 Hello and welcome to this session in which we would look at CPA exam simulation or CPA exam question. So this simulation could be turned into a question and multiple choice just like a multiple choice question could be turned a simulation. The key for you as a CPA candidate is to learn how to answer these questions in any format they are presented to you on the exam day. This simulation or this exercise you could also see it in your intermediate accounting course. Before I start I would like to let you know if you are an accounting student or a CPA candidate you need to know this topic revenue recognition topic. If you go to my website farhatlectures.com you will find additional material information especially if you are studying for your CPA exam. Now you might have a CPA prep course something like Becker, Roger, Gleim, Wiley or Sonshand or some other course. I don't replace those courses I don't. What I do is I'm a useful addition to those courses. I can add 10 to 15 points to your CPA exam if you use my supplemental material. Now how? What's my added value? How do I add value to you? Simply put your CPA prep course don't teach you the material in depth that's not their job. The CPA prep course is to review the material and that's why they are called Becker review, Roger review. They are reviewing. I teach you the material so there are certain topics you either forgot or you did not learn properly or you were never learned in the first place. Farhatlectures.com will help solve this problem for you. If you are an accounting student I have plenty of accounting courses plus additional resources. Connect with me on LinkedIn if you haven't done so and please check my LinkedIn recommendation how other people used my supplemental material to pass their exam. Simply put here's my offer to you. You are risking right now $29 or $30 to try out my system because you can't cancel any time. So this is how much you are losing. Are you willing to risk $30 to find out if you can improve your CPA by 10 to 15 points? A lot of people used it before. They were very happy with it. I strongly suggest you give it a try. Also like this YouTube share it with others and connect with me on Instagram and Facebook as well. So let's go ahead and get started to answer this question. A Philadelphia City Daily newspaper called The Keystone Today charges an annual subscription fee of $375. Customer prepay their subscription and receive 210 issues over the year. To attract more subscribers the company offered new customers the ability to pay $360. That's how much you will pay for an annual subscription that also would include a coupon to receive a 40% discount on a one-hour ride through Rittenhouse Square in Philadelphia in a horse-drawn carriage. The list price of the carriage is $350. The company estimates that 30% of the coupon will be redeemed. Not everyone's going to use the coupon but 30% that subscribe will redeem the coupon. So let's answer some questions about revenue recognition in scenarios like this one. The first question you would be asked for example how much revenue should Keystone recognize upon receipt of the $360 subscription price? So the customer paid $360. How much will we recognize as revenue when they pay? And the answer I hope you know the answer is zero. Why zero? Because we didn't do any work yet. We did not deliver any obligation. It just paid us. Therefore revenue recognized is zero. Second question how many performance obligation exists in this contract? That's important. You want to make sure you understand the difference between different performance obligation. Well in your opinion how many performance obligation? And the answer is two performance obligation. What are those two performance obligations? First of all obviously we have to deliver the newspaper. That's one performance obligation. We have to deliver a product that's separately from the horse ride. That's one. Now we're also going to be delivering. We're going to be giving the customer the option to receive this 40% discount. What for? For the carriage ride. Well this is also a second performance because that's separate than delivering the newspaper. Delivering the newspaper is one thing. The 40% discount is a separate performance. It's an option. It's an option that conveyed to the customer a certain right. That's the right to go on that ride. That's a separate than the newspaper delivery. Also that ride is distinct. It's different from delivering the newspaper. It can be sold separately. You're selling two different things with the $360. You're really selling two different things. And the ride by itself is a separately identifiable obligation. It's not interrelated with the newspaper. You are not customizing the product. You are not taking the newspaper and adding the horse ride to it. You're not customizing this. You're not integrating those two products together. Like building a computer system and also adding the software to it or adding the training. Those are two separate, literally two. So it's easy to identify that they're two separate and hopefully you can see this. So the question is how would the company, how would a Keystone today would recognize the revenue that they receive? That's the question. How would they recognize the revenue that they receive? So the question is prepare the journal entry for the sale to recognize 15 new subscription, clearly identify the revenue or the third revenue associated with the each performance obligation. Again, we know that there is no revenue when they receive the money up front. So