill make to record the payment of the June 1st sale (assume the original transaction
was debited to Accounts Receivable)?

$60,000 debit to Cash, $57,600 credit to Accounts Receivable, and $2,400 credit to Sales Discounts
Forfeited
$60,000 credit to Cash, $57,600 debit to Accounts Receivable, and $2,400 debit to Sales Discounts
Forfeited

$57,600 credit to Cash, $60,000 debit to Accounts Receivable, and $2,400 credit to Sales Discounts
Forfeited

$57,600 debit to Cash, $60,000 credit to Accounts Receivable, and $2,400 debit to Sales Discounts
Forfeited

Solution

O’Neill should debit Cash for the full purchase price ($60,000) as this is the amount that Murphy now
owes (and pays) on this transaction, then credit Accounts Receivable for the discounted price ($57,600)
and credit Sales Discounts Forfeited for the amount of the discount ($60,000 x 4% = $2,400).

Assume that a contract involves a significant financing component. In this scenario, which of the
following statements is accurate?

Interest should be accrued based on the current sales price of the goods or services involved in the
contract.

The transaction amount should be based on the current sales price of the goods or services involved in
the contract.

The time value of money must always be considered when determining the fair value of the transaction.

The time value of money is considered when determining the transaction price if payment occurs more
than a year in the future.

Under IFRS, which of the following statements is accurate with regard to noncash consideration?

Noncash consideration should be recognized on the basis of the fair value of equivalent goods or
services.

Noncash consideration should be recognized on the basis of the fair value of what has been given up.

Noncash consideration should be recognized on the basis of the fair value of what is received.

Noncash consideration should be recognized on the basis of the original cost paid by the customer

nder IFRS, which of the following is true when a company makes a sale with a right of return?
the company should not recognize any revenue

the company records the estimated returns in the Sales Returns account

the company records any returned assets in a separate inventory account

the company should recognize revenue for the full sales price

Alexander Manufacturing wants to use the most likely amount method to estimate variable
consideration for a contract. In order to use this method, Alexander must

be sure that only one possible outcome may occur.

identify a specific number of possible outcomes as well as the likelihood that each of these outcomes
will occur.

be sure that only two possible outcomes may occur.

identify a specific number of possible outcomes, even if it cannot determine the likelihood that each of
these outcomes will occur.

Which of the following statements accurately describes consideration paid or payable to customers?

Consideration paid or payable to customers includes prompt settlement discounts that increase
revenues.

Consideration paid or payable to customers includes discounts that reduce the cost of purchases to the
company.

Consideration paid or payable to customers reduces the consideration received and the revenue to be
recognized.

Consideration paid or payable to customers includes volume rebates that increase the cost to the
customer.

Solution

Consideration to customers offsets the revenue and receivables from that transaction

On August 1, 2023, Perseus Products sold Medusa Manufacturing $600,000 of goods in exchange for a
four-year, zero-interest-bearing note. If the face amount of the note was $816,293, how much interest
revenue should Perseus report related to this transaction on December 31, 2023?
$85,030

$28,000

$48,000

$20,000

Solution

First, determine the imputed interest rate by dividing the note’s face (or principle) value by its
discounted price, then raising your result to the power of 1 divided by the number of years in the loan,
then subtracting 1: ($816,293/$600,000)1/4 –1 = 8%.

Next, determine interest revenue for 2020 by multiplying the interest rate by 5/12 (because the note
will be held for only 5 out of 12 months) by the note’s current value (value of the inventory): 8% x 5/12 x
$600,000 = $20,000.

Alternatively, using a financial calculator with the following inputs:

-$600,000 = PV

$816,293 = FV

4=n

Compute I/Y = 7.9999 = 8.0%

Then calculate the interest for the first year (5 months) = $600,000 x .08 x 5/12 = $20,000

When customers have the right to return their purchases and receive a refund or exchange, if the
vendor follows IFRS, which of the following will they record when recognizing the sales transaction?

the full amount of the sale; with any returns accounted for when they occur

nothing, until the return period expires and the amount of the returns are known with certainty

the full amount of the sale with a contra revenue account for the estimated amount of returns

the net amount of the sale, and a liability for the estimated amount of returns

Which of the following correctly defines a stand-alone selling price?

It is the industry-wide price at which goods or services similar to those in a contract are sold.

The stand-alone price is the fair value at which a company could sell the individual goods or services in a
contract.

It is the price charged for the goods or services in a contract exclusive of any fees or taxes.

A stand-alone price is the bundled price at which goods or services in a contract are sold, inclusive of
discounts.

