 Hello and welcome to the session in which we would look at CPA exam questions that deals with revenue recognition. Revenue recognition is a very important topic for the CPA exam as well as your intermediate accounting courses. So if you are an accounting student or especially a CPA candidate, CPA candidate, I strongly suggest you check out my website. On my website, I do have additional resources for you if you are studying for your CPA exam. I don't replace your Becker, Roger, Glyme or Wiley. I can't do so. But I can be a useful addition to your CPA preparation. Simply put, I can add 10 to 15 points to your CPA exam. If you go through my lectures, my practices, learn what you need to learn in conjunction with your CPA prep course, you will definitely pass the exam. Now here's my offer to you. Are you willing to take your chances by investing this nominal amount in my website for a month to try it out? This is this is your loss. So the maximum you would lose is $30. The output is you could pass the exam. Are you willing to take that chance? If you don't like my subscription, cancel it. If you like it, you keep it. That's up to you. And if not for anything, check out my website to find out how well is your university doing on the CPA exam. This tells you how well you are prepared or how well is your accounting program. So check it out. You can look it up by state, by school, by section, by even age. These are all the accounting courses that I have and connect with me on LinkedIn if you haven't done so. And on LinkedIn, many students, they write me recommendations after they use my material. Check out my recommendation. Please like this recording on YouTube and share it. Connect with me on Instagram and Facebook. So let's take a look at this first question. John signed up and paid $720 for six-month accounting course on June 1st with Farhat Lectures. As of August 1st, Farhat Lectures accounting record would indicate what? Now I'm going to solve this question first the long way, the accounting way, simply put, given you detailed explanation that I'm going to show you real quick. How can you answer this question on the CPA exam in less than 30 seconds? Okay, so when John signed up and paid for six-month accounting course, Farhat Lectures will debit cash $720 and will credit, hopefully you know this, the third revenue or unearned revenue $720. Why? Because John, it's going to be consuming this course over a six-month period. They paid for it and they will consume it over time. As they consume it over time, Farhat Lectures, since they're delivering the product on a monthly basis, they can recognize their revenue on a monthly basis. Now I'm going to go a little bit further and just show you a six-month period. One, two, three, four, five, six. So this course is for six-month period. So in August 1st, they're asking us about the record as of August 1st. So August 1st is right here. So this is June 1st. This is August 1st. So as of August 1st, what should be our record indicate? Well, as of August 1st, we should have earned two-month worth of revenue. Well, $720 divided by six. Each month, we would recognize $120 times two-month. We should have revenue of $240. Once we know we have revenues of $240, we could eliminate C and D. We're down to A and B. Well, then they said, A, it says 480 of account receivable, 480 of the third revenue. Well, guess what? On August 1st, if I make the adjustment, let's assume I'm preparing my record, I will debit the third revenue, $240, and I will credit my revenues $240. Therefore, my third revenue started at $720 minus 240, 480, what's left? So the answer is B. Now, let me show you how would you answer this question real quick if you have good, strong, basic, and I'm saying strong, but basic understanding. Let me show you. If I see, John signed up and paid $720. Well, A has account receivable. There is no room for account receivable here. D has account receivable. There is no room for account receivable here. I'm just, I'm down to 50-50. I didn't even read the remainder of the question. It's for a six-month course on June 1st. So I'm going to be delivering this course over a six-month period. If I'm delivering the course over a six-month period, I cannot recognize the revenue now. So take out the revenue, I'm left with B. So notice, in less than 30 seconds, I was able to answer this question by having basic understanding, no need for account receivable. The course is for a six-month period. The customer will be consuming the material over six months. Therefore, I'm delivering the asset and they're consuming the asset. Remember, I am delivering and they're consuming. As I make the course available, John is watching. As John is watching, they are consuming the asset. So I can recognize the revenue. Be careful. Just make sure you're aware of this. Let's take a look at this question. Also, I'm going to do this. Well, there is no longer short way here. Let's take a look at it. How much revenue should Adam recognize in 2021 for this contract? That's the question. Adam manufacturing agrees to manufacture bumper cars for Dornie parks. Under the terms of the contract, Dornie will pay Adam a total of 75,000 and DP can cancel the contract if they choose, but must pay Adam for any work completed. So they can cancel the contract or whatever work is completed, they pay for it. Adam believes