how would we deal with this? Well, we received $360 times 15 customers because 15 customers. So immediately on the exam what you should do is start with the easy part because you will get points. As you fill out those simulations, you will get points. Well, if the company receive $5,400 in cash, you debit cash $5,400. At least you have this down and you get some points to it. So don't leave anything blank. If you see cash, if you can recognize cash, whether you are paying cash, credit cash or whether you are receiving cash, debit cash. So you'll get some point. Now we have to find out how much of that $5,400 we already determined. It's a two performance obligation. How do we determine this? Well, let's start to see what is the value of the coupon? Well, what is the value of the coupon for the company? Well, let's see. The coupon usually sells, the list price is $350. The customers are going to get a 40% discount on this. Therefore, the price is $140, the performance obligation for each one. Then that's for each coupon. But only we're going to account for 30% because only 30% are going to take that coupon. So simply put, it's $42 per obligation. This is the value of the coupon. This is the standalone price for the coupon. Now, what's the standalone price for the newspaper? The standalone price. Look, it's $375 because those are two separate products. Plus $378, not $375. That's going to give us $420. Now, what we have to do is we have to allocate the value based on the $420. Well, we already know that the coupon is $42 divided by the total $420. The coupon represents 10% of the transaction. It's a separate transaction. Well, the remainder, what's the remainder? The remainder is $378 divided by $420. That represents 90%. You might have three obligations, four obligations. You'll divide by the total. Okay. Now, we are ready to record the transaction. What will be the credit? Be careful. You don't credit revenue here because there is no revenue as of yet. So what you do here is you have two separate, the third revenue. Two separate, the third revenue. The first one is the third revenue, subscription, the third revenue. How much is the subscription, the third revenue? Well, think about it. We have to allocate to the subscription 90%, 90%. What does that mean? It means take 90%, I'm sorry, take 5400 and multiply it by 90%. So 90% of the transaction, 90% of the transaction, of the cash goes to the third subscription revenue. Well, obviously you understand the remaining. The remaining is the third revenue for the coupon and that's 5,400 times 10%. That's $540. You might be asking, so when do they recognize revenue? Well, when do they recognize revenue? They will start to recognize revenue as they deliver the newspaper. That's one obligation. And as customers redeem their coupon. So when the customer comes down to downtown Philadelphia, not center city, not downtown center city Philadelphia and they go to written house square and they go to that carriage, the horse carriage and say, okay, we have a coupon from the Keystone today. We would like to take a ride. Now this company will send the coupon to Keystone letting them know or they may be input this in the computer, which Keystone is now it's informed that somebody took the ride and what they would do, they will start to change the third revenue into revenue. So let's assume one customer, you know, one customer did take the ride. So therefore what we do is we debit, we debit the third revenue $42 and we debit the third revenue, reduce the third revenue and we credit revenue or carriage revenue or some type of revenue. This is when we actually recognize the revenue. This is when we actually recognize the revenue. When do we recognize the revenue for the subscription revenue? Well, we're going to have we are delivering 210 different newspaper or 10 different units as we deliver them. It's as simple as that. We're going to prorate this 210 210 as we deliver each one. So once we deliver the first one, well one divided by 210. This is how much revenue we could recognize now. The company will not recognize the revenue per per per delivery. For example, at the end of the quarter or at the end of the month, they will determine okay, well, we delivered 21 out of 210. Well, 21 out of 210 is 10 percent. So for that month, we would recognize 10 percent of the revenue, which is we will debit the third revenue, sorry debit the third subscription revenue, 10 percent, $486 and credit subscription revenue, $486. And eventually, by the time everyone gets their subscription and everybody else took the ride, this whole thing will be gone, this liability is gone and it will be turned into a revenue. So you have to understand here how to recognize revenue. It's an important topic on the CPA exam. At the end of this recording, I'm going to ask you again to like it. And once again, I'm going to just ask you to do this, check out my website, if not for anything, to find out how well is your university is performing on the CPA exam? Because that's going to tell you how well how rigor is your accounting program. And again, I'm going to invite you to check out my website for the supplemental material, especially for the CPA exam. Don't short change yourself. Passing the exam is a lifetime investment. This means once you pass the exam, you have 20 to 30 and sometime 40 years, you are living longer to recoup your investment and you have to pass the exam once and it's going to pay dividend for decades. So don't short change yourself, study hard, stay safe and of course stay motivated.