AFM291 Chapter 8: Chapter 8
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Identify two categories of revenue for Panera Bread from the table in the article Revenue Recognition: Key differences between U.S. GAAP and IFRSs. Compare and contrast the companyâs current U.S. GAAP revenue recognition with the potential adoption of IFRS. Provide the IASB Framework or the IAS statement, the changes in revenue recognition as well as potential challenges the company may face in adoption.
Table:
| Subject | U.S. GAAP | IFRSs |
|---|---|---|
| Concept/objective | realized or realizable and earned. | According to paragraph 83 of the IASB's Framework for the Preparation and Presentation of Financial Statements, revenue is recognized when (1) "it is probable that any future economic benefit" will flow to the entity and (2) such a benefit can be measured reliably. Further, paragraph 93 of the IASB Framework indicates that revenue normally must be earned before it can be recognized. |
| Definition of revenue | Paragraph 78 of FASB Concepts Statement No. 6, Elements of Financial Statements, defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations." | Paragraph 74 of the IASB Framework states, "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent." Paragraph 7 of IAS 18 defines revenue as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants." |
| Sale of goods or products | SAB Topic 13 indicates that revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Delivery has occurred (e.g., an exchange has taken place). The sales price is fixed or determinable. Collectibility is reasonably assured. In addition, ASC 605-15 provides guidance on product transactions that include a right of return. Further, various industry- and transaction-specific guidance is provided in other U.S. GAAP. | Under paragraph 14 of IAS 18, revenue from the sale of goods is recognized if all of the following conditions are met: The "entity has transferred to the buyer the significant risks and rewards of ownership of the goods." The "entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold." The "amount of revenue can be measured reliably." "[I]t is probable that the economic benefits associated with the transaction will flow to the entity." The "costs incurred or to be incurred in respect of the transaction can be measured reliably." |
| Rendering services | >Like revenue from product sales, revenue from service transactions should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Service has been rendered. The sales price is fixed or determinable. Collectibility is reasonably assured. Other than the limited guidance in >ASC 605-20, no specific guidance on the rendering of services exists under U.S. GAAP. The appropriate method for recognizing revenue in such transactions depends on the individual transaction but is usually based on the proportional performance as of the balance sheet date. | Paragraph 20 of IAS 18 states, "When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage [i.e., percentage] of completion of the transaction at the balance sheet date." Paragraph 20 goes on to list specific conditions for determining whether an outcome of a transaction can be estimated reliably. And subsequent paragraphs provide guidance on determining the stage of completion. Paragraph 26 of IAS 18 states, "When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable." |
| Software arrangements | ASC 985-605 provides guidance on recognizing revenue in a software arrangement. | There is no specific guidance on software revenue recognition in IFRSs. An entity should apply the provisions of IAS 18 as appropriate. |
| Construction-type contracts | ASC 605-35 provides guidance on construction-type contracts. ASC 605-35-25-90 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when dependable estimates cause the outcome to be doubtful), the completed-contract method is preferable. ASC 605-35-25-25 through 25-27, the customer must approve the scope and price of change orders before the related revenue can be recognized. | IAS 11, Construction Contracts, provides guidance on construction-type contracts. Paragraph 32 of IAS 11 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when the outcome of the contract cannot be estimated reliably), revenue is recognized to the extent that costs have been incurred, provided that the costs are recoverable. Use of the completed-contract method is prohibited under IFRSs. Paragraph 13 of IAS 11 specifies that when it is probable that the customer will approve the scope and price of a change order, the related revenue can be recognized. |
| Milestone method | ASC 605-28 provides guidance on the application of the milestone method for recognizing revenue in research or development arrangements. | There is no specific guidance in IFRSs on the application of the milestone method for recognizing revenue in research or development arrangements. |
