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Question: Velocity, a consulting firm, enters into a


Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $60,000 at the beginning of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $20,000 or will be entitled to an additional $20,000 bonus, depending on whether sales at Burger Boy at yearend have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $20,000 bonus and calculates the contract price based on the expected value of future payments to be received. After four months, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $20,000.

Required:
1. Prepare the journal entry to record revenue each month for the first four months of the contract.
2. Prepare the journal entry that the Velocity Company would record after four months to recognize the change in estimate associated with the reduced likelihood that the $20,000 bonus will be received.
3. Prepare the journal entry to record the revenue each month for the second four months of the contract.
4. Prepare the journal entry after eight months to record receipt of the $20,000 cash bonus.


> Briefly describe the guidelines provided by GAAP for the recognition of revenue by a franchisor for an initial franchise fee.

> Briefly describe how IFRS guidelines for recognizing revenue from multiple-deliverable arrangements differ from U.S. GAAP guidelines.

> Briefly describe the guidelines for recognizing revenue from the sale of software and other multiple deliverable arrangements.

> When percentage-of-completion accounting is not appropriate, U.S. GAAP requires the use of the completed contract method, while IFRS requires the use of the cost recovery method. Explain how the two methods affect recognition of revenue, cost of construc

> Refer to the situation described in BE 5–31. Assume that, during the first year the company billed its customer $7 million, of which $5 million was collected before year-end. What would appear in the year-end balance sheet related to this contract? In B

> Vodafone Group, Plc, headquartered in the United Kingdom, is one of the world’s largest telecommunications companies. Excerpts from the revenue recognition disclosure included in its 2015 annual report are reproduced below. Note A1: Significant accountin

> A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million. The company

> As of December 31, 2018, Cady Construction has one construction job for which the construction in progress (CIP) account has a balance of $20,000 and the billings on construction contract account has a balance of $14,000. Cady has another construction jo

> Explain why, in most cases, a seller recognizes revenue when it delivers its product rather than when it produces the product.

> GoodBuy sells gift cards redeemable for GoodBuy products either in store or online. During 2018, GoodBuy sold $1,000,000 of gift cards, and $840,000 of the gift cards were redeemed for products. As of December 31, 2018, $30,000 of the remaining gift card

> Assume the same facts as in BE 5-23 . How much revenue will Saar recognize in 2018 under this arrangement if Saar reports under IFRS? In BE 5-23 Assume the same facts as in BE 5-22 except that the trade name “Saar Associates” is not well known in the ma

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> Under what circumstances should sellers consider the time value of money when recognizing revenue?

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> Is a customer’s right to return merchandise a performance obligation of the seller? How should sellers account for a right of return?

> Willingham Construction is in the business of building high-priced, custom, single-family homes. The company, headquartered in Anaheim, California, operates throughout the Southern California area. The construction period for the average home built by Wi

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> What must a contract include for the contract to exist for purposes of revenue recognition?

> How does a seller allocate a transaction price to a contract’s performance obligations?

> What characteristics make a good or service a performance obligation?

> We recognize service revenue either at one point in time or over a period of time. Explain the rationale for recognizing service revenue using these two approaches.

> What criteria determine whether a company can recognize revenue over time?

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> Two accounting students were discussing the timing of revenue recognition for long-term construction contracts. The discussion focused on which method was most like the typical revenue recognition method of recognizing revenue at the point of product del

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> Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended January 30, 2016, are available in Connect. This material also is available under the Investor Relations li

> Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2015, are available in Connect. This m

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> On January 1, Revis Consulting entered into a contract to complete a cost reduction program for Green Financial over a six-month period. Revis will receive $20,000 from Green at the end of each month. If total cost savings reach a specific target, Revis

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> Assume the same facts as in P5–2, except that customers must pay $75 to purchase the extended warranty if they don’t purchase it with the $50 coupon that was included in the Protab Package. Creative estimates that 40%

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> Access the FASB’s Accounting Standards Codification at the FASB website (www.fasb.org). Required: Determine the specific citation for accounting for each of the following items: 1. What are the five key steps to applying the revenue recognition principl

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> Assume the same information as in E 5–18. In E 5–18 On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $220 million. The expect

> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Required: Determine the specific citation for accounting for each of the following items: Circumstances indicating when the installment method or cost recovery method

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> Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended January 30, 2016, are available in Connect. This material is also available under the Investor Relations li

> Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2015, are provided Connect. This mater

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> Refer to the income statement of Sherwin Williams Company in Illustration 4–2 of this chapter. In Illustration 4–2 Statement of Consolidated Income ($ in thousands, except per share data) __________________________Year ended December 31, 2015 Net sales

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