Chapter 18

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?

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

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?

$0 Until the cost of goods sold, $104,000, is collected, no profits are recognized.

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

$156,000. $720,000 - $432,000 = $288,000 (40% gross profit rate); $288,000 - ($330,000 × 40%) = $156,000.

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?

$7,650,000

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

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

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

A) 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.

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

A) unearned revenue and classified as a current liability. Deferred gross profit on installment sales is generally treated as an unearned revenue and classified as a current liability.

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. A) I and II only. B) Neither I, II, nor III are currently included in the joint project of the FASB and IASB. C) I, II, and III. D) II and III only.

C) I, II, and III.

With respect to IFRS and revenue recognition, all the following statements are true except: A) 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. B) in long-term construction contracts, IFRS requires recognition of a loss immediately if the overall contract is going to be unprofitable. C) IFRS has more-detailed revenue recognition rules compared to U.S. GAAP. D) IFRS does not permit the completed-contract method of accounting for long-term construction contracts.

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

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

C) 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.

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

C) recognized under the percentage-of-completion method. The loss is recognized under the percentage-of-completion method as a change in accounting estimate.

A loss in the current period on a profitable contract must be recognized in full in the current period under the completed-contract method. (T/F)

False

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. (T/F)

False

Both IFRS and U.S. GAAP provide separate definitions for revenues and gains. (T/F)

False IFRS defines revenue to include both revenues and gains.

Burchell Construction Co. began operations in 2015. Construction activity for 2015 is shown below. Cramer uses the completed-contract method. Table over Which of the following should be shown on the income statement for 2015 related to Contract 1?

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

General revenue recognition principles are provided by IFRS contain limited detailed or industry specific guidance. (T/F)

True

Under the installment-sales method, gross profit is recognized in the periods that cash is received, rather than in the period of sale. (T/F)

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.

Franchisors generally report continuing franchise fees as revenue when they are earned and receivable. (T/F)

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

In a consignment sale, the consignor recognizes revenue when it receives cash and notification of the sale from the consignee. (T/F)

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

Companies commonly recognize revenues from manufacturing and selling activities at point of sale (usually meaning delivery). (T/F)

True The two conditions for recognizing revenue (being realized or realizable and being earned) have been met by the time a company delivers products or renders services to customers.

Under the deposit method, no revenue is recognized until the sale is complete. (T/F)

True Under the deposit method, cash is received before the sales transaction is completed.

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? A) $64 million B) No revenue should be recognized until the contract is completed in 2018 C) $267 million D) $180 million

A) $64 million

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 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. B) 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. C) No current period adjustment is required. D) 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.

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

A) 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.

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

A) cost-to-cost method.

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

A) recognized under the percentage-of-completion method. The loss is recognized under the percentage-of-completion method as a change in accounting estimate.

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? A) Progress billings as deferred income, construction in progress as a deferred expense. B) Net, as a current asset if a debit balance, and as a current liability if a credit balance. C) Net, as income from construction if credit balance, and loss from construction if debit balance. D) Progress billings as income, construction in process as inventory.

B) 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.

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

B) a company has substantially completed what it must in order to be entitled to the benefits represented by the revenues. Revenue is considered earned when the earnings process is complete or virtually complete.

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

B) 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.

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

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

B) realized. When goods or services are exchanged for cash or claims to cash (receivables), revenues are realized.

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

B) there is no reasonable basis of estimating the uncollectability of the sales price. he installment-sales method of recognizing profit for accounting purposes is acceptable if there is no reasonable basis for estimating the uncollectability of the sales price.

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

B) unrecovered cost of the merchandise. The difference between the estimated fair value of the merchandise and its unrecovered cost is the loss (gain) on repossession.

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

D) All of the answers are correct.

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

D) The buyer is obligated to pay the seller upon resale of the product. The buyer is obligated to pay the seller upon resale of the product is not one of these six conditions.

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

D) a current liability.

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

D) at the date of sale. Revenue from selling assets other than inventory is usually recognized 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: A) at the time of sale and account for returns as they occur. B) immediately, but reduce revenue by an estimate of future returns. C) when all return privileges have expired. D) at the time of sale only if 6 specific conditions are met.

D) at the time of sale only if 6 specific conditions are met. If a company sells products and gives the buyer the right to return it, revenue should be recognized at the time of sale only if 6 specific conditions are met.

nder the completed contract method, the Construction in Process account balance will consist of A) gross profit only. B) construction costs and gross profit. C) construction costs and billings. D) construction costs only.

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

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

D) 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.

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

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. 12,500,000 - ($6,240,000 + $6,660,000) = $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 $880,000 loss. $14,700,000 less ($7,520,000 + $8,060,000) indicates a loss of $880,000.