| Multiple-element arrangements | ASC 605-25 provides guidance on multiple-element revenue arrangements and establishes detailed criteria for determining whether each element may be separately considered for recognition. This guidance does not apply to arrangements or deliverables that are within the scope of other authoritative literature (e.g., ASC 985-605). | Paragraph 13 of IAS 18 indicates that the recognition criteria under IAS 18 are usually applied separately to each transaction unless either of the following conditions applies: "[I]t is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction." Two or more transactions "are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole." |
| Bill-and-hold arrangements | The SEC staff lists specific criteria that must be met for revenue to be recognized in bill-and-hold arrangements before delivery of the product. (Non-SEC entities also use these revenue recognition criteria because no other authoritative guidance in U.S. GAAP addresses the accounting for these transactions.) The criteria restrict revenue recognition to limited circumstances. | Illustrative Examples to IAS 18 list criteria for recognizing revenue under bill-and-hold arrangements before delivery of the product. While the objective for recognizing revenue in bill-and-hold arrangements may be similar to that in U.S. GAAP, the criteria are not the same. |
| Gross versus net | ASC 605-45 provides guidance on whether to report revenue on the basis of the gross amount billed to the customer (as a principal) or the net amount retained by the company (as an agent). | Paragraph 8 of IAS 18 requires that revenue be reported on a net basis in agency relationships but does not provide specific guidance to consider. Improvements to IFRSs issued in April 2009) provides examples that indicate whether an entity is acting as a principal or as an agent. |
| Customer loyalty programs | Revenue recognition for customer loyalty programs is not specifically addressed in U.S. GAAP. (The EITF attempted to address this issue but did not reach a consensus.) Although entities account for customer loyalty programs in different ways, such programs are typically accounted for under ASC 605-25 as multiple-element arrangements or under an incremental-cost model. | IFRIC 13 indicates that customer loyalty programs are deemed multiple-element revenue transactions and that the fair value of the consideration received should be allocated between the components of the arrangement. |
| Rebates, discounts, incentives, and other consideration | ASC 605-50 indicates that consideration given by an entity to its customers is presumed to be a reduction of revenue unless an identifiable benefit whose fair value can be reasonably estimated is received. | Paragraph 10 of IAS 18 states that revenue "is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity." There is no specific guidance on other types of consideration given by an entity to its customers. |
| Specific industry and other guidance | Certain standards in U.S. GAAP provide specialized guidance on revenue recognition, including guidance that applies to specific industries and transactions. | IFRSs provide no (or limited) revenue recognition guidance that applies to specific industries or transactions. |
Can someone please provide the solutions. No explanation needed,just the answers so I can double check my work.
2. Firms with tangiblelong-term assets and less predictable cash flows, such as automanufacturers and steel companies, whose sales vary with changes ineconomic conditions, tend to use
a. | a more nearly equal mix of long-term debt and shareholdersâequity financing. |
b. | a greater amount of long-term debt [80%] than shareholdersâequity financing [20%]. |
c. | a smaller amount of long-term debt [20%] than shareholdersâequity financing [80%]. |
d. | a greater amount of long-term debt [80%] than assets [20%]. |
e. | a greater amount of shareholdersâ equity [80%] than assets[20%]. |
3. During Year 3,Carrington Company made the following expenditures relating toplant machinery and equipment:
· | Continuing, frequent, and low cost repairs | $46,000 |
· | Special long-term protection devices were attached to tenmachines | 11,000 |
· | A broken gear on a machine was replaced | 5,000 |
How much should be charged to repairs and maintenance in Year3?
a. | $46,000 |
b. | $51,000 |
c. | $57,000 |
d. | $41,000 |
e. | none of the above |
4. Which of the followingis/are not capitalized as an intangible asset?
a. | costs of an internally developed patent |
b. | legal costs to defend a patent successfully |
c. | goodwill acquired when a company purchases another company |
d. | costs to purchase a patent |
e. | none of the above |
5. Repairs and maintenancedo not include
a. | the costs of restoring an asset's service potential afterbreakdowns. |
b. | expenditures that increase the asset's life. |
c. | routine costs such as for cleaning and adjusting. |
d. | major tune-ups including labor and parts. |
e. | All of the above are not considered to be repairs ormaintenance. |
12. Sigma Company suffers a loss to itsbuilding in a fire and spends $100,000 on repairs and improvements.It judges that $80,000 of the expenditure replaces long-livedassets lost in the fire, and $20,000 represents improvements to thebuilding. Which of the following is the single journal entry thatSigma Company will make?
a. | Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 100,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .. 100,000 |
b. | Loss from Fire . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 100,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. 100,000 |
c. | Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 100,000 Building . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .. 20,000 Loss from Fire . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 80,000 |
d. | Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 20,000 Loss from Fire . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 80,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. 100,000 |
e. | Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 100,000 Loss from Fire . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 100,000 |
16. Firms treat expenditures as assetswhen they:
a. | have acquired rights to the future use of a resource as a resultof a past transaction or event. |
b. | can reliably measure the cost of the expected benefits at thetime of initial recognition. |
c. | can exercise the entityâs right to, or control of, thebenefit. |
d. | can obtain the future service potential and control othersâaccess to it. |
e. | all of the above |
Clarion Realty
Clarion Realty has decided to construct its own office building.The construction will be partially financed through a constructionloan and any remainder will be financed from internally generatedfunds. The internal accountants have collected the followinginformation concerning the construction.
Average Balance | Construction | Other | |
Year | Construction Account | Debt @ 6% | Debt @ 10% |
1 | $2,000,000 | $1,000,000 | $500,000 |
2 | $4,000,000 | $1,000,000 | $250,000 |
3 | $3,000,000 | $800,000 | $200,000 |
22. The amount, if any, of capitalizedinterest cost for Year 1 is
a. | $0 |
b. | $50,000 |
c. | $60,000 |
d. | $110,000 |
e. | $170,000 |
23. The amount, if any, of capitalizedinterest cost for Year 2 is
a. | $0 |
b. | $50,000 |
c. | $60,000 |
d. | $180,000 |
e. | $230,000 |
33. When a firm constructs its ownbuildings or equipment:
a. | it recognizes the labor, material, and overhead costs incurredas an asset. |
b. | U.S. GAAP and IFRS require firms to include, or capitalize,interest costs during construction in the cost of aself-constructed asset. |
c. | it recognizes the labor, material, and overhead costs incurredas a period expense. |
d. | U.S. GAAP and IFRS require firms to expense interest costsincurred during construction of a self-constructed asset. |
e. | both choices a and b are correct. |
| . Make all 16 adjustments to journal entries. Remember to include a description under each journal entry. |
| 1 | On March 1, ABC purchased a one-year liability insurance policy for $98,400. | ||||||||
| Upon purchase, the following journal entry was made: | |||||||||
| Dr Prepaid insurance | 98,400 | ||||||||
| Cr Cash | 98,400 | ||||||||
| The expired portion of insurance must be recorded as of 12/31/14. | |||||||||
| Notice that the expired portion from March through November has been recorded already. | |||||||||
| Make sure that the Prepaid Insurance balance after the adjusting entry is correct. | |||||||||
| 2 | Depreciation expense must be recorded for the month of December. | ||||||||
| The building was purchased with cash on February 1, 2014, for $150,000 with a remaining useful life of 30 years and a salvage value of $6,000. | |||||||||
| The method of depreciation for the building is straight-line. | |||||||||
| The equipment was purchased with cash on February 1, 2014, for $60,000 with a remaining useful life of 5 years and a salvage value of $3,000. | |||||||||
| The method of depreciation for the equipment is double-declining balance. | |||||||||
| Depreciation has been recorded for the building and equipment for months February through November. | |||||||||
| 3 | On December 1, XYZ Co. agreed to rent space in ABC's building for $12,000 per month, | ||||||||
| and XYZ paid ABC on December 1 in advance for the first three months' rent. | |||||||||
| The entry made on December 1 was as follows: | |||||||||
| Dr Cash | 36,000 | ||||||||
| Cr Unearned rent revenue | 36,000 | ||||||||
| The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/14. | |||||||||
| 4 | Per timecards, from the last payroll date through December 31, 2014, ABC's employees have worked a total of 250 hours. | ||||||||
| Including payroll taxes, ABC's wage expense averages about $51 per hour. The next payroll date is January 5, 2015. | |||||||||
| The liability for wages payable must be recorded as of 12/31/14. | |||||||||
| 5 | On November 30, 2014, ABC borrowed $235,000 from American National Bank by issuing an interest-bearing note payable. | ||||||||
| This loan is to be repaid in three months (on February 28, 2015), along with interest computed at an annual rate of 6%. | |||||||||
| The entry made on November 30 to record the borrowing was: (for Statement of Cash Flow purposes, consider a financing item) | |||||||||
| Dr Cash | 235,000 | ||||||||
| Cr Notes payable | 235,000 | ||||||||
| On February 28, 2015 ABC must pay the bank the amount borrowed plus interest. | |||||||||
| Assume the beginning balance for Notes Payable is correct. | |||||||||
| Interest through 12/31/14 must be accrued on the $235,000 note. | |||||||||
