ACCT - Ch. 18

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. b. provide the goods or services for a customer. c. market the principal goods and services to prospective customers. d. develop and maintain goodwill of the principal's customers.

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. b. as revenue when received. c. in accordance with the accounting procedures specified in the franchise agreement. d. as revenue only after the balance of the initial franchise fee has been collected.

a. as revenue when uncertainty related to the variable consideration is resolved.

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. b. recognized in the current period under the percentage-of-completion method, but the completed-contract method defers recognition of the loss to the time when the contract is completed. c. recognized in the current period under the completed-contract method, but the percentage-of-completion method defers the loss until the contract is completed. d. deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

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. b. is used primarily for short-term contracts. c. accumulates construction costs in the Billings on Construction in Progress account. d. recognizes revenue and gross profits only when contract is completed.

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. b. reported as a contract asset on the balance sheet. c. reported as a contract liability on the balance sheet. d. are not reported on the balance sheet.

a. reported as a receivable on the balance sheet.

The principal advantage of the completed-contract method is that a. reported revenue is based on final results rather than estimates of unperformed work. b. it reflects current performance when the period of a contract extends into more than one accounting period. c. it is not necessary to recognize revenue at the point of sale. d. a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used.

a. reported revenue is based on final results rather than estimates of unperformed work.

Revenue for ongoing sales-based royalty payments should be recognized a. when the amount of sales can be determined. b. on the date payment is received by the franchisor. c. on the date the performance obligation is satisfied. d. on the date the contract was signed.

a. when the amount of sales can be determined.

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? 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 period 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.

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 a. Prepaid subscription. b. Unearned magazine subscription. c. Mortgage Payable. d. Service Revenue.

b. Unearned magazine subscription.

The use of the net method of recognizing revenue by an agent a. is appropriate as long as both revenue and costs are included. b. is the correct method in a principal-agent relationship. c. could result in an overstatement of the agent's revenue. d. could result in an understatement of the agent's revenue.

b. is the correct method in a principal-agent relationship.

Franchise companies derive their revenues from the a. the sale of initial franchises and related services only. b. sale of initial franchises and related services and from continuing fees based on the franchise operation. c. continuing franchise fees based on the operation of the franchise only. d. None of these answers are correct.

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 a. manufacturer-wholesaler. b. service sponsor-retailer. c. manufacturer-retailer. d. wholesaler-retailer.

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 a. the terms of payment in the contract. b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. c. the method commonly used by the contractor to account for other long-term construction contracts. d. the inherent nature of the contractor's technical facilities used in construction.

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 a. franchise rights are transferred at a point in time. b. the franchisor is providing access to the right rather than transferring control. c. when performance obligations regarding franchise rights are completed. d. franchisee fee is payable upon signing of contract.

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 a. total costs incurred to date. b. total estimated cost. c. unbilled portion of the contract price. d. total contract price.

b. total estimated cost.

Types of franchising arrangements include all of the following except a. service sponsor-retailer. b. wholesaler-service sponsor. c. manufacturer-wholesaler. d. wholesaler-retailer.

b. wholesaler-service sponsor.

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? a. Progress Billings as deferred income, Construction in Progress as a deferred expense. b. Progress Billings as income, Construction in Process as inventory. c. Net balance, as a current asset if debit balance, and current liability if credit balance. d. Net balance, as income from construction if credit balance, and loss from construction if debit balance.

c. Net balance, as a current asset if debit balance, and current liability if credit balance.

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? a. Under the completed-contract method, the loss is not recognized until the year the construction is completed. b. Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed. 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. d. Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs.

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.

The Billings on Construction in Progress account is a(n) a. contract revenue account. b. inventory account. c. contra-inventory account. d. construction expense account.

c. contra-inventory account.

Partial satisfaction of a multiple performance obligation is reported on the balance sheet as a. contract liability. b. receivable. c. contract asset. d. unearned service revenue

c. contract asset.

Disclosure related to revenue a. does not require capitalized costs to obtain and fulfill a contract. b. does not require judgments that affect amount and timing of revenues from contracts. c. requires disclosure of remaining performance obligations. d. requires disaggregation of revenues by reportable segments

c. requires disclosure of remaining performance obligations.

An option to purchase a warranty is recorded as a. an expense in the period the goods or services are sold. b. a warranty liability for all costs incurred after sale due to correction of defects. c. revenue in the period that the service-type warranty is in effect. d. an assurance type warranty which is included in the sales price of the product.

c. revenue in the period that the service-type warranty is in effect.

Under the completed-contract method 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 answers are correct.

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

Sources of revenue for franchise companies are a. assistance for site selection and negotiating lease. b. bookkeeping and advisory services. c. sale of initial franchise and continuing fees. d. advertising and promotion.

c. sale of initial franchise and continuing fees.

Consignments are a specialized marketing method whereby the a. consignee purchases goods for sale and sends payment when goods are sold. b. consignee (agent) holds title to the product. c. consignee pays for good up front and is paid when merchandise is sold. d. consignee takes possession of merchandise but title remains with manufacturer.

d. consignee takes possession of merchandise but title remains with manufacturer.

Consigned goods are recognized as revenues by the a. consignor when a sale to a third party has occurred. b. consignor when the merchandise has been shipped to a consignee. c. consignee when a sale to a third party has occurred. d. consignor when it receives payment from consignee for goods sold.

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 a. debit to Warranty Expense, $900. b. debit to Warranty Liability, $350 c. credit to Warranty Liability, $900 d. credit to Unearned Warranty Revenue, $900

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 a. debit to Accounts Receivable for $200,000. b. debit to Accounts Receivable for $170,000. c. debit to Contract Assets for $170,000. d. debit to Contract Assets for $200,000.

d. debit to Contract Assets for $200,000.

Nonrefundable upfront fees a. should be recognized immediately upon receipt of payment. b. such as activation fees for cable should be allocated over the term of the contract. c. such as a one-time initiation fee in a health club should be recognized immediately. d. should not be recorded as revenue if they are for future delivery of products and services.

d. should not be recorded as revenue if they are for future delivery of products and services.

Franchise fees should be recognized a. on the date the contract was signed. b. on the date the franchise is opened for business. c. on the date the franchise fee is paid to franchisor. d. when performance obligations are satisfied.

d. when performance obligations are satisfied.