Ch 18 HWq - C hapter 18 Homework Questions Q1. Explain the...

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Chapter 18 Homework Questions Q1. Explain the current environment regarding revenue recognition. A series of highly publicized cases of companies recognizing revenue prematurely has caused the SEC to increase its enforcement actions in this area. In some of these cases, significant adjustments to previously issued financial statements were made. Some of these cases involved contingent sales where side agreements were in place or high rates of return occurred. In addition, in some cases, unfinished product was shipped to customers and counted as revenues or unauthorized product was shipped to customers and counted as revenues. Q2. When is revenue conventionally recognized? What conditions should exist for the recognition at date of sale of all or part of the revenue of any sale transaction? Revenue is conventionally recognized at the date of sale. For revenue to be recognized at the date of sale, (1) the amount of the revenue should be reasonably measurable—that is, the collectibility of the sales price is reasonably assured or the amount uncollectible can be estimated reasonably (realized or realizable)—and (2) the earnings process is complete or virtually complete—that is, the seller is not obligated to perform significant activities after the sale to earn the revenue. Q5. What are the three alternative accounting methods available to a seller that is exposed to continued risks of ownership through return of the product? The three alternatives available to a seller that is exposed to risks of ownership due to a return of the product are: (1) Not recording the sale until all return privileges have expired. (2) Recording the sale, but reducing sales by an estimate of future returns. (3) Recording the sale and accounting for the returns as they occur in the future.
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Q6. Under what conditions may a seller who is exposed to continued risks of a high rate of return of the product sold recognize sales transactions as current revenue? GAAP requires that such sales transactions not be recognized as current revenue unless all of the following six conditions are met: (1) The seller’s price to the buyer is substantially fixed or determinable at the date of sale. (2) The buyer has paid the seller, or the buyer is obligated to pay the seller, and the obligation is not contingent on resale of the product. (3) The buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product. (4) The buyer acquiring the product for resale has economic substance apart from that provided by the seller. (5) The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer. (6) The seller can reasonably estimate the amount of future returns.
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Ch 18 HWq - C hapter 18 Homework Questions Q1. Explain the...

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