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Chapter 24: Question 20Q (page 1452)

What is a performance obligation, and how is it used to determine when revenue should be recognized?

Short Answer

Expert verified

Performance obligations are a promise made by the seller of the good to its buyer to transfer goods or services at a particular time period.

Revenue should be recognized when it is realized or realizable and when it is earned.

Step by step solution

01

Definition of Performance Obligation

A promise containing obligations to act in accordance with the standards stated in the relevant agreement is known as a performance obligation.

02

Ways to determine when revenue should be recognized.

Companies recognize revenue when a performance obligation is fulfilled. The principle for recognizing revenue under certain generally accepted accounting principles (GAAP) states that the company should recognize revenue under the following terms:

  • At the point of production.
  • At the time of sale, and
  • On delivery or receipt of cash.

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Most popular questions from this chapter

Under IFRS, share dividends declared after the statement of financial position date but before the end of the subsequent events period are:

a) accounted for similar to errors as a prior period adjustment.

b) adjusted subsequent events, because they are paid from prior year earnings.

c) not adjusted in the current year鈥檚 financial statements.

d) recognized on a prospective basis from the date of declaration

Where can authoritative IFRS be found related to the various disclosure issues discussed in the chapter?

What is the relationship of the asset turnover to the return on assets?

Answer each of the questions in the following unrelated situations.

d) A company has current assets of \(600,000 and current liabilities of \)240,000. The board of directors declares a cash dividend of $180,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?

Your firm has been engaged to examine the financial statements of Almaden Corporation for the year 2017. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2012. The client provides you with the following information.

ALMADEN CORPORATION

BALANCE SHEET

DECEMBER 31, 2017

Asset

Liabilities

Current assets

\(1,881,100

Current liabilities

\) 962,400

Other assets

5,171,400

Long-term liabilities

1,439,500


Capital

4,650,600

\(7,052,500

\)7,052,500

An analysis of current assets discloses the following.

Cash (restricted in the amount of \(300,000 for plant expansion)

\)571,000

Investments in Land

185,000

Accounts receivable less allowance of \(30,000

480,000

Inventories (LIFO flow assumption)

645,100

\)1,881,100

Other assets include:

Prepaid expenses

\( 62,400

Plant and equipment less accumulated depreciation of \)1,430,000

4,130,000

The cash surrender value of life insurance policy

84,000

Unamortized bond discount

34,500

Notes receivable (short-term)

162,300

Goodwill

252,000

Land

446,200

\(5,171,400

Current liabilities include:

Accounts payable

\) 510,000

Notes payable (due 2020

157,400

Estimated income taxes payable

145,000

Premium on common stock

150,000

\( 962,400

Long-term liabilities include

Unearned revenue

\) 489,500

Dividends payable (cash

200,000

8% bonds payable (due May 1, 2022)

750,000

\(1,439,500

Capital includes:

Retained earnings

\)2,810,600

Common stock, par value \(10; authorized 200,000 shares, 184,000 shares issued

1,840,000

\)4,650,600

The supplementary information below is also provided.

  1. On May 1, 2017, the corporation issued at 95.4, \(750,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization.
  2. The bookkeeper made the following mistakes.
    1. In 2015, the ending inventory was overstated by \)183,000. The ending inventories for 2016 and 2017 were correctly computed.
    2. In 2017, accrued wages in the amount of \(225,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.
    3. In 2017, a gain of \)175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings.
  3. A major competitor has introduced a line of products that will compete directly with Almaden鈥檚 primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor鈥檚 line will be of comparable quality but priced 50% below Almaden鈥檚 line. The competitor announced its new line on January 14, 2018. Almaden indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but permit recovery of only a portion of fixed costs.
  4. You learned on January 28, 2018, prior to completion of the audit, of heavy damage because of a recent fire to one of Almaden鈥檚 two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.

Instructions

Analyze the above information to prepare a corrected balance sheet for Almaden in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings.
See all solutions

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