Revenue Recognition | 9e Test Bank

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Chapter 15 Testbank

1. Gains must be reported net of related expenses.

True   False

2. A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration according to AASB 15.

True   False

3. AASB 15 identifies the seven important elements of a contract with a customer that need to be carefully reviewed by a reporting entity in relation to the recognition of revenue. These seven steps must be applied to each contract with a customer in a sequential manner.

True   False

4. AASB 15 requires that an organisation shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer.

True   False

5. Without knowing how to allocate the transaction price to each performance obligation, we would not be able to recognise any revenue as each performance obligation is satisfied.

True   False

6. A call option provides the holder of the option with the right to buy an asset at a specified exercise price, on or before a specified date.

True   False

7. Rent or interest received in advance, the receipt of consulting fees in advance of the provision of services, or payments made in advance in relation to construction contracts are examples of unearned revenue.

True   False

8. The final step in the five-step revenue recognition model is to actually recognise the revenue from the contract with the customer for inclusion within the financial statements.

True   False

9. If the contract price is cash, it is harder to measure the fair value of the consideration relative to the situation where the consideration is in a non-cash form.

True   False

10. Revenues may be generated by:

A. holding and disposing of inventory in the normal course of business

B. having a liability forgiven

C. receiving a donation

D. All of the given answers are correct.

11. Under the AASB (IASB) Conceptual Framework, income is now subdivided into:

A. revenues, which only include sales, fees, interest, dividends, royalties and rent; and gains, which are no different in nature to revenue

B. gains, which are regarded as constituting a separate element in the framework; and revenues, which may only arise in the course of the ordinary activities of the entity

C. revenues, which arise in the course of the ordinary activities of the entity; and gains, which may or may not arise in the course of the ordinary activities of the entity

D. increases in equity referred to as gains; and reductions in liabilities which are classified as revenues

12. Revenue recognition under IASB 2008 requires that:

A. the entity has transferred to the buyer the significant risks and rewards of ownership

B. the entity retains neither continuing managerial involvement to the degree normally associated with ownership nor effective control over the goods

C. the costs incurred, or to be incurred, can be measured reliably

D. there should be a direct function of the transfer of control of the goods and services to the customer

13. The percentage of completion can be measured in a number of ways, including:

A. physical estimates or surveys of the work performed to date

B. the work plan basis, which uses the project management plan to calculate the percentage of the construction completed

C. the billings basis, using the proportion that progress billings to date bear to the total estimated billings for the contract

D. physical estimates or surveys of the work performed to date and the billings basis, using the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs

14. Biological assets are:

A. recognised as income when sold

B. to be valued at market value, with any increase being capitalised and amortised over the period until the asset is sold

C. to be valued at market value, with any increase in market value being treated as income

D. to be valued at fair value, with any increase in fair value being treated as income

15. Light Rail Constructions Ltd uses the percentage of completion method for its construction projects. Which of the following is the point at which it can recognise revenue?

A. during production

B. on completion of production

C. at point of sale

D. at point of final inspection

16. AASB 15 identifies the objective of the standard as ‘to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue’ and ______ arising from a contract with a customer.

A. cash flows

B. debts

C. materials

D. None of the given answers are correct.

17. Which among the following standards identifies five important elements of a contract with a customer that need to be carefully reviewed by a reporting entity in relation to recognition of revenue?

A. AASB 16

B. AASB 15

C. AASB 137

D. AASB 141

18. An entity shall account for a contract with a customer that is within the scope of AASB 15 only when which of the following criteria are met?

A. The parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations.

B. The entity can identify each party’s rights regarding the goods or services to be transferred.

C. The entity can identify the payment terms for the goods or services to be transferred.

D. All of the given answers are correct.

19. According to AASB 15, a performance obligation exists if it requires the transfer to the customer on which of the following?

A. variable consideration

B. constraining estimates of variable consideration

C. the existence of a significant financing component in the contract

D. All of the given answers are correct.

20. According to AASB 15, when determining the transaction price, an entity shall consider the effects of which of the following?

A. only a good or service (or a bundle of goods or services) that is distinct

B. only a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer

C. a good or service (or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer

D. None of the given answers are correct.

21. When estimating the stand-alone selling prices, paragraph 78 of AASB 15 states an entity shall consider which of the following information that is reasonably available to the entity?

A. market conditions

B. entity-specific factors

C. information about the customer or class of customer

D. All of the given answers are correct.

22. According to AASB 15, which among the following approaches states that an entity may estimate the stand-alone selling price by reference to the total transaction price less the sum of the observable stand-alone selling prices of other goods or services promised in the contract?

A. adjusted market assessment approach

B. expected cost plus a margin approach

C. residual approach

D. None of the given answers are correct.

23. Which of the following is an indicator of the transfer of control, according to AASB 15?

A. The entity has a present right to payment for the asset.

B. The customer has legal title to the asset.

C. The entity has transferred physical possession of the asset.

D. All of the given answers are correct.

24. When assets are received by a business for services to be performed at a future date, it is known as which of the following?

A. earned revenue

B. unearned revenue

C. interest revenue

D. None of the given answers are correct.

25. Which of the following gives its holder the right to sell an asset, at a specified exercise price, on or before a specified date?

A. call option

B. put option

C. exercise price

D. None of the given answers are correct.

26. Which of the following is the price the holder of an option will pay to buy a designated asset?

A. call option

B. put option

C. exercise price

D. None of the given answers are correct.

27. Revenue derived as a result of lending resources to another entity is known as:

A. earned revenue

B. unearned revenue

C. interest revenue

D. None of the given answers are correct.

28. Amounts owed to an entity by external parties generally as a result of the entity providing goods or services are known as:

A. bad debts

B. accounts receivable

C. bad debts expense

D. accounts payable

29. According to AASB 15, if a contract contains a significant financing component, then the contract effectively consists of which of the following performance obligations that needs to be accounted for separately?

A. exchange of the goods or services

B. financing of the goods or services

C. exchange of the goods or services and financing of those goods or services

D. None of the given answers are correct.

30. Discuss briefly the discussion paper released by the IASB in 2008 on the process leading to the development of the accounting standard.

______________________________________________________________________________

31. Who is a customer, according to AASB 15?

______________________________________________________________________________

32. Discuss the five-step model of revenue recognition.

______________________________________________________________________________

33. Why does the entity need to identify the contractual arrangements with the customers?

______________________________________________________________________________

34. Why do you need to identify the separate performance obligations in the contract with customers?

______________________________________________________________________________

35. Discuss AASB 15 in relation to determining the transaction price.

______________________________________________________________________________

36. Why do we need to understand the rule pertaining to allocating the transaction price to each performance obligation?

______________________________________________________________________________

37. Discuss the meaning of ‘control’ as per AASB 15.

______________________________________________________________________________

38. Discuss ‘unearned revenue’, using examples.

______________________________________________________________________________

39. According to AASB 7, what is credit risk?

______________________________________________________________________________

Chapter 15 Testbank