1. A company has a contract to deliver 500 units of a product for $2,000 each. The contract includes a warranty for which the estimated cost is $100,000. How should the company allocate the total revenue between the product and warranty?
a) Allocate $100,000 to the product and $900,000 to the warranty
b) Allocate $900,000 to the product and $100,000 to the warranty
c) Allocate $1,500,000 to the product and $500,000 to the warranty
d) Allocate $1,200,000 to the product and $800,000 to the warranty
2. A company enters into a contract with a customer to deliver a product for $20,000. The customer can return the product within 30 days. The company estimates that 10% of the products will be returned. How much revenue should be recognized at the time of sale?
a) $20,000
b) $18,000
c) $17,000
d) $15,000
3. A company sells a software license for $50,000. The customer is provided with technical support for one year, and the value of this support is $5,000. The software is delivered immediately, but support will be provided over the next year. When should the company recognize revenue?
a) Recognize $50,000 upon delivery of the software
b) Recognize $50,000 evenly over the year
c) Recognize $45,000 upon delivery and $5,000 over the year
d) Recognize $5,000 immediately and the remaining $45,000 over the year
4. A company enters into a contract with a customer to deliver 1,000 units of a product at $100 per unit. The contract price is $90,000, and the company expects to incur $50,000 in costs. How should the company recognize revenue under the percentage-of-completion method?
a) Recognize revenue based on cost incurred to date
b) Recognize 100% of the revenue upon completion
c) Recognize revenue as the product is delivered
d) Recognize $90,000 in revenue immediately
5. A company provides a 12-month service contract for $120,000. The contract is signed on January 1, 2025. The company receives full payment at the start of the contract. How should the company recognize the revenue?
a) Recognize $10,000 revenue each month
b) Recognize the entire $120,000 on January 1, 2025
c) Recognize $60,000 in revenue in the first 6 months
d) Recognize $120,000 revenue evenly over the next 24 months
6. A customer purchases a product for $15,000 with an option for a 5% discount if paid in 30 days. The customer expects to take the discount. What is the revenue to be recognized?
a) $15,000
b) $14,250
c) $15,500
d) $14,000
7. A company signs a 2-year lease agreement for $10,000 per month, with the first payment due on the lease start date. How should the company recognize revenue from this lease agreement?
a) Recognize $10,000 each month as revenue
b) Recognize the entire $240,000 on the start date
c) Recognize $240,000 evenly over 24 months
d) Recognize $20,000 at the start of each month for 2 years
8. A company sells goods to a customer with a 30-day right of return. The company estimates that 8% of goods sold will be returned. What is the revenue to recognize?
a) 92% of the total sale price
b) 100% of the total sale price
c) 110% of the total sale price
d) 90% of the total sale price
9. A company enters into a contract to deliver a custom-built machine. The contract is for $500,000, and the machine will take 12 months to build. Revenue should be recognized using the percentage-of-completion method. At the end of month 6, 50% of the costs have been incurred. What revenue should be recognized by the end of month 6?
a) $250,000
b) $500,000
c) $450,000
d) $150,000
10. A software company sells a product for $500,000. The company provides a 2-year software update and maintenance plan valued at $50,000. How should the company allocate the $500,000 sale price?
a) $450,000 for the software and $50,000 for the update
b) $500,000 for the software and $0 for the update
c) $475,000 for the software and $25,000 for the update
d) $250,000 for the software and $250,000 for the update
Concept Tester Questions (11-20)
11. Under IFRS 15, how should a company recognize revenue when it has a contract that includes a right of return, but the company cannot reasonably estimate the returns?
a) Revenue is recognized when the customer accepts the goods
b) Revenue is recognized only when the customer no longer has the right of return
c) Revenue is recognized on delivery, and returns are estimated
d) Revenue is recognized after 30 days, once the return period expires
12. What is the primary characteristic of revenue recognition under the completed contract method?
a) Revenue is recognized when the project is 50% complete
b) Revenue is recognized once the contract is signed
c) Revenue is recognized upon completion of the entire project
d) Revenue is recognized when the payment is received
13. Which of the following would NOT be an indicator of when to recognize revenue over time under IFRS 15?
a) The customer receives and consumes the benefits as the work progresses
b) The asset has no alternative use, and the company has the right to payment and performance obligation completion
c) The company can transfer control at a point in time, not during the process
d) The asset is custom-made for the customer
14. When should a company recognize revenue for a subscription-based service under ASC 606?
a) When the contract is signed
b) As the service is performed over the subscription period
c) At the start of the service period
d) When the full payment is received upfront
15. How should a company recognize revenue from a sale of a product that has a significant financing component, under IFRS 15?
