FEU MAKATI

Theory of Accounts
TOA – Quizzer 18 Prof. Francis H. Villamin

IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS

1. To address inconsistencies and weaknesses, a comprehensive revenue recognition model

was developed entitled the
a. Revenue Recognition Principle.
b. Principle-based Revenue Accounting.
c. Rules-based Revenue Accounting.
d. Revenue from Contracts with Customers.

2. The converged standard on revenue recognition

a. reduces the number of disclosures required for revenue reporting.
b. increases the complexity of financial statement preparation.
c. recognizes and measures revenue based on changes in assets and liabilities.
d. simplifies revenue recognition practices across entities and industries.

3. The first step in the process for revenue recognition is to

a. determine the transaction price.
b. identify the contract with the customer.
c. allocate the transaction price to the separate performance obligations.
d. identify the separate performance obligations in the contract.

4. The second step in the process for revenue recognition is to

a. allocate transaction price to the separate performance obligations.
b. determine the transaction price.
c. identify the contract with customers.
d. identify the separate performance obligations in the contract.

5. The third step in the process for revenue recognition is to

a. determine the transaction price.
b. identify the separate performance obligations in the contract.
c. allocate transaction price to the separate performance obligations.
d. recognize revenue when each performance obligation is satisfied.

6. The fourth step in the process for revenue recognition is to

a. recognize revenue when each performance obligation is satisfied.
b. identify the separate performance obligations in the contract.
c. allocate transaction price to the separate performance obligations.
d. determine the transaction price.

7. The last step in the process for revenue recognition is to

a. allocate transaction price to the separate performance obligations.
b. recognize revenue when each performance obligation is satisfied.
c. determine the transaction price.
d. identify the contract with customers.

8. A contract
a. must be in writing to be an enforceable contract.
b. is an agreement that creates enforceable rights and obligations.
c. is enforceable if each party can unilaterally terminate the contract.
d. does not need to have commercial substance.

9. Revenue from a contract with a customer

a. is recognized when the customer receive the rights to receive consideration.
b. is recognized even if the contract is still wholly unperformed.
c. can be recognized even when a contract is still pending.
d. cannot be recognized until a contract exists.

10. Signing of the contract by the two parties is

a. not recorded until one or both parties perform under the contract.
b. recorded at the time the contract is approved by both parties.
c. not recorded until both parties perform under the contract.
d. recorded immediately after the contract is signed.
TOA Quizzer 18 Revenue from Contracts with Customers Page 2

11. On January 15, 2019, Bella Vista Company enters into a contract to build custom equipment
for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment
was not delivered until March 31. The contract required full payment of P75,000 30 days after
delivery. This contract should be
a. recorded on January 15, 2019.
b. recorded on March 1, 2019.
c. recorded on March 31, 2019.
d. recorded on April 30, 2019.

12. A company must account for a contract modification as a new contract if

a. Goods or services are interdependent on each other.
b. The promised goods or services are distinct.
c. The company has the right to receive consideration equal to standalone price.
d. Goods or services are distinct and company has right to receive the standalone price.

13. When a contract modification does not result in a separate performance obligation, the
additional products are priced at the
a. standalone price of the product.
b. blended price of original contract and contract modification.
c. average selling price of original selling price and standalone price.
d. selling price specified in contract modification

14. A performance obligation exists when

a. a company receives the right to receive consideration.
b. a contract is approved and signed.
c. a company provides a distinct product or service.
d. a company provides interdependent product or service.

15. When multiple performance obligations exists in a contract, they should be accounted for as a
single performance obligation when
a. each service is interdependent and interrelated.
b. the performance obligations are distinct but interdependent.
c. the product is distinct within the contract.
d. determination cannot be made.

16. New Age Computers manufactures and sells pagers and radio paging systems which include a
180 day warranty on product defects. It also sells an extended warranty which provides an
additional two years of protection. On May 10, it sold a paging system for P3,850 and an
extended warranty for another P1,200. The journal entry to record this transaction would
include
a. a credit to Service Revenue of P5,050.
b. a credit to Service Revenue of P1,200
c. a credit to Sales of P3,850 and a credit to Service Revenue of P1,200
d. a credit to Unearned Service Revenue of P1,200.

17. Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing
the software, the company also provides consulting services and support to ensure smooth
operation of the software. The total transaction price is P350,000. Based on standalone values,
the company estimates the consulting services and support have a value of P100,000 and the
software license has a value of P250,000. Assuming the performance obligations are not
interdependent, the journal entry to record the transaction includes
a. a credit to Sales Revenue for P250,000 and a credit to Unearned Service Revenue of
P100,000.
b. a credit to Service Revenue of P100,000.
c. a credit to Unearned Service Revenue of P100,000.
d. a credit to Sales Revenue of P350,000.

18. The transaction price

a. excludes discounts, volume rebates, coupons and free products, or services.
b. is the amount of consideration that a company expects to receive from a customer
c. excludes time value of money if the contract involves a significant financing component.
d. does not consider noncash consideration such as donations, gifts, equipment or labor.

19. Companies can use the expected value to estimate variable consideration when
a. the contract has only two possible outcomes.
b. a company has a small number of contracts with similar characteristics.
c. a company can use the most likely amount in a range of possible outcomes.
d. a company has a large number of contracts with similar characteristics.
TOA Quizzer 18 Revenue from Contracts with Customers Page 3

20. If a contract involves a significant financing component,

a. the time value of money is used to determine the fair value of the transaction.
b. the time value of money is not required to determine transaction price, if the payment is
more than a year.
c. the transaction amount should be based on the current sales price of goods or services.
d. interest is not accrued as a result of the financing component.

21. Noncash consideration should be

a. recognized on the basis of fair value of what is given up.
b. recognized on the basis of original cost paid by customer.
c. recognized on the basis of fair value of what is received.
d. recognized on the basis of fair value of equivalent goods or services.

22. Consideration paid or payable to customers

a. includes volume rebates which increases the cost to the customer.
b. includes discounts which reduces the cost of purchases to the company.
c. reduces the consideration received and the revenue to be recognized.
d. includes prompt settlement discount which increases revenues.

23. The transaction price for multiple performance obligations should be allocated
a. based on selling price from the company’s competitors.
b. based on what the company could sell the goods for on a standalone basis.
c. based on forecasted cost of satisfying performance obligation.
d. based on total transaction price less residual value.

24. When the bundle price is less than the sum of the standalone prices, the discount should be
allocated to
a. the product (or products) associated with the discount.
b. the entire bundle of products or services.
c. the product cost, thereby increasing product margin.
d. the selling price of product or services provided.

25. A company has satisfied its performance obligation when the

a. company has received payment for goods or services.
b. company has significant risks and rewards of ownership.
c. company has legal title to the asset.
d. company has transferred physical possession of the asset.

26. The most popular input measure used to determine the progress toward completion is
a. units-of-delivery method.
b. cost-to-cost basis.
c. labor hours worked.
d. tons produced.

27. The cost-to-cost basis measures progress towards completion by

a. comparing costs incurred to date with total costs to complete the contract.
b. tracking results of work completed to date; it is an output measure.
c. tracking floors of a building completed versus floors still to be completed.
d. tracking miles of a highway completed versus miles of highway still to be completed.

28. When sales are made with a right of return, the company
a. should not recognize any revenue.
b. should recognize revenue for the full sales price.
c. records the returned asset in a separate inventory account.
d. record the estimated returns in the Sales Returns account.

29. When a company has an obligation or right to repurchase an asset for an amount greater than
or equal to its selling price, the transaction should be treated as a
a. outright sale.
b. financing transaction.
c. repurchase transaction.
d. put option.

30. When a customer purchases a product but is not yet ready to accept delivery, this is referred to
as
a. a repurchase agreement.
b. a consignment.
c. a principal-agent relationship.
d. a bill-and-hold arrangement
TOA Quizzer 18 Revenue from Contracts with Customers Page 4

31. The role of the agent in a Principal-Agent relationship is to

a. arrange for the principal to provide goods or services to a customer.
b. provide the goods or services for a customer.
c. market the principal goods and services to prospective customers.
d. develop and maintain goodwill of the principal’s customers.

