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Kieso Solutions - Chapter 6

Chapter 6 of 'Intermediate Accounting' focuses on revenue recognition, outlining key learning objectives such as understanding the economics of selling transactions, identifying performance obligations, determining transaction prices, and recognizing revenue. It also covers differences between IFRS and ASPE, along with methods for accounting for long-term contracts. The chapter includes various exercises and problems to apply these concepts.

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0% found this document useful (0 votes)

738 views181 pages

Kieso Solutions - Chapter 6

Uploaded by

Nick Ridley

We take content rights seriously. If you suspect this is your content, claim it here.

Available Formats

Download as PDF, TXT or read online on Scribd

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting,Thirteenth Canadian Edition

CHAPTER 6

Revenue Recognition
Learning Objectives
1. Understand the economics and legalities of selling
transactions from a business perspective.
2. Identify the five steps in the revenue recognition process.
3. Identify the contract with customers.
4. Identify the separate performance obligations in the contract.
5. Determine the transaction price.
6. Allocate the transaction price to the separate performance
obligations.
7. Understand how to recognize revenue when the company
satisfies its performance obligation.
8. Analyze and determine whether a company has earned
revenues under the earnings approach.
9. Identify other revenue recognition issues.
10. Identify how revenues should be presented, disclosed, and
analyzed.
11. Identify differences in accounting between IFRS and ASPE
and potential changes.
12. Apply the percentage-of-completion method for long-term
contracts.
13. Apply the zero-profit method for long-term contracts.
14. Apply the completed-contract method for long-term contracts.
15. Account for losses on long-term contracts.

Solutions Manual 6.1 Chapter 6

Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting,Thirteenth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Brief Exercises
1. 1 C 9. 4 C 17. 5 AP 25. 6,9 AP 33. 10 C
2. 1 C 10. 5 AP 18. 5,11 AP 26. 2,8 C 34. 12 AP
3. 1,8 C 11. 5 AP 19. 5 AP 27. 8 C 35. 10,14 AP
4. 1 C 12. 5 C 20. 5 AP 28. 9 AP 36. 10,12,14 AP
5. 1 C 13. 5 AP 21. 6 AP 29. 9 AP 37. 13 AP
6. 3 AP 14. 5 AP 22. 7 AP 30. 9 AP 38. 12,13,14 AP
7. 4 C 15. 5 AP 23. 2,6,7 AP 31. 9 AP 39. 15 AP
8. 4 AP 16. 5,11 AP 24. 6,8 AP 32. 9,10 AP 40. 15 AP
Exercises
1. 1 C 9. 5 AP 17. 6,7 AP 25. 9 AP 33. 10,14 AP
2. 1 AP 10. 5 AP 18. 6,7 AP 26. 9 AP 34. 10,12 AP
3. 4 AP 11. 5,7,11 AP 19. 6 AP 27. 9 AP 35. 12,14 AP
4. 4,11 AP 12. 5,7,11 AP 20. 6 AP 28. 9 AP 36. 12,14 AP
5. 4 AP 13. 5 AP 21. 7,11 AP 29. 9 AP 37. 12,14 AP
6. 4 AP 14. 5 AP 22. 7 C 30. 9 AP 38. 12 AP
7. 5 C 15. 6 AP 23. 8 AP 31. 10 C 39. 13 AP
8. 5 AP 16. 2,6,7 AP 24. 8 C 32. 10 C 40. 15 AP
Problems
1. 5,6 AP 3. 4,5 AP 5. 5,6,7,9 AP 7. 5,6 AP 9. 10,12,13,14 AP
2. 4,5,9 AP 4. 5,6 AP 6. 4 AP 8. 4 AP 10. 10,12,15 AP
Cases
1. 4,7,8 2. 4,7,8 AP
AP
Integrated Cases
1. 1,3 AN 2. 8,9 AP 3. 5,7,12 AN

Research and Analysis

1. 9,10 AN 2. 12,13 AP 3. 5,6 AN 4. 10 AP

Solutions Manual 6.2 Chapter 6

Legend: The following abbreviations will appear throughout the solutions manual
file.

LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
Ethics Professional and Ethical Behaviour
PS and DM Problem-Solving and Decision-Making
Comm. Communication
Self-Mgt. Self-Management
Team & Lead Teamwork and Leadership
Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation
DAIS Data Analytics and Information Systems

Solutions Manual 6.3 Chapter 6

ASSIGNMENT CLASSIFICATION TABLE

Brief
Topics Exercises Exercises Problems

1. Economics and legalities of 1, 2, 3, 4, 5 1,2

selling transactions.

2. Identify the five steps in the 23, 26 16

revenue recognition process.

3. Determining the contract and the. 6, 7, 8, 9 3, 5, 6 3, 6, 8

the performance obligations.

4. Transaction price determination. 10, 11, 12, 7, 8, 9, 10, 1, 2, 3, 4,

13, 14, 15, 11, 12, 13, 5, 7
16, 17, 18, 14
19
5. Allocation of transaction price. 20, 21, 24, 15, 16, 17, 1, 4, 5, 7
25 18, 19, 20

6. Understanding when 21, 23 16, 17, 18, 5

performance obligation occurs. 21, 22

7. Determining revenue using the 3, 24, 26, 23, 24

earnings approach (ASPE). 27,

8. Specific revenue recognition 25, 28, 29, 25, 26, 27, 2, 5

issues. 19, 31, 32 28, 29, 30

9. IFRS and ASPE differences. 16, 18 4, 16, 17,

21
10. Long-term Construction 34, 36, 38 33, 34, 35, 9, 10
Contracts-Apply the percentage 36, 37, 38
of Completion Method.

11. Long-term Construction 37 39 9

Contracts-Zero Profit Method.

12. Long-term Construction 35, 36, 38 33, 35, 36, 9

Contracts – Apply the Competed 37
Contract Method.

13. Losses on long-term contracts 39, 40 40 10

Solutions Manual 6.4 Chapter 6

ASSIGNMENT CHARACTERISTICS TABLE

Level of Time
Item Description Difficulty (minutes)
E6.1 Economics of transactions – various consumer Moderate 20-25
industries.
E6.2 Analytics Moderate 15-20
E6.3 Service contracts. Moderate 15-20
E6.4 Loyalty programs. Moderate 15-20
E6.5 Warranty arrangement. Simple 10-15
E6.6 Warranties. Simple 10-15
E6.7 Transaction price. Simple 10-15
E6.8 Variable consideration. Simple 10-15
E6.9 Trailing commission. Moderate 15-20
E6.10 Time value of money. Complex 15-20
E6.11 Sales with returns. Moderate 25-30
E6.12 Sales with returns. Moderate 25-30
E6.13 Advance rentals. Moderate 15-20
E6.14 Gift cards sales and redemptions. Moderate 20-25
E6.15 Allocation of transaction price. Complex 25-30
E6.16 Allocation of transaction price. Moderate 30-35
E6.17 Allocation of transaction price. Moderate 25-30
E6.18 Allocation of transaction price. Moderate 25-30
E6.19 Allocation of transaction price. Moderate 10-15
E6.20 Existence of a contract. Moderate 10-15
E6.21 Existence of a contract. Simple 10-15
E6.22 Licensing arrangement. Simple 10-15
E6.23 Revenue recognition under earnings approach - Complex 40-45
various consumer industries.
E6-24 Transactions with customer acceptance under Complex 15-20
earnings approach.
E6.25 Sales with repurchase. Moderate 15-20
E6.26 Repurchase agreement. Simple 10-15
E6.27 Bill-and-hold. Moderate 10-15
E6.28 Principal and agent. Moderate 15-20
E6.29 Consignment sales. Moderate 15-20
E6.30 Consignment sales. Moderate 30-35
E6.31 Contract costs. Moderate 15-20
E6.32 Contract costs, collectibility. Moderate 10-15
E6.33 Recognition of a profit on long-term contracts. Moderate 20-25
E6.34 Gross profit on uncompleted contract. Moderate 10-15
E6.35 Recognition of revenue on long-term contract Moderate 15-20
and entries.
E6.36 Recognition of profit and SFP amounts for long- Moderate 15-20
term contracts.

Solutions Manual 6.5 Chapter 6

ASSIGNMENT CHARACTERISTICS TABLE

(CONTINUED)

Level of Time
Item Description Difficulty (minutes)

E6.37 Recognition of profit on long-term contract. Moderate 15-20

E6.38 Recognition of profit on long-erm contract. Moderate 50-60
E6.39 Recognition of profit on long-term contract. Moderate 40-45
E6.40 Recognition of profit on long-term contract– Moderate 50-60
overall loss.
P6.1 Allocate Transaction Price, Time Value. Moderate 25–35
P6.2 Upfront Payments, Bill and Hold, Return Moderate 50–60
Privileges and Performance-based Incentives.
P6.3 Point of sale, Assurance warranties, Return Moderate 30-45
Privileges and Performance-based Incentives.
Recognition.
P6.4 Time Value, Gift Cards, Volume Discounts. Moderate 35–40
P6.5 Allocate Transaction Price, Returns, and Complex 50–60
Consignments.
P6.6 Customer Loyalty Program. Complex 30–35
P6.7 Allocate Transaction Price, Upfront Fees, Time Moderate 40–45
Value of Money.
P6.8 Warranty, Customer Loyalty Program. Moderate 25–30
P6-9 Long-Term Contract – All Method Moderate 50–60
P6-10 Recognition of Losses on Long-Term Contract Moderate 45–50

Solutions Manual 6.6 Chapter 6

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6.1

What is being given up? What is being received?

a. This transaction involves a Monetary asset – cash is

sale of goods that are being received upon
tangible assets. Control delivery.
transfers to the buyer upon
delivery, coincident with the
transfer of possession and
passing of legal title.

b. This transaction involves a Monetary asset – a short-

sale of goods that are term, interest-bearing
tangible assets. Control receivable is created upon
transfers to the buyer upon delivery.
delivery, coincident with the
transfer of possession and
passing of legal title.

c. This transaction involves a Consideration in the form of

sale of services for which the accounting services. This
concepts of possession and transaction has commercial
passing of legal title do not substance since the services
apply. are different.

d. This transaction involves Monetary asset – a short-

both goods and services term receivable is created
(also known as multiple upon delivery.
deliverables) that are sold
together for one fee.

LO 1 BT: C Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.7 Chapter 6

BRIEF EXERCISE 6.2

A contract is created when a company sells something.

a. The contract created in this transaction is likely evidenced

by the sales order or invoice. With terms FOB shipping
point, the seller (the manufacturer) is obligated until the
goods are shipped; legal title generally passes to the buyer
at this point. The buyer obtains the risks and rewards of
ownership at the point of shipment. Any loss or damage
incurred during shipping would be borne by the buyer.

b. The contract created in this transaction is likely evidenced

by the sales order or invoice. With terms FOB destination
point, the seller (the manufacturer) is obligated until the
goods have been received by the buyer; legal title generally
passes to the buyer at this point. Any loss or damage
incurred during shipping would be borne by the seller.

c. FOB terms would suggest that legal title passes at point of

shipment. However, the seller (the manufacturer) has an
additional implicit or constructive obligation in this
contract. The seller’s past practice of replacing lost or
damaged products means that the seller is obligated until
the goods are received by the buyer, irrespective of the
passing of legal title.
LO 1 BT: C Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.8 Chapter 6

BRIEF EXERCISE 6.3

XYZ may not be able to record revenue upon delivery. The credit
policy does not appear to be a normal practice for XYZ. It appears
to be specific to the new product only. Concessionary terms in a
sale transaction create measurement uncertainties and alter the
economics of the business transaction. This policy may create
additional obligations for XYZ and bring into question whether
the risks and rewards of ownership, or control, have actually
passed. In fact, it may indicate that a sale has not taken place.
This is similar in substance to a consignment sale.

LO 1,8 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.9 Chapter 6

BRIEF EXERCISE 6.4

Big Data provides companies with historical and real time

information related to specific business practices that relate to
measurement uncertainty. These areas include Sales Returns,
Loss on Impairment (from expected credit losses), Warranty
Expense, Gift Card Usage, Loyalty Program Redemptions, etc.

Companies have real-time granular transactional data that allows

them to answer various questions. For example, in Sales
Returns:

• How many products ($ and quantity) are returned after they

have been sold?

• Do the % of product returns decrease after 30 days of

sales? 3 months of sale? Etc.

• Is there a correlation of % of product return based on

holiday/event? i.e. Returns 30 days after Black Friday,
Christmas, Boxing Day, etc.?

• How much of the product ($ and quantity) is returned

subsequent to year-end that is related to Sales Revenue
prior to year-end?

Being able to answer questions like these allow companies to

predict uncertainty and determine how much revenue can truly
be recognized.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.10 Chapter 6

BRIEF EXERCISE 6.5

a. Sales Returns
• Sales with Amount, Date, Article/SKU
• Returns with Amount, Date linked back to the specific sale
transactions, including calculation of days elapsed since
product sale
• Geographic location of sales

This data can be used to calculate amount/quantity and average

days of returns for sales in specific locations where local trends
can affect returns for different products.

b. Warranty Expense
• Sales information with Date, Article/SKU
• Warranty claim by Date linked back to the specific sale
transactions
• Amount of Warranty claim
• Number of Warranty claims made

This information can be used to calculate amount the percentage

of claims based on total sales, and expense dollars as a
percentage of sales dollars. This will assist in calculating the
warranty liability.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.11 Chapter 6

BRIEF EXERCISE 6.6

No entry is required on May 10, 2023, because neither party has

performed on the contract. That is, neither party has an
unconditional right as of May 10, 2023. On June 15, 2023, Cosmo
delivers the product and therefore should recognize revenue as
it received an unconditional right to consideration on that date.
In addition, Cosmo satisfies its performance obligation by
delivering the product to Greig.

The journal entry to record the sale and related cost of goods
sold is as follows.
June 15, 2023
Accounts Receivable ....................................... 2,000
Sales Revenue .......................................... 2,000
To record sales

Cost of Goods Sold .......................................... 1,300

Inventory ................................................... 1,300
To record cost of goods sold

Upon receiving the cash payment on July 15, 2023, Cosmo

makes the following entry.
July 15, 2023
Cash .................................................................. 2,000
Accounts Receivable ............................... 2,000

LO 3 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.12 Chapter 6

BRIEF EXERCISE 6.7

Ellicott accounts for the bundle of goods and services as a single

performance obligation because the goods or services in the
bundle are highly interrelated. Ellicott also provides a significant
service by integrating the goods or services into the combined
item (that is, the hospital) for which the customer has contracted.
In addition, the goods or services are significantly modified and
customized to fulfill the contract. Revenue for the performance
obligation would be recognized over time by selecting an
appropriate measure of progress toward satisfaction of the
performance obligation.
LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.13 Chapter 6

BRIEF EXERCISE 6.8

Talarczyk makes the following entry to record the sales of

products with warranties.
July 1, 2023

Cash .................................................................. 1,012,000

Warranty Expense ............................................ 40,000
Warranty Liability ..................................... 40,000
Unearned Revenue ................................... 12,000
Sales Revenue .......................................... 1,000,000
To record cash sale

Cost of Goods Sold .......................................... 550,000

Inventory ................................................... 550,000
To record cost of goods sold

Talarczyk reduces the Warranty Liability account over the first

two years as the actual warranty costs are incurred. The
company also recognizes revenue related to the service-type
warranty over the two-year period that extends beyond the
assurance warranty period (two years). The warranty revenue is
recognized over time since the customer is receiving the benefit
over time (i.e., insurance-type protection). In most cases, the
unearned revenue is recognized on a straight-line basis and the
costs associated with the service-type warranty are expensed as
incurred.
LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.14 Chapter 6

BRIEF EXERCISE 6.9

The membership renewal option gives the customer a material
right that cannot be obtained without first paying the non-
refundable initiation fee of $100. In these cases, the customer
is in effect paying in advance for services and the transaction
price must be allocated between the services currently
purchased and the services to be purchased in the future under
the membership renewal option. IFRS 15 allows the entity to
treat this as one performance obligation. The total transaction
price is $100 + ($5 x 12 x 3) = $280. BlueBox would recognize
$280/4 = $70 revenue per year.
LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.15 Chapter 6

BRIEF EXERCISE 6.10

Calculate as an ordinary annuity:

Using a financial calculator:

PV ? Yields $84,502.55
I 12%
N 2
PMT $(50,000)
FV 0
Type 0

Using Excel:
=PV(rate,nper,pmt,fv,type)

The amount of revenue to recognize on the date of sale is

$84,502.55.
A step-by-step solution for this section of the problem can be
found in the student resources section of the online course.

Solutions Manual 6.16 Chapter 6

BRIEF EXERCISE 6.10 (CONTINUED)

Alternately:
Amount due in one year
$50,000 X PVF1, 12% = $50,000 X 0.89286 44,643
Amount due in two years
$50,000 X PVF2, 12% = $50,000 X 0.79719 39,860
Revenue to be recognized on the date of sale 84,503

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.11

The transaction price should include management’s estimate of

the amount of consideration to which the entity will be entitled.
Given the multiple outcomes and probabilities available based
on prior experience, the probability-weighted method is the most
predictive approach for estimating the variable consideration in
this situation:

Completion Date Probability Expected Value

August 1 70% chance of $1,150,000 = $ 805,000
August 8 20% chance of $1,100,000 = 220,000
August 15 5% chance of $1,050,000 = 52,500
After August 15 5% chance of $1,000,000 = 50,000
$1,127,500

Thus, the total transaction price is $1,127,500 based on the

probability-weighted estimate.

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.17 Chapter 6

BRIEF EXERCISE 6.12

a. In this situation, Nair uses the most likely amount as the

estimate - $1,150,000 since there are only two possible
outcomes.

b. When there is limited information with which to develop a

reliable estimate of completion, then no revenue related to
the $150,000 incentive should be recognized until the
uncertainty is resolved. Therefore, no revenue from the
incentive is recognized until the completion of the contract.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.13

a.
January 2, 2023

Notes Receivable.............................................. 10,000

Sales Revenue .......................................... 10,000
To record sales

Cost of Goods Sold ......................................... 6,000

Inventory .................................................. 6,000
To record cost of goods sold

Revenue Recognized in 2023

Sales revenue ................................................... $ 10,000

Interest income ($11,000 – $10,000) ............... 1,000
Total revenue ............................................ $ 11,000

Solutions Manual 6.18 Chapter 6

BRIEF EXERCISE 6.13 (CONTINUED)

c.
Using a financial calculator:
PV $ (10,000)
I ?% Yields 10.0 %
N 1
PMT 0
FV $ 11,000
Type 0

Excel formula =RATE(nper,pmt,pv,fv,type)

LO 5 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.19 Chapter 6

BRIEF EXERCISE 6.14

a.
Parnevik should record revenue of $660,000 on March 1, 2023,
which is the fair value of the inventory in this case. Parnevik is
also financing this purchase and records interest income on the
note over the 5-year period. In this case, the interest rate is
imputed to be 10%.

Using a financial calculator:

PV $ (660,000)
I ?% Yields 10.0 %
N 5
PMT 0
FV $ 1,062,937
Type 0

Excel formula =RATE(nper,pmt,pv,fv,type)

Solutions Manual 6.20 Chapter 6

BRIEF EXERCISE 6.14 (CONTINUED)

b. The journal entries to record Parnevik’s sale to Goosen

Company and related cost of goods sold are as follows.

March 1, 2023

Notes Receivable ...................................... 660,000

Sales Revenue................................... 660,000
To record sales

Cost of Goods Sold ........................... …... 400,000

Inventory ............................................ 400,000
To record cost of goods sold

c. Parnevik makes the following entry to record interest

income for 2023.

December 31, 2023

Notes Receivable ...................................... 55,000

Interest Income1 ................................ 55,000
1
(10% X $660,000 X 10/12)
LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.21 Chapter 6

BRIEF EXERCISE 6.15

a. July 10, 2023

Accounts Receivable .............................. 700,000

Sales Revenue.................................. 595,000
Refund Liability (15% X $700,000) .. 105,000
To record sale on account

Cost of Goods Sold ................................. 476,000

Estimated Inventory Returns1 ................. 84,000
Inventory .......................................... 560,000
1
(15% X $560,000)
To record cost of goods sold

b. October 10, 2023

Refund Liability ........................................ 78,000

Accounts Payable ........................... 78,000
To record returns from customers

Returned Inventory2 ................................. 62,400

Estimated Inventory Returns .......... 62,400
2
($560,000 ÷ $700,000) X $78,000
To record return of inventory

Refund Liability…………………………… 27,000

Sales Revenue……………………… .. 27,000
To adjust refund liability for end of right of return

Cost of Goods Sold………………………. 21,600

Estimated Inventory Returns……. ... 21,600
To adjust cost of goods sold for end of right of return

LO 5 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.22 Chapter 6

BRIEF EXERCISE 6.16

a. July 10, 2023

Accounts Receivable .............................. 700,000

Sales Revenue .............................. 700,000
To record sale on account

Sales Returns and Allowances1 ............. 105,000

Allowance for Sales Returns and
Allowances .................................... 105,000
1
(15% X $700,000)
To accrue for sales returns

Cost of Goods Sold ................................. 476,000

Estimated Inventory Returns1 ................. 84,000
Inventory .......................................... 560,000
1
($560,000 ÷ $700,000) X $105,000
To record cost of goods sold

b. October 10, 2023

Allowance for Sales Returns and

Allowances ......................................... 78,000
Accounts Payable ............................ 78,000
To record return from customer
Returned Inventory2 ............................... 62,400
Estimated Inventory Returns .......... 62,400
2
($560,000 ÷ $700,000) X $78,000
To record return of inventory

Solutions Manual 6.23 Chapter 6

BRIEF EXERCISE 6.16 (CONTINUED)

Allowance for Sales Returns and

Allowances …………………………… 27,000
Sales Returns and Allowances………… 27,000
To adjust allowance for sales returns and allowances
for the end of right of return

Cost of Goods Sold………………………. 21,600

Estimated Inventory Returns……. ... 21,600
To adjust cost of goods sold for end of right of return

LO 5,11 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.24 Chapter 6

BRIEF EXERCISE 6.17

Upon transfer of control of the products, Kristin would

recognize:

a. Revenue of $5,800 ($20 X 290 [300-10] products

expected not to be returned)
b. A refund liability for $200 ($20 refund X 10 products
expected to be returned)
c. An asset of $120 ($12 X 10 products) for its right to
recover products from customers on settling the refund
liability.

