CAF-6 · Chapter 5
IFRS 15 Revenue from Contracts with Customers MCQs with Answers
15 multiple-choice questions on IFRS 15 Revenue from Contracts with Customers for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is Step 3 of the IFRS 15 five-step model?
- A) Identify the performance obligations in the contract.
- B) Determine the transaction price.
- C) Allocate the transaction price to the performance obligations.
- D) Recognize revenue when the entity satisfies a performance obligation.
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Answer: B) Determine the transaction price.
The 5-step model is: 1. Identify contract, 2. Identify performance obligations, 3. Determine transaction price, 4. Allocate transaction price, 5. Recognize revenue.
Question 2
Under IFRS 15, a contract with a customer exists only if:
- A) It is written and signed by both parties.
- B) It is probable that the entity will collect the consideration.
- C) The transaction price is fixed and cannot vary.
- D) The customer has already paid the full amount.
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Answer: B) It is probable that the entity will collect the consideration.
One of the criteria for identifying a contract is that it is probable the entity will collect the consideration to which it will be entitled.
Question 3
A company sells a machine and provides a 1-year service plan that is also sold separately. How many performance obligations are in this contract?
- A) One
- B) Two
- C) Three
- D) None
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Answer: B) Two
The machine and the service plan are distinct goods/services because the customer can benefit from each on its own and they are separately identifiable in the contract.
Question 4
What is 'Variable Consideration'?
- A) The price change after a contract is completed.
- B) Discounts, rebates, refunds, or performance bonuses.
- C) The cost of shipping the goods.
- D) Payments made in a foreign currency.
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Answer: B) Discounts, rebates, refunds, or performance bonuses.
Variable consideration occurs when the amount of consideration can vary due to factors like discounts, refunds, or bonuses.
Question 5
Skyline Ltd sells 100 units at Rs. 200 each. Customers have a right to return within 30 days. Skyline expects 5 units to be returned. How much revenue should be recognized initially?
- A) Rs. 0
- B) Rs. 1,000
- C) Rs. 19,000
- D) Rs. 20,000
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Answer: C) Rs. 19,000
Revenue should be recognized for the amount Skyline expects to be entitled to (95 units x Rs. 200 = Rs. 19,000). The remaining Rs. 1,000 is recognized as a refund liability.
Question 6
If a contract has a significant financing component (payment is delayed by 2 years), the transaction price should be:
- A) The total cash to be received in 2 years.
- B) The cash selling price at the date of transfer.
- C) The cost of the goods plus a 10% markup.
- D) Recognized only when the cash is received.
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Answer: B) The cash selling price at the date of transfer.
The transaction price is adjusted for the time value of money if there is a significant financing component, typically reflecting the cash selling price at the time of transfer.
Question 7
A bundle of Product A and Service B is sold for Rs. 800. Standalone prices are: A = Rs. 600, B = Rs. 400. How much is allocated to Product A?
- A) Rs. 400
- B) Rs. 480
- C) Rs. 500
- D) Rs. 600
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Answer: B) Rs. 480
Allocation is based on relative standalone selling prices. Total standalone = 1,000. Allocation to A = (600/1,000) * 800 = Rs. 480.
Question 8
Revenue is recognized 'Over Time' if:
- A) The customer takes physical possession at the end.
- B) The entity has a right to payment for work completed to date and the asset has no alternative use.
- C) The transaction involves a single large payment.
- D) The customer cannot benefit from the service until it is 100% finished.
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Answer: B) The entity has a right to payment for work completed to date and the asset has no alternative use.
One criterion for 'over time' recognition is when the entity's performance creates an asset with no alternative use and the entity has an enforceable right to payment for performance completed to date.
Question 9
Control of an asset is transferred to a customer when the customer has:
- A) The intent to buy the asset.
- B) The ability to direct the use of and obtain substantially all remaining benefits from the asset.
- C) Paid at least 50% of the price.
- D) Signed a non-binding letter of intent.
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Answer: B) The ability to direct the use of and obtain substantially all remaining benefits from the asset.
An asset is transferred when the customer obtains control, meaning they can direct its use and obtain substantially all its benefits.
Question 10
If an entity acts as an 'Agent', how much revenue should it recognize?
- A) The gross amount of consideration received from the customer.
- B) The net amount (commission) it expects to be entitled to.
- C) Only the amount it pays to the principal.
- D) No revenue, as it is a pass-through transaction.
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Answer: B) The net amount (commission) it expects to be entitled to.
An agent recognizes revenue only for the commission or fee it is entitled to, rather than the full transaction price.
Question 11
A contract modification is treated as a 'Separate Contract' if the scope increases by adding distinct goods and:
- A) The price increases by a nominal amount.
- B) The price increases by an amount that reflects the standalone selling price of the additional goods.
- C) The customer pays for everything upfront.
- D) The modification is oral rather than written.
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Answer: B) The price increases by an amount that reflects the standalone selling price of the additional goods.
A modification is a separate contract if it adds distinct goods/services and the price increase reflects their standalone selling prices.
Question 12
Assurance-type warranties (that the product complies with agreed specifications) are accounted for under:
- A) IFRS 15 as a separate performance obligation.
- B) IAS 37 as a provision.
- C) IAS 2 as a cost of inventory.
- D) IFRS 16 as a lease.
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Answer: B) IAS 37 as a provision.
Assurance-type warranties provide a guarantee of quality and are accounted for as provisions under IAS 37, not as separate performance obligations under IFRS 15.
Question 13
When should an entity recognize a 'Contract Asset'?
- A) When it has an unconditional right to consideration.
- B) When it has satisfied a performance obligation but the right to payment is conditional on something other than the passage of time.
- C) When it receives an advance payment from a customer.
- D) When the customer defaults on a payment.
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Answer: B) When it has satisfied a performance obligation but the right to payment is conditional on something other than the passage of time.
A contract asset represents the entity's right to consideration for goods/services transferred when that right is conditioned on something other than just time.
Question 14
A company receives a non-refundable upfront fee for joining a health club. No services are provided yet. This should be recorded as:
- A) Immediate Revenue
- B) Other Income
- C) Contract Liability
- D) Reduction in Marketing Expense
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Answer: C) Contract Liability
If a customer pays consideration before the entity transfers a good or service, the entity recognizes a contract liability.
Question 15
Revenue from a license that provides a 'Right to Use' the entity's intellectual property is recognized:
- A) Over the license period.
- B) At a point in time when the license is granted.
- C) Only when the customer makes a profit.
- D) As an operating lease.
Show answer & explanation
Answer: B) At a point in time when the license is granted.
A 'right to use' license is satisfied at a point in time (the date the license is granted), whereas a 'right to access' is satisfied over time.