C249 - Chapter 18

When there is 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.

The following are to accurate statements regarding consignment arrangements:

- The merchandise shipped on consignment remains the property of the consignor until sold. - The consignee is entitled reimbursement from the consignor for expenses paid in connection with selling the goods and is generally entitled to a commission at an agreed rate on sale actually made. - The consignor accepts the risk that the goods on consignment might not sell and thus relieves the consignee of the need to commit working capital to inventory

The following are conditions that must be present for a company to recognize revenue for a company to recognize revenue at the time of sale when the company gives the buyer the right to return the product?

- the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale the product - the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer. - the seller's price to the buyer is substantially fixed or determinable at the date sale.

Which of the following are accurate representation concerning revenue recognition?

-Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. - Revenue from permitting others to use enterprise assets is recognized as time passes or as assets are used. - Revenue from disposing of assets other than products is recognized at the date of sale.

Bretts Construction COmpany had a contract starting April 2013, to construct a $6,000,000 building that is expected to be completed in September 2014, at an estimated cost of $5,500,000. At the end of 2013, the costs to date were $2,530,000 and the estimated total costs to complete had not changed. The progress billings during 2013 were $1,200,000 and the cash collected during 2013 was $800,000. 1. For the year ended December 31, 2013, Bretts would recognize gross profit on the building of : 2. At December 31, 2013, Bretts would report Construction in Process in the amount of :

1. $230,000 HOW: Contract Price = $6,000,000 Less Est Cost = 5,500,000 Est total Gross Profit =$500,000 Cost to Date $2,530,000 Percent to Complete = 2,530,000 / 5,500,000 = 46% 500,000 x 46% = $230,000 2. $2,760,000 HOW: $2,530,000 + 230,000 = $2,760,000

Cushing Corporation recently received a long-term contract to construct a luxury liner. The contract will take 3 years to complete at a cost of $3,500,000. The price of the liner is set at $5,000,000. The cost estimates at the end of the first year are in line with original estimates, and $1,050,00 of costs were incurred during the first year. 1. The amount of income recognized during the first year using the percentage-of-completion method is 2. At the end of the first year which of the following entries would be made to recognize revenue on the contract?

1. $450,000 HOW: Total Cost $3,500,000 Cost incurred $1,050,000 1,050,000 / 3,500,000 = 30% 5,000,000-3,500,000 = 1,500,000 x 30% = 450,000 2. Construction in Progress Revenue on Long-Term Contract WHY: Under the percentage of completion method, the construction in process account is used to record revenue throughout the contract period.

During 2014, Trang Corporation sold merchandise costing $500,000 on an installment basis for $800,000. The cash receipts related to these sales were collected as follows: 2014, $250,000; 2015, $450,000; 2016, $100,000 1 - What is the rate of gross profit on the installment sales made by Trang Corporation? 2 - If expenses, other than the cost of the merchandise sold, related to the 2014 installment sales amounted to $60,000, by what amount would Trang's net income for 2014 increase as a result of installment sales? 3 - What amounts would be shown in the December 31, 2015, financial statements for realized gross profit on 2014 installment sales, and deferred gross profit on 2014 installment sales, respectively?

1. - 37.5% HOW: Gross Profit = 800,000 - 500,000 = 300,000 Sales Price = 800,000 Rate of Gross Profit = 300,000 / 800,000 = 37.5% 2. - $33,750 HOW: Realized Gross Profit = 250,000 x 37.5% = $93,750 93,750 less expenses of $60,000 = $33,750 3. - $168,750 and $37,500 HOW: Total Gross Profit (800,000 - 500,000) = 300,000 Gross Profit realized in 2014 (250,000 x 37.5%) = 93,750 2015 (450,000 x 37.5%) = 168,750 2016 (100,000 x 37.5%) = 37,500

The profession requires that the percentage-of-completion method be used when estimates of progress toward completion, revenues, and consts are reasonable dependable and three specific conditions exist. The three conditions are:

1. A buyer can be can be expected to satisfy all obligations under the contract 2. The contract clearly specifies the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement

Which of the following methods or bases is used when the collectibility of the receivable is so uncertain that gross profit (or income) is NOT recognized until cash is received?? A. Percentage of Completion Method B Completed Contract Method C. Installment Sales Method D. Deposit Method