Hence, the amount recognized in cost of goods sold for 290

products is $3,480 ($12 X 290). The journal entries to record the
sale and related cost of goods sold are as follows:

Cash .................................................................. 6,000

Sales Revenue .......................................... 5,800
Refund Liability ......................................... 200
To record cash sale

Cost of Goods Sold .......................................... 3,480

Estimated Inventory Returns .......................... 120
Inventory (300 X $12) ................................ 3,600
To record cost of goods sold

If the company is unable to estimate the level of returns with any

reliability, it should not report any revenue until the returns are
predictable.
LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.25 Chapter 6

BRIEF EXERCISE 6.18

a.
Accounts Receivable ....................................... 110,000
Sales Revenue .......................................... 110,000

Sales Revenue .................................................. 6,600

Contract Liability ($110,000 x 6%) ........... 6,600

Manual reduces revenue by $6,600 because it is probable that it

will provide rebates amounting to 6%. This is the most likely
outcome. As a result, Manual recognized revenue of $103,400.

b.
Accounts Receivable ....................................... 110,000
Sales Revenue .......................................... 110,000

Sales Returns and Allowances ....................... 6,600

Allowance for Sales Returns and
Allowances ($110,000 x 6%) ............. 6,600
LO 5,11 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.26 Chapter 6

BRIEF EXERCISE 6.19

February 2023
Cash .................................................................. 10,000
Contract Liability ..................................... 10,000
To record the sale of gift cards

Contract Liability .............................................. 4,444

Service Revenue1 ..................................... 4,444
To record service revenue

The expected breakage $1,000 ($10,000 x 10%)

The redemption amount: $10,000 - $1,000 breakage or $9,000
1
[$4,000 x ($10,000/$9,000)]
LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.20

a. Gift cards may not all be redeemed by customers (or

redeemed for less than the full value). This is called gift card
breakage. Zehra Inc. can include a portion of the
unredeemed gift cards as revenue if the value of gift cards
that will remain unredeemed can be estimated.

b. Big Data can impact the predictive value. Big Data provides
companies with historical and real time information related
to Gift Card usage. At any given point in time, a company is
able to know the total amount of gift cards sold, amount
outstanding (unredeemed), and the time elapsed since sale
of gift cards. This allows companies to continue to update
their breakage estimate based on consumer behaviour in
any given year.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.27 Chapter 6

BRIEF EXERCISE 6.21

January income ......................................................... $ 0
February income ($4,000 – $3,000) X 50% .............. $500
March income ($4,000 – $3,000) X 30%) .................. $300
April income ($4,000 – $3,000) X 20%) .................... $200
LO 6 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.22

The performance obligations relate to the software sale and the

consulting services. They are distinct.

a. If interdependent, the contract is accounted for as a single

revenue amount of $33,333 [$200,000 X 6/36].

b. If not interdependent, sales revenue of $125,000 is

recognized at delivery of the software and service revenue
is recognized for 6 months. Revenue of $137,500 ($125,000
+ [$75,000 X 6/36]) is recognized in 2023, based on estimated
stand-alone values.

LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.28 Chapter 6

BRIEF EXERCISE 6.23

Steps Analysis
Step 1: Identify the Both parties have agreed to enter into a
contract with contract. The quantity, price, and
customers. payment terms have been agreed to and
each party’s rights under the contract are
clear. The contract has commercial
substance. There are no indications of
any concerns regarding collectibility as
the majority of the contract amount is
collected at the time of the delivery of the
windows.
Step 2: Identify the The contract includes two performance
separate obligations: the sale and the installation
performance of the windows.
obligations in the
contract.
Step 3: Determine $2,400
the transaction price.
Step 4: Allocate the Schedule 1 below
transaction price to
the separate
performance
obligations.
Step 5: Recognize The first performance, the sale of
revenue when each windows, is satisfied on September 1,
performance when the windows are delivered to the
obligation is homeowner. The revenue related to this
satisfied. performance obligation would be
recognized at this point.

The second performance obligation

related to the installation of the windows
is satisfied and the revenue is recognized
on October 15, when the installation is
completed.

Solutions Manual 6.29 Chapter 6

BRIEF EXERCISE 6.23 (CONTINUED)

Schedule 1
Stand- % of Allocation
Alone (SA) Total SA of
Performance Selling Selling Contract Contract
obligation Price Price Price Price
Window delivery $2,000 76.92% X $2,400 $1,846
Installation 600 23.08% X $2,400 554
$2,600 100 % $2,400

LO 2,6,7 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.30 Chapter 6

BRIEF EXERCISE 6.24

July 1, 2023
No entry – neither party has performed under the contract.

Geraths makes the following entries for delivery and installation.

September 1, 2023
Cash ................................................................ 2,000
Unearned Revenue .................................. 154
Sales Revenue ......................................... 1,846
To record sales

Cost of Goods Sold .......................................... 1,100

Inventory ................................................... 1,100
To record cost of goods sold
(Windows delivered, performance obligation for installation
recorded)
October 15, 2023

Cash .................................................................. 400

Unearned Revenue ........................................... 154
Service Revenue - Installation ................. 554

The sale of the windows is recognized once delivered. The

installation fee is recognized when the windows are installed.
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Solutions Manual 6.31 Chapter 6

BRIEF EXERCISE 6.25

a.
July 1, 2023

No entry – neither party has performed under the contract.

Step 4: Allocate the transaction price to the separate

performance obligations.

Stand- % of Allocation
Alone (SA) Total SA of
Performance Selling Selling Contract Contract
obligation Price Price Price Price
Window delivery $2,000 80.65% X $2,400 $1,936
Installation 4801 19.35% X $2,400 464
$2,480 100 % $2,400
1
[$400 + (20% X $400)]

September 1, 2023

Cash .................................................................. 2,000

Unearned Revenue ................................... 64
Sales Revenue ......................................... 1,936
To record sales

Cost of Goods Sold .......................................... 1,100

Inventory ................................................... 1,100
To record cost of goods sold

October 15, 2023

Cash .................................................................. 400

Unearned Revenue ........................................... 64
Service Revenue - Installation ................. 464

The sale of the windows is recognized once delivered. The

installation fee is recognized when the windows are installed.

Solutions Manual 6.32 Chapter 6

BRIEF EXERCISE 6.25 (CONTINUED)

b. If Geraths cannot estimate the costs for installation, then the

residual approach is used. In this approach, the total fair
value of the contract is $2,400. Given that the windows have
a stand-alone fair value of $2,000, then $400 ($2,400 – $2,000)
is allocated to the installation.

Geraths makes the following entries for delivery and installation.

September 1, 2023

Cash .................................................................. 2,000

Sales Revenue ......................................... 2,000
To record sales
Cost of Goods Sold .......................................... 1,100
Inventory ................................................... 1,100
To record cost of goods sold

October 15, 2023

Cash .................................................................. 400

Service Revenue - Installation ................. 400

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Solutions Manual 6.33 Chapter 6

BRIEF EXERCISE 6.26

Note: the suggested solution below outlines the main elements

in the earnings process. Additional intermediary steps could also
be valid.

a. The earnings process consists of the following steps:

purchase of necessary raw materials, manufacture of the
equipment, and sale to customer. The warranty is not part
of the earnings process for the manufacturer – it is a
separate arrangement with another vendor.
b. The earnings process consists of the following steps:
purchase of inventory, receipt of sales order from online
customer, payment received from customer (coincident
with sales order since via credit card), and shipment to
customer.
c. The earnings process consists of the following steps:
installing the necessary underground cables and
connections for the neighbourhood, installing connections
to the customer’s house (previously done for prior
homeowner), activating the account for the existing
homeowner, providing monthly service, billing for monthly
service, and receiving payment from customer for monthly
service.
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Solutions Manual 6.34 Chapter 6

BRIEF EXERCISE 6.27

Under the earnings approach, the concern is only about

recognizing revenue from the sales contract, when the critical
event of the transfer of ownership of the merchandise being sold
occurs.

a. Revenue would be recorded when the customer purchases

the equipment. The risks and rewards of ownership transfer
at this point since the customer picks up the equipment
upon purchase. At this point, there is no remaining
uncertainty and the seller has completed its performance
obligations. No accrual is required for warranty in this
situation since these obligations will be honoured by
another company.

b. Revenue would be recognized when the books are

delivered to the customer. At this point, there is no
remaining uncertainty and no continuing involvement on
the part of the seller. The books cannot be returned by the
customer and the seller has completed its performance
obligations.

c. Assuming there are no separately identifiable services

other than the monthly service, revenue would be
recognized monthly as the cable service is provided to the
customer. The wiring was previously done and anything the
company has to do to activate the account is not likely to
be a separately identifiable service.

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Solutions Manual 6.35 Chapter 6

BRIEF EXERCISE 6.28

a. Inventoriable costs:

500 units shipped at cost of $100 each ................. $50,000

Freight .................................................................... 1,250
Total inventoriable cost .......................................... $51,250

80 units on hand (80/500 X $51,250) ...................... $ 8,200

b. Calculation of consignment profit:

Revenue from consignment sales (420 X $160).... $67,200

Cost of goods sold (420/500 X $51,250) ................ (43,050)
Commission expense (20% X $67,200) ............... (13,440)
Profit on consignment sales................................... $10,710

c. Remittance of consignee:

Consignment sales .................................................. $67,200

Less: Commission revenue ................................... (13,440)
Remittance from consignee.................................... $53,760
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Solutions Manual 6.36 Chapter 6

BRIEF EXERCISE 6.29

When to recognize revenue in a bill-and-hold arrangement

depends on the circumstances. Mills determines when it has
satisfied its performance obligation to transfer a product by
evaluating when ShopBarb obtains control of that product. For
ShopBarb to have obtained control of a product in a bill-and-hold
arrangement, all of the following criteria should be met:

a. The reason to hold the inventory must be substantive.

b. The product must be identified separately as belonging to
ShopBarb.
c. The product must be ready for immediate physical transfer
to ShopBarb.
d. Mills cannot have the ability to use the product or to sell it to
another customer.
In this case, the criteria are assumed to be met. As a result,
revenue recognition should be permitted at the time the contract
is signed. Mills makes the following entry to record the bill-and-
hold sale.
June 1, 2023
Accounts Receivable ....................................... 200,000
Sales Revenue .......................................... 200,000
To record sale on account

Cost of Goods Sold .......................................... 110,000

Inventory ................................................... 110,000
To record cost of goods sold
September 1, 2023
Cash .................................................................. 200,000
Accounts Receivable ............................... 200,000
To record collection on account

If a significant period of time elapses before payment, the

accounts receivable is discounted. In addition, if one of the four
conditions above is violated (a thru d), revenue recognition
should be deferred until the goods are delivered to ShopBarb.
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Solutions Manual 6.37 Chapter 6

BRIEF EXERCISE 6.30

Accounts Payable (ShipAway Cruise Lines) . 70,000

Commission Revenue ($70,000 X 6%) .... 4,200
Cash ........................................................... 65,800
LO 9 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.31

Cash .................................................................. 18,850

Advertising Expense ........................................ 500
Commission Expense1 ..................................... 2,150
Revenue from Consignment Sales ......... 21,500
1
($21,500 X 10%)
To record revenue

Cost of Goods Sold2......................................... 13,200

Inventory on Consignment ...................... 13,200
2
[60% X ($20,000 + $2,000)]
To record cost of goods sold
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Solutions Manual 6.38 Chapter 6

BRIEF EXERCISE 6.32

No entry is required on May 1, 2023, because neither party has
performed on the contract. On June 15, 2023, Eric agreed to pay
the full price and therefore Mount has an unconditional right to
those funds on that date.
On receiving the cash on June 15, 2023, Mount records the
following entry.
June 15, 2023
Cash .................................................................. 25,000
Unearned Revenue ................................... 25,000

On satisfying the performance obligation on September 30, 2023,

Mount records the following entries
September 30, 2023
Unearned Revenue ........................................... 25,000
Sales Revenue .......................................... 25,000
To record sales revenue

Cost of Goods Sold .......................................... 18,000

Inventory ................................................... 18,000
To record cost of goods sold
LO 9,10 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.39 Chapter 6

BRIEF EXERCISE 6.33

1. (a) incremental
2. (b) fulfillment
3. (a) incremental
4. (a) incremental
5. (b) fulfillment
6. (a) incremental
7. (a) incremental
8. (a) Incremental
9. (a) incremental
10. (a) incremental

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Solutions Manual 6.40 Chapter 6

*BRIEF EXERCISE 6.34

Contract Asset/Liability ................................... 1,700,000
Materials, Cash, Payables. ....................... 1,700,000
To record cost of construction
Accounts Receivable ....................................... 1,200,000
Contract Asset/Liability............................ 1,200,000
To record progress billings
(since the contract is non-cancellable and the billings non-
refundable, this represents an unconditional right to receive the
cash and therefore the company records an accounts receivable)

Cash .................................................................. 960,000

Accounts Receivable ............................... 960,000
To record collections

Contract Asset/Liability ................................... 2,380,000

Revenue from Long-Term Contracts ...... 2,380,000*
*[$1,700,000 ÷ ($1,700,000 + $3,300,000)] = 34%
($7,000,000 X 34% = $2,380,000
To record revenues

Construction Expenses ................................... 1,700,000

Contract Asset/Liability............................ 1,700,000
To record construction expenses
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Solutions Manual 6.41 Chapter 6

*BRIEF EXERCISE 6.35

a.
Current Assets
Accounts receivable $240,000
Contract asset (net) 715,000

b.
Current Assets
Accounts receivable $240,000
Current Liabilities
Contract liability (net) 215,000

Note that alternate terminology may be used instead of contract

asset and contract liability. Some companies might refer to this
as construction in process (representing the cost of the work
performed to date) and billings (representing the amounts billed
to date).
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Solutions Manual 6.42 Chapter 6

*BRIEF EXERCISE 6.36

a. Gross profit recognized in Percentage-of-Completion
($000 omitted)

2023 2024 2025

Contract price $4,200 $4,200 $4,200
Less estimated cost:
Costs to date 600 2,100 4,100
Estimated costs to complete 3,150 2,100 ______-_
Estimated total costs 3,750 4,200 4,100
Estimated total gross profit $ 450 $ 0 $ 100
Percent complete 16% 50% 100%
[ $600] [$2,100] [$4,100]
[$3,750] [$4,200] [$4,100]

Percentage-of-Completion Recognized Recognized

To in Prior Current
Date Years Year
2023
Revenues ($4,200 × 16%) $ 672 $ 672
Costs 600 600
Gross profit $ 72 $ 72
2024
Revenues ($4,200 × 50%) $2,100 $ 672 $1,428
Costs 2,100 600 1,500
Gross profit $ 0 $ 72 $ (72)
2025
Revenues ($4,200 × 100%) $4,200 $2,100 $2,100
Costs 4,100 2,100 2,000
Gross profit $ 100 $ 0 $ 100

Solutions Manual 6.43 Chapter 6

*BRIEF EXERCISE 6.36 (CONTINUED)

b.
2024:
Contract Asset/Liability ................................... 1,428,000
Revenue from Long-Term Contracts ...... 1,428,000
To record revenues

Construction Expenses ................................... 1,500,000

Contract Asset/Liability............................ 1,500,000
To record construction expenses

Under the percentage-of-completion method, the increase in

costs requires an adjustment in the current period for the excess
profit that was recognized on the project in prior years.

c. Using the Completed-Contract Method:

Gross profit recognized in:

2023 2024 2025

Gross profit $ –0– $–0– $100,000

Under the completed-contract method, when cost estimates at

the end of the period indicate a loss will result once the contract
is completed, that entire loss must be recognized in the current
period. In this case, the contract is projected to break even, so
no loss is recognized.
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Solutions Manual 6.44 Chapter 6

*BRIEF EXERCISE 6.37

Recognized Recognized
Zero-profit method To in Prior Current
Date Years Year
2023
Revenues (costs incurred) $ 600 $ 600
Costs 600 600
Gross profit $ 0 $ 0
2024
Revenues (costs incurred) $2,100 $ 600 $1,500
Costs 2,100 600 1,500
Gross profit $ 0 $ 0 $ 0
2025
Revenues $4,200 $2,100 $2,100
Costs 4,100 2,100 2,000
Gross profit $ 100 $ 0 $ 100
LO 13 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.45 Chapter 6

*BRIEF EXERCISE 6.38

a. Balance in Contract Asset/Liability account – Percentage-of-

completion method

Costs 2023 $ 600,000

Billings 2023 (500,000)
Construction revenue 2023 672,000
Construction expenses 2023 (600,000)
Balance Dec. 31, 2023 172,000
Costs 2024 1,500,000
Billings 2024 (2,000,000)
Construction revenue 2024 1,428,000
Construction expenses 2024 (1,500,000)
Balance Dec. 31, 2024 (400,000)
Costs 2025 2,000,000
Billings 2025 (1,700,000)
Construction revenue 2025 2,100,000
Construction expenses 2025 (2,000,000)
Balance Dec. 31, 2025 $ 0

Solutions Manual 6.46 Chapter 6

*BRIEF EXERCISE 6.38 (CONTINUED)

b. Balance in Contract Asset/Liability account – Zero-profit

method:
Costs 2023 $ 600,000
Billings 2023 (500,000)
Construction revenue 2023 600,000
Construction expenses 2023 (600,000)
Balance Dec. 31, 2023 100,000
Costs 2024 1,500,000
Billings 2024 (2,000,000)
Construction revenue 2024 1,500,000
Construction expenses 2024 (1,500,000)
Balance Dec. 31, 2024 (400,000)
Costs 2025 2,000,000
Billings 2025 (1,700,000)
Construction revenue 2025 2,100,000
Construction expenses 2025 (2,000,000)
Balance Dec. 31, 2025 $ 0

Under the completed-contract method:

Costs 2023 $ 600,000
Billings 2023 (500,000)
Balance Dec. 31, 2023 100,000
Costs 2024 1,500,000
Billings 2024 (2,000,000)
Balance Dec. 31, 2024 (400,000)
Costs 2025 2,000,000
Billings 2025 (1,700,000)
Gross profit 2025 (100,000)
Balance Dec. 31, 2025 $ 0

Both methods yield the same annual balances in the Contract

Asset/Liability account, but no revenues or expenses are
recognized or recorded until completion under the completed-
contract method.
LO 12,13,14 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual 6.47 Chapter 6
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting,Thirteenth Canadian Edition

*BRIEF EXERCISE 6.39

2023 2024 2025

Contract price $2,000,000 $2,000,000 $2,000,000
Less estimated cost:
Costs to date 900,000 1,800,000 2,150,000
Estimated costs to complete 900,000 300,000 ______-_
Estimated total costs 1,800,000 2,100,000 2,150,000
Estimated total gross profit (loss) $ 200,000 $ (100,000) $ (150,000)
Percent complete 50.00% 85.71% 100%
[ $900,000] [$1,800,000] [$2,150,000]
[$1,800,000] [$2,100,000] [$2,150,000]

Gross profit recognized each year 100,000 (200,000) (50,000)

Solutions Manual 6.48 Chapter 6

*BRIEF EXERCISE 6.39 (CONTINUED)

The revenue and gross profit recognized in 2023:

Revenue $2,000,000 x 50.00% complete = $1,000,000
Gross profit $200,000 x 50.00% = $100,000

Revenue recognized in 2024:

Contract price $2,000,000

Percent complete (based on costs to

date/total estimated costs) - above X 85.71%

Revenue recognizable to date 1,714,200

Less: Revenue recognized prior to 2024 1,000,000

Revenue recognized in 2024 $714,200

To compute the construction costs to be expensed in 2024,

Martin adds the total loss to be recognized in 2024 ($100,000 +
$100,000) to the revenue to be recognized in 2024.

