ACC325 Exam 3 (17&18)

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?

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

To address inconsistencies and weaknesses in revenue recognition, a comprehensive revenue recognition standard was developed entitled the

Revenue from Contracts with Customers.

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

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 a customer purchases a product but is not yet ready for delivery, this is referred to as

a bill-and-hold arrangement

Companies can use the expected value to estimate variable consideration when

a company has a large number of contracts with similar characteristics.

A performance obligation exists when

a company provides a distinct product or service.

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 credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000.

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 credit to Unearned Warranty Revenue of $1,400.

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

a debit to Debt Investments at $315,000.

Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as

a reduction of the carrying value of the investment.

Use of the effective-interest method in amortizing bond premiums and discounts results in

a varying amount being recorded as interest income from period to period.

When investments in debt securities are sold between interest payment dates, preferably the

accrued interest is credited to Interest Revenue.

Held-to-maturity securities are reported at

acquisition cost plus amortization of a discount.

A requirement for a security to be classified as held-to-maturity is

all of these are required.

The fourth step in the process for revenue recognition is to

allocate transaction price to the separate performance obligations.

In accounting for investments in debt securities,

any discount or premium is amortized.

Transfers between categories

are accounted for at fair value for all transfers.

The role of the agent in a Principal-Agent relationship is to

arrange for the principal to provide goods or services to a customer.

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are

available-for-sale debt securities

A transaction price for multiple performance obligations should be allocated

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

blended price of original contract and contract modification.

Revenue from a contract with a customer

cannot be recognized until a contract exists.

A company has satisfied its performance obligation when the

company has transferred physical possession of the asset.

The cost-to-cost basis measures progress towards completion by

comparing costs incurred to date with total costs to complete the contract.

Consignments are a specialized marketing method whereby the

consignee takes possession of merchandise but title remains with manufacturer.

Consigned goods are recognized as revenues by the

consignor when it receives payment from consignee for goods sold.

The Billings on Construction in Progress account is a(n)

contra-inventory account.

Investments in debt securities are generally recorded at

cost including brokerage and other fees.

The most popular input measure used to determine the progress toward completion is

cost-to-cost basis.

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

credit to Unearned Warranty Revenue, $900.

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

debit to Debt Investments.

The third step in the process for revenue recognition is to

determine the transaction price.

When multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when

each service is interdependent and interrelated.

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

earnings are reported by the investee in its financial statements.

GAAP specifies that, regarding the amortization of a premium or discount on a debt security, the

effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the

equity method.

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

financing transaction.

A company must account for a contract modification as a new contract if the

goods or services are distinct and company has right to receive the standalone price.

Debt securities that are accounted for at amortized cost, not fair value, are

held-to-maturity debt securities

The first step in the process for revenue recognition is to

identify the contract with customers.

The second step in the process for revenue recognition is to

identify the separate performance obligations in the contract.

A contract between Boeing and Delta in which Boeing supplies planes to Delta

is an agreement that creates enforceable rights and obligations for both parties.

A contract

is an agreement that creates enforceable rights and obligations.

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

is distinct.

The transaction price

is the amount of consideration that a company expects to receive from a customer.

The use of the net method of recognizing revenue by an agent

is the correct method in a principal-agent relationship.

Investments in debt securities should be recorded on the date of acquisition at

market value plus brokerage fees and other costs incident to the purchase.

Securities which could be classified as held-to-maturity are

municipal bonds

The last step in the process for revenue recognition is to

recognize revenue when each performance obligation is satisfied.

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

recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.

Noncash consideration should be

recognized on the basis of fair value of what is received.

The converged standard on revenue recognition

recognizes and measures revenue based on changes in assets and liabilities.

The percentage-of-completion method

recognizes revenue and gross profit each period based upon progress.

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

recorded on March 31, 2018.

When sales are made with a right of return, the company

records the returned asset in a separate inventory account.

Consideration paid or payable to customers

reduces the consideration received and the revenue to be recognized.

The principal advantage of the completed-contract method is that

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

An option to purchase a warranty is recorded as

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

Under the completed-contract method

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

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are

securities where a company has holdings of less than 20%.

Nonrefundable upfront fees

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

In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be

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

If a contract involves a significant financing component,

the time value of money is used to determine the fair value of the transaction.

