C249 IA2 CH18 - Questions, C249 INTERMEDIATE ACCOUNTING CHAPTER 18

A company uses the completed contract method of accounting for long-term contracts. The company enters into a three-year contract for a total price of $15 million. In the first year, the company incurs cost of $8 million, invoices the customer for $8 million, and receive $6 million. The company expecting her an additional $9 million in cost to complete the contract. What is the loss the company would recognize in the first year of the contract?

$2 million $8 million plus $9 million equals $17 million -$15 million total price equals a loss of $2 million

High Rate of Returns

A high ratio of returned merchandise to sales, which results in companies needing to postpone revenue recognition until the return privilege has substantially expired.

In accounting for long-term construction-type contracts construction costs are accumulated in an inventory account called Construction in Process under the: Percentage-of-Completion Method / Completed-Contract Method A. Yes / Yes B. Yes / No C. No / Yes D. No / No

A. Yes / Yes

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 price 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: A. the entire sales price is collected. B. the seller is convinced that collection is assured beyond a reasonable doubt. C. the buyer formally accepts delivery of the merchandise involved in the sale. D. cash payments by the buyer exceed the seller's cost of the merchandise sold

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

Theoretically, freight costs incurred in the transfer of consigned goods from the consignor (owner) to the consignee (seller) should be considered: A. an expense by the consignee. B. an expense by the consignor. C. inventoriable by the consignee. D. inventoriable by the consignor

D. Inventoriable by the consignor

The journal entries using the percentage of completion method is the SAME under the completed contract method, with one additional entry each year for profit recognition:

DR: Construction In Process CR: Income On Construction

Journal entry to record a loss under they completed contract method:

Dr: Loss on construction CR: Construction in process

A company uses the percentage of completion method of accounting for long-term contracts. The company enters into a three-year contract to construct a yacht for a total price of $600,000. Data at the end of the first year are as follows: Cost incurred to date: $175,000 Most recent estimate of total cost: $500,000 Most recent estimate of total gross profit: $100,000 How much gross profit with the company recognize at the end of the first year?

Find the percentage of completion: take the cost to date divided by the estimated total cost. Find revenues for the first year: multiply contract price with percentage. Find gross profit: revenues minus costs incurred to date. Percent complete equals $175,000 divided by $500,000 equals 35% Revenue for first year equals $600,000 times 35% equals $210,000 Gross profit equals $210,000 -$175,000 equals $35,000 gross profit

Revenue Recognition Principle

One of the basic principles of accounting, which dictates that companies recognize revenue when it is realized or realizable and when it is earned-that is, when assets are salable or interchangeable in an active market at readily determinable prices without significant additional cost and when the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues. Generally, recognition at the time of sale provides a uniform and reasonable test.

Consignment

Specialized type of marketing in which manufacturers or wholesalers deliver goods but retain title to the goods until they are sold.

Which set of criteria must be present for revenue to be recognized on the sale of a good?

Substantial completion of the earnings process, realizable revenue, and transfer of risk of ownership.

Cost-to-Cost Basis

Technique that measures the percentage of completion on a contract by comparing costs incurred to date with the most recent estimate of the total costs to complete the contract.

Match Revenue Transaction to the 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 A. When accounts receivable are collected B. When the designated agent collects the purchase price C. Date of delivery to the customer D. When the designated agent submits an "account sales" E. As completion of the agreement by the seller progresses

The Point of Realization for the revenue transactions 1 - C 2 - C 3 - E 4 - C 5 - A 6 - D

Point of Sale - Delivery

the point at which companies deliver products or merchandise or render services to customers. For revenue recognition, the point of sale or delivery is the point at which companies commonly recognize revenues from manufacturing and selling activities.

year one, a company begin work on a contract that has a total value of $16,500,000. This contract is completed in year two, the company has the following cost for this contract: Cost Incurred. Y1-$5,850,000 Y2-4,200,000 Est cost to complete Y1-$3,900,000 Y2-$0 What amount of gross profit should be recognized on the company's income statement for year two, calculated by using the percentage of completion method?