Revenue recognized in 2024 $714,200

Total loss recognized in 2024:

Reversal of profit from 2023 $100,000

Total estimated loss on contract 100,000 200,000

Construction cost expensed in 2024 $914,200

December 31, 2024 entry

Construction Expense ..................................... 914,200
Contract Asset/Liability............................ 200,000
Revenue from Long-Term Contracts ...... 714,200
To record long-term contract revenues, expenses, and losses for
2024.
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Solutions Manual 6.49 Chapter 6

*BRIEF EXERCISE 6.40

December 31, 2024

Loss from Long-Term Contracts .................... 100,000
Contract Asset/Liability............................ 100,000
To record loss from long-term contract.
LO 15 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.50 Chapter 6

SOLUTIONS TO EXERCISES
EXERCISE 6.1

1. A service is being sold – Costco will provide the customer

with access to the store and merchandise for one year.
2. A combination of goods and services is being sold – DOT
is providing goods and financing services for one year.
3. A service is being sold – Toronto Blue Jays club is
providing entertainment services for April 1 through
September.
4. A service is being sold – CIBC is providing financing
services (a loan) for two years.
5. A service is being sold – Seneca is providing educational
services for September to December.
6. A good is being sold – Roots is providing the sweater.
7. A combination of goods and services is being sold –
Hometown is providing goods and warranty service.
8. A service is being sold – Premier Health Clubs is in business
to provide health club facilities and services to members.

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Solutions Manual 6.51 Chapter 6

EXERCISE 6.2

a.
Pizza Aya's Mira's John's Grand
Time Pizza Pizza Pizza Total
Pizza 15.3% 35.3% 26.8% 22.6% 100.0%
Wings 18.3% 9.1% 31.1% 41.5% 100.0%
Grand Total 16.5% 24.7% 28.6% 30.3% 100.0%

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

b. Graph the market share (percentage by total revenue) of each

company based on product type on a pivot column chart.

Market Share
45.0%
40.0%
35.0%
30.0%
Pizza Time
25.0%
Aya's Pizza
20.0%
Mira's Pizza
15.0%
John's Pizza
10.0%
5.0%
0.0%
Pizza Wings

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 cpa-t007 CM: Reporting and DAIS

Solutions Manual 6.52 Chapter 6

EXERCISE 6.3

a. Cash ....................................................... 209,000

Service Revenue ....................... 90,000
Unearned Revenue ................... 119,000

Cash Earned Unearned

200 @ $200 $40,000 $40,000
100 @ $190 19,000 $19,000
300 @ $500 150,000 50,000 100,000
$209,000 $90,000 $119,000

b. The current portion of the unearned revenue will be $19,000

plus $50,000 of the three-year plan and the non-current
portion will be $50,000 for the last year of the three- year
plan.
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Solutions Manual 6.53 Chapter 6

EXERCISE 6.4

a. Because the points provide a material right to a customer

that it would not receive without entering into a contract, the
points are a separate performance obligation. The points are
unearned revenue until they are redeemed. Letourneau
allocates the transaction price to the merchandise and the
points on a relative stand-alone selling price basis as
follows.

% of Total Allocation
Stand-Alone SA of
Performance (SA) Selling Selling Contract Contract
obligation Price Price Price Price
Merchandise $300,000 94.12% X $300,000 $282,360
Loyalty Points 18,750 1
5.88% X $300,000 17,640
$318,750 100 % $300,000
1
(7,500 points x $2.50)
A step-by-step solution for this section of the problem can be
found in the student resources section of the online course.

b.
Cash .................................................................. 300,000
Unearned Revenue ................................... 17,640
Sales Revenue .......................................... 282,360
To record cash sales of products subject to loyalty points

Cost of Goods Sold (1–35%) X 300,000 .......... 195,000

Inventory ................................................... 195,000
To record cost of goods sold

c. Had Letourneau been following ASPE, there would be no

difference in the accounting of the customer loyalty program
transactions.
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Solutions Manual 6.54 Chapter 6

EXERCISE 6.5

a. The sale of the equipment and the assurance warranty are

one performance obligation because they are interdependent
and interrelated with each other

b.
Cash ($48,800 + $1,200) ................................... 50,000
Warranty Expense ............................................ 1,200
Warranty Liability .................................... 1,200
Sales Revenue ......................................... 50,000

c. Grando should recognize $400 of warranty revenue in 2025

and 2026.

Cash ($48,800 + $1,200 + $800) ....................... 50,800

Warranty Expense ............................................ 1,200
Warranty Liability .................................... 1,200
Sales Revenue ......................................... 50,000
Unearned Revenue .................................. 800
LO 4 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.55 Chapter 6

EXERCISE 6.6

a. The sale of the equipment and the assurance warranty are

one performance obligation because they are
interdependent and interrelated with each other. However,
the extended warranty is separately sold and is not
interdependent.

b. October 1, 2023

Cash .................................................................. 3,600

Warranty Expense ............................................ 200
Warranty Liability (assurance-type warranty) 200
Unearned Revenue (service-type warranty) 400
Sales Revenue .......................................... 3,200
To record cash sale

Cost of Goods Sold .......................................... 1,440

Inventory .................................................. 1,440
To record cost of goods sold

c. Celic reduces the warranty liability associated with the

assurance-type warranty as actual warranty costs are
incurred during the first 90 days after the customer receives
the computer. Celic recognizes the Unearned Revenue
associated with the service-type warranty as revenue
during the contract warranty period and recognizes the
costs associated with providing the service-type warranty
as they are incurred.
LO 4 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.56 Chapter 6

EXERCISE 6.7

1. Grupo would recognize revenue of $1,000,000 at delivery.

2. Grupo would recognize revenue of $800,000 at the point of

sale. The point of sale will occur when the goods reach their
destination.

3. Grupo would recognize revenue of $464,000 at the point of

sale. Interest revenue of $36,000 will be earned over the next
2 years using the effective interest method.

4. Grupo would record the sales revenue at the point of sale at

the amount of $45,000, which is the fair value of the
merchandise sold. This amount is the best estimate since
Grupo is unable to determine the market value of the
common shares obtained in the exchange (since the shares
are shares of a private company).
LO 5 BT: C Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.57 Chapter 6

EXERCISE 6.8

a. Because the arrangement only has two possible outcomes

(regulatory approval is achieved or not), Blair determines
the transaction price based on the most likely approach.
Thus, the best measure for the transaction price is $10,000.

b. December 20, 2023

Accounts Receivable ....................................... 10,000

Revenue ................................................... 10,000

January 15, 2024

Cash .................................................................. 10,000

Accounts Receivable .............................. 10,000
LO 5 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.58 Chapter 6

EXERCISE 6.9

a. Aaron determines that the transaction price for the 100

policies is $14,500 [($100 X 100) + ($10 X 4.5 X 100)].

b. January, 2023

Cash (100 X $100) ............................................. 10,000

Accounts Receivable…………………………. .. 4,500
Service Revenue ....................................... 14,500

Because on average, customers renew for 4.5 years, Aaron

includes that amount in its estimate for the transaction price.
When Aaron satisfies its performance obligation by selling
the insurance policy to the customer, it recognizes revenue
of $145 on each policy because it determines that it is
reasonably assured to be entitled to that amount. Aaron
concludes that its past experience is predictive, even
though the total amount of commission received depends
on the actions of a third party (that is, policyholder
behaviour). As circumstances change, Aaron updates its
estimate of the transaction price and recognizes revenue (or
a reduction of revenue) for those changes in circumstances.
LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.59 Chapter 6

EXERCISE 6.10
Under IFRS, the discount rate should be whichever of the
following is more clearly determinable: (1) the prevailing rate for
a similar financing arrangement or (2) the imputed rate that
discounts the cash flows to the current cash selling price of the
unit sold.

The present value of the cash flows using 8% would result in a

selling price of $925.93 which is greater than the cash selling
price of $900. Therefore, it may be more prudent to use the cash
selling price to impute the interest rate.
Using a financial calculator:

PV ? Yields - $925.93
I 8%
N 1
PMT $0
FV $1,000
Type 0

Solutions Manual 6.60 Chapter 6

EXERCISE 6.10 (CONTINUED)

Using Excel:
=PV(rate,nper,pmt,fv,type)

The discount rate required to equate the present value of the

cash flows with the cash selling price, is 11.11%
Using a financial calculator:
PV $ (900)
I ?% Yields 11.1111 %
N 1
PMT 0
FV $1,000
Type 0

Solutions Manual 6.61 Chapter 6

EXERCISE 6.10 (CONTINUED)

Excel formula =RATE(nper,pmt,pv,fv,type)

Using Excel, the rate is 11.11%.

As a practical expedient, IFRS allow a company to ignore the

financing component if the contract is less than a year.
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Solutions Manual 6.62 Chapter 6

EXERCISE 6.11

a. April 2, 2023

Accounts Receivable ....................................... 1,500,000

Refund Liability ($1,500,000 X 20%) ...... 300,000
Sales Revenue ......................................... 1,200,000
To record sale on account

Estimated Inventory Returns1 ......................... 160,000

Cost of Goods Sold .......................................... 640,000
Inventory ................................................... 800,000
1
(20% X $800,000)
To record cost of goods sold

b. July 1, 2023

Refund Liability ................................................ 100,000

Accounts Payable .................................... 100,000
To record return from customer

Returned Inventory2 ......................................... 53,333

Estimated Inventory Returns................... 53,333
2
($800,000 ÷ $1,500,000) X $100,000
To record return of inventory

c. If Organic Growth is unable to reliably estimate returns, it

defers recognition of revenue until the return period expires
on August 2, 2023.

Solutions Manual 6.63 Chapter 6

EXERCISE 6.11 (CONTINUED)

d. April 2, 2023
Accounts Receivable .............................. 1,500,000
Sales Revenue.................................. 1,500,000
To record sale on account

Sales Returns and Allowances3 ............... 300,000

Allowance for Sales Returns and
Allowances .................................... 300,000
3
(20% X $1,500,000)
To accrue for sales returns

Cost of Goods Sold ................................. 640,000

Estimated Inventory Returns1 ................. 160,000
Inventory .......................................... 800,000
1
(20% X $800,000)
To record cost of goods sold

July 1, 2023

Allowance for Sales Returns and

Allowances ......................................... 100,000
Accounts Payable ........................... 100,000
To record return from customer
Returned Inventory4 ................................ 53,333
Estimated Inventory Returns .......... 53,333
4
($800,000 ÷ $1,500,000) X $100,000
To record return of inventory

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Solutions Manual 6.64 Chapter 6

EXERCISE 6.12

a. Uddin could recognize revenue at the point of sale based

upon the time of shipment because the books are sold f.o.b.
shipping point. That is, control has transferred and its
performance obligation is met. Because the returns can be
estimated, recognition is at point of sale (shipping point) with
a refund liability established.

b. Based on the available information, the correct treatment is

to recognize revenue when the performance obligation is
satisfied – in this case at the time of shipment (transfer of
title). The transaction price amount is adjusted for the
estimated returns for which a refund liability is recorded.

c. August 8, 2023

Accounts Receivable ................................... 15,000,000

Refund Liability ($15,000,000 X 12%) 1,800,000
Sales Revenue ..................................... 13,200,000
To record sale on account

Estimated Inventory Returns1 ..................... 1,440,000

Cost of Goods Sold ...................................... 10,560,000
Inventory .............................................. 12,000,000
1
($12,000,000 X 12%)
To record cost of goods sold

d. October 3, 2023

Refund Liability ........................................... 1,500,000

Accounts Receivable .......................... 1,500,000
To record return from customer

Returned Inventory2 ..................................... 1,200,000

Estimated Inventory Returns ............. 1,200,000
2
($12,000,000 ÷ $15,000,000) X $1,500,000
To record return of inventory

Solutions Manual 6.65 Chapter 6

EXERCISE 6.12 (CONTINUED)

d. (continued)

Cash ..................................................... 13,500,000

Accounts Receivable ............... 13,500,000
To record collection on account

e. August 8, 2023
Accounts Receivable .......................... 15,000,000
Sales Revenue .......................... 15,000,000
To record sale on account

Sales Returns and Allowances3 ......... 1,800,000

Allowance for Sales Returns and
Allowances .................................... 1,800,000
3
(12% X $15,000,000)
To accrue for sales returns

Estimated Inventory Returns4 .............. 1,440,000

Cost of Goods Sold............................... 10,560,000
Inventory........................................ 12,000,000
4
($12,000,000 X 12%)
To record cost of goods sold

October 3, 2023

Allowance for Sales Returns and

Allowances ....................................... 1,500,000
Accounts Receivable ..................... 1,500,000
To record return from customer

Returned Inventory5 ............................... 1,200,000

Estimated Inventory Returns ........ 1,200,000
5
($12,000,000 ÷ $15,000,000) X $1,500,000
To record return of inventory

Solutions Manual 6.66 Chapter 6

EXERCISE 6.12 (CONTINUED)

e. (continued)

Cash .............................................................. 13,500,000

Accounts Receivable .......................... 13,500,000
To record collection on account
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Solutions Manual 6.67 Chapter 6

EXERCISE 6.13

a. December 31, 2023

Cash .................................................................. 240,000

Unearned Rent Revenue .......................
1
240,000
1
(2024 slips – 300 X $800)
To record unearned revenue related to 2024 season

December 31, 2024

Cash .................................................................. 152,000

Unearned Rent Revenue .......................
2
152,000
2
[2025 slips – 200 X $800 X (1.00 – .05)]
To record unearned revenue related to 2025 season

Cash .................................................................. 38,400

Unearned Rent Revenue .......................
3
38,400
3
[2026 slips – 60 X $800 X (1.00 – .20)]
To record unearned revenue related to 2026 season

b. The marina operator chose to collect advance rentals of

$190,400 ($152,000 + $38,400) in exchange for the marina’s
promise to deliver future services. In effect, this has reduced
future cash flow by accelerating payments from boat
owners. Also, the price of rental services has effectively
been reduced. The current cash bonanza does not reflect
current revenue. The future costs of operation must be
covered, in part, from this accelerated cash inflow, or the
saving on interest costs on loans to finance the dock
repairs. On a present value basis, the granting of these
discounts seems ill-advised unless interest rates were to
skyrocket so that interest income would offset the discounts
provided or because the costs for dock repairs are expected
to increase significantly.
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Solutions Manual 6.68 Chapter 6

EXERCISE 6.14

a. December, 2023
Cash .................................................................. 20,000
Contract Liability ..................................... 20,000
To record the sale of gift cards

b. January, 2024
Contract Liability .............................................. 2,174
Sales Revenue1 ......................................... 2,174
To record sales

The expected breakage $1,600 ($20,000 x 8%)

The redemption amount: $20,000 - $1,600 breakage or $18,400
1
[$2,000 x ($20,000/$18,400)]

Cost of Goods Sold .......................................... 1,500

Inventory ................................................... 1,500
To record cost of goods sold.

c. February, 2024
Contract Liability .............................................. 10,870
Sales Revenue2 ......................................... 10,870
To record sales
2
[$10,000 x ($20,000/$18,400)]

Cost of Goods Sold .......................................... 8,000

Inventory ................................................... 8,000
To record cost of goods sold.

d. The SFP will show a balance of $6,956 as a current liability

for unredeemed gift cards. The remaining expected
redemptions are $6,400 ($18,400 - $2,000 - $10,000).
[$6,400 x ($20,000/$18,400)] = $6,956 or ($20,000 - $2,174 -
$10,870 = $6,956)
LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.69 Chapter 6

EXERCISE 6.15

a. January 2, 2023

Cash .................................................................. 150,000

Unearned Revenue .................................. 150,000
To record upfront payment for sales of products A and B

December 31, 2023

Interest Expense ($150,000 X 6%)................... 9,000

Unearned Revenue ................................... 9,000
To record interest on the contract liability

b. December 31, 2024

Interest Expense ([$150,000 + $9,000] X 6%) 9,540

Unearned Revenue ................................... 9,540
To record interest on the contract liability

c. January 2, 2025

Unearned Revenue ........................................... 42,135

Sales Revenue1 ......................................... 42,135

To record revenue on transfer of product A

1
$37,500 + ([$9,000 + $9,540] X 25%)

Solutions Manual 6.70 Chapter 6

EXERCISE 6.15 (CONTINUED)

d.
The future value of the Product B at January 2, 2025 is:
Using a financial calculator:
PV $ 112,500
I 6%
N 5
PMT 0
FV ? Yields $ 150,550.38
Type 0

Excel formula: =FV(rate,nper,pmt,pv,type)

January 2, 2028

Unearned Revenue ........................................... 150,550

Sales Revenue1 ......................................... 150,550
To record revenue on transfer of product B

Solutions Manual 6.71 Chapter 6

EXERCISE 6.15 (CONTINUED)

Alternately, the following calculation could be performed:

Unearned Revenue Balance after two years

on Product B ................................................ $126,4052
Interest accrued for 3 years
($126,405 X [1.063 – 1])................................. 24,145
$150,550
2
$112,500 + ([$9,000 + $9,540] X 75%)

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Solutions Manual 6.72 Chapter 6

EXERCISE 6.16

a.
Steps Analysis
Step 1: Identify the Both parties have agreed to enter into a
contract with contract. The quantity, price, and
customers. payment terms have been agreed to and
each party’s rights under the contract are
clear. The contract has commercial
substance. There are no indications of
any concerns regarding collectibility.
Step 2: Identify the The contract includes two performance
separate obligations: the sale of the goods and
performance the installation of the goods.
obligations in the
contract.
Step 3: Determine $400,000
the transaction price.
Step 4: Allocate the Schedule 1 below
transaction price to
the separate
performance
obligations.
Step 5: Recognize The first performance, the sale of goods,
revenue when each is satisfied on March 1, 2023, when the
performance goods are delivered to Ricard. The
obligation is revenue related to this performance
satisfied. obligation would be recognized at this
point.

The second performance obligation

related to the installation of the goods is
satisfied and the revenue is recognized
on June 18, 2023, when the installation is
completed.

Solutions Manual 6.73 Chapter 6

EXERCISE 6.16 (CONTINUED)

a. (Continued)
Schedule 1

Stand-
Alone
(SA) % of Total Allocation
Performance Selling SA Selling Contract of Contract
obligation Price Price Price Price
Deliver goods $370,000 90.24% X $400,000 $360,960
Installation 40,000 9.76% X $400,000 39,040
$410,000 100 % $400,000

b.
Jan. 2, 2023
No entry – neither party has performed under the contract.

March 1, 2023
Cash ................................................................ 270,000
Accounts Receivable ....................................... 90,960
Sales Revenue ......................................... 360,960
To record sales

Cost of Goods Sold .......................................... 300,000

Inventory ................................................... 300,000
To record cost of goods sold
June 18, 2023

Cash ($400,000 - $270,000) ............................ 130,000

Service Revenue - Installation ................. 39,040
Accounts Receivable ............................... 90,960

The sale of the goods is recognized once delivered. The

installation fee is recognized when the goods are installed.
LO 2,6,7 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.74 Chapter 6

EXERCISE 6.17

Stand-
Alone (SA) % of Total Allocation of
Performance Selling SA Selling Contract Contract
obligation Price Price Price Price
Deliver equip. $1,000,000 95.24% X $1,000,000 $952,400
Installation 50,000 4.76% X $1,000,000 47,600
$1,050,000 100 % $1,000,000

b.
May 2, 2023
No entry – neither party has performed under the contract.

June 1, 2023
Cash ................................................................ 950,000
Contract Asset ................................................ 2,400
Sales Revenue ......................................... 952,400
To record sales

Cost of Goods Sold .......................................... 600,000

Inventory ................................................... 600,000
To record cost of goods sold
September 30, 2023

Cash .................................................................. 50,000

Service Revenue - Installation ................. 47,600
Contract Asset .......................................... 2,400
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Solutions Manual 6.75 Chapter 6

EXERCISE 6.18

a.
Step 4: Allocate the transaction price to the separate
performance obligations.
Stand-
Alone (SA) % of Total Allocation of
Performance Selling SA Selling Contract Contract
obligation Price Price Price Price
Deliver equip. $1,000,000 95.69% X $1,000,000 $956,900
Installation 45,000 1
4.31% X $1,000,000 43,100
$1,045,000 100 % $1,000,000
1
[$36,000 + (25% X $36,000)]

b.
May 2, 2023
No entry – neither party has performed under the contract.

June 1, 2023
Cash ................................................................ 950,000
Contract Asset ................................................ 6,900
Sales Revenue ......................................... 956,900
To record sales

Cost of Goods Sold .......................................... 600,000

Inventory ................................................... 600,000
To record cost of goods sold

September 30, 2023

Cash .................................................................. 50,000
Service Revenue - Installation ................. 43,100
Contract Asset .......................................... 6,900
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Solutions Manual 6.76 Chapter 6

EXERCISE 6.19

a. The separate performance obligations are the oven,

installation, and maintenance service, since each item has
stand-alone value to the customer.

Stand-
Alone % of Allocation
(SA) Total SA of
Performance Selling Selling Contract Contract
obligation Price Price Price Price
Oven $800 78.05% X $1,000 $780
Installation 501 4.88% X $1,000 49
Maintenance 175 17.07% X $1,000 171
$1,025 100 % $1,000

$50 = $850 – $800 (differential between oven with and

without installation services)

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Solutions Manual 6.77 Chapter 6

EXERCISE 6.20

a. No entry – neither party has performed on the contract on

January 1, 2023.
b. The entries to record the sale and related cost of goods sold
of the wiring base is as follows.

February 5, 2023

Contract Asset .................................................. 1,200

Sales Revenue ......................................... 1,200
To record sales

Cost of Goods Sold .......................................... 700

Inventory .................................................. 700
To record cost of goods sold

c. The entries to record the sale and related cost of goods sold
of the shelving unit is as follows.

