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Turnover is recognized when the risks and rewards of the underlying products and services have been substantially transferred to the customer. Revenue from
services is recognized as the services are performed. Interest income is recognized as interest accrues using the effective interest method.
MULTIPLE-CHOICE QUESTIONS
1. “Bill and hold” sales, in which delivery is delayed at the buyer’s request but the buyer assumes title and accepts invoicing, should be recognized when
a. The buyer makes an order.
b. The seller starts manufacturing the goods.
c. The title has been transferred but the goods are kept on the seller’s premises.
d. It is probable that the delivery will be made, payment terms have been established, and the buyer has acknowledged the delivery instructions.
2. ABC Inc. is a large manufacturer of machines. XYZ Ltd., a major customer of ABC Inc., has placed an order for a special machine for which it has given a deposit
of €112,500 to ABC Inc. The parties have agreed on a price for the machine of €150,000. As per the terms of the sales agreement, it is an FOB (free on board)
contract and the title passes to the buyer when goods are loaded onto the ship at the port. When should the revenue be recognized by ABC Inc.?
a. When the customer orders the machine.
b. When the deposit is received.
c. When the machine is loaded on the port.
d. When the machine has been received by the customer.
3. Revenue from an artistic performance is recognized once
a. The audience registers for the event online.
b. The tickets for the concert are sold.
c. Cash has been received from the ticket sales.
d. The event takes place.
4. X Ltd., a large manufacturer of cosmetics, sells merchandise to Y Ltd., a retailer, which in turn sells the goods to the public at large through its chain of retail outlets.
Y Ltd. purchases merchandise from X Ltd. under a consignment contract. When should revenue from the sale of merchandise to Y Ltd. be recognized by X Ltd.?
a. When goods are delivered to Y Ltd.
b. When goods are sold by Y Ltd.
c. It will depend on the terms of delivery of the merchandise by X Ltd. to Y Ltd. (i.e., CIF [cost, insurance, and freight] or FOB).
d. It will depend on the terms of payment between Y Ltd. and X Ltd. (i.e., cash or credit).
5. M Ltd, a new company manufacturing and selling consumable products, has come out with an offer to refund the cost of purchase within one month of sale if the
customer is not satisfied with the product. When should M Ltd. recognize the revenue?
a. When goods are sold to the customers.
b. After one month of sale.
c. Only if goods are not returned by the customers after the period of one month.
d. At the time of sale along with an offset to revenue of the liability of the same amount for the possibility of the return.
6. Micrium, a computer chip manufacturing company, sells its products to its distributors for onward sales to the ultimate customers. Due to frequent fluctuations in the
market prices for these goods, Micrium has a “price protection” clause in the distributor agreement that entitles it to raise additional billings in case of upward price
movement. Another clause in the distributor’s agreement is that Micrium can at any time reduce its inventory by buying back goods at the cost at which it sold the
goods to the distributor. Distributors pay for the goods within 60 days from the sale of goods to them. When should Micrium recognize revenue on sale of goods to the
distributors?
a. When the goods are sold to the distributors.
b. When the distributors pay to Micrium the cost of the goods (i.e., after 60 days of the sale of goods to the distributors).
c. When goods are sold to the distributor provided estimated additional revenue is also booked under the “protection clause” based on past experience.
d. When the distributor sells goods to the ultimate customers and there is no uncertainty with respect to the “price protection” clause or the buyback of goods.
7. Company XYZ Inc. manufacturers and sells standard machinery. One of the conditions in the sale contract is that installation of machinery will be undertaken by
XYZ Inc. During December 2005, XYZ received a special onetime contract from ABC Ltd. to manufacture, install, and maintain customized machinery. It is the first
time XYZ Inc. will be producing this kind of machinery, and it is expecting numerous changes that would need to be made to the machine after the installation is
completed, which one period is described in the contract of sale as the “maintenance period.” The total cost of making the changes during the maintenance period
cannot be reasonably estimated at the time of the installation. When should the revenue from sale of this special machine be recognized?
a. When the machinery is produced.
b. When the machinery is produced and delivered.
c. When the installation is complete.
d. When the maintenance period as per the contract of sale expires.
8. According to the consensus in IFRIC 13, an entity shall apply IAS 18 and account for award credits as a separately identifiable component of the sales transaction in
which they are granted. The consideration allocated to the award credits shall be measured by reference to their
a. Cost.
b. Replacement value.
c. Fair value.
d. Net realizable value.
9. IFRIC 18 provides guidance on the transfers of assets for entities that receive items of PPE. It addresses three issues. Which of the following issues does it not
address?
a. How to account for the transferred item.
b. How to derecognize the item.
c. How to account for the credit side of the transfer transaction.