exam 3 Acc chapter 18
The principal advantage of the completed-contract method is that
a. reported revenue is based on final results rather than estimates of unperformed work.
If a contract involves a significant financing component
a. the time value of money is used to determine the fair value of the transaction.
Bella Pool Company sells prefabricated pools that cost $80,000 to customers for $144,000. The sales price includes an installation fee, which is valued at $20,000. The fair value of the pool is $128,000. The installation is considered a separate performance obligation and is expected to take 3 months to complete. The transaction price allocated to the pool and the installation is
a. $124,541 and $19,459 respectively
At December 31, 2018, Eilert would report Construction in Process in the amount of
a. $19,320,000.
Horner Construction Co. uses the percentage-of-completion method. In 2018, Horner began work on a contract for $22,000,000; it was completed in 2019. The following cost data pertain to this contract: Year Ended December 31 2018 2019 Cost incurred during the year $7,800,000 $5,600,000 Estimated costs to complete at the end of year 5,200,000 — The amount of gross profit to be recognized on the income statement for the year ended December 31, 2019 is
a. $3,200,000.
Kiner, Inc. began work in 2018 on a contract for $21,000,000. Other data are as follows: 2018 2019 Costs incurred to date $9,000,000 $14,000,000 Estimated costs to complete 6,000,000 — Billings to date 7,000,000 21,000,000 Collections to date 5,000,000 18,000,000 If Kiner uses the percentage-of-completion method, the gross profit to be recognized in 2018 is
a. $3,600,000.
Roche Pharmaceuticals entered into a licensing agreement with Zenith Lab for a new drug under development. Roche will receive $8,100,000 if the new drug receives FDA approval. Based on prior approval, Roche determines that it is 85% likely that the drug will gain approval. The transaction price of this arrangement should be
a. $8,100,000.
Marle Construction enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2018 with a performance bonus of $50,000 if the building is completed by July 31, 2018. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability: July 31, 2018 65% August 7, 2018 25% August 14, 2018 5% August 21, 2018 5%
a. $995,000
Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing the software, the company also provides consulting services and support to ensure smooth operation of the software. The total transaction price is $420,000. Based on standalone values, the company estimates the consulting services and support have a value of $120,000 and the software license has a value of $300,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes
a. a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000.
Douglas Diners Inc. charges an initial franchise fee of $180,000 broken down as follows: Rights to trade name, market area, and proprietary know-how $ 80,000 Training services 23,000 Equipment (cost of $21,600) 77,000 Total initial franchise fee $180,000 Upon signing of the agreement, a payment of $80,000 is due. Thereafter, two annual payments of $50,000 are required. The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise agreement is signed on August 1, 2018, and the franchise commences operation on November 1, 2018. Assume that the total training fees includes training services for the period leading up to the franchise opening ($11,000 value) and for 3 months following opening. The journal entry on August 1, 2018 would include
a. a credit to Unearned Service Revenue for $23,000.
New Age Computers manufactures and sells pagers and radio paging systems which include a 180 day warranty on product defects. It also sells an extended warranty which provides an additional two years of protection. On May 10, it sold a paging system for $4,500 and an extended warranty for another $1,400. The journal entry to record this transaction would include
a. a credit to Warranty Revenue of $5,900.
The role of the agent in a Principal-Agent relationship is to
a. arrange for the principal to provide goods or services to a customer.
Continuing franchise fees should be recorded by the franchisor
a. as revenue when uncertainty related to the variable consideration is resolved.
The cost-to-cost basis measures progress towards completion by
a. comparing costs incurred to date with total costs to complete the contract.
On November 1, 2018, Green Valley Farm entered into a contract to buy a $150,000 harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2018. The harvester (cost of $110,000) was delivered on November 30, 2018. The journal entry to record the delivery of the equipment includes a
a. debit to Unearned Sales Revenue for $150,000.
When multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when
a. each service is interdependent and interrelated.
A contract between Boeing and Delta in which Boeing supplies planes to Delta
a. is an agreement that creates enforceable rights and obligations for both parties.
When a customer is able to benefit from a good or service on its own or together with other readily available resources, the good or service
a. is distinct.
Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.
The percentage-of-completion method
a. recognizes revenue and gross profit each period based upon progress.