February 25, 2023

Cash .................................................................. 3,000

Contract Asset ......................................... 1,200
Sales Revenue ......................................... 1,800
To record sales

Cost of Goods Sold .......................................... 320

Inventory .................................................. 320
To record cost of goods sold
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Solutions Manual 6.78 Chapter 6

EXERCISE 6.21

a. May 1, 2023

No entry – neither party has performed on May 1, 2023.

b. May 15, 2023

Cash .................................................................. 900

Unearned Revenue .................................. 900

c. May 31, 2023

Unearned Revenue ........................................... 900

Sales Revenue ......................................... 900
To record sales

Cost of Goods Sold .......................................... 575

Inventory .................................................. 575
To record cost of goods sold

d. The journal entries would be the same under ASPE.

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EXERCISE 6.22

Omega will recognize the licensing revenues all at once because

its performance obligation is satisfied at the point in time it
transfers the patent rights to Crane. Omega’s intellectual
property is static as no changes to the formula will occur and so
no additional benefit can be obtained by Crane in the future.
LO 7 BT: C Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.79 Chapter 6

EXERCISE 6.23

a) Under the earnings approach, revenue recognition depends

on the company’s earnings process and how a company adds
value for its customers. Revenue is recognized in a manner
consistent with the earnings process and when (for sale of
goods) risks and rewards of ownership are transferred to the
customer, revenues are earned; the vendor has no continuing
involvement in, nor effective control over, the goods sold;
costs and revenue can be measured reliably; and collection is
probable. This approach focuses on measuring revenues and
costs and appropriately reflecting these in the statement of
income. This method requires that the revenue be measurable
and collectible before recognition can occur.

b) Revenue would be recognized and recorded as follows:

1. As this represents a sale of services, the At time of membership

focus for revenue recognition is purchase:
performance. The earnings process here is Dr. Cash
continuous for the one-year term. The Cr. Unearned Revenue
percentage-of-completion method should be
used and revenue would be recorded evenly Each month over the 1-year
over the one-year term. term:
Dr. Unearned Revenue
Cr. Service Revenue

Solutions Manual 6.80 Chapter 6

EXERCISE 6.23 (CONTINUED)

b. (continued)

2. This represents a bundled sale of goods At time of delivery:

and services. Dr. Accounts Receivable
a. First, as this is a non-interest-bearing Cr. Sales Revenue
receivable, the fair value of the furniture
sold may be determined by discounting to Over the one-year term of the
reflect the time value of money. loan:
b. For the sale of goods, revenue is generally Dr. Interest Receivable
recognized when the critical event in the Cr. Interest Income
earnings process is completed. This
normally occurs on delivery since the Upon final payment:
risks and rewards transfer at this point. Dr. Cash
c. The interest portion will be accrued over Cr. Accounts Receivable
the one-year term. Cr. Interest Receivable

3. This is a sale of services. The earnings At time of ticket purchase:

process here is continuous for the six- Dr. Cash
month term. Fee revenue for performances, Cr. Unearned Revenue
events, and so on should be recognized
when the event takes place. When a As each game is played
subscription is sold for a pre-set number of during the season:
events, the total fee should be allocated to Dr. Unearned Revenue
each event. Therefore, revenue should be Cr. Service Revenue
recognized on a per-game basis over the
season from April to September.
4. This is sale of services. The earnings At time loan is provided:
process here is continuous and interest Dr. Notes Receivable
income should be accrued evenly over the Cr. Cash
two-year term of the loan.
Over the two-year loan term:
Dr. Interest Receivable
Cr. Interest Income

Upon final payment:

Dr. Cash
Cr. Notes Receivable
Cr. Interest Receivable

Solutions Manual 6.81 Chapter 6

EXERCISE 6.23 (CONTINUED)

b. (continued)

5. This is sale of services. The earnings At time of fee payment in

process here is continuous for the August:
four-month term. Revenue should be Dr. Cash
recognized over the instructional term, Cr. Unearned Revenue
beginning in September.
Over four-month term:
Dr. Unearned Revenue
Cr. Service Revenue

6. For the sale of goods, revenue is At time of delivery in

generally recognized when the critical September
event in the earnings process is Dr. Cash
completed. This normally occurs on Cr. Sales Revenue
delivery, since the risks and rewards
transfer at this point. Revenue would
be recorded upon delivery in
September, as long as any returns
could be estimated.
7. Revenue would be recorded for the At time of delivery in June
machine upon delivery in June. The Dr. Cash
warranty is a separate service (or Cr. Sales Revenue
bundled service) that would be earned Cr. Warranty Liability
over the five-year term.
Over the 5-year period
Dr. Warranty Liability
Cr. Warranty Revenue

Solutions Manual 6.82 Chapter 6

EXERCISE 6.23 (CONTINUED)

b. (continued)

8. As this represents a sale of services, At time of medical

the focus for revenue recognition is assessment (receipt of
performance. initiation fees):
a. Assuming Premier is not in the Dr. Cash
business of providing medical Cr. Service Revenue
services, the initiation fee represents Dr. Expenses
a cost recovery of a requirement for Cr. Cash/ Accts Payable
membership. *
b. The earnings process for the Over the membership period:
ongoing fee is continuous. The Dr. Cash
percentage-of-completion method Cr. Service Revenue
should be used and revenue would
be recorded evenly over the period
of membership.

*If Premier was also in the medical services

business, a case could be made for
allocating the total receipts for both the
initiation and the monthly fee (over the term
of each contract); recognition of the portion
allocated to the medical assessment on
completion of that service; and recognition
of the remainder evenly over the period of
the contract.

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Solutions Manual 6.83 Chapter 6

EXERCISE 6.24

a. Customer acceptance provisions, such as extended trial

periods and goods shipped subject to approval, are
examples of concessionary terms. Concessionary terms
may create additional performance obligations, and if the
concessionary terms are more lenient than usual, they may
complicate the accounting. Customer acceptance
provisions that are more lenient than usual may mean that
risks and rewards of ownership have not yet transferred to
the customer, or that the vendor has continuing involvement
in, or effective control over, the goods sold. Customer
acceptance provisions must be carefully analyzed to
determine when revenue can be recognized.

b. Revenue would be recognized as follows:

1. For sale of goods, risks and rewards transfer when the

customer accepts the books or the trial period lapses.
2. Risks and rewards transfer at point of sale. It would be
appropriate to recognize the sale as long as a reasonable
estimate of sales returns could be accrued at the same
time. If no reasonable amount for the expected sales
returns can be established from historical experience,
then the sale should be postponed until the return
privilege of 30 days expires.
3. For Shivani Inc., the risks and rewards do not transfer
until the customer’s specifications are fulfilled. These
specifications are not subjective and are instead very
specific to the customer’s needs. Shivani should only
recognize revenue when the specifications are achieved
and the goods are delivered (if highly likely that the
delivered goods are acceptable) or when the customer
indicates acceptance of the goods by signing off (if
there is uncertainty about whether the specifications
have been met).

Solutions Manual 6.84 Chapter 6

EXERCISE 6.24 (CONTINUED)

c. If the company advertises that “customer satisfaction is

guaranteed,” a customer may expect that the company will
accept returns even beyond the 30-day contractual refund
period in order to honour its advertised statement. The
company may have a constructive obligation as a result of
signalling to customers that returns may be honoured
beyond the 30-day contractual refund period. This may
result in a performance obligation that needs to be reported
on the SFP.
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Solutions Manual 6.85 Chapter 6

EXERCISE 6.25

a. In this case, due to the agreement to repurchase the

equipment, Cramer continues to have control of the asset
and therefore this agreement is a financing transaction and
not a sale. Thus, the asset is not removed from the books of
Cramer. The entries to record the financing are as follows.
July 1, 2023
Cash .................................................................. 40,000
Contract Liability ...................................... 40,000
To record cash received

b. December 31, 2023

Interest Expense ($40,000 X 6% X 1/2) ........... 1,200

Contract Liability ...................................... 1,200
To record interest expense

c. June 30, 2024

Interest Expense ($40,000 X 6% X 1/2) ........... 1,200

Contract Liability ...................................... 1,200
To record interest expense

Contract Liability ............................................. 42,400

Cash ($40,000 + $1,200 + $1,200) ........... 42,400
To record repayment
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Solutions Manual 6.86 Chapter 6

EXERCISE 6.26

a. The agreement is a financing transaction and not a sale.

March 1, 2023

Cash .................................................................. 200,000

Contract Liability ...................................... 200,000
To record cash received

b. May 1, 2023
Interest Expense ($200,000 X 2%)................... 4,000
Contract Liability ............................................. 200,000
Cash ......................................................... 204,000
To record repayment plus interest
LO 9 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.87 Chapter 6

EXERCISE 6.27

a. This transaction is a bill-and-hold situation. Delivery of the

counters is delayed at the buyer’s request, but the buyer
takes title and accepts billing. Thus, the agreement must be
evaluated to determine if revenue can be recognized before
delivery.

b. Revenue is reported at the time title passes if the following

conditions are met:

(1) The reason for the bill-and-hold arrangement must be

substantive,
(2) The product must be identified separately as belonging
to the customer,
(3) The product must be ready for immediate physical
transfer to the customer, and
(4) The seller cannot have the ability to use the product or
to direct it to another customer.

c. Cash ......................................................... 300,000

Accounts Receivable ............................. 1,700,000
Sales Revenue................................. 2,000,000
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Solutions Manual 6.88 Chapter 6

EXERCISE 6.28

a. June 15, 2023

No entry – neither party has performed on the contract on

June 15, 2023.

b. September 1, 2023

Cash .................................................................. 50,000

Accounts Payable ................................... 50,000
To record refundable advance received on future revenue. Cannot
record to unearned revenue as no fee has yet been secured.

c. October 15, 2023

No entry as the terms of the agreement call for the transaction

to close for Sider to receive a fee.

d. November 1, 2023

Accounts Receivable ....................................... 80,000

Accounts Payable ............................................ 50,000
Service Revenue ....................................... 130,000

Based on the formula for fees of the agreement:

Rate Fee amount

Transaction value $3,500,000
On first (1,000,000) 5% $50,000
On second (1,000,000) 4% 40,000
On third (1,000,000) 3% 30,000
Remainder 500,000 2% 10,000
Fee Earned 130,000
Less advance 50,000
Collected Nov. 30 $80,000

Solutions Manual 6.89 Chapter 6

EXERCISE 6.28 (CONTINUED)

e. November 30, 2023

Cash ....................................................... 80,000

Accounts Receivable ............................... 80,000
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Solutions Manual 6.90 Chapter 6

EXERCISE 6.29

a. Inventoriable costs:
80 units shipped at cost of $500 each ..... $40,000
Freight ......................................................... 740
Total inventoriable cost ..................... $40,740

40 units on hand (40/80 X $40,740) ........... $20,370

b. Computation of consignment profit:

Consignment sales (40 X $750) ................ $30,000
Cost of units sold (40/80 X $40,740) ......... (20,370)
Commission charged by consignee
(6% X $30,000) ........................................ (1,800)
Advertising ................................................. (200)
Installation .................................................. (320)
Profit on consignment sales............................. $ 7,310

c. Remittance of consignee:
Consignment sales ............................................ $30,000
Less: Commissions .......................................... $1,800
Advertising ............................................. 200
Installation .............................................. 320 2,320
Remittance from consignee.............................. $27,680
LO 9 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.91 Chapter 6

EXERCISE 6.30

1. June 1 Wang Corp. ships merchandise costing $455,000

on consignment to Ren Stores Ltd.

a. Wang books:
Inventory on Consignment....................... 455,000
Inventory ........................................... 455,000

b. Ren books:
No entry

2. June 5 Wang pays the freight of $5,000 for the shipment of

June 1.
a. Wang books:
Inventory on Consignment....................... 5,000
Cash .................................................. 5,000
b. Ren books:
No entry

3. June 30 Summary entry for the month of June: Ren sells

half of the merchandise for $600,000 cash.

a. Wang books:
No entry

b. Ren books:
Cash ........................................................... 600,000
Accounts Payable ................................ 600,000

Solutions Manual 6.92 Chapter 6

EXERCISE 6.30 (CONTINUED)

4. June 30 Ren notifies Wang that 50% of the merchandise has

been sold for $600,000 and remits a cheque for the amount
due under the consignment agreement. Wang records the
receipt of the cheque from Ren.

a. Wang books:
Cash ........................................................... 474,000
Commission Expense1 ............................. 90,000
Advertising Expense2 ............................... 36,000
Revenue from Consignment Sales .... 600,000
To record consignment sales
1
($600,000 x 15%)
2
($600,000 x 6%)

Cost of Goods Sold3 ................................. 230,000

Inventory on Consignment ................. 230,000
To record cost of goods sold
3
($455,000 + $5,000) x 50%

b. Ren books:
Accounts Payable ..................................... 600,000
Revenue from Consignment Sales .... 90,000
Advertising Expense ........................... 36,000
Cash ...................................................... 474,000
To record payment to consignor
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Solutions Manual 6.93 Chapter 6

EXERCISE 6.31

(a) The $2,000 commission costs related to obtaining the

contract are incremental costs recognized as an asset. The
design services ($3,000), controllers ($6,000), and testing
and inspection fees ($2,000) are fulfillment costs and should
be capitalized as well, as they are specific to the contract.

The $27,000 cost for the receptacles and loading equipment

appear to be independent of the contract, as Rex will retain
these and likely use them in other projects. These should be
capitalized to property, plant, and equipment and
depreciated by Rex’s Reclaimers.

(b) Companies only capitalize costs that are direct, incremental,

and recoverable (assuming that the contract period is more
than one year (which is the case here). General and
administrative costs (unless those costs are explicitly
chargeable to the customer under the contract) and wasted
materials and labour are not eligible for capitalization and
should be expensed as incurred.
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Solutions Manual 6.94 Chapter 6

EXERCISE 6.32

a. If the contract is for less than 1 year, Rex can use the
practical expedient and recognize the incremental costs of
obtaining a contract as an expense when incurred.

b. The collectibility of the contract payments will not affect the

amount of revenue recognized. That is, the amount
recognized is not adjusted for customer credit risk. Rather,
Rex should report the revenue gross and then present an
allowance for any impairment due to bad debts (recognized
initially, and subsequently, in accordance with the
respective bad debt guidance) prominently as an expense in
the statement of income. If there is significant doubt about
collectibility at the contract’s inception, this may indicate
that the parties to the contract are not committed to perform
their respective obligations to the contract (i.e., existence of
a contract may not be met). No revenue is recognized until
the issue of significant doubt is resolved.
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Solutions Manual 6.95 Chapter 6

*EXERCISE 6.33

a. Gross profit recognized in:

2023 2024 2025

Contract price
$1,600,000 $1,600,000 $1,600,000
Costs:
Costs to date
$400,000 $825,000 $1,070,000
Estimated costs to
complete 600,000 1,000,000 275,000 1,100,000 _______0 1,070,000
Total estimated profit 600,000 500,000 530,000
Percentage completed to
date ____40% 1
75% 2
___100%
Total gross profit
recognized 240,000 375,000 530,000
Less: Gross profit rec.in --
previous years 0 240,000 _375,000
Gross profit recognized in
current year $240,000 $135,000 $155,000

* 1
$400,000 ÷ $1,000,000 2
$825,000 ÷ $1,100,000

Solutions Manual 6.96 Chapter 6

Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

*EXERCISE 6.33 (Continued)

b.
2024
Contract Asset/Liability ($825,000 – $400,000) 425,000
Materials, Cash, Payables ........................ 425,000
To record cost of construction

Accounts Receivable ($900,000 – $300,000) .. 600,000

Contract Asset/Liability ............................ 600,000
To record progress billings

Cash ($810,000 – $270,000) ............................. 540,000

Accounts Receivable ................................ 540,000
To record collections

Contract Asset/Liability ................................... 560,000

Revenue from Long-Term Contracts1 ..... 560,000
1
$1,600,000 X (75% – 40%)
To record revenues

Construction Expenses ................................. 425,000

Contract Asset/Liability ........................... 425,000
To record construction expenses

c. Gross profit recognized in:

Gross profit 2023 2024 2025
$–0– $–0– $530,0002
2
$1,600,000 – $1,070,000
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Solutions Manual 6.97 Chapter 6

*EXERCISE 6.34

DOUGHERTY INC.
Computation of Gross Profit to be
Recognized on Uncompleted Contract
Year Ended December 31, 2023

Total contract price

Estimated contract costs at completion
($800,000 + $1,200,000) ........................................... $2,000,000
Fixed fee ...................................................................... 450,000
Total .......................................................................... 2,450,000
Total estimated cost ................................................... (2,000,000)
Gross profit ......................................................................... 450,000
Percentage of completion ($800,000 ÷ $2,000,000).. X 40%
Gross profit to be recognized .......................................... $ 180,000

b.
DOUGHERTY INC.
Partial Income Statement
Year Ended December 31, 2023

Revenue from long-term contracts $ 980,000

Construction expenses 800,000
Gross profit $ 180,000

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Solutions Manual 6.98 Chapter 6

*EXERCISE 6.35

$640,000
a. 2023: X $2,200,000 = $880,000
$640,000 + $960,000

2024: $2,200,000 (contract price) minus $880,000 (revenue

recognized in 2023) = $1,320,000 (revenue recognized
in 2024).

b. All $2,200,000 of the contract price is recognized as revenue in

2024.

c. Using the percentage-of-completion method, the following

entries would be made:

Contract Asset/Liability ................................... 640,000

Materials, Cash, Payables. ..................... 640,000
To record cost of construction

Accounts Receivable ....................................... 420,000

Contract Asset/Liability .......................... 420,000
To record progress billings

Cash .................................................................. 350,000

Accounts Receivable .............................. 350,000
To record collections

Contract Asset/Liability .................................. 880,000

Revenue from Long-Term Contracts ..... 1
880,0001
1
$2,200,000 X [($640,000 ÷ ($640,000 + $960,000)]
To record revenues

Construction Expenses .................................. 640,000

Contract Asset/Liability ............................ 640,000
To record construction expenses

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Solutions Manual 6.99 Chapter 6

*EXERCISE 6.36

a. No computation of gross profit necessary as no gross profit to

be recognized prior to completion of contract.

Construction costs incurred during the year ......... $ 1,185,800

Partial billings on contract (25% X $6,000,000) ...... (1,500,000)
Contract Liability ...................................................... $ (314,200)

b. Contract price ............................................... $6,000,000

Costs to date .......................................... $1,185,800

Estimated costs to complete ................ 4,204,200
Total ........................................ 5,390,000

Estimated profit ($6,000,000 – $5,390,000) 610,000

% of completion1 .................... X 22%
Gross profit ............................................ $ 134,200
1
($1,185,800 ÷ $5,390,000 = 22%)

Revenue recognized (22% X $6,000,000) ……………. $1,320,000

Partial billings on contract (25% X $6,000,000) ...... (1,500,000)
Contract Liability ...................................................... $ (180,000)
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Solutions Manual 6.100 Chapter 6

*EXERCISE 6.37

a. 2023 2024 2025

Contract price $900,000 $900,000 $900,000
Less estimated cost:
Costs to date 270,000 450,000 610,000
Estimated cost to complete 330,000 150,000 —
Estimated total cost 600,000 600,000 610,000
Estimated total gross profit $300,000 $300,000 $290,000

Gross profit recognized in—

2023: $270,000 X $300,000 = $135,000

$600,000

2024: $450,000 X $300,000 = $225,000

$600,000

Less 2023 recognized

gross profit 135,000
Gross profit in 2024 $ 90,000

2025: Less 2023–2024

recognized gross profit 225,000
Gross profit in 2025 $ 65,000

b. In 2023 and 2024, no gross profit would be recognized.

Total Revenue .................................... $900,000

Total Construction Expenses ........... (610,000)
Gross profit recognized in 2025 ....... $290,000

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Solutions Manual 6.101 Chapter 6

*EXERCISE 6.38

a. 2023 2024 2025

Contract price $10,000,000 $10,000,000 $10,000,000
Less estimated cost:
Costs to date 3,825,000 8,500,0001 9,700,0002
Estimated costs to complete 4,675,000 1,270,000 ______-_
Estimated total costs 8,500,000 9,770,000 9,700,000
Estimated total gross profit $1,500,000 $ 230,000 $ 300,000
Percent complete 45.0% 87.0% 100%
[ $3,825,000] [$8,500,000] [$9,700,000]
[$8,500,000] [$9,770,000] [$9,700,000]

1
($3,825,000 + $4,675,000)
2
($8,500,000 + $1,200,000)

Solutions Manual 6.102 Chapter 6

*EXERCISE 6.38 (CONTINUED)

b. Percentage-of-completion
Recognized Recognized
in Prior in Current
To Date Years Year
2023
Revenues ($10,000,000 × 45%) $ 4,500,000 $ 4,500,000
Costs 3,825,000 3,825,000
Gross profit $ 675,000 $ 675,000
2024
Revenues ($10,000,000 × 87%) $8,700,000 $ 4,500,000 $4,200,000
Costs 8,500,000 3,825,000 4,675,000
Gross profit (loss) $ 200,000 $ 675,000 $ (475,000)
2025
Revenues ($10,000,000 × 100%) $10,000,000 $8,700,000 $1,300,000
Costs 9,700,000 8,500,000 1,200,000
Gross profit $ 300,000 $ 200,000 $100,000

Solutions Manual 6.103 Chapter 6

*EXERCISE 6.38 (CONTINUED)

c. Percentage-of-completion 2023 2024

Contract Asset/Liability 3,825,000 4,675,000

Materials, Cash, Payables 3,825,000 4,675,000
To record cost of construction
Accounts Receivable 3,500,000 4,100,000
Contract Asset/Liability 3,500,000 4,100,000
To record progress billings
Cash 3,100,000 4,150,000
Accounts Receivable 3,100,000 4,150,000
To record collections
Contract Asset/Liability 4,500,000 4,200,000
Revenue from Long-Term Contracts 4,500,000 4,200,000
To record revenues
Construction Expenses 3,825,000 4,675,000

Contract Asset/Liability 3,825,000 4,675,000

To record construction expenses

Solutions Manual 6.104 Chapter 6

*EXERCISE 6.38 (CONTINUED)

d. Balance in Contract Asset/Liability account – Percentage-of-

completion
December 31, 2024:
Costs 2023 $ 3,825,000
Billings 2023 (3,500,000)
Construction revenue 2023 4,500,000
Construction expenses 2023 (3,825,000)
Balance Dec. 31, 2023 1,000,000
Costs 2024 4,675,000
Billings 2024 (4,100,000)
Construction revenue 2024 4,200,000
Construction expenses 2024 (4,675,000)
Balance Dec. 31, 2024 $ 1,100,000

e. Percentage-of-completion

VAUGHN ENTERPRISES LTD.