that if DP canceled the contract, Adam could sell the bumper cars to another amusement park and still make a profit. So if they cancel those bumper cars are not specialized product. They are not only for Dornie parks. Adam can sell them to someone else. That's why in the contract, there is this option to cancel and it's very important. The option to cancel is very important here. The manufacturing contract is expected the last six months. As of December 31st, the job is 80% completed. How much revenue should Adam recognize in 2021 for this contract? So the question is how much should Adam recognize? Well, at face value, you're going to think, well, since we have a contract and they said they will pay for anything that we manufacture, we should recognize 80% of the contract. In other words, 80% of 75,000 and I'm assuming this is it's this answer here. I mean, let me double check just to make sure this is because they have to be very careful here. So if I take, let's see, let me get my calculator here, 75,000 times 0.8. It's yeah, that's 60,000. Actually, you should have made 60,000. It doesn't matter. So should you recognize 60,000? Let's make this answer 60,000 for the purpose of illustration and the answer is no. Why? Remember, Dorney Parks can cancel, can cancel. Although we completed 80%, we did not complete everything. They can cancel and they don't have to pay for the remaining of the contract. Okay, so we cannot recognize 80%. What do we have to do here? We can only recognize the revenue here upon completion and upon delivery. In other words, once we deliver the product to them and remember, if they don't take it, we can sell it somewhere else. It's like, think about building inventory. Think about a manufacturing company that builds regular inventory. Well, guess what? If company A don't buy the inventory from them, company B can buy it. If company B doesn't buy it, company C can buy it. So the product is not unique to Dorney Parks. So simply put all what Adam doing right now is far from Adam's perspective, Adam is building inventory. Now, it's a good thing that Dorney will buy it from us. That's what they said in the contract, but also they said they can choose to cancel. And if they cancel, we can sell it to somewhere else. Therefore, how much revenue we can recognize? None, zero, because we did not complete, we did not even complete any work done, any work yet, let alone completed. And if it's completed, they will buy it from us, anything that we completed, but we did not complete anything. Okay? And remember, there's an alternative view, so if they don't buy it, we can sell it to someone else. Therefore, the answer is zero. Again, you don't even have to do this computation. Once you know that there is an alternative views, it means guess what? It's not really a specialized product. And here you have to understand the difference between what we saw in this question and the prior question. And the prior question, as we, as time goes by, the consumer is enjoying the asset, is consuming the asset. Here, the consumer is not enjoying the asset. As if we delivered any of those cars, if we deliver those bumper cars to Dorney parks, if we deliver them, then yes, then we can recognize some revenue because we did deliver the product and they said they will pay for anything that's complete, but that's not the case here. Let's take a look at this question. How much revenue does Main Street Electronic recognize for the month ended April, assuming the revenue is accrued monthly? So we're accruing revenue monthly. Okay. Main Street sells computers and provide hardware maintenance on April 1st. Main Street sold the package deal containing a computer and a one year unlimited maintenance repair service for the computer at a bundled price of a thousand. If sold separately, the computer would cost 660 and the one year unlimited maintenance repair would cost 540. How much revenue can we recognize for April? So a month later, how much revenue can we recognize? So here's what we're doing. We're selling computers. That's fine. That's one one product and we're selling a maintenance and repair service. So we have two product here and they are they can be sold separately. We are told in the problem that notice they have two different distinct prices. So this is maintenance and repair. Okay. So here's what we're saying. The computer by itself cost 660. The warranty is not the not the warranty. The maintenance and repair is 540. So let's see. So together 1200, but we're selling them and we're selling everything for a thousand. We're selling everything for a thousand. Now, since they can be sold separately, we have to allocate the thousand as two different product. How do we do so? We're going to take 660 divided by 1200 and 540 divided by 1200. Why we want to know how much of the contract goes to the how much of the thousand dollar goes to the computer and how much of it goes to the maintenance and repair. So let's take a look at the 660 divided by 1200. That's 55%. So 55% is for the computer. And obviously without doing the computation, 45% is for the maintenance and repair. Well, by the end of the month, what did we do by the end of the month? By the end of the month, we did deliver the computer because we sold we sold it by April 1st. So by the end of the month, we can recognize 550 for the computer 100%. We have a