ACCA FR · Chapter 5
Revenue from contracts with customers MCQs with Answers
11 multiple-choice questions on Revenue from contracts with customers for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under IFRS 15, when may variable consideration (such as a performance bonus) be included in the transaction price?
- A) Only once the cash has been received
- B) Always, at its maximum possible amount
- C) Only to the extent that it is highly probable that a significant reversal of revenue will not occur when the uncertainty is resolved
- D) Never; revenue is limited to the fixed consideration in the contract
Show answer & explanation
Answer: C) Only to the extent that it is highly probable that a significant reversal of revenue will not occur when the uncertainty is resolved
Variable consideration is estimated using either the expected value or the most likely amount. It is then constrained: it is included only to the extent that it is highly probable a significant reversal of cumulative revenue will not occur. The estimate is reassessed at each reporting date.
Question 2
What is the correct order of the five steps for recognising revenue under IFRS 15?
- A) Identify the contract; determine the transaction price; identify the performance obligations; recognise revenue; allocate the price to the obligations
- B) Identify the contract; identify the performance obligations; determine the transaction price; allocate the price to the obligations; recognise revenue when or as each obligation is satisfied
- C) Identify the performance obligations; identify the contract; allocate the price; determine the transaction price; recognise revenue
- D) Determine the transaction price; identify the contract; identify the performance obligations; recognise revenue; allocate the price
Show answer & explanation
Answer: B) Identify the contract; identify the performance obligations; determine the transaction price; allocate the price to the obligations; recognise revenue when or as each obligation is satisfied
IFRS 15 sets out five steps: (1) identify the contract with a customer, (2) identify the separate performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations, usually by relative stand-alone selling price, and (5) recognise revenue when or as each performance obligation is satisfied.
Question 3
Rook Co sells a machine together with two years of servicing for a single price of $1,000. Sold separately, the machine would be priced at $900 and the servicing at $300. How much of the transaction price should be allocated to the machine?
- A) $900
- B) $700
- C) $500
- D) $750
Show answer & explanation
Answer: D) $750
IFRS 15 allocates the transaction price to performance obligations in proportion to their stand-alone selling prices. Total stand-alone prices = $900 + $300 = $1,200. Machine = $1,000 x 900/1200 = $750, recognised on delivery. Servicing = $250, recognised over the two years.
Question 4
Rookery Co runs an online marketplace. During the year customers bought goods worth $50,000 through the site. Rookery Co never controls the goods, which are delivered directly by suppliers, and it passes 85% of the sale price to suppliers. What revenue should Rookery Co recognise?
- A) $50,000
- B) $42,500
- C) $7,500
- D) $15,000
Show answer & explanation
Answer: C) $7,500
Rookery Co does not control the goods before they pass to the customer, so it acts as an agent. An agent recognises revenue equal to its commission (the net amount it keeps): $50,000 x 15% = $7,500. Gross revenue of $50,000 would be recognised only by a principal.
Question 5
Raven Co has a contract that satisfies its performance obligation over time. Progress is measured by costs incurred as a proportion of total expected costs. The contract price is $10,000,000, costs to date are $4,000,000 and estimated costs to complete are $4,000,000. Raven Co has invoiced the customer $4,500,000, of which $4,000,000 has been received. What contract balance (excluding the trade receivable) should appear in the statement of financial position?
- A) Contract asset of $500,000
- B) Contract asset of $1,000,000
- C) Contract liability of $500,000
- D) Contract asset of $5,000,000
Show answer & explanation
Answer: A) Contract asset of $500,000
Progress = $4,000,000 / ($4,000,000 + $4,000,000) = 50%. Revenue to date = $10,000,000 x 50% = $5,000,000. Revenue recognised exceeds amounts invoiced by $5,000,000 - $4,500,000 = $500,000, which is a contract asset. The $500,000 invoiced but not received is a trade receivable, shown separately.
Question 6
Crow Co began a contract during the year, with revenue recognised over time based on costs incurred as a proportion of total expected costs. The contract price is $6,000,000, costs to date are $3,000,000 and estimated costs to complete are $4,000,000. What loss should be recognised in profit or loss for the year?