Income Statement 2024
Revenue from long-term contracts $4,200,000
Construction expenses 4,675,000
Gross profit (loss) $ (475,000)
SFP (12/31) 2024
Current assets
Accounts receivable 1 $ 350,000
Contract asset (net) (above) 1,100,000

1
Progress billings to date Dec. 31,2024 $7,600,0002
Collections to date 7,250,0003
Balance Dec. 31,2024 $ 350,000
2
($3,500,000 + $4,100,000)
3
($3,100,000 + $4,150,000)
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Solutions Manual 6.105 Chapter 6

*EXERCISE 6.39

a. Zero-profit method
Recognized Recognized
in Prior in Current
To Date Years Year
2023
Revenues (costs incurred) $3,825,000 $3,825,000
Costs 3,825,000 3,825,000
Gross profit $ 0 $ 0
2024
Revenues (costs incurred) $8,500,000 $3,825,000 $4,675,000
Costs 8,500,000 3,825,000 4,675,000
Gross profit $ 0 $ 0 $ 0
2025
Revenues $10,000,000 $8,500,000 $1,500,000
Costs 9,700,000 8,500,000 1,200,000
Gross profit $ 300,000 $ 0 $300,000

Solutions Manual 6.106 Chapter 6

*EXERCISE 6.39 (CONTINUED)

b. Zero-profit method 2023 2024

Contract Asset/Liability 3,825,000 4,675,000

Materials, Cash, Payables 3,825,000 4,675,000
To record cost of construction
Accounts Receivable 3,500,000 4,100,000
Contract Asset/Liability 3,500,000 4,100,000
To record progress billings
Cash 3,100,000 4,150,000
Accounts Receivable 3,100,000 4,150,000
To record collections
Contract Asset/Liability 3,825,000 4,675,000
Revenue from Long-Term Contracts 3,825,000 4,675,000
To record revenues
Construction Expenses 3,825,000 4,675,000

Contract Asset/Liability 3,825,000 4,675,000

To record construction expenses

Solutions Manual 6.107 Chapter 6

*EXERCISE 6.39 (CONTINUED)

c. Balance in Contract Asset/Liability account - Zero-profit

method
December 31,2024:
Costs 2023 $ 3,825,000
Billings 2023 (3,500,000)
Construction revenue 2023 3,825,000
Construction expenses 2023 (3,825,000)
Balance Dec. 31, 2023 325,000
Costs 2024 4,675,000
Billings 2024 (4,100,000)
Construction revenue 2024 4,675,000
Construction expenses 2024 (4,675,000)
Balance Dec. 31, 2024 $ 900,000

d. Zero-profit method

VAUGHN ENTERPRISES LTD.

Income Statement 2024
Revenue from long-term contracts $4,675,000
Construction expenses 4,675,000
Gross profit $ 0
SFP (12/31) 2024
Current assets
Accounts receivable 1 $ 350,000
Contract asset (net) (above) $ 900,000

1
Progress billings to date Dec. 31,2024 $7,600,0002
Collections to date 7,250,0003
Balance Dec. 31,2024 $ 350,000
2
($3,500,000 + $4,100,000)
3
($3,100,000 + $4,150,000)
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Solutions Manual 6.108 Chapter 6

*EXERCISE 6.40

a. 2023 2024
Contract price $9,500,000 $9,500,000
Less estimated cost:
Costs to date 3,825,000 8,500,0001
Estimated costs to complete 4,675,000 1,270,000
Estimated total costs 8,500,000 9,770,000
Estimated total gross profit/(loss) $1,000,000 $ (270,000)
Percent complete 45% 87%
[ $3,825,000] [$8,500,000]
[$8,500,000] [$9,770,000]
1
($3,825,000 + $4,675,000)

b. The revenue recognized in 2023:

Contract price $9,500,000 x 45% complete = $4,275,000
Gross profit $1,000,000 x 45% complete = $450,000

Revenue recognized in 2024:

Contract price $9,500,000

Percent complete (based on costs to date/total

estimated costs) - above X 87%

Revenue recognizable to date 8,265,000

Less: Revenue recognized prior to 2024 4,275,000

Revenue recognized in 2024 $3,990,000

Solutions Manual 6.109 Chapter 6

*EXERCISE 6.40 (CONTINUED)

c. To compute the construction costs to be expensed in 2024,

Vaughn adds the total loss to be recognized in 2024 ($450,000
profit previously recognized + $270,000 overall loss expected
on contract) to the revenue to be recognized in 2024.

Revenue recognized in 2024 $3,990,000

Total loss recognized in 2024:

Reversal of profit from 2023 $450,000

Total estimated overall loss on contract 270,000 720,000

Construction costs expensed in 2024 $4,710,000

d.
December 31, 2024 entry
Construction Expenses ................................... 4,710,000
Contract Asset/Liability ............................ 720,000
Revenue from Long-Term Contracts ...... 3,990,000
To record long-term contract revenues, expenses, and losses for
2024.

e. Balance in Contract Asset/Liability account

December 31,2024:
Costs 2023 $ 3,825,000
Billings 2023 (3,500,000)
Construction revenue 2023 4,275,000
Construction expenses 2023 (3,825,000)
Balance Dec. 31, 2023 775,000
Costs 2024 4,675,000
Billings 2024 (4,100,000)
Construction revenue 2024 3,990,000
Construction expenses 2024 (4,710,000)
Balance Dec. 31, 2024 $ 630,000

Solutions Manual 6.110 Chapter 6

*EXERCISE 6.40 (CONTINUED)

f.
VAUGHN ENTERPRISES LTD.
Income Statement 2024
Revenue from long-term contracts $ 3,990,000
Construction expenses 4,710,000
Gross profit/(loss) $ (720,000)

SFP (12/31) 2024

Current assets
Accounts receivable1 $ 350,000
Contract asset (net) (above) $ 630,000

1
Progress billings to date Dec. 31,2024 $7,600,000
Collections to date 7,250,000
Balance Dec. 31,2024 $ 350,000

g. December 31, 2024

Loss from Long-Term Contracts..................... 270,000
Contract Asset/Liability ............................ 270,000
To record loss from long-term contract.
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Solutions Manual 6.111 Chapter 6

TIME AND PURPOSE OF PROBLEMS

Problem 6.1

Purpose—to provide the student with an opportunity to determine transaction price,

allocate the transaction price to performance obligations, and account for time value
of money.

Problem 6.2

Purpose—to provide the student with an opportunity to determine transaction price

and revenue recognition in situations including: upfront payments, bill-and-hold,
return privileges, and performance-based incentive arrangements.

Problem 6.3

Purpose— to provide the student with an opportunity to determine transaction price

and revenue recognition in situations including: point of sale, assurance warranties,
return privileges, and performance-based incentive arrangements.

Problem 6.4

Purpose—to provide the student with an understanding of, and an opportunity to

determine transaction price, allocate the transaction price to performance
obligations, and account for time value of money and for gift cards.

Problem 6.5

Purpose—to provide the student with an opportunity to determine transaction price,

allocate the transaction price to performance obligations, and account for returns
volume rebates and consignment sales.

Problem 6.6

Purpose—to provide the student with an understanding of the criteria and

applications utilized in the determination of revenue recognition for a customer
loyalty program. The student is required to allocate the `transaction price to the
loyalty points and sales revenue for the products and then prepare entries for loyalty
points redemptions when combined with a cash sale where points are earned.

Problem 6.7

Purpose—to provide the student with an opportunity to determine transaction price,

allocate the transaction price to performance obligations, perform effective interest
calculations, and account for upfront fees.
Solutions Manual 6.112 Chapter 6
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 6.8

Purpose—to provide the student with an opportunity to account for warranty and
customer loyalty programs.

*Problem 6.9

Purpose—to provide the student with an understanding of both the percentage-of-

completion, zero-profit, and completed-contract methods of accounting for long-
term construction contracts where the contract is profitable. The student is required
to compute the estimated gross profit that would be recognized during each year of
the construction period under each of the three methods, prepare entries, and
provide financial statement presentation of the results.

*Problem 6.10

Purpose—to provide the student with an understanding of both the percentage-of-

completion, zero-profit, and completed-contract methods of accounting for long-
term construction contracts where the contract is unprofitable. The student is
required to compute the estimated gross profit that would be recognized during each
year of the construction period under each of the three methods, prepare entries,
and provide financial statement presentation of the results.

Solutions Manual 6.113 Chapter 6

SOLUTIONS TO PROBLEMS
PROBLEM 6.1

a. The total revenue of $8,000 ($800 X 10) should be allocated to the

two performance obligations based on their relative fair values. In
this case, the fair value of the barbeques is considered $7,000
($700 X 10) and the fair value of the installation fees is $1,500 ($150
X 10). The total fair value to consider is therefore $8,500 ($7,000 +
$1,500). The allocation is as follows.

Equipment ($7,000 / $8,500) X $8,000 = $6,588

Installation ($1,500 / $8,500) X $8,000 = $1,412

BBQ Master makes the following entries:

April 20, 2023

Cash .................................................................. 8,000

Unearned Revenue..................................... 8,000

May 15, 2023

Unearned Revenue ............................................ 8,000

Service Revenue - Installation .................... 1,412
Sales Revenue .......................................... 6,588
To record sales

Cost of Goods Sold ............................................ 4,250

Inventory ($425 X 10) ................................. 4,250
To record cost of goods sold

Both the sale of the equipment and the service revenue are
recognized once the installation is completed on May 15, 2023.

Solutions Manual 6.114 Chapter 6

PROBLEM 6.1 (CONTINUED)

b. April 17, 2023

Cash .................................................................. 56,000

Sales Revenue ($200 X 280) ...................... 56,000
To record sales

Sales Revenue ................................................... 3,360

Contract Liability ($56,000 x 6%) ................ 3,360
To record contract liability

Cost of Goods Sold ........................................... 44,800

Inventory (280 X $160) ............................... 44,800
To record cost of goods sold

In this case, BBQ Master should reduce revenue recognized by $3,360

because it is certain that it will provide the volume rebate of 6%.

c. October 1, 2023
Notes Receivable .............................................. 4,000
Sales Revenue1 .......................................... 4,000
1
($5,324 X .75132 [PV i=10%, n=3])
To record sales
Cost of Goods Sold ............................................ 2,700
Inventory ..................................................... 2,700
To record cost of goods sold

December 31, 2023

Notes Receivable ............................................... 100
Interest Income (10% X 3/12 X $4,000) ...... 100

BBQ Master records revenue of $4,000 on October 1, 2023, which

is the value of consideration received, based on the present value
of the note. As a practical expedient, companies are not required to
reflect the time value of money to determine the transaction price if
the time period for payment is less than a year.
LO 5,6 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.115 Chapter 6

PROBLEM 6.2

a. The journal entry to record the sale and related cost of goods sold
is as follows

June 1, 2023

Accounts Receivable .......................................... 70,000

Refund Liability (4% X $70,000) ................. 2,800
Sales Revenue ........................................... 67,200
To record sale on account
Cost of Goods Sold ................................................. 38,400
Estimated Inventory Returns (4% X $40,000) ........ 1,600
Inventory ($400 X 100) ................................... 40,000
To record cost of goods sold

b. 1. May 1, 2023

Cash (20% X [300 X $1,800]) ............................ 108,000

Unearned Revenue..................................... 108,000

2. August 1, 2023

Unearned Revenue ............................................ 108,000

Cash .................................................................. 432,000
Sales Revenue ($1,800 X 300) ................... 540,000
To record sales

Cost of Goods Sold ............................................ 280,500

Inventory (300 X [$260 + $275 + $400]) ..... 280,500
To record cost of goods sold

Note: Economy could account for the installation and product sales
as separate performance obligations. However, as a practical
expedient, if a company has two or more distinct performance
obligations, it may bundle these performance obligations if they
have the same revenue recognition pattern. That is, they are
recognized immediately or they are recognized over time using the
same revenue recognition pattern.
Solutions Manual 6.116 Chapter 6
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 6.2 (CONTINUED)

c. The introduction of a bonus payment gives rise to a change in the

transaction price for the revenue arrangement, to include an
adjustment for management’s estimate of the amount of
consideration to which Economy will be entitled. Given the
information available, a probability-weighted method could be used:

60% chance of $594,000 ($540,000 X 1.10) = $356,400

40% chance of $540,000 = 216,000
$572,400

Thus, the total transaction price is $572,400 based on the

probability-weighted estimate.

Note: With just two possible outcomes, Economy uses the “most-
likely-amount” approach, resulting in a transaction price of
$594,000.

May 1, 2023

Cash (20% X $540,000) ..................................... 108,000

Unearned Revenue..................................... 108,000

July 1, 2023

Unearned Revenue ............................................ 108,000

Cash ($594,000 – $108,000) ............................. 486,000
Sales Revenue ........................................... 594,000
To record sales

Cost of Goods Sold ............................................ 280,500

Inventory (300 X [$400 + $275 + $260]) ..... 280,500
To record cost of goods sold

Solutions Manual 6.117 Chapter 6

PROBLEM 6.2 (CONTINUED)

d. This is a bill-and-hold arrangement. It appears that the criteria for

Epic to have obtained control of the appliance bundles have been
met:

a. The reason for the bill-and-hold arrangement must be

substantive.
b. The product must be identified separately as belonging to
Epic.
c. The product must be ready for immediate physical transfer to
Epic.
d. Economy cannot have the ability to use the product or to direct
it to another customer.

Thus, Economy has transferred control to Epic; Economy has a

right to payment for the appliances and legal title has transferred.

Economy makes the following entries.

February 1, 2023

Cash (10% X 400 X $1,800) ............................... 72,000

Unearned Revenue..................................... 72,000

April 1, 2023

Unearned Revenue ............................................ 72,000

Accounts Receivable ($720,000 – $72,000)....... 648,000
Sales Revenue ($1,800 X 400) ................... 720,000
To record sales

Cost of Goods Sold ............................................ 374,000

Inventory (400 X [$400 + $275 + $260]) ..... 374,000
To record cost of goods sold
LO 4,5,9 BT: AP Difficulty: M Time: 60 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.118 Chapter 6

PROBLEM 6.3

a. DeMent recognizes revenue when it delivers books to distributors,

which is when it satisfies the performance obligation. The
transaction price for the arrangement is adjusted for expected
returns, unless no reliable estimate of returns can be developed. In
that case the amount of revenue recognized will be constrained to
amounts not subject to returns (70%) – until the returns are known.

Ankiel recognizes revenue when alarm systems leave the factory

to be delivered to customers, which is when it satisfies the
performance obligation related to product sales. Commissions are
recorded as expenses and a warranty liability and expense are
recorded for the assurance warranty.

Depp recognizes revenue over time as the asset management

services are provided. The transaction price may be adjusted for
the expected bonus payment. Since this is the first quarter of the
fiscal year, none is accrued due to the uncertainty of realization.

b. DeMent Publishing Division

Sales—fiscal 2023 ......................................................... $7,000,000

Less: Refund liability (20%) ............................................. 1,400,000
Net sales—revenue to be recognized in fiscal 2023 ........ $5,600,000

Although distributors can return up to 30% of sales, prior

experience indicates that 20% of sales is the expected average
amount of returns. The collection of 2023 sales has no impact on
fiscal 2023 revenue. The 21% of returns on the initial $5,500,000 of
2023 sales confirms that 20% of sales will provide a reasonable
estimate.

Solutions Manual 6.119 Chapter 6

PROBLEM 6.3 (CONTINUED)

b. (continued)

Ankiel Securities Division

Revenue for fiscal 2023 = $5,200,000

The revenue is the amount of goods actually billed and shipped when
revenue is recognized at point of sale (terms of f.o.b. factory).
Orders for goods do not constitute sales. Down payments are not
sales but unearned revenue when collected. The actual freight
costs are expenses made by the seller that the buyer will reimburse
at the time payment is made for the goods.

Commissions and warranty costs are also selling expenses. Both

of these expenses will be accrued and will appear in the operating
expenses section of the statement of income.

Depp Advisory Division

Revenue for 1st quarter of fiscal 2023 = $6,000

($2,400,000 X .25%)
Depp is not reasonably assured to be entitled to the incentive fee
until the end of the year. Although Depp has experience with similar
contracts, that experience is not predictive of the outcome of the
current contract because the amount of consideration is highly
susceptible to volatility in the market. In addition, the incentive fee
has a large number and high variability of possible consideration
amounts. The calculation and recording of any bonus payment
should be deferred until the end of the year when the performance
is known, as it is subject to substantial volatility during the year.
LO 4,5 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.120 Chapter 6

PROBLEM 6.4

a. Sales with financing

January 1, 2023

Notes Receivable ............................................... 4,450

Sales Revenue1 .................................. 4,450
1
($5,000 X .8900 [PV n=2; i=6%])
To record sales

Cost of Goods Sold ............................................ 4,000

Inventory ..................................................... 4,000
To record cost of goods sold

Total revenue for Colbert:

Sales revenue $4,450
Interest income ($4,450 X 6%) 267*
Total $4,717
*assuming a December 31 year end and thus a full year interest accrual
st

b. Gift Cards
March 1, 2023

Cash .................................................................. 2,000

Contract Liability (20 X $100) ..................... 2,000
To record the sale of gift cards

March 31, 2023

Contract Liability ................................................. 1,111

Sales Revenue ..........................................
2
1,111
The expected breakage $200 ($2,000 x 10%)
The redemption amount: $2,000 - $200 breakage or $1,800
2
[(50% x $2,000) x ($2,000/$1,800)]
To record sales

Cost of Goods Sold ............................................ 800

Inventory (10 X $80) ................................... 800
To record cost of goods sold

Solutions Manual 6.121 Chapter 6

PROBLEM 6.4 (CONTINUED)

b. (continued)

April 30, 2023

Contract Liability ................................................. 667

Sales Revenue3 .......................................... 667
3
[(30%4 x $2,000) x ($2,000/$1,800)]
4
(cumulative 80% less 50%)
To record sales

Cost of Goods Sold ............................................ 480

Inventory (6 X $80) ..................................... 480
To record cost of goods sold

June 30, 2023

Contract Liability ................................................. 222

Sales Revenue ..........................................
4
222
4
($2,000 - $1,111- $667) Remaining cards have expired
To record sales

Cost of Goods Sold ............................................ 80

Inventory (15 X $80) .................................... 80
5
(85% less 80%) X 20 cards = 1 card
To record cost of goods sold

Solutions Manual 6.122 Chapter 6

PROBLEM 6.4 (CONTINUED)

c. Bundled Sales

Since the plastic is delivered later, Colbert has two performance

obligations, (1) the printer and the stand and (2) the plastic. As
indicated, the stand-alone price for the printer, stand, and plastic is
$5,625, but the bundled price for all three is $5,125. In this case,
the performance obligation related to the printer and stand is when
the discount applies. As a result, the allocation of the discount of
$500 should be allocated to these two items, delivered together as
follows.

Allocated Amounts
Plastic $ 175
Printer and stand ($5,125 – $175) 4,950
Total $5,125

The journal entries are as follows:

March 1, 2023

Cash .................................................................. 51,250

Sales Revenue (10 X $4,950) ..................... 49,500
Unearned Revenue (10 X $175) ................. 1,750
To record sale of printer and stand

Cost of Goods Sold [10 X ($4,000 + $200] ......... 42,000

Inventory ..................................................... 42,000
To record cost of goods sold

September 1, 2023

Unearned Revenue ............................................ 1,750

Sales Revenue (10 X $175) ........................ 1,750
To record sale of plastic

Cost of Goods Sold ............................................ 1,350

Inventory (10 X $135) ................................. 1,350
To record cost of goods sold
LO 5,6 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.123 Chapter 6

PROBLEM 6.5

a. January 1, 2023

Notes Receivable ............................................... 48,000

Refund Liability (5% X $48,000) ................. 2,400
Sales Revenue ........................................... 45,600
To record sale on account

Cost of Goods Sold ............................................ 30,400

Estimated Inventory Returns (40 X $800 X 5%) . 1,600
Inventory (40 X $800) ................................. 32,000
To record cost of goods sold

b. August 10, 2023

Accounts Receivable (16 X $3,600*) .................. 57,600

Sales Revenue ........................................... 57,600
To record sale on account

Cost of Goods Sold ............................................ 32,000

Inventory (16 X $2,000) .............................. 32,000
To record cost of goods sold

* Note: There is no adjustment for the volume discount, because it is not

probable (“highly uncertain”) that the customer will reach the benchmark.

c. This revenue arrangement has 3 different performance obligations

as each has stand-alone value: (1) the sale of the dryers, (2)
installation, and (3) the maintenance plan.

