Understanding Australian Accounting Standards 1st Edition by Janice Loftus – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

Testbank

to accompany

Understanding Australian

Accounting Standards

By Janice Loftus, Ruth Picker, Ken Leo,

Victoria Wise and Kerry Clark

Prepared by

John Sweeting and Emma HolmesTest Bank to accompany Understanding Australian Accounting Standards

John Wiley & Sons Australia, Ltd 2013

CHAPTER 5

Revenue

Learning Objective 5.1 Learning Objective 5.2 Learning Objective 5.3 Learning Objective 5.4 Learning Objective 5.5 Learning Objective 5.6 Learning Objective 5.7 Learning Objective 5.8 Learning Objective 5.9 Learning Objective 5.10 Learning Objective 5.11 Learning Objective 5.12 Understand the background to the development of AASB 118

Revenue

Understand the definition of ‘income’ under the Conceptual

Framework

Distinguish between the definitions of ‘income’ and ‘revenue’

Understand the scope of AASB 118

Explain and apply the meaning of ‘fair value’ when applied to the

measurement of revenue

Explain and apply the recognition criteria for revenue, distinguishing

between the sale of goods and the rendering of services

Explain and apply the revenue recognition criteria for interest,

royalties and dividends

Understand the practical application of AASB 118

Interpret and analyse the revenue recognition issues and disclosures

arising in specific industries in practice

Describe the relationship between AASB 118 and other standards and

interpretations, in particular AASB Interpretation 13 Customer

Loyalty Programmes

Describe the disclosure requirements of AASB 118

Describe expected future developments in accounting for revenue.

© John Wiley & Sons Australia, Ltd 2013 5.1Chapter 5: Revenue

Multiple choice

1. The Appendix to AASB 118 contains illustrative examples which:

Learning Objective 5.1 Understand the background to the development of AASB 118 Revenue

a. b. c. are not part of the standard itself.

in some cases contradicts the requirements within the body of AASB 118.

in some cases is inconsistent with the principles within the Conceptual

Framework

*d. all of the options are correct.

2. The two elements of performance referred to in the Conceptual Framework are:

Learning Objective 5.2 Understand the definition of ‘income’ under the Conceptual Framework

a. assets and liabilities

b. revenue and expenses

c. liabilities and equity

*d. expenses and income

3. Which of the following is NOT an example of an agency arrangement where the selling

entity would recognise revenue on a net basis?

Learning Objective 5.3 Distinguish between the definitions of ‘income’ and ‘revenue’

a. A travel agent selling an airline ticket to a customer, charging the customer $200

and remitting $180 to the airline.

b. A supermarket selling groceries to a customer for $110 and remitting $10 GST to

the government.

*c. A distributor receiving stock from its supplier on a sale-or–return basis. The sales

price per unit is $120 and the cost per unit is $75

d. A licensed hotel selling keno tickets to customers for $5.00 and remitting $4.50

per ticket to the state gaming authority.

4. Which of the following is NOT excluded from the scope of AASB 118 Revenue?

Learning Objective 5.4 Understand the scope of AASB 118

a. c. d. Accounting for share of joint venture revenue.

*b. Subscriptions

Revenue arising from primary production activities

Revenue arising from oil and gas exploration

© John Wiley & Sons Australia, Ltd 2013 5.2Test Bank to accompany Understanding Australian Accounting Standards

5. Which of the following are excluded from the scope of AASB 118?

I the initial recognition of agricultural produce

II insurance contracts within the scope of AASB 4

III the extraction of mineral ores

IV lease agreements

Learning Objective 5.4 Understand the scope of AASB 118

a. I, II only

b. II, III and IV only

c. I, III and IV only

*d. I, II, III and IV

6. When consideration is deferred and there is a below-market rate of interest charged the

fair value of the consideration should be determined:

Learning Objective 5.5 Explain and apply the meaning of ‘fair value’ when applied to the

measurement of revenue

a. *b. c. d. as the nominal amount of the cash receivable

by discounting all future receipts using an imputed rate of interest

by discounting all future receipts using the interest rate in the contract

as the recommended retail price of the item sold.

7. The following information relates to SellIT:

 5000 units of stock were sold for $10 per unit

 the cost of that stock to SellIT was $4.50 per unit

 other costs incurred during the period totaled $10 000

 proceeds on sale of an item of plant during the period was $2000

 the carrying amount of the plant at the date of disposal was $500.

