Principles of Financial Accounting · free preview
The Revenue Recognition Principle and Its Reach
The revenue recognition principle records revenue when goods or services transfer to the customer, which governs not only routine sales but also returns, allowances, warranties, and long-term contracts.
1. Performance obligations first
Performance obligations first
2. Evidence and measurement
Evidence and measurement
3. Multiple obligations in one contract
Multiple obligations in one contract
4. Warranties and variable consideration
Warranties and variable consideration
5. When retail revenue is recognized
A customer buys a jacket at a clothing store and pays at the register. When is revenue recognized?
6. Bundled obligations
A company sells a phone with a 12-month service plan for 720 dollars. Stand-alone, the phone sells for 600 dollars and the service for 240 dollars. What does the principle require?
7. Expected returns
A retailer sells 10,000 dollars of goods with a history showing 3 percent returns. How should the sale be recorded?
8. Warranty classification
A carmaker includes a 3-year warranty assuring the car works, and sells a separate 5-year extended protection plan. How are the two treated?
9. Performance obligation definition
Complete the term. A distinct promise in a contract to transfer a good or service to a customer is a ____ obligation.
10. Revenue amount with expected returns
A seller ships goods priced at 10,000 dollars and expects 3 percent to be returned. Compute the net revenue recognized in dollars, number only.
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