The total revenue of $45,200 should be allocated to the three

performance obligations based on their relative fair values:

Dryers (3 X $14,000) $42,000

Installation (3 X $1,000) 3,000
Maintenance plan 1,200
Total estimated fair value $46,200
Solutions Manual 6.124 Chapter 6
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 6.5 (CONTINUED)

c. (continued)

Stand-
Alone
(SA) % of Total Allocation
Performance Selling SA Selling Contract of Contract
obligation Price Price Price Price
Dryers $42,000 90.91% X $45,200 $41,091
Installation 3,000 6.49% X $45,200 2,934
Maintenance 1,200 2.60% X $45,200 1,175
46,200 100 % $45,200

June 20, 2023

Cash (20% X $45,200) ....................................... 9,040
Unearned Revenue..................................... 9,040
To record collection of advance payment on contract

October 1, 2023
Cash (80% X $45,200) ....................................... 36,160
Unearned Revenue ($9,040 - $1,175) ................ 7,865
Service Revenue - Installation .................... 2,934
Sales Revenue ........................................... 41,091
To record sales and installation revenue

Cost of Goods Sold ............................................ 33,000

Inventory (3 X $11,000) .............................. 33,000
To record cost of goods sold
December 31, 2023

Unearned Revenue ............................................ 98

Service Revenue1 ....................................... 98
1
($1,175 X 3/36)
To record three months of service revenue

Solutions Manual 6.125 Chapter 6

PROBLEM 6.5 (CONTINUED)

d. Entries for Ritt – the Consignor

April 25, 2023

Inventory on Consignment (100 X $800) ............ 80,000

Inventory ..................................................... 80,000

June 30, 2023

Cash [(60 X $1,200) – $7,200] ........................... 64,800

Commission Expense (10% X 60 X $1,200) ...... 7,200
Revenue from Consignment Sales ............. 72,000
To record revenue from consignment sales

Cost of Goods Sold (60 X $800)......................... 48,000

Inventory on Consignment ......................... 48,000
To record cost of goods sold

Entries for Farm Depot - the Consignee

April 25, 2023

No entry – Inventory continues to be controlled by Ritt.

Entries for Consignment Sales June 30,2023

Cash .................................................................. 72,000
Accounts Payable ....................................... 64,800
Revenue from Consignment Sales ............. 7,200
To record revenue from consignment sales

June 30, 2023

Accounts Payable .................................................... 64,800
Cash ............................................................... 64,800
To record payment on account
LO 5,6.7.9 BT: AP Difficulty: C Time: 60 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.126 Chapter 6

PROBLEM 6.6

a. The transaction price is allocated to the products and loyalty points,

as follows:

Stand-
Alone (SA) % of Total Allocation
Performance Selling SA Selling Contract of Contract
obligation Price Price Price Price
Product $300,000 97.96% X $300,000 $293,880
Loyalty Points 6,250 1
2.04% X $300,000 6,120
$306,250 100 % $300,000
1
(2,500 X $2.50)
b. July 2, 2023

Cash .................................................................. 300,000

Unearned Revenue..................................... 6,120
Sales Revenue ……………………… .......... 293,880
To record sales

Cost of Goods Sold ............................................ 171,000

Inventory…………………………….............. 171,000
To record cost of goods sold

Solutions Manual 6.127 Chapter 6

PROBLEM 6.6 (CONTINUED)

c. At July 31, 2023, the portion of the sales revenue recognized as a

result of the loyalty points redeemed is $2,448 ($6,120/2,500 points
= $2.448 per point; 1,000 points x $2.448 = $2,448).

The transaction price of the cash sale of $75,000 – $3,0001 =

$72,000 is allocated to the products and loyalty points, as follows:
1
(1,000 points redeemed at $3 discount)
% of
Stand-Alone Total SA
Performance (SA) Selling Selling Contract Allocation of
obligation Price Price Price Contract Price
Product $72,000 97.96% X $72,000 $70,531
Loyalty Points 1,500 2
2.04% X $72,000 1,469
$73,500 100 % $72,000
2
Cash sale amount $72,000 ÷ $100 = 720 points
Redemption rate is 2,500 ÷ 3,000 = 83.33%
720 points x redemption rate of .8333 = 600 points x $2.50 = $1,500

July 31, 2023

Cash ($75,000 - $3,000)..................................... 72,000
Unearned Revenue ($2,448 - $1,469) ................ 979
Sales Revenue ........................................... 72,979
To record sales

Cost of Goods Sold ............................................ 39,000

Inventory ..................................................... 39,000
To record cost of goods sold
LO 4 BT: AP Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.128 Chapter 6

PROBLEM 6.7

a. The total revenue of $50,000 (100 contracts X $500) should be

allocated to the two performance obligations based on their relative
fair values. In this case, the fair value of each tablet is $250 and the
fair value of the Internet service is $286. The total fair value to
consider is $536 ($250 + $286) for each contract. The allocation for
each contract is as follows.

Stand-
Alone (SA) % of Total Allocation
Performance Selling SA Selling Contract of Contract
obligation Price Price Price Price
Tablet $250 46.64% X $500 $233
Internet service 286 53.36% X $500 267
$536 100 % $500

The present value of the note receivable for future payments on

the Internet service:

Using a financial calculator:

PV ? Yields - $18,555.10
I 8%
N 3
PMT $ 7,2001
FV $0
Type 0

1
(100 x $72)

Solutions Manual 6.129 Chapter 6

PROBLEM 6.7 (CONTINUED)

c. (Continued)

Using Excel:
=PV(rate,nper,pmt,fv,type)

Alternately:
$7,200 X 2.5771 [PVOA n=3, i=8%]) = $18,555

Instalment Note Receivable Schedule

Note
Cash Interest Principal Carrying
Date Collected Revenue Collected Amount
Jan. 2 2023 $18,555
Jan. 2 2024 $7,200 $ 1,484 $5,716 12,839
Jan. 2 2025 7,200 1,027 6,173 6,666
Jan. 2 2026 7,200 534 * 6,666 -
* rounding $1

Solutions Manual 6.130 Chapter 6

PROBLEM 6.7 (CONTINUED)

b.
January 2, 2023

Cash ($10,000 + $ 21,4451) ............................... 31,445

Notes Receivable ............................................... 18,555
Unearned Revenue (100 X $267) ............... 26,700
Sales Revenue (100 X $233) ...................... 23,300
To record sales

Cost of Goods Sold ($175 X 100)....................... 17,500

Inventory ..................................................... 17,500
To record cost of goods sold

1
Cash received on 100 contracts:
Total contract price ($500 X 100) $50,000
Less upfront payment on the Internet service 10,000
Less the PV of the note receivable 18,555
$21,445

The sale of the tablets (and gross profit) should be recognized once
the tablets are delivered on January 2, 2023.

December 31, 2023

Interest Receivable ............................................. 1,484

Interest Income ($18,555 X 8%) ................. 1,484
To accrue interest on instalment note receivable

Unearned Revenue ............................................ 6,675

Service Revenue ($26,700 ÷ 4) .................. 6,675
To record revenue for Internet service provided in 2023

Solutions Manual 6.131 Chapter 6

PROBLEM 6.7 (CONTINUED)

c. January 2, 2024

Cash .................................................................. 7,200

Interest Receivable ..................................... 1,484
Notes Receivable........................................ 5,716

December 31, 2024

Interest Receivable ............................................. 1,027

Interest Income ($12,839 X 8%) ................. 1,027
To accrue interest on instalment note receivable

Unearned Revenue ............................................ 6,675

Service Revenue ($26,700 ÷ 4) .................. 6,675
To record revenue for Internet service provided in 2024

d. January 2, 2025

Cash .................................................................. 7,200

Interest Receivable ..................................... 1,027
Notes Receivable........................................ 6,173

December 31, 2025

Interest Receivable ............................................. 534

Interest Income ($6,666 X 8%) ................... 534
To accrue interest on instalment note receivable

Unearned Revenue ............................................ 6,675

Service Revenue ($26,700 ÷ 4) .................. 6,675
To record revenue for Internet service provided in 2025

Solutions Manual 6.132 Chapter 6

PROBLEM 6.7 (CONTINUED)

e. Without reliable data with which to estimate the stand-alone selling

price of the Internet service, Tablet Tailors allocates $250 for each
contract to revenue on the tablets, with the residual amount ($250)
allocated to the Internet service.

Tablet Tailors makes the following entries.

January 2, 2023

Cash ($10,000 + $ 21,445)................................. 31,445

Notes Receivable ............................................... 18,555
Unearned Revenue ($250 X 100) ............... 25,000
Sales Revenue ........................................... 25,000
To record sales

Cost of Goods Sold ............................................ 17,500

Inventory ..................................................... 17,500
To record cost of goods sold

The sale of the tablets (and gross profit) should be recognized once
the tablets are delivered on January 2, 2023. Tablet Tailors will
recognize service revenue of $6,250 ($25,000 ÷ 4) in each year of
the 4-year contract.

LO 5,6 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.133 Chapter 6

PROBLEM 6.8

a. Warranty Performance Obligations

1. To transfer 70 specialty winches to customers with a total
transaction price of $21,000.
2. To provide extended warranty services for 29 winches after the
assurance warranty period with a value of $11,600 (29 X $400)
for 2 years.

With respect to the loyalty points program, Hale has a performance

obligation for:

1. Delivery of the products and,

2. Future delivery of products that can be purchased by
customers with loyalty points earned.

Cash .................................................................. 32,600

Warranty Expense .............................................. 2,100
Warranty Liability ........................................ 2,100
Unearned Revenue (29 X $400) ................. 11,600
Sales Revenue ........................................... 21,000
To record cash sale

Cost of Goods Sold ............................................ 16,000

Inventory ..................................................... 16,000
To record cost of goods sold
Hale reduces the Warranty Liability account over the first three
years as the actual warranty costs are incurred. The company also
recognizes revenue related to the service-type warranty over the
two-year period that extends beyond the assurance warranty period
(three years). In most cases, the unearned revenue is recognized
on a straight-line basis and the costs associated with the service-
type warranty are expensed as incurred.

Solutions Manual 6.134 Chapter 6

PROBLEM 6.8 (CONTINUED)

c. Because the loyalty points provide a material right to a customer
that it would not receive without entering into a contract, the points
are a separate performance obligation. Hale allocates the
transaction price to the product and the points on a relative stand-
alone selling price basis as follows.

Stand-
Alone (SA) % of Total Allocation
Performance Selling SA Selling Contract of Contract
obligation Price Price Price Price
Products $100,000 91.32% X $100,000 $91,320
Loyalty points 9,500 1
8.68% X $100,000 8,680
$109,500 100 % $100,000
1
9,500 points X $1 per point

Cash ................................................................... 100,000

Unearned Revenue..................................... 8,680
Sales Revenue ........................................... 91,320
To record cash sales of products subject to loyalty points

Cost of Goods Sold (1–45%) X 100,000 ............ 55,000

Inventory ..................................................... 55,000
To record cost of goods sold

LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.135 Chapter 6

*PROBLEM 6.9

a. 2023 2024 2025

Contract price $2,800,000 $2,800,000 $2,800,000
Less estimated cost:
Costs to date 800,000 1,800,000 2,350,000
Estimated costs to complete 1,700,000 600,000 ______-_
Estimated total costs 2,500,000 2,400,000 2,350,000
Estimated total gross profit $ 300,000 $ 400,000 $ 450,000
Percent complete 32% 75% 100%
[ $800,000] [$1,800,000] [$2,350,000]
[$2,500,000] [$2,400,000] [$2,350,000]

Solutions Manual 6.136 Chapter 6

*PROBLEM 6.9 (CONTINUED)

a. (continued) Percentage-of-completion
Recognized Recognized
in Prior in Current
To Date Years Year
2023
Revenues ($2,800,000 × 32%) $ 896,000 $ 896,000
Costs 800,000 800,000
Gross profit $ 96,000 $ 96,000
2024
Revenues ($2,800,000 × 75%) $2,100,000 $ 896,000 $1,204,000
Costs 1,800,000 800,000 1,000,000
Gross profit $ 300,000 $ 96,000 $ 204,000
2025
Revenues ($2,800,000 × 100%) $2,800,000 $2,100,000 $700,000
Costs 2,350,000 1,800,000 550,000
Gross profit $ 450,000 $ 300,000 $150,000

Solutions Manual 6.137 Chapter 6

*PROBLEM 6.9 (CONTINUED)

b. Percentage-of-completion 2023 2024

Contract Asset/Liability 800,000 1,000,000

Materials, Cash, Payables 800,000 1,000,000
To record cost of construction
Accounts Receivable 850,000 1,450,000
Contract Asset/Liability 850,000 1,450,000
To record progress billings
Cash 700,000 1,500,000
Accounts Receivable 700,000 1,500,000
To record collections
Contract Asset/Liability 896,000 1,204,000
Revenue from Long-Term Contracts 896,000 1,204,000
To record revenues
Construction Expenses 800,000 1,000,000

Contract Asset/Liability 800,000 1,000,000

To record construction expenses

Solutions Manual 6.138 Chapter 6

*PROBLEM 6.9 (CONTINUED)

c. Balance in Contract Asset/Liability account – Percentage-of-

completion
December 31,2024:
Costs 2023 $ 800,000
Billings 2023 (850,000)
Construction revenue 2023 896,000
Construction expenses 2023 (800,000)
Balance Dec. 31, 2023 46,000
Costs 2024 1,000,000
Billings 2024 (1,450,000)
Construction revenue 2024 1,204,000
Construction expenses 2024 (1,000,000)
Balance Dec. 31, 2024 $ (200,000)

d. Percentage-of-completion

ESSAN CONSTRUCTION INC.

Income Statement 2024
Revenue from long-term contracts $1,204,000
Construction expenses 1,000,000
Gross profit $ 204,000
SFP (12/31) 2024
Current assets
Accounts receivable 1 $ 100,000
Current liabilities
Contract liability (net) (above) $ 200,000

1
Progress billings to date Dec. 31,2024 $2,300,000
Collections to date 2,200,000
Balance Dec. 31,2024 $100,000

Solutions Manual 6.139 Chapter 6

*PROBLEM 6.9 (CONTINUED)

e. Zero-profit method
Recognized Recognized
in Prior in Current
To Date Years Year
2023
Revenues (costs incurred) $ 800,000 $ 800,000
Costs 800,000 800,000
Gross profit $ 0 $ 0
2024
Revenues (costs incurred) $1,800,000 $ 800,000 $1,000,000
Costs 1,800,000 800,000 1,000,000
Gross profit $ 0 $ 0 $ 0
2025
Revenues $2,800,000 $1,800,000 $1,000,000
Costs 2,350,000 1,800,000 550,000
Gross profit $ 450,000 $ 0 $450,000

Solutions Manual 6.140 Chapter 6

*PROBLEM 6.9 (CONTINUED)

f. Zero-profit method 2023 2024

Contract Asset/Liability 800,000 1,000,000

Materials, Cash, Payables 800,000 1,000,000
To record cost of construction
Accounts Receivable 850,000 1,450,000
Contract Asset/Liability 850,000 1,450,000
To record progress billings
Cash 700,000 1,500,000
Accounts Receivable 700,000 1,500,000
To record collections
Contract Asset/Liability 800,000 1,000,000
Revenue from Long-Term Contracts 800,000 1,000,000
To record revenues
Construction Expenses 800,000 1,000,000

Contract Asset/Liability 800,000 1,000,000

To record construction expenses

Solutions Manual 6.141 Chapter 6

*PROBLEM 6.9 (CONTINUED)

g. Balance in Contract Asset/Liability account - Zero-profit method

December 31,2024:
Costs 2023 $ 800,000
Billings 2023 (850,000)
Construction revenue 2023 800,000
Construction expenses 2023 (800,000)
Balance Dec. 31, 2023 (50,000)
Costs 2024 1,000,000
Billings 2024 (1,450,000)
Construction revenue 2024 1,000,000
Construction expenses 2024 (1,000,000)
Balance Dec. 31, 2024 $ (500,000)

h. Zero-profit method

ESSAN CONSTRUCTION INC.

Income Statement 2024
Revenue from long-term contracts $1,000,000
Construction expenses 1,000,000
Gross profit $ 0
SFP (12/31) 2024
Current assets
Accounts receivable 1 $ 100,000
Current liabilities
Contract liability (net) (above) $ 500,000

1
Progress billings to date Dec. 31,2024 $2,300,000
Collections to date 2,200,000
Balance Dec. 31,2024 $100,000

Solutions Manual 6.142 Chapter 6

*PROBLEM 6.9 (CONTINUED)

i..
Percentage-of- Completed-
Zero-Profit
Completion Contract

2023 $ 96,000 $0 $0

2024 $204,000 $0 $0

2025 $150,000 $450,000 $450,000

LO 10,12,13,14 BT: AP Difficulty: M Time: 60 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.143 Chapter 6

*PROBLEM 6.10

a. 2023 2024
Contract price $2,800,000 $2,800,000
Less estimated cost:
Costs to date 800,000 1,800,000
Estimated costs to complete 1,700,000 1,050,000
Estimated total costs 2,500,000 2,850,000
Estimated total gross profit/(loss) $ 300,000 $ (50,000)
Percent complete 32.00% 63.16%
[ $800,000] [$1,800,000]
[$2,500,000] [$2,850,000]

b. The revenue recognized in 2023:

Contract price $2,800,000 x 32.00% complete = $896,000
Gross profit $300,000 x 32.00% complete = $96,000

Revenue recognized in 2024:

Contract price $2,800,000

Percent complete (based on costs to date/total

estimated costs) - above X 63.16%

Revenue recognizable to date 1,768,480

Less: Revenue recognized prior to 2024 896,000

Revenue recognized in 2024 $872,480

Solutions Manual 6.144 Chapter 6

*PROBLEM 6.10 (CONTINUED)

To compute the construction costs to be expensed in 2024, Essan adds

the total loss to be recognized in 2024 ($96,000 2023 profit recognized
previously + $50,000 overall contract loss) to the revenue to be
recognized in 2024.

Revenue recognized in 2024 $872,480

Total loss recognized in 2024:

Reversal of profit from 2023 $96,000

Total estimated loss on contract 50,000 146,000

Construction costs expensed in 2024 $1,018,480

d.
December 31, 2024 entry
Construction Expenses....................................... 1,018,480
Contract Asset/Liability ............................... 146,000
Revenue from Long-Term Contracts .......... 872,480
To record long-term contract revenues, expenses, and losses for 2024.

e. Balance in Contract Asset/Liability account

December 31,2024:
Costs 2023 $ 800,000
Billings 2023 (850,000)
Construction revenue 2023 896,000
Construction expenses 2023 (800,000)
Balance Dec. 31, 2023 46,000
Costs 2024 1,000,000
Billings 2024 (1,450,000)
Construction revenue 2024 872,480
Construction expenses 2024 (1,018,480)
Balance Dec. 31, 2024 $ (550,000)

Solutions Manual 6.145 Chapter 6

*PROBLEM 6.10 (CONTINUED)

f.
ESSAN CONSTRUCTION INC.
Income Statement 2024
Revenue from long-term contracts $ 872,480
Construction expenses 1,018,480
Gross profit/(loss) $ (146,000)

SFP (12/31) 2024

Current assets
Accounts receivable1 $ 100,000
Current liabilities
Contract liability (net) (above) $ 550,000

1
Progress billings to date Dec. 31,2024 $2,300,000
Collections to date 2,200,000
Balance Dec. 31,2024 $100,000

g. December 31, 2024

Loss from Long-Term Contracts ......................... 50,000
Contract Asset/Liability ............................... 50,000
To record loss from long-term contract.
LO 10,12,15 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 6.146 Chapter 6

CASES

See the Case Primer on the Student Website as well as the summary case primer
in the front of the text.

CA 6.1 BUDGET VACATIONS

Case Overview
Given that the company is private, it may use IFRS or ASPE.
ASPE is more flexible and less costly to apply. However, the
company is thinking of going public. Therefore, it might make more
sense to apply IFRS, since IFRS is required for public companies
in Canada.
The bank would be a major user of the financial statements (since
the company is looking for financing to update its facilities). Other
major users include future investors if the company goes public.
The bank is analyzing the current ratio as well as the debt-to-equity
ratio for decision making purposes regarding the loan. Therefore,
there may be a bias by the company to try to improve these ratios
to obtain the bank financing.
The controller must ensure that the statements are transparent
and not misleading since the bank and potential investors will be
making resource allocation decisions based on these statements.

Analysis and recommendations

Solutions Manual 6.147 Chapter 6

CA 6.1 BUDGET VACATIONS (CONTINUED)

Issue: The company’s measurement/recognition of the magazine

revenue for new customers.

Recognize revenues only after

Recognize revenues when the the refund privilege has
magazines are delivered expired
- The contract with the customer - The company has limited
is to deliver the magazines – history of cancellation
representing a performance rates, given that it has
obligation. only been operating for
- Once the magazines are 18 months. The amount
delivered on a monthly basis – of consideration is highly
control passes to the susceptible to factors
customer. outside the company’s
- The existence of the right to control including
return magazines means that economic factors and job
the consideration is variable losses (which may affect
and must be estimated using the potential cancellation
either an expected value of the contract).
method or the most likely - Thus, revenue
amount. It sounds like the recognition might be
company is expecting a constrained.
significant number of new
subscriptions, so the expected
value method might be the
best method to use.
- The company can estimate the
potential returns based on data
from other competitors and so
should set up a separate
refund liability.
- An asset for returned
magazines would not be set up
since the used magazine
would be of little value.

