Contract Liability and Revenue Recognition
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Contract Liability and Revenue Recognition

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Questions and Answers

When is the transaction price recognized for the quarterly newsletters?

  • Over four quarters as the newsletters are provided (correct)
  • At the beginning of the contract
  • At the end of the fiscal year
  • Upon receipt of the payment

    • What occurs if additional benefits are provided to members by the alumni association?

  • All revenue must be recognized at once
  • Revenue recognition is delayed
  • It creates additional performance obligations (correct)
  • The transaction price cannot be allocated

    • What is the recognition criterion for contribution revenue outside of Topic 606?

  • Recognized when received (correct)
  • Recognized based on estimated future benefits
  • Recognized at the beginning of the fiscal year
  • Recognized upon fulfillment of conditions

    • What might be necessary for determining revenue recognition according to the new standard?

    <p>A detailed analysis of conditions</p> Signup and view all the answers

    What can assist in enhancing clients' enterprise value according to the firm?

    <p>Understanding regulatory environments</p> Signup and view all the answers

    What does the article suggest regarding the uniqueness of revenue situations?

    <p>Every situation is unique and requires careful evaluation</p> Signup and view all the answers

    How does practice influence the revenue recognition process?

    <p>It simplifies the process over time</p> Signup and view all the answers

    What is a key aspect to consider when recognizing revenue under the new standard?

    <p>The specific conditions and contract details</p> Signup and view all the answers

    What is the purpose of debiting the contract liability at the beginning of the semester?

    <p>To reflect the obligation to provide services in exchange for payment</p> Signup and view all the answers

    How is the refund estimate calculated according to the provided information?

    <p>Total fees multiplied by 10 percent</p> Signup and view all the answers

    What indicates that the contract has commercial substance?

    <p>The university will name the stadium after the corporation</p> Signup and view all the answers

    What is the recorded amount per day if the total charges are $10,000 with a 10 percent refund estimate over a 100-day semester?

    <p>$91</p> Signup and view all the answers

    Which of the following actions corresponds with the end of the add/drop period if a student drops 10 percent of classes?

    <p>Debit refund liability, credit cash</p> Signup and view all the answers

    What is the estimated refund liability when total charges are $10,000 with a non-refundable deposit of $1,000?

    <p>800</p> Signup and view all the answers

    What is the correct transaction price based on the provided financial details?

    <p>$13,000,000</p> Signup and view all the answers

    What should the university maintain to satisfy the contract's terms with the corporation?

    <p>Signage in accordance with the agreement</p> Signup and view all the answers

    What is the first step in adjusting refund liability?

    <p>Making an entry to update refund estimates</p> Signup and view all the answers

    In which situation must an institution implement procedures to track refund estimates?

    <p>For summer semesters that span fiscal years</p> Signup and view all the answers

    How is revenue recognized according to the new revenue recognition model?

    <p>When the performance obligation is satisfied</p> Signup and view all the answers

    What must be avoided under Topic 606 regarding receivables and deferred revenue?

    <p>Recording billings before services are rendered</p> Signup and view all the answers

    What is included in the transaction price in the scenario involving naming rights for a residence hall?

    <p>Both fixed and variable consideration</p> Signup and view all the answers

    In what manner is revenue allocated when there is only one performance obligation?

    <p>Entire transaction price is allocated to that obligation</p> Signup and view all the answers

    What is the consequence of not having an unconditional right to consideration under Topic 606?

    <p>Receivables can't be recorded until obligations are fulfilled</p> Signup and view all the answers

    How is revenue typically recognized for benefits received and consumed over time?

    <p>Ratable over the term of the contract</p> Signup and view all the answers

    Under Topic 606, when is revenue recognized for a license to intellectual property that has standalone functionality?

    <p>At the start of the two-year contract term</p> Signup and view all the answers

    In the case of a university granting a food service provider the right to provide services, what is the primary basis for revenue recognition during the contract?

    <p>The passage of time</p> Signup and view all the answers

    How does the university assess progress in recognizing revenue for the food service contract?

    <p>By measuring the passage of time</p> Signup and view all the answers

    What must the university consider if the license payment is made over the contract term?

    <p>If there is a significant financing component</p> Signup and view all the answers

    In this arrangement, what is generated by the capital assets provided by the food service company?

