1.The revenue recognition standard, Revenue from Contracts with Customers, state
ID: 340953 • Letter: 1
Question
1.The revenue recognition standard, Revenue from Contracts with Customers, states a specific approach should be used by companies to recognize revenue. The standard:
a.Requires an asset-liability approach because an asset or a liability may stem from the terms of the contract and measuring the change in the asset or liability over the life of the contract results in a disciplined approach to measuring and recognizing revenue.
b.Requires an earned-realized approach because the contract will result in revenue being earned and the collection of payment from the customer will result in the realization of the earned revenue.
c.Requires companies to recognize revenue by using a liability-equity approach because a contract results in a company’s promise to perform a service and the company reports that promise as a liability until the service is completed. Further, a company’s equity is increased because net income is closed to retained earnings.
d.Requires companies to recognize revenue by using an asset-equity approach because revenue typically results in an increase in assets through the collection of cash or recognition of accounts receivable and an increase in equity through the closing of net income to retained earnings.
2. Which type of transaction generally results in revenue being recognized with the passage of time?
3. Mars Corporation uses the percentage-of-completion method. At the end of the first year of a $9,000,000 contract, the following information is available:
In the first year, Mars should recognize gross profit of
4. Mars Corporation uses the completed-contract method. At the end of the first year of a $9,000,000 contract, the following information is available:
In the first year, Mars should recognize gross profit of
5. At the end of the first year of a $9,000,000 contract, Mars Corporation provides the following information:
In the first year, Mars should recognize gross profit (loss) of
Explanation / Answer
Q1. Answer is a. Requires an asset and liability approach because an asset or liability may stem from the terms of the contract and measuring the change in the liability or asset over the ilfe of the contract results in a disciplines approach to measure and recognize revenue. Q2. Answer is c. Rendering o services. Q3. Answer is b. $ 250,000 Explanation: % percentage completion: Cost to date/ Total estimated cost *100 ( $2000,000 /(2000,000+6000,000) *100 = 25% Revenue recognized during the year ($9000,000*25%) 2,250,000 Less: Cost incurred 2,000,000 Gross profit recognized 250,000 Q4. Answer is b. $0 Explanation: In completed contract method, the profit irecognized in the year in which the contract is completed. Q5. Answer is b. (1000,000) is recognzed in eaither percentage completion or completed contract method/ Explanation: This is based on the prudence principle to recognized the anticipated losses.
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