Solutions Manual 6.148 Chapter 6

CA 6.1 BUDGET VACATIONS (CONTINUED)

Recommendation: The company needs to make a decision regarding

revenue recognition. However, based on the facts that the company has
already been in business for just over a year and that industry statistics
are available regarding contract cancellations, it could recognize
revenues using the expected value method.

Issue: The special offer to all new customers of a new world atlas at a
guaranteed discounted price.

The atlas promise is a separate performance obligation and must be

recorded as unearned revenues. The atlas is a distinct and separate
product from the magazine. The amount should be measured as the
stand-alone value of the atlas less the $2. The company would have to
estimate the number of atlases that would be delivered (this is estimated
at 60%).

Issue: A new customer contract has resulted in a large order; however,

the customer has asked the company to “hold” the magazines for several
weeks.

Recognize revenues when the Wait until the magazines are

sale is made delivered
The following criteria would need - There is significant
to be met in order to recognize uncertainty. This is a new
the revenues: customer – there is no
- The reason for holding the evidence that the deal will
inventory is substantive “close”.
(e.g., perhaps the - It is unclear why the
purchaser has no room in magazines are not being
its warehouse). shipped immediately,
- The magazines must be set especially since the
aside and ready to be magazines need to be
shipped. current in order to be sold.
- The magazines cannot be - It is unclear as to whether
sold to another customer. the customer has made any
payment and so this contract
may be wholly unperformed.

Solutions Manual 6.149 Chapter 6

CA 6.1 BUDGET VACATIONS (CONTINUED)

Recommendation: Delay revenue recognition since there is too much

uncertainty.

The current ratio (Current Assets ÷ Current Liabilities) and debt to equity
ratio will change, but not in the direction the company thinks, provided
unearned revenues are recorded properly. As subscriptions are
obtained, current assets (cash or accounts receivable) will increase, and
current liabilities (unearned revenue) will increase by the same amount.
As the revenue is recognized, the current ratio will become more
favourable. Similarly, the debt-to-equity ratio will not be decreased, due
to the increase in liabilities.

Solutions Manual 6.150 Chapter 6

CA 6.2 ROUGE VALLEY GOLF AND HEALTH CLUB (RVGH)

Case Overview

The company financial statements are used to determine bonus

payments; therefore, the controller may have a bias to maximize net
income. The controller and assistant controller disagree on the treatment
of several items. Care should be taken to ensure that the statements are
not biased and adhere to appropriate reporting standards. Given that the
company is public, IFRS standards are a constraint.

Analysis and recommendations

Issue: The controller has requested revenue be recognized when the

annual membership fee is collected.

The membership fees are typically paid in advance, providing a money-

back guarantee and allowing a refund of any remaining unused portion
of the membership fees. The membership fee gives the member the use
of the fitness centre, the right to fitness classes, and the right to reserve
a tee time at any of the facilities for an additional user fee. As such, the
membership represents a single performance obligation to RVGH, since
it is not bundled with any other obligation. The membership should be
recognized as revenue over the life of the membership, since the
services provided, and the benefits received by the customer, are
substantially the same each month. Every month RVGH earns one-
twelfth of the revenue. The recording of the sale of a membership results
in a liability for the unearned portion and potentially a refundable portion
of the fee. For those membership fees that are financed, interest is
recognized as time passes at the rate of 8 percent per annum. Provided
the company believes that it is probable that it will collect the outstanding
receivable, the revenue on the financed memberships should also be
recognized over the life of the membership.

Separate user fees for the reserved golf course tee times should be
recorded as revenue as the members use the course.

Although the controller would prefer immediate recognition, there is no

basis to support this.

Solutions Manual 6.151 Chapter 6

CA 6.2 RVGH (CONTINUED)

Issue: The controller has requested revenues be recognized when the

coupons are sold as opposed to when they are used.

As with the membership fees, the services delivered when customers

use coupons represent a separate contract between RVGH and its
customers. Cash received from the sale of coupon books should initially
be recorded to unearned revenue. Service revenue from the delivery of
classes should be recorded and the unearned revenue liability reduced
when the coupons are redeemed. Specifically, when members attend
aerobics classes.

At year-end, an adjustment should be made to recognize the revenue

from unused coupons that have expired. Once the company builds a bit
of history, it may take a percentage of the estimated unredeemable
coupon revenue into income over the year as the coupons are used,
similar to breakage on gift cards.

Since the company currently has no history, GAAP supports recognition

of revenue as its performance obligation is met and the rest when the
coupons expire. There is no compelling reason to support the
recognition of revenue when the coupons are sold.

Issue: The controller would like to recognize the 20% equipment down
payment and the corresponding estimated 4% repair expense related to
the sale when the down payment is received.

RVGH has not provided any goods or service at the time the down
payment for equipment purchases is received. The down payment
should be treated as Unearned Revenue until delivery of the equipment
is made, because satisfaction of the performance obligation occurs
when delivery or transfer of ownership of the machine takes place.
Revenue would be recorded for the machine upon delivery.

The warranty is a type of assurance warranty – i.e., assuring that the

machine is of good quality. The estimated cost of the assurance
warranty would be accrued and booked to a Warranty Expense and a
Warranty Liability account. There is no basis for deferring or recognizing
possible warranty costs.
Solutions Manual 6.152 Chapter 6
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

CA 6.2 RVGH (CONTINUED)

Ethical Issues:

Karen Browning may wish to speak to Jaymie Hogan again regarding

the GAAP violations to ensure that Karen fully understands Jaymie’s
position. In order to resolve the situation, Karen Browning should follow
the policies established by RVGH for the resolution of ethical conflicts.
If the company does not have such a policy or the policy does not resolve
the conflict, Karen should consider the following courses of action:

1. Since Karen’s immediate supervisor is involved in the situation, she

should take the issue to the next higher managerial level. Karen need
not inform Jaymie of this step because of her involvement.

2. If there is no resolution, Karen should continue to present the problem

to successively higher levels of internal review, such as the Audit
Committee or Board of Directors.

3. Karen should have a confidential discussion of her options with an

objective advisor to obtain a clearer understanding of possible
courses of action.

4. After exhausting all levels of internal review without resolution, Karen

may have no other recourse than to resign from her position. Upon
doing so, she should submit an informative memorandum to an
appropriate representative of the organization. She may also wish to
report this situation to the CPA office that governs the
province/territory the business is located in.

5. Browning should not communicate with individuals outside of the

organization about this situation unless legally prescribed to do so.

Solutions Manual 6.153 Chapter 6

CA 6.2 RVGH (CONTINUED)

If RVGH decides it wants to become a private company, and chose to

use ASPE, there could be differences in the way in which revenues are
recognized. Note that as a private company, it could continue to use
IFRS.

Issue: The controller has requested revenues be recognized when the

annual membership fee is collected.

Under the earnings approach, the membership revenues are recognized

over the year, since RVGH must provide access to and maintain the
facilities in order to earn the revenues. Revenues must be determined
to be collectible prior to being recognized. Revenue would be recognized
over the 12-month period (same as under IFRS).

Separate user fees for reserved golf course tee times are also recorded
as revenue when the members use the course (same as under IFRS).

The timing of the recognition is the same for interest revenue earned
from membership fee financing under IFRS.

Issue: The controller has requested that revenues be recognized when

the coupons are sold as opposed to when they are used.

The performance of the service provided when the coupons are

redeemed should result in the recognition of revenue when customers
receive the service (same as IFRS). The collection risk is not an issue,
given the cash was received when the coupons were sold.

Solutions Manual 6.154 Chapter 6

CA 6.2 RVGH (CONTINUED)

Issue: The controller would like to recognize the 20% equipment down
payment and the corresponding estimated 4% repair expense related to
the sale when the down payment is received.

For the elliptical machine sales, the critical event in the transaction that
allows the sale to be recognized is the transfer of ownership of the
goods. This is indicated in the f.o.b. terms. When this occurs, the risks
and rewards of ownership have been transferred. Machine sales also
include a one-year warranty. Since the repair services are not yet
rendered, a liability is accrued to address the cost of servicing the
warranty, estimated in this case at 4% of the sales price.

Solutions Manual 6.155 Chapter 6

INTEGRATED CASES

IC 6.1 STANDFORD PHARMACEUTICALS INC. (SP)

Note that this case includes some issues that includes technical material to be
covered in more detail later in the text. The case may be used to encourage students
to do some advanced research on their own or alternatively, students might be
encouraged to use basic analysis using the conceptual framework. Issues may be
discussed in more general terms including whether to recognize debt or liabilities,
how to measure assets, and whether or not to disclose a problem. The solution
below takes the latter route.

Case Overview

The company is experiencing cash flow difficulties (as evidenced by increased

competition, inability to pay bonuses, and rapid expansion) and is currently
negotiating an increase to its credit line. The bank has concerns about the
company’s liquidity and solvency and will likely focus on the cash flows, current ratio,
and debt to equity ratio in deciding whether to lend more money. Therefore, any
issues that affect these numbers are important. The auditor would like to assess
audit risk and will want to examine any potentially controversial financial reporting
issues. Since the company is barely breaking even, anything that affects net income
will be considered material. The CFO will be biased to show higher net income since
he is worried that the share price will fall. He will also want to project a more stable
cash flow picture in order to maximize stock prices for management stock options.
The case implies that the entity is a public company (worried about the share prices
falling); given this IFRS is a constraint. The main users will want more relevant and
reliable information.

Analysis and recommendations

Issue: The company is currently subject to a class action lawsuit that is related to a
significant number of individuals allegedly falling ill as a result of using one of SP’s
major pharmaceuticals.

This is likely the most significant issue. This is a very large potential liability (claim
equal to prior year revenues). Since the company’s lawyers cannot estimate the
likely loss and even though they fear that the company will lose, note disclosures
must be made (no impact on net income or key ratios). However, every attempt
should be made to try to estimate the loss. However, the company will not want to
overemphasize the problem. The existence of this lawsuit could result in a going
concern issue – information that the auditor and banker will find to be relevant. The
company must decide whether to include a financial statement note disclosure about
its status as a going concern – a tough decision.

Solutions Manual 6.156 Chapter 6

IC 6.1 SP (CONTINUED)

Issue: SP entered into a $30 M purchase arrangement with Dev Drugs to develop
new drugs and distribution channels. However, since SP was experiencing cash
flow problems much of this money was spent upfront and it appears it was not spent
on what the money was intended for.
Revenue Liability
- The funding represents - The transaction represents a
revenues for development of source of funding to the
drugs and distribution systems. company. The company is short
It is measurable and collectible of cash and cannot afford to
since it has already been show more debt on the balance
received. sheet. This funding represents a
- A large portion of this money more creative source of cash.
has already been spent. - It appears that the company has
Therefore, SP might argue that an obligation to repay the money
the company has already done via the 2% royalty payment.
what it was being paid to do. Even though the legal form is
- The 2% royalty would be paid to that the payment represents a
DDC who would presumably royalty, the economic substance
own the drugs that SP was is that it represents an obligation
helping to develop. to repay the funding.
- The performance obligation is - Why would DDC otherwise fund
the development service that distribution channels? Is this just
was provided. It is provided over a type of loan that SP uses to
time and the customer receives alleviate cash flow difficulties?
and consumes the benefit as it
is provided.
- Since the services appear to be
largely provided over the period,
the revenue should be
recognized as the services are
provided.

In conclusion, if the money is primarily for drug research and the development of
drugs for DDC (where DDC owns the resulting drug), the money may be reflected
as revenue as long as SP has satisfied the performance obligation by providing the
R&D services. The portion for development of distribution channels sounds more
like financing and should be treated as debt. A neutral presentation is required that
does not give an advantage to one set of users (management) over another (DDC
or shareholders). This would be a risky area in terms of the audit.

Solutions Manual 6.157 Chapter 6

IC 6.1 SP (CONTINUED)

Issue: Jenstar Drugs Limited (JDL) was purchased for $200 M. The amount included
net identifiable assets with a fair value of $150 M, of which $120 M was assigned to
patents. A major competitor has announced several new drugs that will directly
complete with JDL.

Write down the JDL asset purchase Leave as is

- It would appear there is some - It is too early to assess the
impairment due to the increase impact of the increased
in competition. competition.
- The patents may be worth less if - With regard to the patent, SP
they relate to the drugs in has a commitment from a third
question. party to buy it for $50 million. If
- This is a material amount since the difference is recoverable
SP paid $200 million and the from revenues, no write-down is
company is in a break-even necessary.
situation meaning that any write-
down would result in a loss.

Currently it is difficult to estimate the impact of the competition, so no write-down is

recommended. Since the company is only considering a sale of JDL, this is not a
discontinued operations issue. This would also be a high-risk area for the audit since
it is difficult to quantify any impairment or prove that there was an impairment.

Issue: SP acquired a trademark with a 3-year legal life remaining. The trademark
is renewable every 10 years at little cost. The company is unsure if it will renew. SP
needs to determine how amortization will be recorded for the trademark.

This is a minor issue given the significance of the other issues. The amortization
period could be three years if it is assumed that the company will not renew. If it is
assumed that SP will renew, there is no need to amortize at all. Given there is little
cost to renew, it would not be unreasonable to treat the life as indefinite and not
record amortization. However, since SP is unsure whether it will renew it or not, there
may be some question about the extent of its future economic benefits. This issue
should be resolved before a decision is made about the accounting.

Solutions Manual 6.158 Chapter 6

IC 6.2 SHANNONROCK RACING INC. (SR)

Case Overview
The company is privately owned and may choose to use either ASPE or IFRS. The
bank has agreed to accept statements prepared in accordance with ASPE.
The bank will be a key user of the financial statements and will be looking for
transparency. The company generates revenues from hosting races, driving
lessons, and facility rentals in the form of club memberships. The CEO has
diversified operations into the oil and gas sector, with half of the current year’s
revenues being generated through trading gains generated through gas contracts.
The company may be biased and does not wish to show significant revenue
contributions from gas deals.
The lawyers/plaintiffs in the lawsuit may be looking to the financial statements to try
and determine whether the company is generating significant profit at the expense
of the community (by creating pollution from track racing activities).
As controller, you want to ensure that the financial statements are transparent and
faithfully represent the economic situation of the company.

Analysis and recommendations

Issue: Revenue recognition for upfront fees: For a lifetime membership related to
the adoption of a “stock car” and for track racing, the club charges an upfront fee
with monthly subscription fees thereafter. All members adopt a car.
Rationale for recognizing revenue now Rationale for recognizing revenue later
- The fees are non-refundable - The upfront fee provides access
and are earned once the to the club over the life of the
member has completed the member. Therefore, the fees
driver training course. could be recognized over the
- The upfront payment is member’s lifetime.
specifically for the right to - This creates a measurement
belong to the club, all other issue – how to measure life?
activities such as racing, car May wish to use historical data.
adoption, and insurance are
attached to a monthly fee.
- The amount is measurable and
collectible, given it is received
upfront.

In conclusion, it would seem more prudent to recognize revenue over the life of the
member, assuming this can be measured with reasonable certainty.

Solutions Manual 6.159 Chapter 6

IC 6.2 SR (CONTINUED)

Issue: Insurance fee revenues: The monthly subscription fee includes the right to
use the member’s “adopted” car, a certain weekly number of racetrack hours
(including unlimited gas) and a monthly insurance premium. SR has negotiated a
master plan that it pays for and then is reimbursed as part of the membership fee.
Should SR recognize revenue related to the insurance portion of the fee that it
collects per member or net the amount received from members related to insurance
against the expense of the master agreement?

Recognize net Show gross

- The insurance plan costs are - Company has risks – the
incurred by SR on behalf of the company takes out the
members and then reimbursed insurance and negotiates the
by members through the insurance plan.
monthly membership fee. - If members do not purchase a
- The net amount is more like a membership, SR is left on the
commission that is earned by hook for the insurance costs of
selling the insurance. the master plan. However, the
risk of this is quite low, since a
member cannot adopt a car
without incurring a membership
fee that includes the insurance
cost.
- The company may incur a great
cost for insurance than it
recovers in membership fees
from its members.

In conclusion, recognize revenue on a net basis because the company does not take
on all the risks of the transaction and members do not negotiate.

Solutions Manual 6.160 Chapter 6

IC 6.2 SR (CONTINUED)

Issue: Treatment of the oil and gas contracts: SR has diversified into the oil and
gas sector, initially through purchase commitments to buy gas at fixed prices. This
has evolved into the trading of gas contracts, which has contributed to half of the
company’s net income for the year.

Treat as a derivative Treat as an expected use/executory

contract
- The company appears to be - The contracts were initially
trading for profit in speculative entered into for purposes of
gas contracts. meeting gas needs of drivers.
- A significant portion of the - Therefore, the company may
company’s income comes from argue that they should be
this source (50%). documented as expected use
- It is important to be transparent contracts.
and consider the financial - Similar to other purchase
statement user interests. commitments, these would not
- If these are exchange-traded necessarily get recognized until
contracts, they should be the delivery of the gas.
measured at FV with
gains/losses through income
under ASPE.
- This changes the risk profile of
company and requires additional
disclosures.

The business seems to have changed its operating activities to include active
trading. Therefore, these contracts should be recognized and revalued at each
reporting date.

Solutions Manual 6.161 Chapter 6

IC 6.2 SR (CONTINUED)

Issue: Lawsuit: The company is being sued by its surrounding community for alleged
pollution related to racing activities. A nearby city has passed a law holding company
polluters responsible for cleanup costs related to the pollution they create. SR
lawyers are arguing that the pollution caused by the racetrack only represents a
small fraction of total community pollution and that the airport and freeway are also
major contributors. Should the company accrue a liability for future cleanup costs?

Accrue cleanup costs Do not accrue costs

- SR may be at fault as racetracks - The pollution could be due to
contribute to the creation of a the highway and airport as well,
significant number of airborne this is difficult to measure.
toxins. - Since it is not clear who has
- The company has a duty to caused the pollution, who
participate in cleaning up the should take responsibility is also
pollution as a community not clear.
member if it wants to remain in
the community.

The lawsuit seems to be at a very preliminary stage and so SR may disclose (only)
at this point.

Solutions Manual 6.162 Chapter 6

IC 6.3 TOWERS INC. (TI)

Case Overview

TI shares trade on the stock exchange; therefore, IFRS is a constraint.

There is a downturn in business due to economic decline, industry alignment, and
tightening of capital markets. As a result, there may be a reporting bias to either
make the financial statements look better or to clean out the statement of financial
position so that future years look better.

The employee bonus plan was introduced to try and improve employee retention
and morale. It is putting pressure on TI to achieve profits in the fourth quarter. Given
this, “profits” are a key metric for the period. However, there is an uncertainty as to
how these profits are defined, i.e., net income versus operating profits. These
profitability targets may lead to financial statement manipulation. The use of
roadmaps is especially problematic. It implies that the numbers may be manipulated
and that this is acceptable to management. It appears that management has
manipulated profits in prior years by overstating provisions. This further supports the
potential for manipulation in the current year. This is unacceptable and unethical. As
controller and a CPA, you should not accept this.

The company is under scrutiny from securities regulators, which means there is
additional risk if aggressive accounting is employed. The lawsuits also increase the
risk related to aggressive financial statement reporting. In both cases the accounting
policies chosen will come under close scrutiny in court and/or through either
securities commission regulators. Stakeholders include regulators who will be
deciding whether to fine or penalize the company. They, along with the investors and
their lawyers, will be looking for evidence of aggressive accounting treatments.

Credit-rating agencies also use the financial statements to assess the

creditworthiness of the company. These agencies will be looking for evidence of
aggressive accounting to support the recent downgrade. The stock exchanges are
also stakeholders and must make the decision on whether to delist the company.

Management walks a fine line. On one hand, they want to ensure that the employees
are retained and get any bonuses they deserve. On the other hand, they want to
ensure the accounting is transparent, given the company is at risk due to the
potential lawsuits and regulatory penalties as well as being delisted from the
exchanges. Since the company is in breach of its stock exchange requirements for
2024, the company’s shares could be delisted. This creates a possible going concern
issue.

Solutions Manual 6.163 Chapter 6

IC 6.3 TI (CONTINUED)

Analysis and recommendations

Issue: Revenue recognition: TI sent out interim product solutions, the final product
was not ready at the time of shipment. Revenues were recognized upon shipment.
Generally, customers will pay half upon receipt of the interim product.

Recognize revenues when the product Do not recognize revenues

is shipped
- The interim product and final - The interim product is not the
versions of the product are product that the customer
interrelated. Therefore, this is one agreed to buy. As a result,
performance obligation. the customer has not
- While it appears as though the received the product agreed
contract will be fulfilled within the to as part of the purchase
year, the revenue should be and no revenue should be
recognized over time as long as recognized until the final
the company can measure the product is completed and
percentage completed. delivered (control passes to
- The software is an asset that is the customer). At this point –
created by the company and the customer will accept the
controlled by the customer. asset.
Ownership transfers to the - Immediate recognition is
customer once they receive the aggressive accounting and
software. will surely be questioned by
- History indicates that returns are the regulators and in court.
highly unlikely. The company cannot afford
- The sale amount is measurable any more negative publicity.
since the amount has been - If the company does not ship
agreed to and as noted above – the final product, then the
returns are unlikely. sale would be null and void.
- The customers have already paid
half of the amount and since the
other half will be paid within a
short period of time, collectibility
is unlikely to be an issue.