    <p>A capital asset for the university</p> Signup and view all the answers

    What is indicated by the fact that the food service provider simultaneously receives and consumes the benefits of the university's performance?

    <p>Revenue can be recognized over time</p> Signup and view all the answers

    What is implied by the university concluding that the recordings have standalone functionality?

    <p>No future updates will be necessary</p> Signup and view all the answers

    What does the university's exclusive right to provide food services signify about the transaction?

    <p>It simplifies the revenue recognition process</p> Signup and view all the answers

    How should revenue be recognized according to the content?

    <p>On a straight-line basis over the term of the contract</p> Signup and view all the answers

    What is the first step in recognizing revenue according to the framework mentioned?

    <p>Identify the performance obligations</p> Signup and view all the answers

    What is considered a performance obligation in the university's case?

    <p>The granting of a license to a commercial company</p> Signup and view all the answers

    What happens to the revenue recognition if the performance obligation is only partially satisfied?

    <p>Revenue is recognized proportionally as satisfied</p> Signup and view all the answers

    What does FASB ASC 606-10-55 pertain to in this context?

    <p>Guidelines for sales-based royalties and revenue recognition</p> Signup and view all the answers

    When will the university recognize revenue from food sales?

    <p>When food service sales occur at monthly intervals</p> Signup and view all the answers

    What is specifically stated about the university's participation in athletics?

    <p>It will not affect revenue recognition processes</p> Signup and view all the answers

    What is the duration of the agreement with the vendor for the use of the recordings?

    <p>10 years</p> Signup and view all the answers

    Study Notes

    Contract Liability

    • The contract is an agreement between the university and a corporation to name a stadium after the corporation.
    • The contract details the payment terms and includes the university's obligation to name the stadium and display the name per specifications.
    • The university is considered to receive value from the contract as the corporation is receiving advertising.
    • The university has determined that the collectability of the consideration is probably, meaning they are confident the corporation will pay.
    • The contract is deemed to have commercial substance, as the corporation is receiving value from the agreement.

    Revenue Recognition

    • The university recognizes revenue by allocating the $13,000,000 transaction price across four quarters based on the quarterly newsletter provided.
    • The university only has one performance obligation in the naming rights contract, so the entire transaction price is allocated to this one aspect.
    • The university recognizes revenue when the obligation to name the stadium is satisfied, which is done over the 15-year period of the contract.
    • The corporation receives and consumes the benefits of the naming rights simultaneously, meaning the university can recognize revenue pro ratably over the contract term.

    Performance Obligations

    • The university's performance obligation in the contract is to exclusively name the stadium after the corporation, ensuring signage is maintained according to the contract terms.
    • The university must fully fulfill this single performance obligation for the naming rights contract.

    Other Relevant Concepts

    • Revenue recognition models can be complex and vary depending on the specific type of revenue situation.
    • The university needs to analyze the terms of the contract carefully to determine the appropriate revenue recognition process.
    • Traditionally, universities record receivables and deferred revenue when a bill is rendered and mailed.
    • This practice is no longer acceptable under Topic 606 as an unconditional right to consideration doesn't exist.
    • In situations where a contract spans multiple fiscal years, the university must implement procedures to track and calculate refund estimates.
    • Universities must also record contract liabilities and refund liabilities as appropriate.

    Naming Rights (Second Example)

    • A university receives $200,000 from an alumnus in exchange for naming a residence hall.
    • The university recognizes revenue on a straight-line basis over the term of the contract, starting on the commencement date.

    Intellectual Property

    • A university has a world-renowned marching band that has recorded marches.
    • A vendor wants to use the recordings in advertisements and enters into a contract with the university for a license.
    • Revenue is recognized at the beginning of the two-year contract terms because the recordings are standalone and functionality will not change.

    Exclusive Food Services

    • A university enters a contract with a food service provider to provide food services exclusively.
    • The university receives upfront payment and a percentage of food sales from the food service provider.
    • Revenue is recognized ratably over the term of the contract because the university is transferring control over time.

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    Description

    This quiz explores the concepts of contract liability and revenue recognition within the context of a university-corporate naming rights agreement. It discusses the conditions that determine collectability and the allocation of transaction price across performance obligations. Test your understanding of these financial principles!

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