Unconditional rights to receive consideration because a performance obligation has been satisfied are
a. reported as a receivable on the balance sheet.
Revenue for ongoing sales-based royalty payments should be recognized
a. when the amount of sales can be determined.
Cooper Construction Company had a contract starting April 2018, to construct a $24,000,000 building that is expected to be completed in September 2020, at an estimated cost of $22,000,000. At the end of 2018, the costs to date were $10,120,000 and the estimated total costs to complete had not changed. The progress billings during 2018 were $4,800,000 and the cash collected during 2018 was 3,200,000. Cooper uses the percentage-of-completion method. For the year ended December 31, 2018, Cooper would recognize gross profit on the building of:
b. $ 920,000
Seasons Construction is constructing an office building under contract for Cannon Company and uses the percentage-of-completion method. The contract calls for progress billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000 and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2018. At December 31, 2019, Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $18,000,000 due to unanticipated price increases. What is reported in the balance sheet at December 31, 2019 for Seasons as the difference between the Construction in Process and the Billings on Construction in Process accounts, and is it a debit or a credit?
b. $1,550,000 Debit
Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of $19,200,000. Other details follow: 2018 2019 Costs incurred during the year $3,200,000 $9,800,000 Estimated costs to complete, as of December 31 9,600,000 0 Billings during the year 3,600,000 14,400,000 Collections during the year 2,400,000 15,600,000 Assume that Gomez uses the percentage-of-completion method of accounting. The portion of the total gross profit to be recognized as income in 2018 is
b. $1,600,000.
Wynne Inc. charges an initial franchise fee of $2,300,000, with $500,000 paid when the agreement is signed and the balance in five annual payments. The present value of the future payments, discounted at 10%, is $1,364,680. The franchisee has the option to purchase $300,000 of equipment for $240,000. Wynne has substantially provided all initial services required and collectibility of the payments is reasonably assured. The amount of revenue from franchise fees is
b. $1,804,680.
Remington Construction Company uses the percentage-of-completion method. During 2018, the company entered into a fixed-price contract to construct a building for Sherman Company for $36,000,000. The following details pertain to the contract:At December 31, 2018 At December 31, 2019 Percentage of completion 25% 60% Estimated total cost of contract $27,000,000 $30,000,000 Gross profit recognized to date 2,250,000 3,600,000 The amount of construction costs incurred during 2019 was
b. $11,250,000.
In 2018, Fargo Corporation began construction work under a three-year contract. The contract price is $7,200,000. Fargo uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2018, follow:Balance Sheet Accounts receivable—construction contract billings $300,000 Construction in progress $900,000 Less contract billings 720,000 Costs and recognized profit in excess of billings 180,000 Income Statement Income (before tax) on the contract recognized in 2018 $180,000 How much cash was collected in 2018 on this contract?
b. $420,000
Kiner, Inc. began work in 2018 on a contract for $21,000,000. Other data are as follows: 2018 2019 Costs incurred to date $9,000,000 $14,000,000 Estimated costs to complete 6,000,000 — Billings to date 7,000,000 21,000,000 Collections to date 5,000,000 18,000,000 If Kiner uses the completed-contract method, the gross profit to be recognized in 2019 is
b. $7,000,000.
Arizona Communications contracted to set up a call center for the City of Phoenix. Under the terms of the contract, Arizona Communications will design and set-up a call center with the following costs: Design of call center $20,000 Computers, servers, telephone equipment $550,000 Software $170,000 Installation and testing of equipment $30,000 Selling commission $50,000 Annual service contract $100,000 In addition, Arizona Communications will maintain and service the equipment and software to ensure smooth operations of the call center for an annual fee of $180,000. Ownership of equipment installed remains with the City of Phoenix. The contract costs that should be capitalized is
b. $820,000
The fourth step in the process for revenue recognition is to
c. allocate transaction price to the separate performance obligations.
When there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract, which of the following is correct?
b. Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
A contract liability is a company's obligations to transfer goods or services to a customer for which the company has received consideration from the customer. An example of a contract liability is
b. Unearned magazine subscription.
A transaction price for multiple performance obligations should be allocated
b. based on what the company could sell the goods for on a standalone basis.
When a contract modification does not result in a separate performance obligation, the additional products are priced at the
b. blended price of original contract and contract modification.