C. - Installment Sales Method

Some companies defer the recognition of revenue because the collection of the sales prices is NOT reasonably assured. One method employed to defer revenue recognition is the cost recovery method. Under the cost recovery method profit is NOT recognized until:

Cash payments by the buyer exceed the sellers cost of the merchandise sold

Under the installment sales method, emphasis is placed on collection rather than on sale, and revenue is considered unrealized until the entire sales price has been collected. T/F

FALSE - Each time a portion of the revenue from an installment sale is collected, it is recognized as revenue. The statement in question reads... "Until the Entire Sales prices is collected" which makes it false.

Franchise companies derive their income almost exclusively from the collection and amortization of initial franchise fees. T/F

FALSE - Franchise companies derive their revenue from one or both of two sources: (1) from the sale of initial franchise and related assets or services and (2) from continuing fees based on the operations of franchises.

The accounting profession indicates that the percentage-of-completion method is preferred in accounting for long-term construction contracts only when estimates of costs to complete and extent of a progress toward completion are verified by an independent certified public accountant. T/F

FALSE - The accounting profession considers the percentage-of-completion method preferable when estimates of cost to complete and extent of progress toward completion of long-term contracts are reasonable dependable. There is no necessity to have the estimates verified by an independent third party. In 1981, the AICPA recommended that the completed - contract method and the percentage-of-completion method be used in specified circumstances and that these two methods not be viewed as acceptable alternatives in the same circumstances.

Expenses paid by the consignor is a consignment arrangement are normally deducted from any commission earned by the consignee. T/F

FALSE - The consignee acts as an agent for the consignor in selling merchandise. The consignee earns a commission upon the sale of the consigned merchandise. However expenses incurred by the consignor are not deducted from the commissions earned by the consignee.

FASB Concepts Statements No. 5 provides that revenue is recognized when (a) it is collected and (b) the earning process is complete: T/F

FALSE - The revenue recognition principle adopted by the FASB has revenue recognized when (1) it is realized or realizable and (2) it is earned. Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables). Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues

Under the percentage-of-completion method, the difference between the Construction-in-Process and the Billings on Construction in Process accounts is reported in the balance sheet as a current asset if a debit, and as a contract asset if a credit. T/F

FALSE - Under the percentage of completed method, the difference between the Construction in Process and the Billings on Construction in Process Accounts is reported in the balance sheet as a current asset if a debit and as a current liability if a credit.

When interest is involved in installment sales, it should be accounted for as an addition to gross profit recognized on the installment sales collections during the period. T/F

FALSE - When interest is involved in installment sales, it should be accounted for separately as interest revenue district from the gross profit recognized on the installment sales collections during the period.

When there is a loss in the current period on a profitable contract, 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. T/F

FALSE - When there is a loss in the current period on a profitable contract 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.

Repossessed merchandise as a result of a defaulted installment sales contract should be recorded at the best possible estimate of what the item can ultimately be resold for in the second-hand market. T/F

FALSE - the objective with respect to repossessed merchandise is to put it on the books at its fair value or, when fair value is not ascertainable, at the best possible approximation of fair value.

Theoretically, freight costs incurred in the transfer of consigned goods from the consignor to the consignee should be considered

Inventoriable by the consignor

The Nathan Company is involved in the construction of an asset under long-term construction contract. At the end of the third year of the five year contract, the cost estimates indicate that a loss will result on the completion of the entire contract. In accounting for this contract, the entire expected loss must be recognized in the current period under theL Percentage-Of Completion Method Completed Contract Method

Percentage of Completion Method - YES Completed Contract Method - YES

In the accounting for long-term construction type contracts costs are accumulated in an inventory account called Construction-in Process under the : Percentage Of Completion Method Completed Contract Method

Percentage-of-Completion Method - YES Completed-Contract Method - YES

For which if the following products is it appropriate to recognize revenue at the completion of production even though no sale has been made. A. Automobiles B. Large Appliances C. Single Family Residential Units D. Precious Metals

Precious Metals

Under the completed contract method of accounting for long-term construction contracts, interim charges and / or credits to the income statement are made for: Revenues Costs Gross Profit

