Chapter 8 practice

Work through a complete generated contract or practice one revenue-recognition decision at a time.

The generated case asks you to apply all six chapter objectives to one arrangement. The 24 standalone multiple-choice questions let you practice one decision at a time. All practice is optional and is not submitted.

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Complete application

Work through a generated contract

Choose an industry and difficulty. Then answer Objectives 2.3a through 2.3f before opening the worked answer.

Case controls

Choose a case

Industry changes the setting. Difficulty selects a group of validated accounting patterns. “New case” changes the facts and amounts within that group.

RR-MFG-ONE-1

One delivered good

Manufacturing · Foundational · case 25 of 72

If something in this case does not look right, tell me and include case RR-MFG-ONE-1. You do not need to copy the full problem.

Contract facts

Alder Manufacturing and Pine Ridge Foods approved a written agreement. The agreement identifies each party's rights and requires payment of $72,000 under stated terms.

Pine Ridge Foods has sufficient financing and a reliable payment history. The arrangement is expected to change the timing or amount of Alder Manufacturing's future cash flows, and both parties are committed to perform.

Alder Manufacturing promises one standard packaging controller. The customer can use it on its own. Alder Manufacturing delivers it on December 15; Pine Ridge Foods accepts it and obtains possession, legal title, and risk of loss that day.

Alder Manufacturing issues an unconditional invoice for $72,000 on delivery. By December 31, Pine Ridge Foods has paid $0.

Your work

Answer all six questions before opening the worked answer. If the arrangement does not qualify as a contract, state where the five-step analysis stops and account for any cash received.

2.3a Does the arrangement qualify as a contract with a customer under ASC 606?
2.3b What are the performance obligations?
2.3c What is the transaction price?
2.3d How should the transaction price be allocated?
2.3e When and how much revenue should be recognized by December 31?
2.3f How should the customer-contract balances be classified at December 31?

Show the worked answer

2.3a: Contract threshold

Yes. The parties approved the agreement and are committed to perform. Their rights and the payment terms are identifiable. The arrangement has commercial substance, and the customer's financing and payment history support probable collection.

2.3b: Performance obligations

The standard packaging controller is one performance obligation. It is the only promised good or service.

2.3c: Transaction price

The transaction price is the fixed $72,000.

2.3d: Allocation

Allocate all $72,000 to the single performance obligation.

2.3e: Revenue

Recognize $72,000 at the point in time when Pine Ridge Foods obtains control on December 15.

2.3f: Contract-related balances

Report a $72,000 receivable for the unconditional invoice that remains unpaid. Revenue and billings are both $72,000, so no contract asset or contract liability remains.

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Decide whether a contract exists under ASC 606

Test the five contract criteria before applying the remaining steps. A signature or cash receipt alone does not establish a contract for revenue recognition.

Question 1: Identify missing approval

Foundational

A customer signs an order and pays a $5,000 deposit. The seller’s credit committee must approve the order before either party must perform. The committee has not acted by year-end. What is the best conclusion?

Question 2: Separate a concession from credit risk

Intermediate

A hospital has strong credit and intends to pay. Based on customary discounts, a supplier expects to accept $92,000 instead of the stated $100,000 price. What amount is used to assess collection probability?

Question 3: Account for a failed-contract deposit

Foundational

A seller receives a nonrefundable $12,000 deposit, but collection of the remaining price is not probable. Nothing has transferred, the seller still owes the promised goods or services, and none of the revenue-recognition conditions for a failed contract is met. What should the seller report?

Question 4: Evaluate commercial substance

Foundational

Assume a proposed customer arrangement is otherwise within the scope of ASC 606. The arrangement will not change the amount, timing, or risk of the company’s future cash flows. Which contract criterion fails?

Identify performance obligations

Apply both parts of the distinct test, then consider the series guidance for repeated distinct services.

Question 5: Apply both parts of the distinct test

Foundational

A company sells a standard server and installation. Other vendors can install the server, and the seller does not significantly integrate or modify it. How many performance obligations are present?

Question 6: Identify one combined output

Intermediate

A contractor promises design, equipment, and installation, then significantly integrates all three inputs into one functioning production line. What is the best conclusion?

