Intermediate 3 chapter 18

The principal advantage of the completed-contract method is that reported revenue reflects final results rather than estimates.

T

Companies can recognize revenue prior to completion and delivery of the product under certain circumstances.

T

Companies recognize profit under the cost-recovery method only when cash collections exceed the total cost of the goods sold.

T

If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset.

T

Revenues are realized when a company exchanges goods and services for cash or claims to cash.

T

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

F

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.

F

Companies should recognize revenue when it is realized and when cash is received.

F

Deferred gross profit is generally treated as unearned revenue and classified as a current liability under the installment-sales method.

F

If a company sells its product but gives the buyer the right to return it, the company should not recognize revenue until the sale is collected.

F

Once the separate units of accounting are determined under multiple-deliverable arrangement, the amount paid for the arrangement is allocated among the separate units based on cost of manufacturing the separate unit.

F

The Construction in Process account includes only construction costs under the percentage-of-completion method.

F

The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not completed-contract

F

Under the completed-contract method, companies recognize costs only when the contract is completed.

F

Under the cost-recovery method, a company recognizes no revenue until cash payments by the buyer exceed the cost of the merchandise sold.

F

Under the installment-sales method, companies defer revenue and income recognition until the period of cash collection.

F

The installment-sales method defers only the gross profit instead of both the sales price and cost of goods sold.

T

Under the completion-of-production basis, companies recognize revenue when agricultural crops are harvested since the sales price is reasonably assured and no significant costs are involved in product distribution.

T

. When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are considered a. earned. b. realized. c. recognized. d. All of these answers are correct.

a

According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is a. recognition. b. realization. c. allocation. d. matching.

a

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 a. recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed. b. recognized in the current period under the percentage-of-completion method, but the completed-contract method defers recognition of the loss to the time when the contract is completed. c. recognized in the current period under the completed-contract method, but the percentage-of-completion method defers the loss until the contract is completed. d. deferred and recognized when the contract is completed, regardless of whether the

a

Crane, Inc. is a retailer of home appliances and offers a service contract on each appliance sold. Crane sells appliances on installment contracts, but all service contracts must be paid in full at the time of sale. Collections received for service contracts should be recorded as an increase in a a. deferred revenue account. b. sales contracts receivable valuation account. c. stockholders' valuation account. d. service revenue account.

a

Horner Construction Co. uses the percentage-of-completion method. In 2014, Horner began work on a contract for $16,500,000; it was completed in 2015. The following cost data pertain to this contract: Year Ended December 31 2014 2015 Cost incurred during the year $5,850,000 $4,200,000 Estimated costs to complete at the end of year 3,900,000 — The amount of gross profit to be recognized on the income statement for the year ended December 31, 2015 is a. $2,400,000. b. $2,580,000. c. $2,700,000. d. $6,450,000.

a

How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used? a. As construction in process in the current asset section of the balance sheet. b. As construction in process in the noncurrent asset section of the balance sheet. c. As a receivable in the noncurrent asset section of the balance sheet. d. In a note to the financial statements until the customer is formally billed for the portion of work completed.

a

Kiner, Inc. began work in 2014 on a contract for $16,800,000. Other data are as follows: 2014 2015 Costs incurred to date $7,200,000 $11,200,000 Estimated costs to complete 4,800,000 — Billings to date 5,600,000 16,800,000 Collections to date 4,000,000 14,400,000 78. If Kiner uses the percentage-of-completion method, the gross profit to be recognized in 2014 is a. $2,880,000. b. $3,200,000. c. $4,320,000. d. $4,800,000. 79. If Kiner uses the completed-contract method, the gross profit to be recognized in 2015 is a. $2,720,000. b. $5,600,000. c. $2,800,000. d. $11,200,000.

a, b

Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as a. service revenue. b. deferred service revenue. c. a reduction in installment accounts receivable. d. a direct addition to retained earnings.

b

Green Construction Co. has consistently used the percentage-of-completion method of recognizing revenue. During 2014, Green entered into a fixed-price contract to construct an office building for $24,000,000. Information relating to the contract is as follows: At December 31 2014 2015 Percentage of completion 15% 45% Estimated total cost at completion $18,000,000 $19,200,000 Gross profit recognized (cumulative) 1,200,000 2,880,000 Contract costs incurred during 2015 were a. $5,760,000. b. $5,940,000. c. $6,300,000. d. $8,640,000.

b

In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the a. total costs incurred to date. b. total estimated cost. c. unbilled portion of the contract price. d. total contract price.

b

Remington Construction Company uses the percentage-of-completion method. During 2014, the company entered into a fixed-price contract to construct a building for Sherman Company for $24,000,000. The following details pertain to the contract: At December 31, 2014 At December 31, 2015 Percentage of completion 25% 60% Estimated total cost of contract $18,000,000 $20,000,000 Gross profit recognized to date 1,500,000 2,400,000 The amount of construction costs incurred during 2015 was a. $12,000,000. b. $7,500,000. c. $4,500,000. d. $2,000,000.

b

The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it a. is unacceptable for income tax purposes. b. gives results based upon estimates which may be subject to considerable uncertainty. c. is likely to assign a small amount of revenue to a period during which much revenue was actually earned. d. None of these answers are correct. b

b

When goods or services are exchanged for cash or claims to cash (receivables), revenues are considered a. earned. b. realized. c. recognized. d. All of these answers are correct.

b

Which of the following is not an accurate representation concerning revenue recognition? a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. b. Revenue from services rendered is recognized when cash is received or when services have been performed. c. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used. d. Revenue from disposing of assets other than products is recognized at the date of sale.

