Chapter 18 : Revenue recognition

Under the deposit method, no revenue is recognized until the sale is complete. True False

True

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

$0

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

$400,000 loss. Ans : $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 $1,540,000 loss. $1,080,000 loss. $880,000 loss. $0.

$880,000 loss. Ans: - $14,700,000 less ($7,520,000 + $8,060,000) indicates a loss of $880,000.

With respect to IFRS and revenue recognition, all the following statements are true except: 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. IFRS has more-detailed revenue recognition rules compared to U.S. GAAP.

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

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

Realized.

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

The buyer is obligated to pay the seller upon resale of the product.

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

True

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

True

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

a company has substantially completed what it must in order to be entitled to the benefits represented by the revenues.

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

a current liability.

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

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: at the time of sale only if 6 specific conditions are met. at the time of sale and account for returns as they occur. when all return privileges have expired. immediately, but reduce revenue by an estimate of future returns.

at the time of sale only if 6 specific conditions are met.

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

both the completed-contract and the percentage-of-completion methods.

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

either a current asset or current liability

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

recognized under the percentage-of-completion method.

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

the percentage-of-completion method only.

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

there is no reasonable basis of estimating the uncollectability of the sales price

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

unearned revenue and classified as a current liability.

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

unrecovered cost of the merchandise.