SellIT would recognise the following amount as revenue for the period:

Learning Objective 5.5 Explain and apply the meaning of ‘fair value’ when applied to the

measurement of revenue

a. $27 500

*b. $50 000

c. $51 500

d. $52 000

© John Wiley & Sons Australia, Ltd 2013 5.3Chapter 5: Revenue

8. House Proud Pty Ltd is operating a promotion selling furniture under the following

conditions:

 Initial deposit of 20% of purchase price.

 Immediate delivery of furniture.

 Interest rate of 12.5%pa charged on the outstanding balance.

 Repayment of the balance (including the interest) over 24 equal monthly installments.

 House Proud retains legal title to the furniture until the final monthly payment has

been made.

House Proud would recognise revenue as follows:

Learning Objective 5.6 Explain and apply the recognition criteria for revenue, distinguishing

between the sale of goods and the rendering of services

a. Recognise interest as it is received (monthly) and recognise the revenue on the sale of

the goods once the final payment has been received.

b. Recognise all revenue as it is received

*c.Recognise interest as it is received (monthly) and recognise the revenue on the sale of

the goods upfront.

d. Recognise the whole amount of revenue upfront

9. Which of the following is NOT a condition that needs to be satisfied prior to recognising

revenue from the rendering of services using the ‘percentage of completion’ method?

Learning Objective 5.6 Explain and apply the recognition criteria for revenue, distinguishing

between the sale of goods and the rendering of services

a. the amount of revenue can be measured reliably

b. the stage of completion of the transaction can be measured reliably

c. the costs of the transaction (including future costs) can be measured reliably

*d. the contract is non-cancellable.

10. Under AASB 118 interest revenue is recognised as follows:

Learning Objective 5.6 Explain and apply the recognition criteria for revenue, distinguishing

between the sale of goods and the rendering of services

a. On a straight line method

*b. On an effective interest method

c. On either an effective interest method, or a straight line method, depending on

which method the entity feels provides the most relevant and reliable information.

d. At the time of receipt of the interest.

© John Wiley & Sons Australia, Ltd 2013 5.4Test Bank to accompany Understanding Australian Accounting Standards

11. Special Limited is in the business of producing and distributing special screenings on

various topics.

On 1 January 2014, Special granted a license to TV 101 for $250 000 in relation to a

special titled “The Big Ice”. The following conditions were attached to the license:

 TV 101 was allowed to show the special once only within the 2014 calendar year.

 TV 101 could choose the date and time of the screening.

The documentary was delivered to TV 101 on 1 January 2014. TV 101 screened the

documentary on 30 March 2014. The $250 000 fee was paid to Special on 30 March

2014.

Special should recognise revenue as follows:

Learning Objective 5.8 Understand the practical application of AASB 118

a. Recognise the $250 000 on 1 January 2014.

b. Recognise the $250 000 evenly over the 2014 calendar year.

*c. Recognise the $250 000 on 30 March 2014 (the date of screening)

d. Recognise the $250 000 on 31 December 2014.

12. Deefer Limited sold an item of machinery on 1 July 2013 on the following terms:

 Initial payment of $25 000

 Annual payments of $25 000 for 5 years (total $125 000).

The buyers incremental rate of interest is 7.5% and the present value of the future annual

payments is $101 147.

At 30 June 2014 Deefer would recognise interest revenue of:

Learning Objective 5.8 Understand the practical application of AASB 118

a. $7500

*b. $7586

c. $9375

d. $17 414

© John Wiley & Sons Australia, Ltd 2013 5.5Chapter 5: Revenue

13. ACC, a professional body charges an annual fee of $600 for subscription to its

publications. The $600 fee entitles customers to receive a copy of the latest version of

the professional standards relevant to their industry (updated annually). Subscribers also

receive monthly newsletters for the duration of the subscription period.

ACC should recognise the $600 as follows:

Learning Objective 5.8 Understand the practical application of AASB 118

a. Recognise the whole $600 as revenue upfront

b. Recognise revenue of $50 per month across the period of the annual subscription.

*c. Recognise an amount upfront in relation to the copy of the professional standards,

with the balance being recognised evenly across the period of the annual

subscription.

d. Recognise the whole $600 as revenue at the end of the subscription period

14. Big Bank Limited provides Good Sport Pty Ltd with a five-year loan to finance the

construction of a new sporting stadium. Good Sport had the choice of paying a market rate of

interest (7.5% at the inception of the loan) or paying interest at a rate of 1.5% below the market

rate, and paying in addition a fixed ‘arrangement fee’ of $200 000 to compensate Big Bank for

charging an interest rate below the fair market value. Good Sport chose the second option.