The most popular input measure used to determine the progress toward completion is
b. cost-to-cost basis.
Botanic Choice sells natural supplements to customers with an unconditional sales return if they are not satisfied. The sales returns extends 60 days. On February 10, 2018, a customer purchases $4,000 of products (cost $2,000). Assuming that based on prior experience, estimated returns are 20%. The journal entry to record the expected sales return and cost of goods sold includes a
b. debit to Allowance for Sales Returns of $800 and a credit to Cost of Goods sold of $400.
The Billings on Construction in Progress account is a(n)
c. contra-inventory account.
When a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price, the transaction should be treated as a
b. financing transaction.
The first step in the process for revenue recognition is to
b. identify the contract with customers.
A contract
b. is an agreement that creates enforceable rights and obligations.
The use of the net method of recognizing revenue by an agent
b. is the correct method in a principal-agent relationship.
The last step in the process for revenue recognition is to
b. recognize revenue when each performance obligation is satisfied.
Franchise companies derive their revenues from the
b. sale of initial franchises and related services and from continuing fees based on the franchise operation.
The category of franchising that has given rise to accounting challenges is
b. service sponsor-retailer.
In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be
b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
Franchise revenue is recognized over time if
b. the franchisor is providing access to the right rather than transferring control.
In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the
b. total estimated cost.
Types of franchising arrangements include all of the following except
b. wholesaler-service sponsor.
Monroe Construction Company uses the percentage-of-completion method of accounting. In 2018, Monroe began work on a contract it had received which provided for a contract price of $37,500,000. Other details follow: 2018 Costs incurred during the year $18,000,000 Estimated costs to complete as of December 31 12,000,000 Billings during the year 16,500,000 Collections during the year 9,500,000 What should be the gross profit recognized in 2018?
c. $ 4,500,000
Partial satisfaction of a multiple performance obligation is reported on the balance sheet as
c. contract asset.
Hayes Construction Corporation contracted to construct a building for $7,500,000. Construction began in 2018 and was completed in 2019. Data relating to the contract are summarized below:Year ended December 31, 2018 2019 Costs incurred $3,000,000 $2,250,000 Estimated costs to complete 2,000,000 — Hayes uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2018, and 2019, respectively, Hayes should report gross profit of
c. $1,500,000 and $750,000.
Eilert Construction Company had a contract starting April 2018, to construct a $42,000,000 building that is expected to be completed in September 2019, at an estimated cost of $38,500,000. At the end of 2018, the costs to date were $17,710,000 and the estimated total costs to complete had not changed. The progress billings during 2018 were $8,400,000 and the cash collected during 2018 was $5,600,000. Eilert uses the percentage-of-completion method. : For the year ended December 31, 2018, Eilert would recognize gross profit on the building of
c. $1,610,000.
Cooper Construction Company had a contract starting April 2018, to construct a $24,000,000 building that is expected to be completed in September 2020, at an estimated cost of $22,000,000. At the end of 2018, the costs to date were $10,120,000 and the estimated total costs to complete had not changed. The progress billings during 2018 were $4,800,000 and the cash collected during 2018 was 3,200,000. Cooper uses the percentage-of-completion method. At December 31, 2018 Cooper would report Construction in Process in the amount of:
c. $11,040,000
Adler Construction Co. uses the percentage-of-completion method. In 2018, Adler began work on a contract for $11,000,000 and it was completed in 2019. Data on the costs are Year Ended December 31 2018 2019 Costs incurred $3,900,000 $2,800,000 Estimated costs to complete 2,600,000 — For the years 2018 and 2019, Adler should recognize gross profit of
c. $2,700,000 $1,600,000
On August 5, 2018, Famous Furniture shipped 40 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was $350 each. The cost of shipping the dining sets amounted to $3,600 and was paid for by Famous Furniture. On December 30, 2018, the consignee reported the sale of 30 dining sets at $850 each. The consignee remitted payment for the amount due after deducting a 6% commission, advertising expense of $600, and installation and setup costs of $780. The amount cash received by Famous furniture is
c. $22,590
Sources of revenue for franchise companies are
c. sale of initial franchise and continuing fees.
Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of $19,200,000. Other details follow: 2018 2019 Costs incurred during the year $3,200,000 $9,800,000 Estimated costs to complete, as of December 31 9,600,000 0 Billings during the year 3,600,000 14,400,000 Collections during the year 2,400,000 15,600,000 Assume that Gomez uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2019 is
c. $6,200,000.
Horner Construction Co. uses the percentage-of-completion method. In 2018, Horner began work on a contract for $22,000,000; it was completed in 2019. The following cost data pertain to this contract: Year Ended December 31 2018 2019 Cost incurred during the year $7,800,000 $5,600,000 Estimated costs to complete at the end of year 5,200,000 — If the completed-contract method of accounting was used, the amount of gross profit to be recognized for years 2018 and 2019 would be
c. 2018:$0. 2019:$8,600,000.
On January 1, 2018 Dairy Treats, Inc. entered into a franchise agreement with a company allowing the company to do business under Dairy Treats' name. Dairy Treats had performed substantially all required services by January 1, 2018, and the franchisee paid the initial franchise fee of $980,000 in full on that date. The franchise agreement specifies that the franchisee must pay a continuing franchise fee of $84,000 annually, of which 20% must be spent on advertising by Dairy Treats. What entry should Dairy Treats make on January 1, 2018 to record receipt of the initial franchise fee and the continuing franchise fee for 2018?
c. Cash...................................................................................... 1,064,000 Franchise Fee Revenue............................................ 980,000 Franchise Revenue................................................... 67,200 Unearned Franchise Revenue.................................. 16,800
How should the balances of Progress Billings and Construction in Process be shown at reporting dates prior to the completion of a long-term contract?
c. Net balance, as a current asset if debit balance, and current liability if credit balance.
Seasons Construction completes the remaining 25% of the building construction on December 31, 2020, as scheduled. At that time the total costs of construction are $18,750,000. What is the total amount of Revenue from Long-Term Contracts and Construction Expenses that Seasons will recognize for the year ended December 31, 2020?
c. Revenue: $4,650,000 Expenses: $5,250,000
Seasons Construction is constructing an office building under contract for Cannon Company and uses the percentage-of-completion method. The contract calls for progress billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000 and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2018. At December 31, 2018, Seasons estimates that it is 30% complete with the construction, based on costs incurred. What is the total amount of Revenue from Long-Term Contracts recognized for 2018 and what is the balance in the Accounts Receivable account assuming Cannon Company has not yet made its last quarterly payment?
c. Revenue: $5,580,000 AR:$1,550,000
Cost estimates at the end of the second year indicate that a loss will result on completion of the entire contract. Which of the following statements is correct?
c. Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.
A performance obligation exists when
c. a company provides a distinct product or service.
P & G Auto Parts sells parts to AAA Car Repair during 2018. P&G offers rebates of 2% on purchases up to $60,000 and 3% on purchases above $60,000 if the customer's purchases for the year exceed $200,000. In the past, AAA normally purchases $300,000 in parts during a calendar year. On March 25, 2018, AAA Car Repair purchased $74,000 of parts. The journal entry to record the purchase includes a
c. credit to Sales Revenue for $72,380.
On November 1, 2018, Green Valley Farm entered into a contract to buy a $150,000 harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2018. The harvester (cost of $110,000) was delivered on November 30, 2018. The journal entry to record the contract on November 1, 2018 includes a
c. credit to Unearned Sales Revenue for $150,000.
Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144,000 on March 15, 2018. Estimated standalone fair values of the equipment, installation and training are $90,000, $60,000 and $30,000 respectively. The journal entry to record the transaction on March 15, 2018 will include a
c. credit to Unearned Service Revenue of $24,000.
Botanic Choice sells natural supplements to customers with an unconditional sales return if they are not satisfied. The sales returns period extends 60 days. On February 10, 2018, a customer purchases $4,000 of products (cost $2,000). Assuming that based on prior experience, estimated returns are 20%. The journal entry to record the actual return of $250 of merchandise includes a
c. debit to Returned Inventory for $125
Noncash consideration should be
c. recognized on the basis of fair value of what is received.
The converged standard on revenue recognition
c. recognizes and measures revenue based on changes in assets and liabilities.
On January 15, 2018, Bella Vista Company enters into a contract to build custom equipment for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000 30 days after delivery. The revenue for this contract should be
c. recorded on March 31, 2018.
