Ch 18 Ques & BE

Ch 18 Ques & BE - CHAPTER 18 Revenue Recognition...

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Unformatted text preview: CHAPTER 18 Revenue Recognition ANSWERS TO QUESTIONS 1. 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 ad- justments 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. 2. 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 estim- ated 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. 3. Revenues are recognized generally as follows: (a) Revenue from selling products—date of delivery to customers. (b) Revenue from services rendered—when the services have been performed and are billable. (c) Revenue from permitting others to use enterprise assets—as time passes or as the assets are used. (d) Revenue from disposing of assets other than products—at the date of sale. 4. Types of sales transactions: (1) Cash sale. (2) Credit sale. (3) C.O.D. sale. (4) Will-call or layaway sale. (5) Sale in advance of delivery (long-term construction). (6) Branch sale. (7) Intercompany sale. (8) Franchise sale. (9) Installment sale. The student should identify for each type of sale a form of business which typically engages in that type of sale. Many of these sales transactions are not mentioned in this chapter, so the student will probably not identify all these transactions. 5. 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. 6. FASB Statement No. 48 requires that such sales transactions not be recognized as current rev- enue 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....
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Ch 18 Ques & BE - CHAPTER 18 Revenue Recognition...

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