$2,400,000 2,400,000 Y1 Costs incurred = 5,850,000/(5,850,000+3,900,000) = 60% Y1 Profit = 6,750,000 (16,500,000-5,850,000-3,900,000) X 60% = 4,050,000, Gross Profit = 6,750,000 Y2 Profit = 6,750,000-4,050,000-300,000 (3,900,000-4,200,000) = 2,400,000

In year one, company a sold inventory worth $45,000 to company be. The following table contains the details surrounding the sale: Year One Year Two Year Three Cash Collected. $20,000. $15,000. $10,000 Revenue. $45,000. $0.00. $0.00 Cost of Goods Sold. $32,000. $0.00. $0.00 Deferred Gross Profit. $13,000. $13,000. $0.00 Less: Recognized Gross Profit. $0 How much gross profit should Company A recognize in Year 2 using the cost recover method?

$3,000 Cash collected through Y2 = $35,000; Cost of Project is $32,000 35-32 = 2,000

A customer purchases a $30 gift certificate and a seven dollar cup of coffee from the Starbucks on account. How much revenue should Starbucks recognize on the day of the purchase?

$7

A company uses the completed contract method of accounting for long-term contracts. The company completes all deliverables for a three-year contract and the second year of the contract. The contract generates total revenue of $700,000 in gross profit of $100,000. How much revenue should the company recognize in the current reporting?

$700,000

The percentage of completion method recognizes a portion of the profit each year using the following formula:

(Costs incurred so far / Total expected project costs) x estimated profit - previous years profit

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. DR: Construction in Progress CR: 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? A. 37.5%. B. 50%. C. 60%. D. 62.5%. 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? A. $240,000. B. $190,000. C. $ 71,250. D. $ 33,750. 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? A. $168,750 and $37,500. B. $262,500 and $37,500. C. $131,250 and $50,000. D. $0 and $0.

1. A. 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. D. $33,750 HOW: Realized Gross Profit = 250,000 x 37.5% = $93,750 93,750 less expenses of $60,000 = $33,750 3. A. $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

In year one, a company began work on a contract that has a total value of $16,500,000. This contract was completed in year two. The company has the following cost information for this contract: Cost incurred: Y1-5,850,000. Y2-4,200,000 EST cost to complete: Y1-3,900,000. Y2-0.00 What amount of gross profit should be recognized on the company's income statement for year two calculated by using the percentage of completion method?

2,400,000 Y1 Costs incurred = 5,850,000/(5,850,000+3,900,000) = 60% Y1 Profit = 6,750,000 (16,500,000-5,850,000-3,900,000) X 60% = 4,050,000, Gross Profit = 6,750,000 Y2 Profit = 6,750,000-4,050,000-300,000 (3,900,000-4,200,000) = 2,400,000

The principal advantage of the completed-contract method is that: A. reported revenue is based on final results rather than estimates of unperformed work. B. it reflects current performance when the period of a contract extends into more than one accounting period. C. it is not necessary to recognize revenue at the point of sale. D. a greater amount of gross profit and net income is reported then is the case when the percentage-of-completion method is used.

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

Deferred gross Profit is a contra asset to the ________ account.

Accounts Receivable

If a company uses the percentage of completion method for construction projects and realizes there will be a total loss, what must happen to the previous year's profits?

An entry must be made to recognize the loss as well as nullify any profit made in previous years (profits + loss)

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 A. Yes / No / No B. No / No / No C. No / Yes / No D. Yes / Yes / Yes

B. No / No / No

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. Revenue from services rendered is recognized when cash is received or when services have been performed.

Which of the following is not an accurate statement regarding consignment arrangements? A. The merchandise shipped on consignment remains the property of the consignor until sold. B. Since the merchandise shipped remains the property of the consignor, the consignee has no legal obligation regarding any damage to the merchandise. C. The consignee is entitled to 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. D. 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.

B. Since the merchandise shipped remains the property of the consignor, the consignee has no legal obligation regarding any damage to the merchandise.

Which of the following is not a condition that must be present for a company to recognize revenue at the time of sale when the company gives the buyer the right to return the product? A. The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product. B. The present value of the future returns can be reasonably estimated. C. The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer. D. The seller's price to the buyer is substantially fixed or determinable at the date of sale

B. The present value of the future returns can be reasonably estimated.

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

B. 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 Nathan Company is involved in the construction of an asset under a 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 the: Percentage-of-Completion Method / Completed-Contract Method A. Yes / No B. Yes / Yes C. No / Yes D. No / No

B. Yes / Yes

Deferred gross profit on installment sales is generally treated as: A. an owners' equity account until collection. B. unearned revenue and is classified as a current liability. C. unearned revenue and is classified as a deferred charge on the balance sheet. D. unearned revenue and is allocated between income tax liability, allowance for bad debts, and net income.