Revenues - NO Costs - NO Gross Profit - NO

Under the installment sales accounting method certain items related to the sale are recognized in the period of the sale and certain items are recognized in the period in which cash is collected. Of the following items, which are recognized in the period of SALE and which are recognized in the period in which CASH is collected? REVENUES COST OF SALES GROSS PROFIT OTHER EXPENSES

Revenues - SALE Cost of Sales - SALE Gross Profit - CASH Other Expenses - SALE

A franchiser must disclose all significant commitments and obligations resulting from franchise agreements, including a description of services that have not yet been substantially performed. T/F

TRUE

According to the APB, the installment method of recognizing revenue is restricted to those cases in which receivables are collectible over an extended period of time and there is no reasonable basis for estimating the degree of collectability. T/F

TRUE

Because payment for a product sold on an installment basis is spread over a relatively long period, the risk of loss resulting from uncollectible accounts is greater in installment sales transactions than in ordinary sales. T/F

TRUE

Consignment accounting represents a method of postponing the recognition of revenue until is is known that a sale to a third part has accrued. T/F

TRUE

Deferred gross profit on installment sales is generally treated as consisting entirely of unearned revenue and is classified as a current liability. T/F

TRUE

In consignment sales accounting merchandise shipped on consignment remains the property of the consignor until sold. T/F

TRUE

The annual entries to record costs of construction, progress billings, and collections from customers under the completed-contract method would be identical to those illustrated under the percentage-of-completion method with the significant exclusion of the recognition of revenue and gross profit. T/F

TRUE

The completion of production basis is permitted by GAAP. T/F

TRUE

The deposit method postpones recognizing a sale until a determination can be made as to whether a sale has occurred for accounting purposes. T/F

TRUE

The difference between realized gross profit and deferred gross profit on installment sales is based on the cash collections related to the installment sales. T/F

TRUE

The principal advantage of the completed contract method in accounting for long-term construction contracts is that reported income is based on final results rather than on estimates of unperformed work. T/F

TRUE

Trade loading and channel stuffing management and marketing policy decisions and actions that hype sales, distort operating results, and window dress financial statements. T/F

TRUE

Transactions for which sales recognition is postponed because of a high ratio of returned merchandise should NOT be recognized as sales until the return privilege has substantially expired. T/F

TRUE

Under the cost recovery method deferred gross profit is offset against the related receivable - reduced by collections - on the balance sheet. T/F

TRUE

Under the cost-to-cost basis, the percentage-of-completion is measured by company costs incurred to date with the most recent estimate of the total costs to complete the contract. T/F

TRUE

Revenue Transaction and Point of Realization 1. Cash Sales of merchandise 2. Sales of Merchandise on account 3. Percentage-of-completion method on long-term construction project 4. Completed-contract method on long-term construction project 5. Installment Sales 6. Consignment Sales

The Point of Realization for the revenue transactions 1. Cash Sales of Merchandise - Date of Delivery to customer 2. Sales of Merchandise on Account - Date of Delivery to customer 3. Percentage-of-completion method on long-term construction project - As completion of the agreement by the seller progresses 4. Completed-contract method on long-term construction project - Date delivery to customer 5. Installment Sales - When Accounts receivable are collected 6. Consignment sales - When the designed agent submits and "account sales"

The major DISADVANTAGE of the completed-contract method as compared with the percentage-of-completion method is that total net income over the life of the construction contract is normally smaller under the completed-contract method. T/F

The total net income or gross profit over the life of a construction contract is the same under both the percentage-of-completion method and the completed-contract method. The major difference between the methods is the timing of the recognition of gross profit during the life of the contract.

Initial franchise fees, are recorded as revenue only when and as the franchisor makes substantial performance of the services it is obligated to perform and:

collection of the fee is reasonable assured

One of the more popular input measures used to determine the progress toward completion in the percentage-of-completion method is

cost-to-cost basis

The realization of income on installment sales transactions involves:

deferring gross profit while recognizing operating or financial expenses in the period incurred

The principal advantage of the completed contract method is that

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

Deferred gross profit on installment sales is generally treated as:

unearned revenue and is classified as a current liability