32. The use of the net method of recognizing revenue by an agent

a. is appropriate as long as both revenue and costs are included.
b. is the correct method in a principal-agent relationship.
c. could result in an overstatement of the agent’s revenue.
d. could result in an understatement of the agent’s revenue.

33. Consignments are a specialized marketing method whereby the

a. Consignee purchases goods for sale and sends payment when goods are sold.
b. Consignee (agent) holds title to the product.
c. Consignee pays for good up front and is paid when merchandise is sold.
d. Consignee takes possession of merchandise but title remains with manufacturer.

34. Consigned goods are recognized as revenues by the

a. consignor when a sale to a third party has occurred.
b. consignor when the merchandise has been shipped to a consignee.
c. consignee when a sale to a third party has occurred.
d. consignor when it receives payment from consignee for goods sold.

35. A warranty provided when a customer exercises an option to purchase a warranty is recorded
as
a. an expense in the period the goods or services are sold.
b. a warranty liability for all costs incurred after sale due to correction of defects.
c. revenue in the period that the service-type warranty is in effect.
d. an assurance type warranty which is included in the sales price of the product.

36. Nonrefundable upfront fees

a. should be recognized immediately upon receipt of payment.
b. such as activation fees for cable should be recognized as revenue immediately.
c. such as a one-time initiation fee in a health club should be recognized immediately.
d. should not be recorded as revenue at the time of payment if they are for future delivery of
products and services.

37. Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-
type warranty for the first 90 days. Entertainment Tonight also offers an optional extended
coverage plan under which it will repair or replace any defective part for 2 years beyond the
expiration of the assurance-type warranty. The total transaction price for the sale of the stereo
system and the extended warranty is P3,000. The standalone price of each is P2,300 and
P800, respectively. The estimated cost of the assurance-warranty is P350. The accounting for
warranty will include a
a. debit to Warranty Expense, P800.
b. debit to Warranty Liability, P350
c. credit to Warranty Liability, P800
d. credit to Unearned Warranty Revenue, P800

38. Unconditional rights to receive consideration because a performance obligation has been
satisfied are
a. reported as a receivable on the statement of financial position.
b. reported as a contract asset on the statement of financial position.
c. reported as a contract liability on the statement of financial position.
d. are not reported on the balance sheet.

39. Partial satisfaction of a multiple performance obligation is reported on the statement of

financial position as
a. contract liability.
b. receivable.
c. contract asset.
d. unearned service revenue.

40. Contract liability is a company’s obligations to transfer goods or services to a customer for
which the company has received consideration from the customer. An example of a contract
liability is
a. Prepaid subscription.
b. Unearned magazine subscription.
c. Mortgage Payable.
d. Service Revenue.
TOA Quizzer 18 Revenue from Contracts with Customers Page 5

41. On July 31, O’Malley Company contracted to have two products built by Taylor Manufacturing
for a total of P185,000. The contract specifies that payment will only occur after both products
have been transferred to O’Malley Company. O’Malley determines that the standalone prices
are P100,000 for Product 1 and P85,000 for Product 2. On August 1, when Product 1 has been
transferred, the journal entry to record this event include a
a. debit to Accounts Receivable for P100,000.
b. debit to Accounts Receivable for P85,000.
c. debit to Contract Assets for P85,000.
d. debit to Contract Assets for P100,000.

42. Disclosure related to revenue

a. does not require capitalized costs to obtain and fulfill a contract.
b. does not require judgments that affect amount and timing of revenues from contracts.
c. requires disclosure of remaining performance obligations.
d. requires disclosure of average balance of contract assets.

*43. The percentage-of-completion method

a. recognizes revenue and gross profit each period based upon progress.
b. is used primarily for short-term contracts.
c. accumulates construction costs in the Billings on Construction in Progress account.
d. recognizes revenue and gross profits only when contract is completed.

*44. In selecting an accounting method for a newly contracted long-term construction project, the
principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of progress
toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term construction
contracts.
d. the inherent nature of the contractor's technical facilities used in construction.

*45. How should the balances of progress billings and construction in process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory.
c. Net balance, as a current asset if debit balance, and current liability if credit balance.
d. Net balance, as income from construction if credit balance, and loss from construction if
debit balance.