Unrealized holding gains or losses which are recognized in income are from debt securities classified as

trading

Kern Company purchased bonds with a face amount of $1,000,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $15,000, and paid accrued interest for three months of $25,000. The amount to record as the cost of this long-term investment in bonds is

$1,035,000. (second highest)

On November 1, 2018, Howell Company purchased 1,000 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $1,052,500, which includes accrued interest of $15,000. The bonds, which mature on January 1, 2023, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2018, balance sheet at

$1,036,000. (second lowest)

On October 1, 2018, Menke Company purchased to hold to maturity, 500, $1,000, 9% bonds for $520,000. An additional $15,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2022. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2018 income statement from this investment should be

$10,050.(lowest)

Ziegler Corporation purchased 25,000 shares of common stock of the Sherman Corporation for $40 per share on January 2, 2017. Sherman Corporation had 100,000 shares of common stock outstanding during 2018, paid cash dividends of $150,000 during 2018, and reported net income of $500,000 for 2018. Ziegler Corporation should report revenue from investment for 2018 in the amount of

$125,000. (second highest)

On November 1, 2018, Horton Company purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $800,000, for $720,000. An additional $24,000 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2025. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2018 income statement as a result of Horton's available-for-sale investment in Lopez was

$14,000 (highest)

At the end of 2018, Hauke Company purchased 6,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2018 was $5,880,000. The bonds mature on March 1, 2023, and pay interest on March 1 and September 1. Hauke sells 3,000 bonds on September 1, 2019, for $2,964,000, after the interest has been received. Hauke uses straight-line amortization. The gain on the sale is

$14,400. (lowest that's not 0)

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Company bonds of:

$155,283. (second highest)

Tracy Company owns 4,000 of the 10,000 outstanding shares of Penn Corporation common stock. During 2018, Penn earns $450,000 and pays cash dividends of $150,000. Tracy should report investment revenue for 2018 of

$180,000. (highest)

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2018, Patton Company should increase its Debt Investments account for the Scott Company bonds by

$2,571. (lowest)

On October 1, 2018, Renfro Company purchased to hold to maturity, 4,000, $1,000, 9% bonds for $3,960,000 which includes $60,000 accrued interest. The bonds, which mature on February 1, 2027, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2018 balance sheet at a carrying value of

$3,903,000. (second lowest)

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. At December 31, 2018, the fair value of the Carlin, Inc. bonds was $1,272,000. What should Richman Company report as other comprehensive income and as a separate component of stockholders' equity?

$30,744(highest)

On January 3, 2017, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2018 related to these bonds?

$47,698 (lowest)

Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2018, Taylor earns $1,200,000 and pays cash dividends of $960,000. Harrison should report investment revenue for 2018 of

$480,000. (highest)

Instrument Corporation has the following investment which was held throughout 2018-2019: Fair Value Cost 12/31/18 12/31/19 Equity investment $900,000 $1,200,000 $1,140,000 What amount of gain or loss would Instrument Corporation report in its income statement for the year ended December 31, 2019 related to its investment?

$60,000 loss.(only loss option)

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. At December 31, 2018, the fair value of the Ritter, Inc. bonds was $3,180,000. What should Landis Company report as other comprehensive income and as a separate component of stockholders' equity?

$76,860. (highest)

Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2018, Taylor earns $1,200,000 and pays cash dividends of $960,000. If the beginning balance in the investment account was $750,000, the balance at December 31, 2018 should be

$846,000. (second lowest)

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. At February 1, 2019, Richman Company sold the Carlin bonds for $1,236,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2019 was $1,240,500. Assuming Richman Company has a portfolio of available-for-sale debt investments, what should Richman Company report as a gain (or loss) on the bonds?

($4,500).(lowest that's not 0)

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. At April 1, 2019, Landis Company sold the Ritter bonds for $3,090,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2019 was $3,097,440. Assuming Landis Company has a portfolio of Available-for-Sale Debt Securities, what should Landis Company report as a gain or loss on the bonds?

($7,440). (smallest that's not 0)

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

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

On January 2, 2018 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment. During 2018 Jobs, Inc. reported net income of $1,260,000 and distributed dividends of $540,000. The ending balance in the Investment in Pod Company account at December 31, 2018 was $960,000 after applying the equity method during 2018. What was the purchase price Pod Company paid for its investment in Jobs, Inc?

780,000 (second lowest)

Which of the following is not correct in regard to trading securities?

All of these choices are correct.

Which of the following is not a debt security? Commercial paper Loans receivable All of these are debt securities Convertible bonds

Loans receivable