Big Bank should recognise revenue from the arrangement fee as:

Learning Objective 5.7 Explain and apply the revenue recognition criteria for interest, royalties

and dividends

a. b. c. *d. fee revenue as services are provided by Big Bank

fee revenue on the completion of the significant act of drawing down the loan

interest revenue on the completion of the significant act of drawing down the loan

interest revenue over the life of the loan in accordance with the effective interest

method.

15. Orange Pty Ltd develops and sells off-the-shelf accounting software packages. The retail

price of each package is $399 (GST inclusive). Included with each purchase are “free” upgrades

for a period of 12 months after the date of purchase. These upgrades can be purchased separately

for $80 (GST inclusive).

At the date of purchase of the software package by a customer, Orange should record

revenue of:

Learning Objective 5.9 Interpret and analyse the revenue recognition issues and

disclosures arising in specific industries in practice

*a. $290.00

b. $319.00

c. $362.72

d. $399.00

© John Wiley & Sons Australia, Ltd 2013 5.6Test Bank to accompany Understanding Australian Accounting Standards

The following information relates to questions 16 and 17

TelCo provides a bundled service offering to a customer for $3000 upfront. The services

provided are as follows:

 Upfront advice

 ‘on-call’ advice

 Database access for a 2-year period

If TelCo were to charge a separate fee for each service if sold separately the fee would be:

Up-front advice $200

On-call advice $2600

Database access $800

16. Using the relative fair value approach the amount of revenue recognised in relation to the

on-call advice is:

Learning Objective 5.9 Interpret and analyse the revenue recognition issues and

disclosures arising in specific industries in practice

a. indeterminable based on the facts provided

b. $1000

*c. $2167

d. $2600

17. The revenue that would be recorded by TelCo at the inception of the agreement is:

Learning Objective 5.9 Interpret and analyse the revenue recognition issues and

disclosures arising in specific industries in practice

*a. $166

b. $833

c. $1500

d. $3000

18. The effect that IFRIC Interpretation titled Agreements for the Construction of Real Estate

will have the following effect for entities that undertake off-the-plan real estate sales is

that:

Learning Objective 5.10 Describe the relationship between AASB 118 and other standards and

interpretations, in particular AASB Interpretation 13 Customer Loyalty Programmes

*a. the percentage of completion method of revenue recognition will be discontinued.

b. the use of the completed contracts method of revenue recognition will be

discontinued.

c. d. the amount of revenue recognised on such sales will reduce.

the amount of revenue recognised on such sales will increase.

© John Wiley & Sons Australia, Ltd 2013 5.7Chapter 5: Revenue

19. Which of the following disclosures are required under AASB 118?

I total income, allocated between revenue and other gains

II the accounting policies adopted for revenue recognition

III the amount of each significant category of revenue recognised during the period

IV the amount of revenue arising from exchanges of goods and services.

Learning Objective 4.11 Describe the disclosure requirements of AASB 118

a. I and II only

*b. II, III and IV only

c. I, II and III only

d. I, II, III and IV

20. The IASB/FASB Exposure Draft titled Revenue from Contracts with Customers is

inconsistent with the principles within which of the following?

Learning Objective 5.12 Describe expected future developments in accounting for revenue.

a. c. d. The Conceptual Framework for Financial Reporting

*b. AASB 118 Revenue

IFRIC 13 Customer Loyalty Programmes

All of the options are correct

21. Which of the following items are defined in AASB 118?

Learning Objective 5.3 Distinguish between the definitions of ‘income’ and ‘revenue’.

a. Income

*b. Revenue

c. Gains

d. All of the above

22. Easter Pty Ltd operates a facility making chocolate Easter eggs. Easter has a policy that all

unsold chocolate eggs can be returned for a full refund within 1 week of Easter Sunday.

On 1 March 2014, Easter sold 500 pallets of packaged eggs at $100 per pallet. Historical

data indicates that 20% of the stock will be returned for a refund. Within one month of

Easter Sunday (by the end of April 2014) 10% of the eggs were retuned for refund. Using

the expected sales approach, how much revenue would be recognised by Easter at the end

of April 2014?

