Question

Sanjeev enters into a contract offering variable consideration. The contract pays him $1,850/month for six months of continuous consulting services. In addition, there is a 70% chance the contract will pay an additional $3,500 and a 30% chance the contract will pay an additional $1,500, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.

Assume that Sanjeev estimates variable consideration as the most likely amount. After Sanjeev has recognized revenue for two months of the contract, he changes his assessment of the chance the contract will pay him $5,000 to 50%. What adjustment to revenue should Sanjeev recognize to account for that change in estimate?

Multiple Choice

• Debit of $500

• Credit of $1,850

• Debit of $1,850

• Credit of $500

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2020. Collections on this sale were $20,000 in 2020, $15,000 in 2021, and $20,000 in 2022.

In its 2021 year-end balance sheet, Reliable would report installment receivables (net) of:

Multiple Choice

• $0.

• $20,000.

• $4,000.

• $15,000

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.

In 2022, Lake would recognize realized gross profit of:

Multiple Choice

• $0.

• $300,000.

• $310,000.

• $700,000.

Holmgren Seafoods, Inc. catches and processes salmon and tuna caught off the coast of Maine. In May 2021, it placed 100 freshly caught wild salmon with a retail price of $75 each in Joe’s Fish Shop. Holmgren’s contract with the shop stipulates that the shop will earn a 15% commission on each salmon sold. Joe’s is responsible for purchasing any fish that remain unsold at the end of a three-day period.

Required:
During the three-day period, Joe’s Fish Shop was able to sell 88 of the 100 salmon. How much revenue should Holmgren recognize with respect to this transaction?

Answer 1

Sanjeev

In the first two months of the contract, the most likely outcome is that Sanjeev receives a $3,500 bonus (likelihood = 70%), in which case Sanjeev would be paid a total of ($1,850 × 6 months) + $3,500, or $14,600. Therefore, Sanjeev would recognize $14,600 ÷ 6 = $2,433 each month, and after two months would have recognized $4,867. Then Sanjeev concludes that the most likely outcome is that Sanjeev receives a $5,000 bonus (likelihood = 50%), in which case Sanjeev would be paid a total of ($1,850 × 6 months) + $5,000, or $16,100. Therefore, Sanjeev should have recognized $16,100 ÷ 6 = $2,683 each month, and after two months should have recognized $5,366. The amount of adjustment Sanjeev should record is a credit of $499, calculated as $5,366 - $4,867.