ACCT 3021 v2.0 Final ch18/17/16

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? $8,000 $5,600 $4,504 $0

$0

On its December 31, 2014, balance sheet, Trump Company reported its investment in available-for-sale securities, which had cost $600,000, at fair value of $550,000. At December 31, 2015, the fair value of the securities was $585,000. What should Trump report on its 2015 income statement as a result of the increase in fair value of the investments in 2015? Select one: A. $0 B. unrealized loss of $15,000 C. realized gain of $35,000 D. unrealized gain of $35,000

A. $0

Dexter purchases equipment from Ray Company for a price of $5,000,000 and chooses Ray to do the installation. Ray doesn't charge for the installation of equipment. The price of the installation service is estimated to have a fair value of $60,000. Assuming the transaction to be multiple-deliverable arrangement, compute the amount to be allocated to installation. Select one: A. $59,289 B. $60,720 C. $60,000 D. $61,457

A. $59,289 Purchase price $5,000,000 Installation Fair value $60,000 Total cost 5,060,000 Discount [(5,000,000/5,060,000)x100%] Discount = 1.18577% Installation Fair Value 60,000 Discount [1.18577 x 60,000] = 711.46 Amount allocated to installation $59,289

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are: Select one: A. available-for-sale securities where a company has holdings of less than 20% B. trading securities where a company has holdings of less than 20% C. securities where a company has holdings of between 20% and 50% D. securities where a company has holdings of more than 50%.

A. available-for-sale securities where a company has holdings of less than 20%

Debt securities that are accounted for at amortized cost, not fair value, are: Select one: A. held-to-maturity debt securities B. trading debt securities C. available-for-sale debt securities D. never-sell debt securities.

A. held-to-maturity debt securities

On January 1, 2015 Reese Company granted Jack Buchanan, an employee, an option to buy 300 shares of Reese Co. stock for $40 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $3,600. Buchanan exercised his option on September 1, 2015, and sold his 100 shares on December 1, 2015. Quoted market prices of Reese Co. stock during 2015 were: January 1 $40 per share September 1 $48 per share December 1 $54 per share The service period is for two years beginning January 1, 2015. As a result of the option granted to Buchanan, using the fair value method, Reese should recognize compensation expense for 2015 on its books in the amount of Select one: A. $0 B. $1,800 C. $3,600 D. $4,200.

B. $1,800

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? Select one: A. The investor should always use the equity method to account for its investment. B. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee. C. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. D. The investor should always use the fair value method to account for its investment.

B. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

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? Select one: A. Under both the percentage-of-completion and the completed-contract methods, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. 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. C. Under the completed-contract method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. D. No current periods adjustment is required.

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.

Under the installment-sales method: Select one: A. revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product B. gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale C. gross profit is not recognized until the amount of cash received exceeds the cost of the item sold D. revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received.

B. gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale

If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(n): Select one: A. forced conversion B. sweetener C. additional conversion D. end conversion.

B. sweetener

During 2014, Gordon Company issued at $104 four hundred, $1,000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Gordon's common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at $96. The market value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Gordon's stockholders' equity? Select one: A. $0 B. $16,000 C. $16,640 D. $15,808

C. $16,640

At December 31, 2014, Hancock Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2014. Net income for the year ended December 31, 2014, was $1,360,000. What should be Hancock's 2014 earnings per common share, rounded to the nearest penny? Select one: A. $2.69 B. $3.40 C. $3.20 D. $3.03

C. $3.20

Ziegler Corporation purchased 25,000 shares of common stock of the Sherman Corporation for $40 per share on January 2, 2014. Sherman Corporation had 100,000 shares of common stock outstanding during 2015, paid cash dividends of $90,000 during 2015, and reported net income of $300,000 for 2015. Ziegler Corporation should report revenue from investment for 2015 in the amount of: Select one: A. $22,500 B. $52,500 C. $75,000 D. $82,500.

C. $75,000 [25,000/100,000 x 100] = 25% [300,000 x .25]

Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes: Select one: A. a debit to Held-to-Maturity Securities at $300,000 B. a credit to Premium on Investments of $15,000 C. a debit to Held-to-Maturity Securities at $315,000 D. none of these.

C. a debit to Held-to-Maturity Securities at $315,000

Compensation expense resulting from a compensatory stock option plan is generally: Select one: A. recognized in the period of exercise B. recognized in the period of the grant C. allocated to the periods benefited by the employee's required services D. allocated over the periods of the employee's service life to retirement.

C. allocated to the periods benefited by the employee's required services

The revenue recognition principle provides that revenue is recognized when: Select one: A. it is realized B. it is realizable C. it is realized or realizable and it is earned D. none of these.

C. it is realized or realizable and it is earned

Under the completed-contract method: Select one: A. revenue, cost, and gross profit are recognized during the production cycle B. revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed C. revenue, cost, and gross profit are recognized at the time the contract is completed D. none of these.

C. revenue, cost, and gross profit are recognized at the time the contract is completed

A sale should not be recognized as revenue by the seller at the time of sale if: Select one: A. payment was made by check B. the selling price is less than the normal selling price C. the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated D. none of these.

C. the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated

Unrealized holding gains and losses which are recognized in income are from securities classified as: Select one: A. held-to-maturity B. available-for-sale C. trading D. none of these.