Learning Objective 4.5 Explain and apply the meaning of ‘fair value’ when

applied to the measurement of revenue.

a. Nil

b. $40 000

*c. $45 000

d. $50 000

23. Deefer Limited sold an item of machinery on 1 July 2014 on the following terms:

© John Wiley & Sons Australia, Ltd 2013 5.8Test Bank to accompany Understanding Australian Accounting Standards

 Initial payment of $25 000

 Annual payments of $25 000 for 5 years (total $125 000).

The buyers incremental rate of interest is 7.5% and the present value of the future annual

payments is $101 147.

At the time of sale of the machine Deefer would recognise revenue of:

Learning Objective 5.5 Explain and apply the meaning of ‘fair value’ when applied to the

measurement of revenue.

a. $25 000

b. $125 000

*c. $126 147

d. $150 000

24. Which of the following is NOT an example of an entity retaining significant risks and

rewards of ownership?

Learning Objective 5.6 Explain and apply the recognition criteria for revenue, distinguishing

between the sale of goods and the rendering of services.

a. The entity retains an obligation for unsatisfactory performance not covered by

normal warranty provisions.

b. The receipt of revenue from a particular sale is contingent on the buyer reselling the

goods.

c. The goods are shipped subject to installation, and the installation is a significant

part of the contract that has not yet been completed by the entity.

*d. The buyer has the right to rescind the purchase for a reason specified in the sales

contract. The entity is confident that this option will not be exercised.

25. On 1 July 2010 ABC Ltd purchased a 5-year $1000 5% debenture for $957.88. The

current market rate of interest is 6%. The maturity date is 30 June 2015. Interest is

payable annually on 30 June.

The interest income that ABC would recognise for the year ended 30 June 2011 is:

Learning Objective 5.7 Explain and apply the revenue recognition criteria for interest, royalties

and dividends

a. $47.89

b. $50.00

*c. $57.47

d. $60.00

26. Which of the following is incorrect in relation to consignment sales?

Learning Objective 5.8 Understand the practical application of AASB 118.

© John Wiley & Sons Australia, Ltd 2013 5.9Chapter 5: Revenue

a. b. c. *d. A consignment sale is one where the owner transfers possession of the goods but

not legal title to a third party (agent).

On sale of an item held on consignment, the agent remits the proceeds to the

owner (normally less commission).

The owner will recognise revenue on consignment sales at the time of sale of the

item to the ultimate customer.

Consignment sales are a common way of increasing revenue at or near the end of

a period.

27. On 1 January 2014 ABC Ltd sold goods to ZZZ Pty Ltd for a total price of $1 000.

Under the terms of the sale ZZZ is able to return the goods within five days of delivery.

On 3 January 2014 ZZZ returned 30% of the goods.

ABC would recognise revenue as follows:

Learning Objective 5.8 Understand the practical application of AASB 118.

a. $1 000 to be recorded as revenue on 1 January 2014

b. $700 to be recorded as revenue on 3 January 2014

*c. $700 to be recorded as revenue on 5 January 2014

d. None of the above

28. The introduction of IFRIC 13 Customer Loyalty Programmes had the following impact

on revenue recognition policies for entities in the airline industry:

Learning Objective 5.9 Interpret and analyse the revenue recognition issues and

disclosures arising in specific industries in practice

a. no impact

b. reduced the amount of revenue able to be recognised

c. increased the amount of revenue able to be recognised

*d. changed the timing of the recognition of revenue

29. In terms of revenue related disclosures on the face of the statement of profit or loss and

other comprehensive income:

Learning Objective 5.11 Describe the disclosure requirements of AASB 118

a. AASB 101 Presentation of Financial Statements requires revenue by category to

be disclosed on the face of the statement of profit or loss and other comprehensive

income.

b. AASB 118 Revenue requires revenue by category to be disclosed on the face of

the statement of profit or loss and other comprehensive income.

*c. AASB 101 Presentation of Financial Statements requires total revenue to be

disclosed on the face of the statement of profit or loss and other comprehensive

income.

d. AASB 118 Revenue requires total revenue to be disclosed on the face of the

statement of profit or loss and other comprehensive income.

30. Which of the following events took place in December 2008?

© John Wiley & Sons Australia, Ltd 2013 5.10Test Bank to accompany Understanding Australian Accounting Standards

Learning Objective 5.12 Describe expected future developments in accounting for revenue.

a. b. *c. d. The IASB issued an Exposure Draft proposing amendments to AASB 118.

The FASB formally adopted AASB 118.

The IASB and FASB jointly issued a Discussion Paper on revenue recognition.

The IASB issued an amended AASB 118.

© John Wiley & Sons Australia, Ltd 2013 5.11