- A) $428,571
- B) Nil, because the contract is incomplete
- C) $571,429
- D) $1,000,000
Show answer & explanation
Answer: D) $1,000,000
Total expected costs are $7,000,000, which is more than the $6,000,000 price, so the contract is expected to make a loss of $1,000,000. The whole expected loss is recognised immediately. Revenue = $6,000,000 x 3/7 = $2,571,429, and cost of sales is set so the total loss is $1,000,000. Recognising only the proportion that relates to work done ($428,571) is wrong.
Question 7
In the last week of its financial year Jackdaw Co sold 1,000 units at $100 each, giving customers 30 days to return any unwanted units for a full refund. Based on experience, Jackdaw Co expects 5% of the units to be returned. How much revenue should be recognised for these sales?
- A) $95,000
- B) $100,000
- C) $90,000
- D) Nil until the return period expires
Show answer & explanation
Answer: A) $95,000
Expected returns are variable consideration. Jackdaw Co recognises revenue only for the goods it expects to keep: 1,000 x $100 x 95% = $95,000. A refund liability of $5,000 is recognised for the expected returns, together with an asset for the right to recover the goods.
Question 8
On 1 January 20X5 Magpie Co delivered goods to a customer, who agreed to pay $2,000,000 on 31 December 20X6. The arrangement contains a significant financing component, and the appropriate discount rate is 10% a year. What revenue should be recognised on delivery? (Use unrounded discount factors and round your final answer to the nearest dollar.)
- A) $2,000,000
- B) $1,818,182
- C) $1,652,893
- D) $1,600,000
Show answer & explanation
Answer: C) $1,652,893
The financing component is removed by discounting the consideration: $2,000,000 / 1.10^2 = $1,652,893, calculated with an unrounded discount factor and rounded to the nearest dollar, which is recognised as revenue when control passes on delivery. The $347,107 difference is recognised as finance income over two years, starting with $165,289 in 20X5.
Question 9
Which of the following is one of the IFRS 15 criteria for recognising revenue over time?
- A) The customer has paid a deposit in advance
- B) The contract lasts for more than 12 months
- C) The entity has invoiced the customer for work completed to date
- D) The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs
Show answer & explanation
Answer: D) The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs
Revenue is recognised over time if any one of three criteria is met. These are: the customer simultaneously receives and consumes the benefits; the entity's performance creates or enhances an asset the customer controls; or the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. Contract length, advance payments and invoicing are not criteria.
Question 10
Swift Co sells washing machines with the one-year manufacturer's guarantee required by law. Customers can also buy an optional three-year extended warranty, which is priced separately. How should the extended warranty be treated under IFRS 15?
- A) As a separate performance obligation, with revenue recognised over the extended warranty period
- B) As part of the sale of the machine, with all revenue recognised on delivery
- C) As an IAS 37 provision, with no revenue allocated to it
- D) As deferred income, recognised as revenue only when a claim is made
Show answer & explanation
Answer: A) As a separate performance obligation, with revenue recognised over the extended warranty period
A warranty that the customer can buy separately provides a service beyond assurance that the product works as specified, so it is a service-type warranty. It is a separate performance obligation, and its share of the price is recognised as revenue over the warranty period. The basic statutory guarantee is an assurance-type warranty and is accounted for as a provision under IAS 37.
Question 11
During the year Starling Co made sales of $200,000 under its loyalty scheme. Customers earned points that can be redeemed against future purchases, and the stand-alone selling price of the points awarded is estimated at $10,000. The stand-alone selling price of the goods sold is $200,000. No points had been redeemed by the year end. How much revenue should be recognised for the year? (Round to the nearest dollar.)
- A) $200,000
- B) $190,476
- C) $190,000
- D) $210,000
Show answer & explanation
Answer: B) $190,476
The loyalty points are a separate performance obligation. The $200,000 received is allocated on the basis of relative stand-alone selling prices. Points = $200,000 x $10,000/$210,000 = $9,524, which is deferred as a contract liability until the points are redeemed or lapse. Revenue recognised for the goods = $200,000 - $9,524 = $190,476.