separate product. It's the computer itself. We deliver it. Therefore, as far as this part, we completed our portion of the park, our portion of the contract. And that portion of the contract gives us $550. By the end of April, we also delivered one month worth of services to this company. Well, we said 550 goes to the computer, 450 to the contract maintenance and service. So we're going to take 450 multiplied by 112. Well, let's take 112 multiplied by 450. So if we take 1 divided by 12 times 450, we can recognize an additional $37.50. $37.50. This is for the contract. Therefore, our total revenue is 587.50 by the end of the month. And the answer is A. And the answer is A. Also, if you are understanding this would also help you understanding the, you know, if you understand this big picture, first of all, you cannot recognize all of revenue. So you could eliminate B. $45 does not make any sense to me. Okay. It could eliminate B2. So if you have to guess between 587 and 705, I would guess with 587 because part of the contract is on a monthly basis. Okay. So this is if you're doing this real quick. Well, let's take a look at this question starting with the question first. Assume that scales and software, I'm looking at here, and calibration services are all separate for performance obligation. How much revenue will Ivan recognize in 2021 for this contract? So by just reading the question, you know, you're dealing with three separate performance obligation because they're telling you that in the problem clearly. Okay. Let's see what we are giving here. On July 15th, Ivan and company signed a contract to provide town bakery with an ingredient weighing system for a price of $92,400. The system includes finely tuned scales that fit into towns automated assembly line. So we have the scale Ivan proprietary software modified to allow the weighing system to function in the bakery. So we have a software as well. This is what we are told here, but this is easy. That's why it's easier to when you read the question first. And the one year contract to calibrate the equipment. Well, we have also calibration and they paid in total, the bakery paid in total $92,400. Ivan competes with other vendors who offer ongoing calibration contract for Ivan system. If Ivan was to provide these goods and services separately, it would charge $62,000 for the scale, $10,000 for the software, and $28,000 for the calibration contract, if they are sold separately. If they are sold separately, if we add all of this up, it will add up to $100,000. Ivan delivered and installed the equipment and the software on August 1st and the calibration service commenced on that date. And we want to know how much revenue we would recognize for year 2021. Well, let's see. The scale represents 62% of the deal. Oops, sorry. The scale represents 62% of the deal. Why 62%? We have $62,000 divided by $100,000. This is called the relative sales value, $10,000 divided by $100,000, 10% calibration, 28%. So what did we deliver by the end of the year for 2021? Did we deliver the scale? Yes, we did install the scale. How much of the $92,000 goes to the scale? Well, 62% because we did deliver this performance obligation completely. Therefore, 62,000 times 62% should give us revenue of $57,288. We can recognize this revenue. Did we deliver the software? Well, notice here we delivered the equipment and the software. Therefore, we can recognize 10% of this amount, which should be $9,240. We also delivered this. What about the calibration contract? The calibration contract, it says it's for a one year, one year. It's not immediately. It's a one year contract. Notice here, it's a one year contract. Therefore, what's going to happen? First, we have to find out how much are we going to get out of this contract? Well, first of all, we're going to take the 28% times $92,400. Let's find out how much is that. So we're going to take, let's clear this, $0.28 times $92,400. That's equal to $92,400. That's equal to in total, I'm going to change the color here in total. That's equal to $25,872. Can we recognize this amount? No, we cannot. Why not? Because the contract is for one year. We did not deliver the product yet. So what's going to happen is this, we installed it in August. Therefore, we're going to account for August, September, October, November, and December. Therefore, we're going to take this amount multiplied by 512. So this amount multiplied by, let's see, so 5 divided by 12, let's clear this again, 5 divided by 12 multiplied by $25,872. That's going to give us $10,780, $10,780. This is the amount that we can recognize from the calibration. Then we can add to this the software $92,040, which we fully completed the work, plus the $57,288. That's going to give us $77,308. Therefore, the answer is C. The answer is C. And this is how we will answer this question. Once again, at the end of this recording, what I'm going to do, I'm going to ask you to like this recording, share it, please check out my website if you are a CPA candidate and you want to add 10 to 15 points to your CPA exam. Again, my challenge to you is this, are you willing to take a chance? Invest $30 for your CPA. Just find out whether my system works or well, works with you. If it does, it's great because my system go with any CPA course that you are taking. Most importantly, study hard, stay safe, and good luck.