Recognizing revenue now would likely be viewed as overly aggressive. However,

the revenue could be recognized over time using the percentage-of-completion
method if the company is able to measure the percentage complete. This will have
a negative impact on the employees as it may cause them to miss their targets. They
may believe that the sales are valid economic transactions that have resulted from
their efforts.
Solutions Manual 6.164 Chapter 6
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

IC 6.3 TI (CONTINUED)

Issue: How to account for the acquisition of the subsidiary: The company presently
owes DEF Inc. additional consideration for a prior acquisition. This will take the form
of issuing additional shares.

Accrue the additional consideration Do not accrue the additional

consideration
- This additional consideration - It is not known whether the
should be debited to the acquired company will perform as
investment account or to well at year end. Therefore, this is
individual items on the statement a contingency.
of financial position if the - The argument may be made that
subsidiary is consolidated. the main problem is that the
- The obligation to deliver a certain amount to be paid (in terms of
number of shares creates a duty shares) cannot be reliably
that cannot be avoided if the measured.
acquired company performs well. - The form of the additional
It is unclear whether a fixed dollar consideration may be variable. If
amount is owed (liability) or a the company is delisted, the
fixed number of shares (equity). consideration may have to be in a
- The company appears to be form other than shares if the
performing at above expectation shares have no fair value.
levels to date. - At most, disclosure should be
- IFRS requires recognition of made.
contingent consideration upfront
(measured at fair value).

This does not affect the bonuses for this year. The higher investment cost will flow
through to future years and generate lower profits in the year sold. Despite this,
recognition of the contingent consideration reflects the reality of the situation and is
the acceptable route (if it is measurable).

Solutions Manual 6.165 Chapter 6

IC 6.3 TI (CONTINUED)

Issue: In 2025, the company is continuing its restructuring and will be streamlining
its activities. As part of this strategy, it is abandoning its voice-over-fibre (VOF)
operations. Treatment of the abandonment of VOF needs to be determined.

Treat as discontinue operations Do not treat as discontinued

operations
- This is a separate component dealing - This appears to be a part of
with a specific technology – VOF. the evolution of the business.
- The operations and cash flows are - It is not clear that VOF is
distinct since it seems that the operationally distinct – it may
company has determined which be no more than a production
assets will be abandoned and which line. Likewise, there is no
employees will be let go. It sounds as evidence that cash flows are
though the closure is imminent (early separate.
2025) which implies that a detailed - It is misleading to try to break
plan is in place. out the costs and revenues if
- This creates transparent financial you cannot measure them.
statements since the company has - The company may wish to
strategically decided to let go of old assess whether assets are
technology to allow new investment impaired since future cash
and focus on new technology. flows appear to be non-
- The assets are not held for sale since existent.
they will be abandoned, and not sold.
- The company may wish to assess
whether or not the assets are
impaired since future cash flows
appear to be non-existent.
- The results of operations up to year
end would be classified as
discontinued operations on the
statement of income.
- Note that if the bonus is based on
income from continuing operations,
this may be an important issue. If it is
based on net income, there is no
impact on bonuses.

Transparency might dictate that the operations be segregated and that every
attempt be made to show them separately so that users may assess the prospects
of the company.

Solutions Manual 6.166 Chapter 6

IC 6.3 TI (CONTINUED)

A critical issue is the possible delisting of the company’s shares on the stock
exchanges. The controller must ensure that steps are taken to avoid being delisted.
This includes communicating with the stock exchanges to ensure financial
statements are filed as soon as possible.

The controller should discuss the criminal investigation and the class-action lawsuits
with senior management and / or the Board. Given the scrutiny from both regulators
and various lawsuits, the concerns over possible delisting of the stock should be
taken seriously. If there is no resolution, the controller should continue to present
the problem to successively higher levels of internal review, i.e., audit committee and
the Board.

Finally, the provisions should not be used to manipulate earnings. Every attempt
must be made to measure the value of the bad debts and inventory, and evidence
should be gathered to substantiate the values. The reversal of the provisions should
be highlighted as a one-time and non-recurring item if these items are no longer
needed.

Solutions Manual 6.167 Chapter 6

RESEARCH AND ANALYSIS

RA 6.1 BCE INC. and TELUS CORPORATION

a. BCE: In Note 1 to its financial statements, BCE details its operations as follows:
“BCE is a telecommunications and media company providing wireless, wireline,
internet and television services to residential, business and wholesale customers
in Canada. Our Bell Media segment provides conventional TV, specialty TV, pay
TV, streaming services, digital media services, radio broadcasting services and
out-of-home advertising services to customers in Canada”.

BCE includes specific wording regarding contracts with customers in Note 2c as

summarized below:

• Revenue is measured on the value of the expected consideration from the

customer and recognized when control of the product or service is
transferred to the customer.
• For bundled arrangements:
o If products and services are separately identifiable and the customer
realizes benefits without further company support, these are
accounted for individually,
o The total consideration is allocated to each product / service based
on its stand-alone price,
o When products / services are not sold separately, BCE uses the
expected cost-plus margin approach to determine the standalone
prices,
o Products / services purchased by the customer that are in addition
to the bundle are accounted for separately.
• BCE enters into arrangements with subcontractors to provide services to its
customers. If BCE is the principal, the total amount of revenue billed to the
customer is recognized. If BCE is not the principal, BCE recognizes only the
portion of the billing that they get to keep.

Solutions Manual 6.168 Chapter 6

RA 6.1 BCE INC. and TELUS (CONTINUED)

• Wireless / Wireline Segment Revenues:

o Revenue is generated by providing integrated digital wireless voice
and data communication products / services to residential and
business customers,
o Product related revenues are recognized when a customer takes
possession of the product,
o Service revenues are recognized as the services are provided to the
customer,
o Bundled arrangement revenues are recognized using observable
stand-alone prices and adjusted for market conditions and other
factors as appropriate,
o For wireless products and services that are sold separately, the
customer usually pays in full or monthly. For wireless products and
services that are bundled, typically they are financed over time. If the
financing component is significant, the device financing plan portion
is discounted at market rates and accreted over the contract period,
o Revenue is also generated from providing data, including Internet
access and Internet protocol television (IPTV), local telephone, long
distance, satellite TV service and connectivity, as well as other
communication services and products to residential and business
customers. Product and service revenue is recognized in a similar
manner to the points made above.
• Media Segment Revenues:
o The media segment principally generates revenue from conventional
TV, specialty TV, digital media, radio broadcasting and OOH
advertising and subscriber fees from specialty TV, pay TV and
streaming services.
o Advertising revenue is recognized when advertisements are aired or
posted on websites or appear on advertising panels and street
furniture.
o Revenues relating to subscriber fees are recorded monthly as the
services are provided.

Solutions Manual 6.169 Chapter 6

RA 6.1 BCE INC. and TELUS (CONTINUED)

TELUS recognizes similar types of revenue to BCE as summarized below

from the details provided in Note 1(e):

• Most revenues, wireless and wired, are earned from access to, and usage
of telecommunication infrastructure. Most of the remaining revenues are
earned from providing services and products that facilitate access to, and
usage of, the telecommunication infrastructure.
• TELUS describes itself as offering complete and integrated solutions. The
revenues it generates involves the delivery of multiple products and services
(performance obligations) that occur at different points in time. TELUS
applies professional judgement to identify its performance obligations and
the subsequent allocation of the transaction price to those obligations.
• TELUS indicates that its contracts with customers do not have a significant
financing component. Except for any upfront payments and any in-store
cash and carry items, equipment sales payments are typically due within 30
days of billing.
• Multiple contracts with a customer are normally accounted for separately
unless they are over a short period of time. In that case, those contracts are
grouped together.
• Regarding revenue from contracts with customers, TELUS follows IFRS 15
and makes the following points:
o No adjustment is made to the contracted amount of consideration
related to the effects of financing as it is expected that any potential
amounts are not significant at the contract level,
o There is no deferral of acquisition costs when the agreement is 1
year or less,
o When estimating transaction price allocations for remaining
unfilled performance obligations (fully or partially), amounts related
to contracts that are 1 year or less are excluded.

Solutions Manual 6.170 Chapter 6

RA 6.1 BCE INC. and TELUS (CONTINUED)

• Voice and data revenues are recognized on an accrual basis and include an
estimate for revenues earned but not yet billed. Upfront customer activation
and connection fees are deferred and recognized over the average expected
term of the customer relationship.
o The CRTC subsidizes local exchange carriers, (including TELUS)
to provide residential basic telephone service to high cost serving
areas. TELUS recognizes the subsidy on an accrual basis by
applying the subsidy rate to the number of residential network
access lines provided in high cost serving areas.
• Other and wireless equipment:
o TELUS recognizes product revenues, including amounts related to
wireless handsets sold to re-sellers and customer premises
equipment, when the products are both delivered to, and accepted
by, the end-user customers, irrespective of which supply channel
delivers the product.
o With respect to wireless handsets sold to re-sellers, TELUS
considers itself as the principal and primary obligor to the end-user
customers. Revenues from operating leases of equipment are
recognized on a systematic and rational basis (normally a straight-
line basis) over the term of the lease.

Solutions Manual 6.171 Chapter 6

RA 6.1 BCE INC. and TELUS (CONTINUED)

b. BCE reports that when the company has arranged with subcontractors or others
to provide a service directly to customers, the company must determine whether
it is acting as a principal or as an agent in that relationship. Where the company
determines that it is the principal, revenue is reported at the gross amount billed
to its customers. Where the company determines that it is an agent, revenue is
reported net. However, the company provides no details on what factors are
considered in determining how the revenue will be recognized. TELUS makes
no reference to subcontracted work or reporting revenue at net amounts.
However, TELUS does refer to the fact that, for wireless handsets sold to re-
sellers, it considers itself to be the principal and primary obligor to the end
customer.

c. TELUS’s revenue recognition explanations appear to be more comprehensive

and descriptive for certain items. More detailed descriptions are given about the
nature of the services provided, and how differences in accruals and billings are
treated. On the other hand, BCE is much more specific in the types of revenue
generated and how these are recognized. It gives more guidance on the types
of contracts that have multiple deliverables and how the allocation is decided.

Solutions Manual 6.172 Chapter 6

RA 6.1 BCE INC. and TELUS (CONTINUED)

d. As described above, many of the estimates within the revenue recognition

practices of both BCE and TELUS center around estimating the length of the
customer relationship, the various performance obligations, and the associated
respective values proportionate to the overall transaction price, etc.

Data analytics would assist management in constructing estimates and making

more informed decisions in these topic areas. Information from their own
customer relationship management systems, and accounting information
systems could be mined to visualize what the company has experienced over
time. Relevant data elements could include, but is not limited to the following:

- Length of customer relationship by:

o Product type
o Service type
o Location (Geographic region)
- Revenue per customer by:
o Product type
o Service Type
o Location (Geographic region)
- Cost per customer by:
o Product type
o Service Type
o Location (Geographic region)

The goal is to create a dashboard that will bring various metrics from across
the organization into perspective, and into one consolidated visual. This
visualization of the data enables managers to make more informed
decisions.

Solutions Manual 6.173 Chapter 6

RA 6.2 AIRBUS SE

a. As identified in Notes 3 (sources of revenue) and 11 to its financial

statements, Airbus SE is in the business of manufacturing commercial
aircraft, civil and military helicopters, commercial space launch vehicles,
military aircraft, satellites, defence systems and defence electronics, and
providing services related to such products.

b. Airbus SE recognizes revenue related to the construction contracts using the

percentage-of-completion method. As per Note 4, Revenue recognition for
performance obligations transferred over time, “The PoC method is used to
recognise revenue for performance obligations transferred over time. This
method places considerable importance on accurate estimates at completion
as well
as on the extent of progress towards completion. For the determination of the
progress of the performance obligations, significant estimates include total
contract costs, remaining costs to completion, total contract revenue, contract
risks and other judgements. The management of the operating divisions
continually review all estimates involved in such performance obligations and
adjusts them
as necessary (see “– Note 23: Contract Assets and Contract Liabilities, Trade
Receivables and Trade Liabilities”).” Airbus makes several estimates and
determinations regarding progress completed and costs remaining until
project completion in order to recognize revenue over time. As per the
percentage of completion method a contract asset or liability may be
recognized depending on the given situation. Note 23 provides the details
pertaining to Airbus’ produced goods contracts.

c. As referenced in Note 23, Airbus characterizes Contract Assets and Liabilities

as:

“Contract assets represent the Company’s right to consideration in

exchange for goods or services that the Company has transferred to a
customer when that right is conditioned by something other than the passage
of time (e.g., revenue recognised from the application of the PoC method
before the Company has a right to invoice).

Contract liabilities represent the Company’s obligation to transfer goods or

services to a customer for which the Company has received consideration, or
for which an amount of consideration is due from the customer (e.g., advance
payments received).

Solutions Manual 6.174 Chapter 6

RA 6.2 AIRBUS SE (CONTINUED)

Net contract assets and contract liabilities are determined for each
contract separately. For serial contracts, contract liabilities are presented in
current contract liabilities, if revenues are expected within the next twelve
months or material expenses for the manufacturing process have already
occurred. For long-term production contracts (e.g., governmental contracts
such as A400M, Tiger, NH90), contract liabilities are classified as current
when the relating inventories or receivables are expected to be recognised
within the normal operating cycle of the long-term contract.”

As per the Statement of Financial Position, total Contract Assets (current and
non-current) is EU 1,122 million. Total Contract Liabilities (current and non-
current) is EU 43,887 million.

As per Note 23, Contract Assets decreased in 2020 by EU 4,353 million due
to prior year progress yet to be realized by the customer now being realized.
This decrease in 2020 Contract Assets was offset by an increase of EU 4,188
million as a result of changes in the measure of progress.

Also shown in Note 23, Contract Liabilities decreased by EU 20,327 million in

2020 as revenue was recognized that related to the liability as of the beginning
of the year. The decrease in Contract Liabilities was offset by an increase of
EU 20,915 million due to cash received by customers that did not qualify as
revenue that should be recognized.

Solutions Manual 6.175 Chapter 6

RA 6.3 THE PROCTOR & GAMBLE COMPANY (P&G)

a. Note 1 to P&G’s financial statements indicate that the company provides

“branded consumer packaged goods” that are sold in more than 180
countries, with “on-the-ground” operations in about 70 countries.
b. P&G’s net sales for its year ended June 30, 2020 were US $70,950
million.
c. P&G’s net sales increased by US $3,266 million or (4.83)% between
2019 and 2020: between 2018 and 2019, the increase was US $852
million or (1.27)%, and between 2018 and 2020, the increase was US
$4,118 million or (6.16)%.
d. Revenue is primarily from the sale of finished products. Revenue is
recognized when title to the goods, ownership, and the risk of loss, are
transferred to the customer. This could be either on the date the goods
are shipped to, or when they are received by, the customer.
Net sales are defined as revenue from sales, net of sales and other taxes
collected on behalf of government bodies, plus shipping and handling
costs included in the list prices charged to customers, minus same period
allowances for sales discounts and product returns. In addition, sales are
reported net of trade promotion costs.

e. Trade promotions include customer pricing allowances, merchandising

funds, and consumer coupons. The costs associated with all trade
promotion spending are deducted from revenue in determining net sales,
usually in the same period as the sale is recognized. Most of these
arrangements have terms of approximately one year. Accruals for
expected payouts under these programs are included in Accrued and
Other Liabilities on the Balance Sheet.

Pricing allowances (volume rebates) are usually based on customers

making a qualifying level of purchases from P&G in a one-year period.
To the extent P&G can estimate with sufficient reliability a measure of its
obligations to pay out under such programs, accrual accounting and
matching would dictate the recognition of the costs in the same period as
the related sales. Whether providing merchandising funding based on
similar criteria as customer volume rebates or a fixed amount provided
with each purchase to customers, this matching also would be required
under accrual accounting.

Solutions Manual 6.176 Chapter 6

RA 6.3 P&G (CONTINUED)

e. (continued)

For these types of customer incentives, P&G is not receiving any

additional benefit, but only the current sales from the customer. Both are
appropriately recognized as reductions in revenue as price adjustments.
Deducting costs associated with coupons provided to P&G consumers
from current revenue may or may not be consistent with accrual
accounting. This is because the conditions attached to the coupons can
take various forms and require different transactions on the part of the
consumers. To the extent that the coupons are a form of a multiple
product arrangement with the remaining revenue deliverable to be
provided in the future, accrual accounting would require the deferral of
some part of current period revenues until the ultimate transaction with
the consumer is complete, at which point the deferred revenue and costs
of the transaction are recognized in the same period.

To the extent that P&G’s coupons are not considered a future

revenue/product deliverable, but instead are considered price
adjustments of current period sales, accrual accounting would account
for them as reductions in the amount of current sales revenue
recognized. Although the revenue reductions might not exactly match
with the sales recognized in revenue, the differences from year to year
would be immaterial. If the coupon program is seen by the company as
marketing/promotion costs, to be consistent with this view, the estimated
cost of the coupons should be included as a separate selling cost rather
than as a pricing incentive and reduction in revenue.

Solutions Manual 6.177 Chapter 6

RA 6.4 THE COCA-COLA COMPANY AND PEPSICO, INC.

a.
(in millions of US$) Coca-Cola PepsiCo

Net revenue - 2020 $33,014 $70,372

Net revenue - 2019 37,266 67,161

$ change in net revenues (4,252) 3,211

% change in net revenues (11.4%) 4.78%

PepsiCo’s net revenue increased by 4.78% in 2020 over 2019, while

Coca-Cola’s net revenue decreased by 11.4%.

b. Both companies appear to have similar revenue recognition policies.

As per Note 3 Coca-Cola indicates:

“Revenue is recognized when performance obligations under the terms
of the contracts with our customers are satisfied. Our performance
obligation generally consists of the promise to sell concentrates, syrups
or finished products to our bottling partners, wholesalers, distributors or
retailers. Control of the concentrates, syrups or finished products is
transferred upon shipment to, or receipt at, our customers' locations, as
determined by the specific terms of the contract. Upon transfer of control
to the customer, which completes our performance obligation, revenue
is recognized. Our sales terms generally do not allow for a right of return
except for matters related to any manufacturing defects on our part. After
completion of our performance obligation, we have an unconditional right
to consideration as outlined in the contract.”

PepsiCo reports a similar policy in Note 2, indicating that they also do not
allow a right of return. However, the company explains that it has a policy
of removing and replacing certain products that are damaged or out-of-
date from store and warehouse shelves. Therefore, the company
provides for an allowance for anticipated damaged and out-of-date
products, which is assumed to be deducted from sales revenue.

Solutions Manual 6.178 Chapter 6

RA 6.4 COCA-COLA COMPANY AND PEPSICO (CONTINUED)

c. The geographic segments each company operates in is found in the

notes on segmented information.

In Note 19, Coca-Cola generates net operating revenue in the following

geographic areas (in millions), with the percentage of total third party
reported revenues noted in brackets: Europe, Middle East, and Africa
$5,534 (16.76%), Latin America $3,499 (10.60%), North America
$11,473 (34.75%), Asia Pacific $4,213 (12.76%), and it includes Global
Ventures $1,991 (6.03%), a Bottling Investments segment $6,258
(18.96%), and Corporate $46 (0.1%).

In Note 1, PepsiCo. reports that its most significant revenue is derived

from six countries as follows (in millions): United States $40,800
(57.98%), Mexico $3,924 (5.58%), Russia $3,009 (4.28%), Canada
$2,989 (4.25%), United Kingdom $1,882 (2.67%), China $1,732 (2.46%),
South Africa $1,282 (1.82%) with all other countries making up the
remaining sales $14,754 (20.97%).

Coca-Cola breaks down the North America segment further, showing

that net operating revenues from the United States is $11,281 (34.17%).
As can be seen, the United States is the largest market for both
companies making up 34.17% of net revenues for Coca-Cola and
57.98% for PepsiCo, leaving foreign sales at 65.83% for Coca-Cola and
42.02% for PepsiCo. PepsiCo appears to rely more on domestic markets
and sales than does Coca-Cola.

Solutions Manual 6.179 Chapter 6

RA 6.4 COCA-COLA COMPANY AND PEPSICO (CONTINUED)

d. Answers will vary but the following would be good examples:

Agriculture – “100% of our direct commodities are sustainably sourced

in 28 countries …”
- As consumers continue to look for products that have
been sustainably sourced, this will support continued
revenue and subsequent growth.
- Sustainably sourced products are typically of higher
quality and are also perceived that way by customers.
This would contribute to revenue generation and
potentially higher prices.

Products – “We’ve continued to expand our portfolio of improved

choices for customers. …”
- Greater choice means that PepsiCo can better meet the
ever changing and increasingly demanding needs of
customers. This greatly supports the company’s ability to
generate revenue and grow into the future.

Packaging – “ … to help drive a circular economy and ensure

packaging never becomes waste …”
- Customers are increasingly looking for product options
that minimize their carbon footprint and protect the
environment. A goal like this one shows that PepsiCo
products are a viable option and would attract
customers.

Solutions Manual 6.180 Chapter 6

LEGAL NOTICE

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retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written permission
of John Wiley & Sons Canada, Ltd.

MMXXII vii F2

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