| 6 | ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete | ||||||||
| physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at | |||||||||
| that time totaled $75,000, which reflects historical cost. | |||||||||
| Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment. | |||||||||
| Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. | |||||||||
| A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of | |||||||||
| completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory | |||||||||
| using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting | |||||||||
| for adjustments of inventory to market value. | |||||||||
| 7 | It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized | ||||||||
| that their intangible asset might be impaired on December 31, 2014. Record the impairment if any. | |||||||||
| The expected future net cash flows for this intangible asset totals $30,000, and the fair value of the asset is $27,500. | |||||||||
| 8 | On 7/1/14, ABC purchased 7,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury | ||||||||
| stock was $7 per share, or $49,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/14, | |||||||||
| ABC reissued these 7,000 shares of treasury stock at $10 per share. Record the journal entry required for the reissuance of the treasury stock. | |||||||||
| 9 | On 12/31/14, ABC issued 5,000 shares of $3 par value common stock at the closing market price of $7 per share. Prepare ABC's journal entry | ||||||||
| to reflect the issuance of the stock on 12/31/14. | |||||||||
| 10 | On 7/1/14, ABC sold 12% bonds having a maturity value of $800,000 for $861,771, resulting in an effective yield of 10%. The bonds are | ||||||||
| dated 7/1/14, and mature 7/1/19. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of | |||||||||
| amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/14. | |||||||||
| Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense. | |||||||||
| 11 | The following information is available for ABC Corporation at 12/31/14 regarding its investments in stocks of other companies. | ||||||||
| Securities | Cost | Fair Value | |||||||
| 2,200 shares of Toyota Corporation Common Stock | $ 100,000 | $ 125,000 | |||||||
| 1,100 shares of G.M. Corporation Common Stock | $ 67,000 | $ 34,000 | |||||||
| $ 167,000 | $ 159,000 | ||||||||
| Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading. | |||||||||
| 12 | On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824, | ||||||||
| which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization. | |||||||||
| Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used. | |||||||||
| Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the | |||||||||
| investment account. | |||||||||
| 13 | ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used, | ||||||||
| prepare the entry to record bad debt expense. | |||||||||
| 14 | On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make | ||||||||
| annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000 | |||||||||
| unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method | |||||||||
| of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet | |||||||||
| been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal | |||||||||
| entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for | |||||||||
| this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.) | |||||||||
| 15 | ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension | ||||||||
| plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014. | |||||||||
| Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry. | |||||||||
| Pension asset/liability (January 1) | $0 | ||||||||
| Actual return on plan assets | $40,000 | ||||||||
| Expected return on plan assets | $20,000 | ||||||||
| Contributions (funding) in 2014 | $37,000 | ||||||||
| Fair value of plan assets (December 31) | $75,000 | ||||||||
| Settlement rate | 10% | ||||||||
| Projected benefit obligation (January 1) | $0 | ||||||||
| Service cost | $60,000 | ||||||||
| Benefits paid in 2014 | $0 | ||||||||
| *For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature. | |||||||||
| 16 | On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of | ||||||||
| $10 per share on December 31, 2014. Additional information is as follows: | |||||||||
| a. The service period related to the restricted stock is 2 years. | |||||||||
| b. Vesting occurs if the CFO stays with the company for a two-year period. | |||||||||
| c. The par value of the common stock is $3 per share. | |||||||||
| Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation. | |||||||||
| Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense) | |||||||||
| 17 | Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15. | ||||||||
| However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full | |||||||||
| on the return's March 15, 2015 due date. | |||||||||
| ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600, | |||||||||
| so January through November income tax expense recognized amounts to $63,800 (11/12 months). | |||||||||
| Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents | |||||||||
| tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities. | |||||||||
| Based on the income before income taxes figure from the income statement, record December's income tax expense | |||||||||
| so that the entire year's total tax expense is correct. | |||||||||