a) Revenue is recognized at the point of sale, with the financing component treated as a separate transaction
b) Revenue is recognized when payment is received
c) Revenue is recognized after the financing period ends
d) Revenue is recognized evenly over the life of the financing arrangement
16. In a contract that involves the construction of a building, which of the following methods would most likely be used to recognize revenue over time?
a) Completed contract method
b) Percentage-of-completion method
c) Output method
d) Cost recovery method
17. How should a company account for a transaction where the revenue is subject to contingencies?
a) Recognize revenue only once the contingency is resolved
b) Recognize revenue upon signing the contract, subject to the contingency
c) Recognize revenue upfront if the contingency is highly probable
d) Recognize revenue immediately if the contingency is minor
18. Under ASC 606, how is "control" defined in terms of revenue recognition?
a) Control refers to when the seller has the right to transfer ownership of the asset
b) Control refers to when the buyer has the right to use the asset
c) Control refers to when the seller has delivered the product to the customer
d) Control refers to when the asset is physically transferred to the buyer
19. A company provides a 3-year service agreement that includes both maintenance and technical support. How should the company allocate the contract price?
a) Allocate the entire price to maintenance
b) Allocate the entire price to technical support
c) Allocate based on the relative fair value of each element
d) Recognize the full price of the contract at the start of the agreement
20. A company sells goods to a customer for $500,000. The goods are delivered, but the customer has a right to return them within 60 days. The company estimates that 15% of the goods will be returned. How much revenue should the company recognize at the time of sale?
a) $500,000
b) $425,000
c) $475,000
d) $550,000
Final 10 Concept Testing Questions (21-30)
21. Under ASC 606, if the transaction price of a contract is variable, when should the company recognize revenue?
a) Once the variable consideration becomes fixed
b) Only when the customer has made a payment
c) When the amount is reasonably estimable and has been determined
d) At the contract inception
22. A company’s revenue is recognized when goods are transferred to the customer. The goods have no alternative use and the company has the right to payment for performance completed. Which method of revenue recognition should the company use?
a) Completed contract method
b) Percentage-of-completion method
c) Point in time recognition
d) Over-time recognition method
23. What is the primary difference between ASC 606 and ASC 605 in terms of revenue recognition?
a) ASC 606 applies to only financial service companies, while ASC 605 applies to all industries
b) ASC 606 emphasizes recognizing revenue based on the transfer of control, while ASC 605 used the risk and rewards method
c) ASC 606 is for contracts with customers only, while ASC 605 applies to both customers and non-customers
d) There is no significant difference between the two standards
24. Under IFRS, when should revenue from long-term contracts be recognized?
a) At the completion of the contract
b) As the customer receives the benefits of the contract
c) Based on the costs incurred relative to the total estimated costs
d) At the midpoint of the contract period
25. A company enters into a contract to deliver a custom-built product, but the customer will only be able to use the product when the project is completed. When should revenue be recognized under IFRS 15?
a) When the customer receives the product
b) When control of the product is transferred to the customer
c) When all performance obligations are fulfilled
d) Upon the completion of the product
26. A company provides a long-term consulting service under contract. Revenue is recognized on the percentage-of-completion method. How should the company recognize revenue if the performance obligations are completed over time?
a) Recognize all revenue upfront
b) Recognize the revenue based on the passage of time
c) Recognize the revenue as the customer receives the benefit of the service
d) Recognize revenue when the final payment is made
27. A construction company delivers a building and receives partial payment in advance. The company incurs costs as the project progresses. How should the company recognize revenue in the percentage-of-completion method?
a) Recognize 100% of the contract price upfront
b) Recognize revenue based on milestones achieved
c) Recognize revenue as costs are incurred, in proportion to completion
d) Recognize revenue when all payments are received
28. A company sells a product for $200,000. The delivery of the product occurs in the next fiscal year. When should revenue be recognized under ASC 606?
a) When the contract is signed
b) When the product is delivered
c) When payment is received
d) When the customer takes possession of the product
29. A company provides a 3-month warranty with a product sold for $500. The estimated cost of the warranty is $50. How should the company recognize revenue for the warranty?
a) Recognize $500 revenue immediately
b) Recognize $50 revenue for the warranty immediately
c) Recognize $500 revenue immediately and $50 revenue for warranty as it’s incurred
d) Recognize the $50 warranty cost as a liability
30. When a company sells goods to a customer under a long-term contract, how should it recognize revenue if the customer will take possession only after the entire order is completed?
a) At the time the order is placed
b) When the customer receives possession of the goods
c) As the goods are produced
d) When the performance obligations are fully satisfied
Quick Revision & Key Takeaways
Key Points to Remember:
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Right of Return: Revenue should be recognized based on the estimate of returns, and only the portion expected to be retained should be recognized as revenue.