Solution

This is the price for which the individual components of a bundle can be sold separately

Organic Gardens sells organic vegetable, fruit, and flower seeds and seedlings as well as organic bug and
weed killers. They give customers a 90-day unconditional right of return if they are NOT satisfied with
any of the products. On April 6, a customer purchased $1,500 of products (cost $750). Based on prior
experience, Organic Gardens expects returns of 20%. The journal entry to record the return of $100 of
merchandise includes a

credit to Estimated Inventory Returns for $50.

debit to Estimated Inventory Returns for $50.

credit to Returned Inventory for $50.

credit to Refund Liability for $100.

Solution

To record the return, they would debit Refund Liability for $100 and credit Accounts Payable for $100.
They would also debit Returned Inventory for $50 ($100 * 50%) and credit Estimated Inventory Returns
for $50.

When the price of a good or service is dependent on a future event, and there are two possible amounts
of consideration to be received, the amount recognized would likely be

the median amount.

the probability-weighted amount.

the most likely amount.

the highest amount.

Organic Gardens sells organic vegetable, fruit, and flower seeds and seedlings as well as organic bug and
weed killers. Customers have a 90-day unconditional right of return if they are not satisfied with any of
the products. On April 6th a customer purchased $1,500 of products (cost $750). Based on prior
experience, Organic Gardens expects returns of 20%. Under IFRS, which of the following would be
included in the journal entries to record the sale and cost of goods sold?

debit Cash and credit Sales Revenue each with $1,500

credit Estimated Inventory Returns $150

credit Refund Liability $300 and credit Sales Revenue $1,200

debit Cost of Goods Sold and credit Inventory each with $750

The journal entry to record the sale, including the right of return liability would be:

Cash1,500

Sales Revenue1,200($1,500 * 80%)

Refund Liability 300($1,500 * 20%)

The journal entry to record the Cost of Goods Sold would be:

Cost of Goods Sold600($750 * 80%)

Estimated Inventory Returns150($750 * 20%)

Inventory 750

Brogan Inc. has just sold $70,000 of goods to Miller Industries. Based on Miller’s past purchase history,
Brogan assumes Miller will make enough purchases over the course of the year to qualify for a 3%
volume discount. Thus, Brogan records a credit to Sales Revenue of $67,900. If Miller later fails to meet
the discount threshold, then Brogan will need to

debit Sales Discounts Earned for $2,100.

credit Sales Discounts Forfeited for $2,100.

credit Accounts Receivable for $2,100. Webb Manufacturing sold $2,000 of goods to a
customer and has offered a 5% discount if full payment is made within 10 days.
Otherwise, the customer has 60 days to pay the full price for the shipment. If the
customer provides Webb with full payment within seven days, which of the following
journal entries would be incorrect to record the payment?

Cash 1,900

Accounts
1,900
Receivable

Cash 1,900

Sales Discounts 100

Accounts
2,000
Receivable

1,90
Cash
0

Cost of Goods Sold 100

Accounts Receivable 2,000

All of the entries shown are correct.

debit Cash for $2,100.

Solution

The difference of $2,100 will increase the Sales Discounts Forfetied account rather than the Sales
Revenue account.

Webb Manufacturing sold $2,000 of goods to a customer and has offered a 5% discount if full payment
is made within 10 days. Otherwise, the customer has 60 days to pay the full price for the shipment. If
the customer provides Webb with full payment within seven days, which of the following journal entries
would be incorrect to record the payment?

Cash 1,900

Accounts Receivable 1,900

Cash 1,900

Sales Discounts 100

Accounts Receivable 2,000

Cash 1,900

Cost of Goods Sold 100

Accounts Receivable 2,000

All of the entries shown are correct.

Quinn Corporation offers a 3% volume discount to all customers who buy at least $200,000 of its
product during the calendar year. For the past four years, Williams Manufacturing has exceeded this
purchase amount. On March 15, Williams bought $108,000 of product from Quinn. If Williams meets
Quinn’s stated discount threshold before December 31, which of the following entries correctly records
the payment on account that Quinn would have received from Williams (assume IFRS)?
$108,000 debit to Cash, $104,760 credit to Accounts Receivable, and $3,240 credit to Sales Discounts

$104,760 debit to Cash and $104,760 credit to Accounts Receivable

$108,000 debit to Cash and $108,000 credit to Accounts Receivable

$104,760 debit to Cash, $108,000 credit to Accounts Receivable, and $3,240 debit to Sales Discounts

ecause Williams has met the discount threshold, Quinn should debit cash for the discounted sales
amount of $108,000 x 97% = $104,760, then credit Accounts Receivable for the same amount.

Which of the following statements accurately describes a contract’s transaction price?

The transaction price is the amount of consideration that a company expects to receive from a customer
in exchange for transferring goods and services.

The transaction price excludes the time value of money if the contract involves a significant financing
component.