C. trading

Bruner Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2014, Bruner started work on a $42,000,000 construction contract that was completed in 2015. The following information was taken from Bruner's 2014 accounting records: Progress billings $13,200,000 Costs incurred 12,600,000 Collections 8,400,000 Estimated costs to complete 25,200,000 What amount of gross profit should Bruner have recognized in 2014 on this contract? Select one: A. $4,200,000 B. $2,800,000 C. $2,100,000 D. $1,400,000

D. $1,400,000 Contract Price $42,000,000 Gross Profit for 2014 [12,600,000/37,800,000 x 100] =33.33% % of work completed in 2014 = 33.33% Gross Profit [cost - contract price] 42,000,000 - [12,600,000 + 25,200,000] = 4,200,000 4,200,000 x 33.33% = $1,400,000

In 2014, Eklund, Inc., issued for $103 per share, 70,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Eklund's $25 par value common stock at the option of the preferred stockholder. In August 2015, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock? Select one: A. $1,190,000 B. $910,000 C. $1,750,000 D. $1,960,000.

D. $1,960,000.

Oliver Co. uses the installment-sales method to record the sale of dining room sets. When an account had a balance of $14,000, no further collections could be made and the dining room set was repossessed. At that time, it was estimated that the dining room set could be sold for $4,000 as repossessed, or for $5,000 if the company spent $500 reconditioning it. The gross profit rate on this sale was 70%. The gain or loss on repossession was a: Select one: A. $9,800 loss B. $10,000 loss C. $1,000 gain D. $300 gain.

D. $300 gain. Item bal $14,000 Outstanding profit [14,000 x .70] = 9,800 Outstanding cost [14,000 - 9,800] = $4,200 Recondition cost + outstanding cost = $4,700 [4,200 + 500] New sales price $5,000 Gain [5,000 - 4,700] = $300

Jordan Company purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for: Select one: A. 10 periods and 10% from the present value of 1 table B. 10 periods and 8% from the present value of 1 table C. 20 periods and 5% from the present value of 1 table D. 20 periods and 4% from the present value of 1 table.

D. 20 periods and 4% from the present value of 1 table

Dublin Company holds a 30% stake in Club Company which was purchased in 2015 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2015 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2015? I. $3,000,000 II. $3,040,000 III. $3,120,000 Select one: A. I, II, and III Incorrect B. I or II only C. II only D. II or III only

D. II or III only

A requirement for a security to be classified as held-to-maturity is: Select one: A. ability to hold the security to maturity B. positive intent C. the security must be a debt security D. all of these.

D. all of these.

When computing diluted earnings per share, convertible bonds are: Select one: A. ignored B. assumed converted whether they are dilutive or antidilutive C. assumed converted only if they are antidilutive D. assumed converted only if they are dilutive.

D. assumed converted only if they are dilutive.

A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably: Select one: A. zero B. calculated by the excess of the proceeds over the face amount of the bonds C. equal to the market value of the warrants D. based on the relative market values of the two securities involved.

D. based on the relative market values of the two securities involved.

The conversion of bonds is most commonly recorded by the: Select one: A. incremental method B. proportional method C. market value method D. book value method.

D. book value method.

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

D. both the completed-contract and the percentage-of-completion methods.

Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the: Select one: A. greater earnings adjustment B. greater earnings per share adjustment C. smaller earnings adjustment D. smaller earnings per share adjustment.

D. smaller earnings per share adjustment.

A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported? Select one: A. at the time of completion of the equipment (completion of the production method) B. at the date of delivery (sales method) C. the installment-sales method D. the cost-recovery method

D. the cost-recovery method

With respect to IFRS and revenue recognition, all the following statements are true except: IFRS does not permit the completed-contract method of accounting for long-term construction contracts. IFRS has more-detailed revenue recognition rules compared to U.S. GAAP. under IFRS, if revenues and costs are difficult to estimate, then companies recognize revenue only to the extent of the cost incurred—a zero-profit approach. in long-term construction contracts, IFRS requires recognition of a loss immediately if the overall contract is going to be unprofitable.

IFRS has more-detailed revenue recognition rules compared to U.S. GAAP.

Chapter 17

Investment and Debt Securities

Chapter 16

Stock compensation

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? The buyer's obligation to the seller would not be changed in the event of theft or damage of the product. The buyer is obligated to pay the seller upon resale of the product. The seller's price is substantially fixed or determinable at time of sale. The amount of future returns can be reasonably estimated.

The buyer is obligated to pay the seller upon resale of the product.

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

True

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

True

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

True

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 $320,000 loss. $0. a $400,000 loss. a $133,334 loss.

a $400,000 loss.

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 $1,540,000 loss. a $1,080,000 loss. a $880,000 loss. $0.

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

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

a company has substantially completed what it must in order to be entitled to the benefits represented by the revenues.

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

a current liability.

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

at the date of sale.

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

at the time of sale only if 6 specific conditions are met.

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

either a current asset or current liability.

When goods or services are exchanged for cash or claims to cash (receivables), revenues are earned. realized. recognized. all of these answer choices are correct.

realized.

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

recognized under the percentage-of-completion method.

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

the percentage-of-completion method only.

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

there is no reasonable basis of estimating the uncollectability of the sales price.

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

unearned revenue and classified as a current liability.

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

unrecovered cost of the merchandise.