Evanko Co. is analyzing its prepaid expense account balance at December 31, Year 2, and noted the following items composing that balance: $1,500 associated with a $3,000 annual insurance policy Evanko paid for that commenced on July 1, Year 1; a $2,000 advance rent payment Evanko paid on November 1, Year 1, in connection with a new building lease (the lease commences on January 1, Year 3); and $3,200 of supplies Evanko prepaid for on October 15, Year 2. A physical count of the prepaid supplies noted $2,000 of those supplies still on hand at December 31, Year 2. What amounts should Evanko report as prepaid expense in its December 31, Year 2, balance sheet, and as expense in its income statement for the year ended December 31, Year 2?

CPA FAR revenue recognition follows ASC 606's five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognize revenue when control transfers (at a point in time or over time). Expense recognition follows matching principles (cause-effect, systematic allocation, or immediate recognition).  Key Revenue Recognition (ASC 606) Five Steps: Identify the Contract: A mutual agreement exists with collectability likely. Identify Performance Obligations: Distinct goods or services promised in the contract. Determine... Show more

CPA FAR revenue recognition follows ASC 606's five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognize revenue when control transfers (at a point in time or over time). Expense recognition follows matching principles (cause-effect, systematic allocation, or immediate recognition). 

Key Revenue Recognition (ASC 606) Five Steps:
Identify the Contract: A mutual agreement exists with collectability likely.
Identify Performance Obligations: Distinct goods or services promised in the contract.
Determine Transaction Price: Amount the company expects to receive.
Allocate Transaction Price: Distribute the price to each performance obligation based on standalone selling prices.
Recognize Revenue: When (or as) the performance obligation is satisfied by transferring control to the customer. 

Revenue Patterns:
Point in Time: Control transfers at a specific date (e.g., retail sale).
Over Time: Revenue is recognized over a period if the customer consumes benefits immediately, enhances an asset they control, or if the asset has no alternative use.
Consignment: Revenue is recognized when the consignee sells the goods to a third party. 

Expense Recognition Principle:
Expenses are recognized based on: 
Cause and Effect: Matching expenses directly to revenue (e.g., Cost of Goods Sold).
Systematic and Rational Allocation: Allocating costs over useful life (e.g., Depreciation).
Immediate Recognition: Recognizing costs immediately (e.g., Administrative expenses, repairs). 

Key FAR Considerations:
Long-Term Contracts: Revenue is often recognized over time using cost-to-cost methods (percentage of completion).
Bundled Products: If a contract includes multiple items (e.g., a laptop and service), allocate the price to each separate obligation.
Hardest Topics: Revenue recognition is frequently tested and considered one of the hardest topics in the FAR section. 

Note: Consignment sales to a third party require the consignee to actually sell the goods to the end user for the consignor to recognize revenue.

Show less