Intermediate Accounting II - C249 - Ch. 18 Quiz

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

$0 Profit is only recognized after the cost of goods sold has been recovered through payments made by the customer.

On September 1, 2013, West Wind Co. sold manufacturing equipment that cost $715,500 for $910,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $365,933.75 starting on August 31, 2014. Because collection of the note is very uncertain, West Wind will use the cost-recovery method. How much revenue from this sale should West Wind recognize in 2014? $96,500 $0 $64,833 $36,593

$0 Profit is only recognized after the cost of goods sold has been recovered through payments made by the customer.

Ichabod Co. began operations on July 1, 2015 and appropriately uses the installment method of accounting. The following information pertains to Ichabod's operations for 2015: Installment sales 720,000 Cost of installment sales 432,000 General and administrative expenses 72,000 Collections on installment sales 330,000 The balance in the deferred gross profit account at December 31, 2015 should be $90,000. $115,200. $156,000. $288,000.

$156,000. Installment sales - Cost of Installment Sales = Gross Profit Gross Profit / Installment Sales = Rate of Gross Profit Collection on installment sales X Rate of Gross Profit = Realized Gross Profit Gross Profit -Realized Gross Profit = Deferred Gross Profit

Belgium Co. is constructing a tunnel for $600 million. Construction began in 2013 and is estimated to be completed in 2018. At December 31, 2015, Belgium has incurred costs totaling $267 million with $64 million of that incurred in 2015, $107 million in 2014, and the remainder during 2013. Belgium believes that it completed 30% of the tunnel during 2015, although that may change based on future activity. Belgium Co. uses IFRS for its accounting and regards its cost numbers as very uncertain. What amount of revenue should Belgium Co. recognize for the year ended December 31, 2016? $180 million $64 million $267 million No revenue should be recognized until the contract is completed in 2018

$64 million If revenues and costs are difficult to estimate, then companies recognize revenue only to the extent of the cost incurred—a cost-recovery (zero-profit) approach.

Portugal, Inc. has the following amounts related to its activities for the year ended December 31, 2015: Sales to customers $ 6,250,000 Gain on sale of equipment $ 450,000 Gain on sale of investments $ 950,000 Loss on sale of land $ 300,000 Portugal, Inc. uses IFRS for its external financial reporting. How much revenue should Portugal, Inc. report on its income statement for the year ended December 31, 2015? $6,250,000 $7,200,000 $7,650,000 $7,350,000

$7,650,000 Under IFRS, revenue should be measured at fair value of the consideration received or receivable. 6,250,000 +450,000 + 950,000 = 7,650,000

Under the completion-of-production basis, revenue is recognized if: the sales price is reasonably assured. the units produced are interchangeable. no significant costs are involved in distributing the product. All of the answers are correct.

All of the answers are correct. This applies to agricultural products and minerals because there is a ready market for these products with reasonably assured prices, the units are interchangeable, and selling and distributing does not involve significant costs. All expected revenues and costs of production related to the units produced will be reported on the income statement.

A loss in the current period on a profitable contract must be recognized in full in the current period under the completed-contract method. True or False

False A loss in the current period on a profitable contract must be recognized in full in the current period under the percentage-of-completion method.

Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the completed-contract method. True or False

False Cost estimates at the end of the current period may indicate that a loss will result on completion of the entire contract. Under both the percentage-of-completion and the completed-contract methods, the company must recognize in the current period the entire expected contract loss.

Burchell Construction Co. began operations in 2015. Construction activity for 2015 is shown below. Cramer uses the completed-contract method. Contract #, Contract Price, Billings through 12/31,2015, Collections through 12/31/2015, Costs to 12/31,2015, Estimated Costs to complete 1, $4,650,000, $4,450,000, $3,900,000, $3,700,000, $0 2, $3,600,000, $1,600,000, $1,600,000, $920,000, $1,980,000 3, $3,100,000, $ 1,700,000, $ 1,600,000, $ 2,050,000, $ 1,100,000 Which of the following should be shown on the income statement for 2015 related to Contract 1? Gross profit, $950,000 Gross profit, $200,000 Gross profit, $750,000 Gross profit, $550,000

Gross profit, $950,000 Contract price $4,650,000 less total costs $3,700,000 equals a gross profit of $950,000.