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Performance Obligation: Revenue is recognized when the performance obligations are satisfied, and this may occur over time or at a point in time, depending on the nature of the contract.
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Percentage-of-Completion Method: Used for long-term contracts, where revenue and costs are recognized based on the progress of the work.
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Variable Consideration: Revenue can only be recognized when it is probable that a significant reversal in revenue will not occur.
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Financing Components: Adjust for the time value of money in contracts with significant financing components.
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Subscription and Service Contracts: Recognize revenue evenly over the period of service unless there are specific circumstances that suggest otherwise.
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Contingencies: If the revenue is contingent upon certain events, it should be recognized once the contingency is resolved or becomes probable.
✅ Answers & Explanations: Revenue Recognition (ASC 606
1. Revenue Allocation with Warranty
Answer: (b) Allocate $900,000 to the product and $100,000 to the warranty
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Explanation: If the warranty is a separate performance obligation (like extended warranty), allocate transaction price accordingly. $100,000 is for warranty (a separate obligation), the rest is product revenue.
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Wrong Choices:
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(a)/(d): Misallocate total amount, overvaluing warranty.
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(c): $500,000 warranty is overstated.
2. Right of Return – Revenue Estimation
Answer: (b) $18,000
3. Software and Support Allocation
Answer: (c) Recognize $45,000 upon delivery and $5,000 over the year
4. Percentage of Completion (Cost-Based)
Answer: (a) Recognize revenue based on cost incurred to date
5. 12-Month Service Contract
Answer: (a) Recognize $10,000 revenue each month
6. Sales Discount Expected
Answer: (b) $14,250
7. Lease Agreement – Revenue
Answer: (a) Recognize $10,000 each month as revenue
8. Return Estimate – 8%
Answer: (a) 92% of the total sale price
9. Custom Machine – 6 Months
Answer: (a) $250,000
10. Software + Maintenance
Answer: (a) $450,000 for software and $50,000 for the update
🔍 Concept Tester Questions (11–20)
11. Right of Return – Estimate Not Possible
Answer: (b) Revenue is recognized only when the customer no longer has the right of return
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Explanation: If returns can’t be reasonably estimated, defer revenue.
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Wrong Choices: Others allow premature recognition.
12. Completed Contract Method
Answer: (c) Revenue is recognized upon completion of the entire project
13. When to Recognize Over Time
Answer: (c) The company can transfer control at a point in time, not during the process
14. Subscription Revenue
Answer: (b) As the service is performed over the subscription period
15. Financing Component
Answer: (a) Revenue is recognized at the point of sale, with the financing component treated separately
16. Construction Contract
Answer: (b) Percentage-of-completion method
17. Contingent Revenue
Answer: (a) Recognize revenue only once the contingency is resolved
18. Definition of Control
Answer: (b) Control refers to when the buyer has the right to use the asset
19. Multi-Element Service Agreement
Answer: (c) Allocate based on the relative fair value of each element
20. Estimated Return – 15%
Answer: (c) $475,000
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Explanation: $500,000 × (1 – 15%) = $475,000
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Wrong Choices: Misapplied or ignored estimate.
🔬 Final 10 Concept Testing (21–30)
21. Variable Consideration
Answer: (c) When the amount is reasonably estimable and has been determined
22. No Alternative Use + Right to Payment
Answer: (d) Over-time recognition method
23. ASC 606 vs ASC 605
Answer: (b) ASC 606 emphasizes recognizing revenue based on the transfer of control
24. IFRS Long-Term Contracts
Answer: (c) Based on the costs incurred relative to the total estimated costs
25. Custom Product, Usable Only When Completed
Answer: (d) Upon the completion of the product
26. Long-Term Consulting Service
Answer: (c) Recognize the revenue as the customer receives the benefit of the service
27. Building Project – Progress
Answer: (c) Recognize revenue as costs are incurred, in proportion to completion
28. Product Delivery Next Year
Answer: (b) When the product is delivered
29. Warranty Treatment
Answer: (d) Recognize the $50 warranty cost as a liability
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Explanation: Warranty is cost to be accrued, not revenue.