B. unearned revenue and is classified as a current liability

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 the cash is collected? Revenues / Cost of Sales / Gross Profit / Other Expenses A. Sale / Sale / Cash / Cash B. Sale / Cash / Sale / Cash C. Sale / Sale / Cash / Sale D. Cash / Cash / Sale / Cash

C. Sale / Sale / Cash / Sale

The profession requires that the percentage-of-completion method be used when estimates of progress toward completion, revenues, and costs are reasonably dependable and three specific conditions exist. Which of the following is not one of the three required conditions? A. The buyer can be expected to satisfy all obligations under the contract. B. 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. C. The asset being constructed is a tangible asset to be used in the production of the purchasing entity's product or the rendering of its service. D. The contractor can be expected to perform the contractual obligation.

C. The asset being constructed is a tangible asset to be used in the production of the purchasing entity's product or the rendering of its service.

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: A. the franchise agreement will last for 5 years or more. B. the franchisee has the financial support of a local bank. C. collection of the fee is reasonably assured. D. the franchisee maintains a specified minimum profit level.

C. collection of the fee is reasonable assured

The realization of income on installment sales transactions involves: A. recognition of the difference between the cash collected on installment sales and the cash expenses incurred. B. deferring the net income related to installment sales and recognizing the income as cash is collected. C. deferring gross profit while recognizing operating or financial expenses in the period incurred. D. deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected.

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

Which account should be credited as soon as the company determines that it will have a probable loss on a long-term contract?

Construction in process Debit - Lost from long-term contract Credit - construction in process (loss)

What section of the financial statements does the company recognize billings in excess of cost incurred and gross profit for the percentage-of-completion method?

Current liability. The percentage of completion method recognizes Billings in excess of costs and recognized profits in the current liability section of the balance sheet

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

D. Precious Metals

One of the more popular input measures used to determine the progress toward completion in the percentage-of-completion method is: A. revenue-percentage basis. B. cost-percentage basis. C. progress completion basis. D. cost-to-cost basis.

D. cost-to-cost basis

What is the journal entry for recording repossessed good under an installment sales contract?

Debit - deferred gross profit Debit - repossessed merchandise Debit - Loss on repossession Credit - Accounts receivable

What is the journal entry to record the return of merchandise previously purchased on account?

Debit - sales returns and allowances Credit - Accounts receivable

During year one, a company has installment sales of $2 million and installment sales revenue of $500,000. The cost of good sold related to the sales is $1.5 million. Identify the formula in your answer. How much gross profit should the company recognize for the year?

Installment Sales. $2,000,000 Less cost of sales. $1,500,000 Gross Profit: $500,000 500,000/2,000,000=25% 25%x500,000= 125,000

Input Measures

Measures of the extent of progress based on efforts devoted to the contract, i.e., costs incurred, labor hours worked, etc.

Output Measures

Measures of the extent of progress based on results or achievements, i.e., tons of output, floors of a building completed, etc.

Repossessions

Merchandise that the seller has taken back when the purchaser failed to meet payment requirements. The seller would remove both the account receivable and the applicable deferred gross profit from the ledger, using a Repossessed Merchandise - Inventory - account.

What is channel stuffing?

Offering deep discounts to wholesale customers so they buy more product than they can promptly resell.

Realizable Revenues

Part of the first test of the revenue recognition principle, revenues are realizable when assets received or held are readily convertible into cash or claims to cash - that is, when they are salable or interchangeable in an active market at readily determinable prices without significant additional cost.

Realized Revenues

Part of the first test of the revenue recognition principle, revenues are realized when a company exchanges goods and services for cash or claims to cash - receivables.

Initial Franchise Fee

Payment for establishing the franchise relationship and providing some initial services, such as employee and management training.

Continuing Franchise Fees

Payment received in return for the continuing rights granted by the franchise agreement and for providing such services as management training, advertising and promotion, legal assistance and other support.