When sales are made with a right of return, the company
c. records the returned asset in a separate inventory account.
Consideration paid or payable to customers
c. reduces the consideration received and the revenue to be recognized.
Disclosure related to revenue
c. requires disclosure of remaining performance obligations.
An option to purchase a warranty is recorded as
c. revenue in the period that the service-type warranty is in effect.
In 2018, Fargo Corporation began construction work under a three-year contract. The contract price is $7,200,000. Fargo uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2018, follow: Balance Sheet Accounts receivable—construction contract billings $300,000 Construction in progress $900,000 Less contract billings 720,000 Costs and recognized profit in excess of billings 180,000 Income Statement Income (before tax) on the contract recognized in 2018 $180,000 What was the initial estimated total income before tax on this contract?
d. $1,440,000
On June 1, 2018, Johnson & Sons sold equipment to James Landscaping Service in exchange for a zero-interest bearing note with a face value of $110,000, with payment due in 12 months. The fair value of the equipment on the date of sale was $100,000. The amount of revenue to be recognized on this transaction in 2018 is
d. $100,000 sales revenue and $5,833 interest revenue.
Under the completed-contract method
revenue, cost, and gross profit are recognized at the time the contract is completed.
Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144,000 on March 15, 2018. Estimated standalone fair values of the equipment, installation, and training are $90,000, $60,000, and $30,000 respectively. The transaction price allocated to equipment, installation and training is
d. $72,000, $48,000 and $24,000 respectively.
Seasons Construction is constructing an office building under contract for Cannon Company and uses the percentage-of-completion method. The contract calls for progress billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000 and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2018. At December 31, 2019, Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $18,000,000 due to unanticipated price increases. What is the total amount of Construction Expenses that Seasons will recognize for the year ended December 31, 2019?
d. $8,175,000
To address inconsistencies and weaknesses in revenue recognition, a comprehensive revenue recognition standard was developed entitled the
d. Revenue from Contracts with Customers.
When a customer purchases a product but is not yet ready for delivery, this is referred to as
d. a bill-and-hold arrangement
Companies can use the expected value to estimate variable consideration when
d. a company has a large number of contracts with similar characteristics.
Douglas Diners Inc. charges an initial franchise fee of $180,000 broken down as follows: Rights to trade name, market area, and proprietary know-how $ 80,000 Training services 23,000 Equipment (cost of $21,600) 77,000 Total initial franchise fee $180,000 Upon signing of the agreement, a payment of $80,000 is due. Thereafter, two annual payments of $50,000 are required. The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise agreement is signed on August 1, 2018, and the franchise commences operation on November 1, 2018. Assuming that no future services are required by the franchisor once the franchise begins operations, the entry on November 1, 2018 would include
d. a debit to Unearned Franchise Revenue for $80,000.
Revenue from a contract with a customer
d. cannot be recognized until a contract exists.
A company has satisfied its performance obligation when the
d. company has transferred physical possession of the asset.
Consignments are a specialized marketing method whereby the
d. consignee takes possession of merchandise but title remains with manufacturer.
Consigned goods are recognized as revenues by the
d. consignor when it receives payment from consignee for goods sold.
Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days. Entertainment Tonight also offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the extended warranty is $3,000. The standalone price of each is $2,300 and $900, respectively. The estimated cost of the assurance-warranty is $350. The accounting for warranty will include a
d. credit to Unearned Warranty Revenue, $900
On July 31, O'Malley Company contracted to have two products built by Taylor Manufacturing for a total of $370,000. The contract specifies that payment will only occur after both products have been transferred to O'Malley Company. Taylor determines that the standalone prices are $200,000 for Product 1 and $170,000 for Product 2. On August 1, when Product 1 has been transferred, Taylor's journal entry to record this event includes a
d. debit to Contract Assets for $200,000.
A company must account for a contract modification as a new contract if the
d. goods or services are distinct and company has right to receive the standalone price
The second step in the process for revenue recognition is to
d. identify the separate performance obligations in the contract.
Nonrefundable upfront fees
d. should not be recorded as revenue if they are for future delivery of products and services
Franchise fees should be recognized
d. when performance obligations are satisfied.
The transaction price
the amount of consideration that a company expects to receive from a customer