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Wrong Choices: Misclassify cost or revenue.
30. Long-Term Contract – Delivery at End
Answer: (b) When the customer receives possession of the goods
✅ Revenue Recognition Simplified – 30 Questions Answered
Understand ASC 606 & IFRS 15 with real-world scenarios. Here are 30 multiple-choice questions (MCQs) with clear answers and detailed explanations. Perfect for CPA prep and finance professionals.
🧠 Questions 1–10: Practical Scenarios
- Revenue Allocation with Warranty:
Answer: Allocate $900,000 to the product and $100,000 to the warranty
Explanation: Extended warranties are separate performance obligations. Allocate based on standalone price.
- Right of Return – Revenue Estimation:
Answer: $18,000
Explanation: 90% is expected to be kept = $20,000 × 90%.
- Software and Support Allocation:
Answer: Recognize $45,000 upon delivery and $5,000 over the year
Explanation: Software is point-in-time; support is over time.
- Percentage of Completion:
Answer: Recognize revenue based on cost incurred to date
Explanation: Use cost-to-cost method under ASC 606.
- 12-Month Service Contract:
Answer: Recognize $10,000 revenue each month
Explanation: Straight-line over service period.
- Sales Discount Expected:
Answer: $14,250
Explanation: $15,000 × (1 - 5%) = $14,250.
- Lease Agreement – Monthly Payment:
Answer: Recognize $10,000 each month as revenue
Explanation: Lease income is recognized as earned.
- Return Estimate – 8%:
Answer: 92% of the total sale price
Explanation: Defer 8% return estimate.
- Custom Machine – Half Done:
Answer: $250,000
Explanation: Recognize based on 50% of work completed.
- Software + Maintenance:
Answer: $450,000 for software and $50,000 for the update
Explanation: Allocate transaction price based on fair values.
🔍 Questions 11–20: Conceptual Understanding
- Return Estimate Not Possible:
Answer: Revenue is recognized only when return right expires
- Completed Contract Method:
Answer: Recognize revenue upon completion of entire project
- Over-Time Criteria Fails:
Answer: The company can transfer control only at a point in time
- Subscription Revenue:
Answer: Recognize revenue over the subscription period
- Financing Component:
Answer: Recognize product revenue now and interest over time
- Construction Contract Method:
Answer: Use percentage-of-completion if measurable
- Contingent Revenue:
Answer: Wait until contingency is resolved
- Definition of Control:
Answer: When buyer can use or direct the use of the asset
- Multi-Element Contracts:
Answer: Allocate based on relative fair value
- Estimated Returns 15%:
Answer: $475,000
Explanation: $500,000 × (1 - 15%) = $475,000.
🧪 Questions 21–30: Deep Concept Testing
- Variable Consideration:
Answer: Recognize when outcome is estimable and probable
- No Alternative Use + Right to Payment:
Answer: Over-time recognition
- ASC 606 vs 605:
Answer: ASC 606 focuses on control transfer
- IFRS – Long-Term Revenue:
Answer: Use cost-based % completion
- Custom Product – Control at End:
Answer: Recognize revenue on delivery
- Consulting Contract Over 6 Months:
Answer: Recognize as benefit is provided
- Progressive Building Project:
Answer: Recognize revenue proportionate to cost incurred
- Product Delivery Next Year:
Answer: Revenue on delivery
- Warranty Cost:
Answer: Accrue warranty as liability, not defer revenue
- Long-Term Contract – Delivery Only at End:
Answer: Recognize revenue when control transfers
📘 Quick Revision Notes: ASC 606 / IFRS 15
- 5 Steps: Identify contract → Identify performance obligations → Determine transaction price → Allocate → Recognize
- Control Transfer: At a point or over time based on indicators
- Returns: Estimate and defer that portion
- Variable Consideration: Only recognize when probable
- Financing Component: Use time value of money if >1 year delay
- Journal Entries:
Initial:
Dr. Cash xxx
Cr. Deferred Revenue xxx
When Earned:
Dr. Deferred Revenue xxx
Cr. Revenue xxx
Warranty Accrual:
Dr. Warranty Expense xxx
Cr. Warranty Liability xxx
🎯 Tip: Focus on understanding control transfer and separating obligations to master ASC 606.
Created by Vijaya Sai M, CPA aspirant & Finance Manager. For more CPA stories and real-life finance insights, follow my YouTube channel!
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