The joint project of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) related to revenue recognition includes I. Evaluating a "customer-consideration" model. II. Eliminating inconsistencies in the existing conceptual guidance. III. Establishing a single, comprehensive standard.

I, II, and III. the project is intended to improve financial reporting by (1) converging U.S. and international standards on revenue recognition (2) eliminating inconsistencies in the existing conceptual guidance on revenue recognition (3) providing conceptual guidance that would be useful in addressing future revenue recognition issues (4) eliminating inconsistencies in existing standards-level authoritative literature and accepted practices (5) filling voids in revenue recognition guidance that have developed over time 6) establishing a single, comprehensive standard on revenue recognition. Presently, the Boards proposed a "customer-consideration" model; under this model, revenue is recognized when a performance obligation is satisfied. It is hoped that this approach (rather than using the earned and realized criteria) will lead to a better basis for revenue recognition.

Under the percentage-of-completion method, 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? Progress billings as deferred income, construction in progress as a deferred expense. Progress billings as income, construction in process as inventory. Net, as a current asset if a debit balance, and as a current liability if a credit balance. Net, as income from construction if credit balance, and loss from construction if debit balance.

Net, as a current asset if a debit balance, and as a current liability if a credit balance. The balances of progress billings and construction in process should be shown at net, as a current asset if a debit balance, and as a current liability if a credit balance.

With respect to IFRS and revenue recognition, all the following statements are true except: IFRS has more-detailed revenue recognition rules compared to U.S. GAAP. IFRS does not permit the completed-contract method of accounting for long-term construction contracts. 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.

Not True: IFRS has more-detailed revenue recognition rules compared to U.S. GAAP. True: IFRS has less-detailed revenue recognition rules compared to U.S. GAAP.

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

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

General revenue recognition principles are provided by IFRS contain limited detailed or industry specific guidance. True or False

True General revenue recognition principles are provided by IFRS that are consistent with U.S. GAAP but contain limited detailed or industry specific guidance.

Both IFRS and U.S. GAAP provide separate definitions for revenues and gains. True or False

True IFRS defines revenue to include both revenues and gains.

In a consignment sale, the consignor recognizes revenue when it receives cash and notification of the sale from the consignee. True or False

True In a consignment sale, the consignor recognizes revenue when it receives cash and notification of the sale from the consignee.

Under the installment-sales method, gross profit is recognized in the periods that cash is received, rather than in the period of sale. True or False

True Each time cash is received, the installment-sales method recognizes gross profit equal to the gross profit percentage times the amount of cash received.

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? 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 completed-contract method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. No current period adjustment is required. 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.

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.

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

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

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

both the completed-contract and the percentage-of-completion methods. Under both methods, a loss on an unprofitable long-term contract is recognized in the current period.

Under the completed contract method, the Construction in Process account balance will consist of construction costs and gross profit. construction costs and billings. construction costs only. gross profit only.

construction costs only. Under the completed contract method, the Construction in Process account balance consists of construction costs only.

A very popular measure used to determine the progress toward completion under the percentage-of-completion method is the: output method. efforts expended method. units of work performed method. cost-to-cost method.

cost-to-cost method. The formula for the cost to cost method is to divide all costs recorded to date on a project or job by the total estimated amount of costs that will be incurred for that project or job. The result is an overall percentage of completion that is then used for billing and revenue recognition purposes.

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

either a current asset or current liability. 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.

When a loss occurs in the current period on a profitable long-term contract, the loss is: 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 both the completed-contract method and the percentage-of-completion method.

recognized under the percentage-of-completion method.

In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be: the method commonly used by the contractor to account for other long-term construction contracts. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. the inherent nature of the contractor's technical facilities used in construction. the terms of payment in the contract.

the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.

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

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