Solution Manual for Intermediate Accounting 18 Edition, by Stice

Solution Manual for Intermediate Accounting 18 Edition, by Stice

CHAPTER 8
QUESTIONS
1. The two general revenue recognition criteria are that revenue should be recognized
when it is realized or realizable and it has
been earned through substantial completion of the activities involved in the earnings
process.
2. The four revenue recognition criteria identified in SOP 97−2 are:
a. Persuasive evidence of an arrangement
exists.
b. Delivery has occurred.
c. The vendor’s fee is fixed or determinable.
d. Collectibility is probable.
The first two items relate to whether revenue has been earned, and the last two relate to the realizability of the revenue.
3. SAB 101 was issued by the SEC to curtail
specific abuses in revenue recognition
practices.
4. Question 1 of SAB 101 emphasizes the
proper signing of sales agreements to encourage companies to implement good internal controls surrounding revenue recognition. If a company does not have good
internal controls in place for processing
customer contracts, it becomes much easier for company executives to manipulate
the reported amount of revenue.
5. A sale can be turned into a consignment
through a liberal return policy that does not
require the buyer to pay for the product until the buyer in turn sells it to a customer. A
sale can also be turned into a consignment
if the seller agrees to repurchase the product at the same price and provides interestfree financing to the buyer.
6. In a bill-and-hold arrangement, the seller
“sells” goods to the buyer but holds the
goods for later shipment, either in the seller’s own warehouse or in a third-party
warehouse. A bill-and-hold arrangement is
a sale when the arrangement comes about
upon the written request of the buyer, the
goods are ready to ship, and the goods are
separated from other inventory to the extent that they cannot be used to fill other
orders.
7. The presumption is that customer acceptance provisions are important to the buyer
or else they wouldn’t have been included in
the sales agreement in the first place. Accordingly, the seller has not completed the
earnings process until the customer acceptance provisions have been satisfied.
8. Up-front, nonrefundable fees are not recognized as revenue immediately because
the earnings process is not complete. The
buyer is not paying for the initiation of the
service, but instead is paying for the service itself.
9. An element of a multiple-element arrangement is considered to be a unit of accounting if that element has standalone value,
meaning that it can be sold separately (by
anyone, not necessarily the seller) or the
customer can resell it.
10. The three different methods for determining
the separate selling price of a single element in a multiple-element transaction are
as follows:
a. Vendor-specific objective evidence
(VSOE), which is the price at which the
same company sells the same product
or service separately.
b. Third-party evidence (TPE), which is the
price at which other companies sell the
same product or service separately.
c. Best estimate using other data such as
cost and profit margin data.
11. The three basic steps in recognizing revenue under the contract approach are as follows:
a. Identify the performance obligations accepted by the seller.
b. Allocate transaction prices based on
relative separate selling prices of any
distinct elements of a multiple-element
arrangement.
c. Recognize revenue as the performance
obligations are satisfied.