The transaction price does not consider noncash consideration such as donations, gifts, equipment, or
labour.

The transaction price excludes discounts, volume rebates, coupons and free products, or services.

Solution

The transaction price is the amount of consideration that a company expects to receive from a customer
in exchange for transferring goods and services.

In which of the following situations would it be more appropriate for a company to use the expected
value to estimate variable consideration?

the company is entering into a contract that has only two possible outcomes

the company has a small number of contracts with similar characteristics

the company has a large number of contracts with similar characteristics

the company is entering into a contract that has only one possible outcome

Solution

One can use this in the case of numerous similar contracts.

Ingram Interiors enters into a contract with Capital Enterprises to provide interior decorating and
painting services for Capital’s corporate headquarters. Progress payments are made upon completion of
each stage of the contract. In this scenario, Ingram should recognize revenue related to the contract

halfway through completion of its performance obligation.

as soon as the contract is signed.

over time.

as soon as its performance obligation is fully completed.

Revenue would be recognized over time, as the work is completed.

Supersoft Inc. has been contracted to deliver a software package to a customer. The package consists of
several modules that are being delivered and installed separately over several months. Each module can
be used by the client independently of all the others. When will Supersoft recognize revenue from this
contract?

when the contract is signed

through the duration of the contract as each module is delivered, installed, and accepted

when the first module is delivered, installed, and accepted

when the last module is delivered, installed, and accepted

Solution

Since each module can be used by itself, each is considered a separate performance obligation by
Supersoft so revenue is recognized as each module is delivered and installed.

Edwards Equipment entered into a contract with Peterson Printing to manufacture and install one full-
colour printing press. Peterson submits progress payments upon completion of each stage of the
contract. If the contract is terminated prior to completion, Edwards maintains ownership of all work in
progress and may dispose of it or sell it in whatever way it sees fit. Given this scenario, which of the
following statements is accurate?

This contract meets the criteria for recognizing revenue over time because Edwards has an alternative
use for the press if the contract is terminated.
This contract does not meet the criteria for recognizing revenue over time because Edwards has an
alternative use for the press if the contract is terminated.

This contract does not meet the criteria for recognizing revenue over time because Edwards does not
have an enforceable right to payment.

This contract meets the criteria for recognizing revenue over time because Edwards does not have an
enforceable right to payment.

In which of the following instances has a company satisfied its performance obligation?

the company has received payment for goods or services

the selling company has significant risks and rewards of ownership

the company has transferred physical possession of the asset

the selling company has legal title to the asset

What changes in control occur between the buyer and the seller when a contract is agreed upon and
when revenue is finally recognized?

When the contract is agreed upon, the buyer has control of the asset, whereas when revenue is
recognized, the seller has control of the asset.

When the contract is agreed upon, the seller and buyer both have control of the asset, whereas when
revenue is recognized, only the buyer has control of the asset.

When the contract is agreed upon, the seller has control of the asset, whereas when revenue is
recognized, the buyer has control of the asset.

When the contract is agreed upon, the seller has control of the asset, whereas when revenue is
recognized, the buyer and seller both have control of the asset.

Solution

Once revenue has been recognized at the end of the process, the control of the asset switches from the
seller to the buyer.

When a company has received and paid for the asset, then the company has

entered step three of the revenue recognition process.

signed a contract to purchase the asset.

entered step two of the revenue recognition process.

control of the asset.

Solution

A customer has control over an asset if they have received the asset and title of the asset, paid for it and
taken on the risks and rewards of ownership.

Where a contract is performed over time, which of the following methods may be used to recognize
revenue?

only an input measure, such as the costs incurred to date as a proportion of the total costs expected,
can be used

only an output measure, such as the number of items completed as a proportion of the total output
expected, can be used

either an input method or an output method is acceptable

revenue can only be recognized when the contract is complete

Payments to be received over a period of more than one year should be discounted to present value
under

both IFRS and ASPE.

IFRS, but not ASPE.

ASPE, but not IFRS.

neither IFRS nor ASPE.

Solution

Both IFRS and ASPE require that amounts to be received over a term of more than one year be
discounted.

On October 12, Ridley Elevators contracted with Mullin Construction to provide cargo and passenger
elevators for a new hotel. According to the contract, Mullin would pay for the elevators after delivery of
the final elevator. The transactions associated with this contract were:

October 25 Ridley delivered two cargo elevators to Mullin.

November 30 Ridley delivered six passenger elevators to Mullin.

December 1 Ridley billed Mullin for eight elevators.

December 20 Ridley received payment from Mullin for eight elevators.

On which date would Ridley Elevators record a debit to Accounts Receivable?

October 12

December 20

October 25

November 30