Question 7: Apply the series guidance

Intermediate

A company promises 24 months of the same daily monitoring service. Each day is distinct, the customer receives the benefit as service occurs, and the same progress measure applies. How is the promise accounted for?

Determine the transaction price

Choose the estimation method, apply the constraint, and separate a significant financing effect when required.

Question 8: Estimate a binary bonus

Foundational

A contract pays a $30,000 bonus if a project finishes by June 30 and $0 otherwise. Which method will usually best predict the variable consideration?

Question 9: Estimate a range of outcomes

Intermediate

A contractor has many similar contracts, several possible incentive amounts, and reliable probability data for each outcome. Which method will usually best predict consideration?

Question 10: Calculate expected variable consideration

Intermediate

A contractor estimates a 30% chance of no bonus, a 50% chance of a $20,000 bonus, and a 20% chance of a $50,000 bonus. The expected-value method is appropriate. Before applying the constraint, what is the estimated variable consideration?

Question 11: Apply the constraint

Intermediate

A company estimates a $50,000 bonus, but the amount depends on a volatile factor outside its control and a significant reversal of cumulative revenue remains possible. What should it do?

a Include the full estimate. b Include only the amount for which it is probable that a significant reversal of cumulative revenue will not occur. c Exclude all contract consideration. d Record a receivable immediately.

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Answer: b

Choice B. Include estimated variable consideration only to the extent that it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty is resolved.

Question 12: Separate a financing effect

Intermediate

Equipment transfers today, but the customer pays a fixed price three years later. The delay primarily finances the customer, and no practical expedient applies. What is required?

Allocate the transaction price

Use relative standalone selling prices unless the evidence supports a specific allocation.

Question 13: Calculate a relative allocation

Foundational

A contract has a $90,000 transaction price. Standalone selling prices are $60,000 for Product A and $40,000 for Service B. How much is allocated to Service B?

Question 14: Allocate variable consideration specifically

Intermediate

A usage credit relates specifically to recurring test-kit batches, and assigning it there is consistent with the allocation objective. Where should it be allocated?

Question 15: Allocate a contract discount

Intermediate

A bundle sells below the sum of its standalone selling prices. No evidence shows that the discount relates entirely to specific obligations. What should the company do?

Determine when to recognize revenue

Test each obligation against the three over-time conditions. If none applies, identify when control transfers.

Question 16: Recognize a recurring service

Foundational

A customer receives and consumes the benefit of a hosted software subscription each day. Which conclusion applies?

Question 17: Enhance a customer-controlled asset

Intermediate

A contractor renovates a building owned and controlled by the customer. The work enhances the building as construction occurs. How is revenue recognized?

Question 18: Apply the third over-time condition

Intermediate

A manufacturer builds equipment that cannot be redirected. If the customer cancels for reasons other than manufacturer failure, an enforceable clause requires payment for work to date plus a reasonable profit. Which conclusion applies?

Question 19: Evaluate control indicators

Intermediate

Standard equipment ships December 30, but title, risk of loss, and customer acceptance transfer January 3. When should revenue be recognized?

Question 20: Calculate over-time revenue

Intermediate

A performance obligation qualifies for over-time recognition and has a $120,000 allocation. Qualifying costs incurred are $45,000, total expected qualifying costs are $90,000, and cost-to-cost faithfully depicts progress. How much cumulative revenue should the company recognize?

Question 21: Combine two recognition patterns

Intermediate

A contract allocates $80,000 to equipment and $24,000 to a 12-month service. The equipment transfers on October 1, and three months of service have been provided by December 31. Service transfers evenly over time. How much total revenue is recognized by December 31?

Classify customer-contract balances

Compare performance with billing and collection. A receivable is unconditional except for the passage of time.

Question 22: Identify a contract liability

Foundational

Under a valid ASC 606 contract, a customer prepays $18,000 for six months of service. No service has been provided. What should the company report?

Question 23: Distinguish a contract asset

Intermediate

A company completes a milestone and recognizes $25,000 of revenue. It cannot bill until the customer approves a separate validation test next month. What asset should it report?

Question 24: Calculate a contract liability

Intermediate

Under a valid ASC 606 contract, a company has recognized $84,000 of cumulative revenue and billed the customer $100,000. The billed amount is unconditional, and no cash has been collected. What contract liability should the company report?