b

In 2015, Fargo Corporation began construction work under a three-year contract. The contract price is $4,800,000. Fargo uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2015, follow: Balance Sheet Accounts receivable—construction contract billings $200,000 Construction in progress $600,000 Less contract billings 480,000 Costs and recognized profit in excess of billings 120,000 Income Statement Income (before tax) on the contract recognized in 2015 $120,000 73. How much cash was collected in 2015 on this contract? a. $200,000 b. $280,000 c. $40,000 d. $480,000 74. What was the initial estimated total income before tax on this contract? a. $600,000 b. $640,000 c. $800,000 d. $960,000

b, d

Gomez, Inc. began work in 2014 on contract #3814, which provided for a contract price of $14,400,000. Other details follow: 2014 2015 Costs incurred during the year $2,400,000 $7,350,000 Estimated costs to complete, as of December 31 7,200,000 0 Billings during the year 2,700,000 10,800,000 Collections during the year 1,800,000 11,700,000 76. Assume that Gomez uses the percentage-of-completion method of accounting. The portion of the total gross profit to be recognized as income in 2014 is a. $900,000. b. $1,200,000. c. $3,600,000. d. $4,800,000. 77. Assume that Gomez uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2015 is a. $1,800,000. b. $2,700,000. c. $4,650,000. d. $14,400,000.

b,c

A sale should not be recognized as revenue by the seller at the time of sale if a. payment was made by check. b. the selling price is less than the normal selling price. c. the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated. d. None of these answers are correct.

c

Adler Construction Co. uses the percentage-of-completion method. In 2014, Adler began work on a contract for $6,600,000 and it was completed in 2015. Data on the costs are: Year Ended December 31 2014 2015 Costs incurred $2,340,000 $1,680,000 Estimated costs to complete 1,560,000 — For the years 2014 and 2015, Adler should recognize gross profit in 2014 and 2015 of 2014 2015 a. $0 $2,580,000 b. $1,548,000 $1,032,000 c. $1,620,000 $960,000 d. $1,620,000 $2,580,000

c

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

c

Hayes Construction Corporation contracted to construct a building for $4,500,000. Construction began in 2014 and was completed in 2015. Data relating to the contract are summarized below: Year ended December 31, 2014 2015 Costs incurred $1,800,000 $1,350,000 Estimated costs to complete 1,200,000 — Hayes uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2014, and 2015, respectively, Hayes should report gross profit of a. $810,000 and $540,000. b. $2,700,000 and $1,800,000. c. $900,000 and $450,000. d. $0 and $1,350,000.

c

If the completed-contract method of accounting was used, the amount of gross profit to be recognized for years 2014 and 2015 would be 2014 2015 a. $6,750,000. $0. b. $6,450,000. $(300,000). c. $0. $6,450,000. d. $0. $6,750,000.

c

Monroe Construction Company uses the percentage-of-completion method of accounting. In 2015, Monroe began work on a contract it had received which provided for a contract price of $25,000,000. Other details follow: 2015 Costs incurred during the year $12,000,000 Estimated costs to complete as of December 31 8,000,000 Billings during the year 11,000,000 Collections during the year 6,500,000 What should be the gross profit recognized in 2015? a. $1,000,000 b. $13,000,000 c. $3,000,000 d. $5,000,000

c

The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of these necessary conditions? a. Estimates of progress toward completion, revenues, and costs are reasonably dependable. b. The contractor can be expected to perform the contractual obligation. c. The buyer can be expected to satisfy some of the obligations under the contract. d. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.

c

The revenue recognition principle provides that revenue is recognized when a. it is realized. b. it is realizable. c. it is realized or realizable and it is earned. d. None of these answers are correct.

c

Eilert Construction Company had a contract starting April 2015, to construct a $21,000,000 building that is expected to be completed in September 2016, at an estimated cost of $19,250,000. At the end of 2015, the costs to date were $8,855,000 and the estimated total costs to complete had not changed. The progress billings during 2015 were $4,200,000 and the cash collected during 2015 was $2,800,000. Eilert uses the percentage-of-completion method. 83. For the year ended December 31, 2015, Eilert would recognize gross profit on the building of a. $0. b. $737,917. c. $805,000. d. $945,000. 84. At December 31, 2015, Eilert would report Construction in Process in the amount of a. $9,660,000. b. $8,855,000. c. $8,260,000. d. $805,000.

c,a

An alternative available when the seller is exposed to continued risks of ownership through return of the product is a. recording the sale, and accounting for returns as they occur in future periods. b. not recording a sale until all return privileges have expired. c. recording the sale, but reducing sales by an estimate of future returns. d. All of these answers are correct.

d

Bruner Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2014, Bruner started work on a $42,000,000 construction contract that was completed in 2015. The following information was taken from Bruner's 2014 accounting records: Progress billings $13,200,000 Costs incurred 12,600,000 Collections 8,400,000 Estimated costs to complete 25,200,000 What amount of gross profit should Bruner have recognized in 2014 on this contract? a. $4,200,000 b. $2,800,000 c. $2,100,000 d. $1,400,000

d

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

d

The process of formally recording or incorporating an item in the financial statements of an entity is a. allocation. b. articulation. c. realization. d. recognition.

d

Which of the following is not a reason why revenue is recognized at the time of sale? a. Realization has occurred. b. The sale is the critical event. c. Title legally passes from seller to buyer. d. All of these are reasons to recognize revenue at the time of sale.

d