Chapter 18

The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions? A.The buyer is obligated to pay the seller upon resale of the product. B. The amount of future returns can be reasonably estimated. C.The seller's price is substantially fixed or determinable at time of sale. D. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product.

A.

Triad Builders, Inc. is using the completed-contract method for a $14,700,000 contract that will take two years to complete. Data at December 31, 2015, the end of the first year, are as follows: Costs incurred to date $7,520,000 Estimated costs to complete $8,060,000 Billings to date 6,440,000 Collections to date 5,980,000 The gross profit or loss that should be recognized for 2015 is A. a 880,000 loss B. 1,080,000 loss C. 0 D. a 1,540,000 loss

A. $14,700,000 less ($7,520,000 + $8,060,000) indicates a loss of $880,000.

A loss on an unprofitable long-term contract is recognized in the current period under: A. both the completed-contract and the percentage-of-completion methods. B. the percentage-of-completion method only. C. neither the completed-contract nor the percentage-of-completion methods. D.the completed-contract method only.

A. Under both methods, a loss on an unprofitable long-term contract is recognized in the current period.

Revenue from selling assets other than inventory is generally recognized: a. at the date of sale. b.at the completion of production. c. after costs are recovered. d.as cash is collected.

A. Revenue from selling assets other than inventory is usually recognized at the date of sale.

Revenue is considered to be earned when: a.assets received by the company in exchange for goods or services are readily convertible to known amounts of cash or claims to cash. b.a company has substantially completed what it must in order to be entitled to the benefits represented by the revenues. c.a company exchanges goods or services for cash or claims to cash. d.when it is realized or realizable.

B. Revenue is considered earned when the earnings process is complete or virtually complete.

The loss (gain) on repossession of merchandise is the difference between the estimated fair value of the merchandise and: A. the balance of the installment receivable B. unrecovered cost of merchandise C. its original cost D. the deferred gross profit

B. The difference between the estimated fair value of the merchandise and its unrecovered cost is the loss (gain) on repossession.

The installment-sales method of recognizing profit for accounting purposes is acceptable if A.an unrealized profit account is credited. B.there is no reasonable basis of estimating the uncollectability of the sales price. C.collections in the year of sale do not exceed 30% of the total sales price. D. the method is consistently used for all sales of similar merchandise.

B. The installment-sales method of recognizing profit for accounting purposes is acceptable if there is no reasonable basis for estimating the uncollectability of the sales price.

When a seller is exposed to continued risks of ownership through return of the product, the seller should recognize revenue: a.immediately, but reduce revenue by an estimate of future returns. b. at the time of sale and account for returns as they occur. c.at the time of sale only if 6 specific conditions are met. d.when all return privileges have expired

C. If a company sells products and gives the buyer the right to return it, revenue should be recognized at the time of sale only if 6 specific conditions are met.

A loss in the current period on a contract expected to be profitable upon completion is recognized in the current period under: A.both the completed-contract and percentage-of-completion methods. B.neither the completed-contract nor percentage-of-completion methods. C.the percentage-of-completion method only. D.the completed-contract method only.

C. A loss in the current period on a profitable contract is recognized in the current period under the percentage-of-completion method only.

Deferred gross profit on installment sales is generally reported as A. a contra asset account. B.a contra revenue account. C. a current liability. D.a deduction from gross profit.

C. Deferred gross profit on installment sales is generally considered unearned revenue and is classified as a current liability.

Deferred gross profit on installment sales is generally treated as a (n) A. deduction from gross profit on sales. B.deduction from installment accounts receivable. C.unearned revenue and classified as a current liability. D.deduction from installment sales.

C. Deferred gross profit on installment sales is generally treated as an unearned revenue and classified as a current liability.

Reedy Builders, Inc. is using the completed-contract method for a $12,500,000 contract that will take three years to complete. Data at December 31, 2015, the end of the first year, are as follows: Costs incurred to date $6,240,000 Estimated costs to complete 6,660,000 Billings to date 5,920,000 Collections to date 5,540,000 The gross profit or loss that should be recognized for 2015 is: A. $0 B. a $133.334 loss C. a 400,000 loss D. a 320,000 loss

C. Incorrect. $12,500,000 - ($6,240,000 + $6,660,000) = $400,000 loss

When a loss occurs in the current period on a profitable long-term contract, the loss is: A.not recognized under either the completed-contract method or the percentage-of-completion method. B.recognized under both the completed-contract method and the percentage-of-completion method. C. recognized under the percentage-of-completion method. D. recognized under the completed-contract method.

C. The loss is recognized under the percentage-of-completion method as a change in accounting estimate.

When goods or services are exchanged for cash or claims to cash (receivables), revenues are a. recognized b. earned c. realized d. all the above

C. When goods or services are exchanged for cash or claims to cash (receivables), revenues are realized.

The Billings on Construction in Process account is reported as: A. a current asset only. B. revenue on the income statement. C.a current liability only. D.either a current asset or current liability.

D. Billings on Construction in Process is reported as a current asset or current liability, depending on whether its balance is larger or smaller than the Construction in Process account balance.

On July 1, 2013, Wilmington Co. sold equipment that cost $104,000 for $112,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $45,038 starting on June 30, 2014. Because collection of the note is very uncertain, Wilmington will use the cost-recovery method. How much revenue from this sale should Wilmington recognize in 2014? A. $8,000 B.$4,504 C.$5,600 D.$0

D. Until the cost of goods sold, $104,000, is collected, no profits are recognized.

Franchisors generally report continuing franchise fees as revenue when they are earned and receivable. True or False

True

Companies commonly recognize revenues from manufacturing and selling activities at point of sale (usually meaning delivery). True or False

True The two conditions for recognizing revenue (being realized or realizable and being earned) have been met by the time a company delivers products or renders services to customers.

Under the deposit method, no revenue is recognized until the sale is complete. True or False

True Under the deposit method, cash is received before the sales transaction is completed.