*46. In accounting for a long-term construction-type contract using the percentage-of-completion

method, the gross profit recognized during the first year would be the estimated total gross
profit from the contract, multiplied by the percentage of the costs incurred during the year to
the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.

*47. The Billings on Construction in Progress account is a(n)

a. contract revenue account.
b. inventory account.
c. contra-inventory account.
d. construction expense account.

48. The principal advantage of the cost-recovery method is that

a. reported revenue is based on final results rather than estimates of unperformed work.
b. it reflects current performance when the period of a contract extends into more than one
accounting period.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case when the
percentage-of-completion method is used.

49. Under the cost-recovery method

a. revenue, cost, and gross profit are recognized during the production cycle.
b. revenue and cost are recognized during the production cycle, but gross profit recognition is
deferred until the contract is completed.
c. revenue, cost, and gross profit are recognized at the time the contract is completed.
d. None of these answers are correct.
TOA Quizzer 18 Revenue from Contracts with Customers Page 6

50. Cost estimates on a long-term contract may indicate that a loss will result on completion of the
entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion or
cost-recovery method is employed.
b. recognized in the current period under the percentage-of-completion method, but the cost-
recovery method defers recognition of the loss to the time when the contract is completed.
c. recognized in the current period under the cost-recovery method, but the percentage-of-
completion method defers the loss until the contract is completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or cost-recovery method is employed.

51. Cost estimates at the end of the second year indicate that a loss will result on completion of the
entire contract. Which of the following statements is correct?
a. Under the cost-recovery method, the loss is not recognized until the year the construction
is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first year
does not affect the computation of loss for the second year.
c. Under the cost-recovery method, when the billings exceed the accumulated costs, the
amount of the estimated loss is reported as a current liability.
d. Under the cost-recovery method, when the Construction in Process balance exceeds the
billings, the estimated loss is added to the accumulated costs.

52. .When there is a significant increase in the estimated total contract costs but the increase does
not eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the cost-recovery methods, the estimated
cost increase requires a current period adjustment of excess gross profit recognized on
the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase requires a
current period adjustment of excess gross profit recognized on the project in prior periods.
c. Under the cost-recovery method only, the estimated cost increase requires a current
period adjustment of excess gross profit recognized on the project in prior periods.
d. No current period adjustment is required.

53. All revenue for franchise companies is derived from

a. assistance for site selection and negotiating lease.
b. bookkeeping and advisory services.
c. sale of initial franchise and continuing fees.
d. advertising and promotion.

54. Franchise fees should be recognized

a. on the date the contract was signed.
b. on the date the franchise is opened for business.
c. on the date the franchise fee is paid to franchisor.
d. when performance obligations are satisfied.

55. Revenue for sales-based royalty payments should be recognized

a. when the amount of sales can be determined.
b. on the date payment is received by the franchisor.
c. on the date the performance obligation is satisfied.
d. on the date the contract was signed.

56. Franchise revenue are recognized over time if

a. franchise rights are transferred at a point in time.
b. the franchisor is providing access to the right rather than transferring control.
c. performance obligations regarding franchise rights are completed when the franchise
opens.
d. the franchisee fee is payable upon signing of contract.

57. Types of franchising arrangements include all of the following except

a. service sponsor-retailer.
b. wholesaler-service sponsor.
c. manufacturer-wholesaler.
d. wholesaler-retailer.

58. Continuing franchise fees should be recorded by the franchisor

a. as revenue when uncertainty related to the variable consideration is resolved.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.
TOA Quizzer 18 Revenue from Contracts with Customers Page 7

59. Occasionally a franchise agreement grants the franchisee the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the franchisor
should
a. increase revenue recognized from the initial franchise fee by the amount of the expected
future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase the
selling price when the franchisee subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain purchases
are made.
d. None of these answers are correct.

60. Franchise revenues are recognized over time if

a. franchise rights are transferred at a point in time.
b. the franchisee fee is payable upon signing of contract.
c. performance obligations regarding franchise rights are completed when the franchise
opens.
d. None of these answers are correct.

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