Earned Revenues

Revenue recognition criterion indicating that a company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues - that the earnings process is complete or virtually complete.

Deposit Method

Revenue recognition method in used in cases when companies receive cash from the buyer before transfer of the goods or property. Under this method, the seller reports the cash received from the buyer as a deposit on the contract and classifies it on the balance sheet as a liability, while continuing to report the property as an asset. The seller recognizes revenue and income only when the sale is complete.

Installment-Sales Method

Revenue recognition method in which companies recognize income in the periods of collection rather than in the period of sale. "Installment sales" generally describes any type of sale for which payment is required in periodic installments over an extended period of time. Theoretically, the installment-sales method is not generally preferred, except for some sales of real estate; a better approach generally is for a company to recognize a sale when completed and keep a bad debt account to estimate uncollectibles.

Cost-Recovery Method

Revenue recognition method in which companies recognize profit only when cash collections exceed the total cost of the goods sold. Any additional cash collection after the seller has recovered all costs is recorded as income. This method is required under GAAP for franchises and real estate where a high degree of uncertainty exists related to the collection of receivables.

Completed-Contract Method

Revenue recognition method in which companies recognize revenue and gross profit only at the point of sale - the point at which a contract is deemed completed. Under this method, companies do not record interim charges or credits to income statement accounts for revenues, costs and gross profit.

Completion-of-Production Basis

Revenue recognition method in which companies recognize revenue at the completion of procedure, e.g., mining of metals or harvesting crops, even though no sale has been made.

Percentage-of-Completion Method

Revenue recognition method in which companies recognize revenues, costs, and gross profit as progress is made toward completion on a long-term contract, using a basis or standard, such as the cost-to-cost basis, to measure the progress toward completion at interim dates.

What is the difference between recognizing revenue versus recognizing game?

Revenue results from ordinary operations; gains occur outside of ordinary operations.

What is consignment of goods for sale?

Seller retains title to goods and does not recognize revenue until goods are sold.

What situation would prompt a company to delay accounting for revenue to a time later than the point of sale?

The company expects a material number of the sold items to be returned.

Consignee

The dealer who acts as an agent for the consignor in selling the merchandise.

Consignor

The manufacturer or the wholesaler who provides the consigned goods.

Franchisor

The party who grants business rights under the franchise.

Franchisee

The party who operates the franchised business.

Substantial Performance

The point at which the franchisor has no remaining obligation to refund any cash received or excuse any nonpayment of note from the franchisee, and has performed all the initial services required under the contract.

Billings Account

Under the percentage-of-completion method, when a company records a receivable from a sale, it must subtract the balance from this account from Construction In Process to avoid double-counting inventory.

Principal-Agent Relationship

When amounts collected on behalf of the principal are not revenue of the agent, e.g., when a travel agent sells airline tickets.

Multiple-Deliverable Arrangements

When multiple products or services are provided to a customer as part of a single arrangement. In accounting for MDAs, all units of an MDA are considered separately if each unit has standalone value, includes a general right of return, and delivery or performance is probable and substantially in the control of the seller.

When should a company record A loss for an unprofitable contract using the percentage of completion method?

When the loss amount is estimated.

When should a company record an Expected loss using the completed contract method?

When the loss is probable and can be reasonably estimated.

A company uses the cost recovery method of accounting for long-term contracts. The company enters into a three-year contract the total price of $30 million in expected cost of $25 million. In the first year of the contract the company receives $10 million revenue from the client and incurs cost of $12 million. Explain the cost recovery role in your answer. How much gross profit should the company recognize in the first year of the contract?

Zero. No profit is recognized until cash payments by the buyer exceed the sellers cost of the merchandise sold. After all the costs have been recovered any additional cash collections are included in income

Billings on Construction is a contra _______ to the Construction in Process Account.

asset

IF the balance in the Billings On Construction account is less than the balance in the Construction In Process account, the net amount is shown as a current ______; if it is more, the net amount is shown as a current ______.

asset; liability

If at any time during the construction period it is estimated that a loss will occur on the project, it should be recognized by a ______ to a loss account and a ______ to the inventory account.

debit; credit

When is revenue recognized?

when its earned