Revenue Recognition Practice

For profitable long-term contracts, income is recognized in each year under the:

Completed contract method NO Percentage-of-completion YES

Which of the following is true about intraperiod tax allocation?

Its purpose is to relate the income tax expense to the items which affect the amount of tax.

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

When accounting for a long-term construction contract using the percentage-of-completion method, gross profit is recognized in any year is debited to:

a. *Construction in progress.* b. Billings on construction contract c. Deferred income d. Accounts receivable

Allocation of the transaction price to separate performance obligations:

a. *Is based on relative standalone selling prices.* b. Cannot be based on estimated selling prices. c. May not use the residual method when selling prices are uncertain. d. Is not allowed when bad debts are material.

When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are

a. *earned.* b. realized. c. recognized. d. all of these.

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.

Which of the following is an indicator that revenue for a service can be recognized over time ?

a. *The seller is enhancing an asset that the buyer controls as the service is performed.* b. The seller is providing continuous effort to the buyer. c. The seller can estimate the percent of work completed. d. The sales price is fixed and determinable.

Continuing franchise fees should be recorded by the franchisor

a. *as revenue when earned and receivable from the franchisee.* b. as revenue when received. c. in accordance with the accounting procedures specified in the franchise agreement. d. as revenue only after the balance of the initial franchise fee has been collected.

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 should defer 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 should defer the loss until the contract is completed. d. deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable that the option will be exercised. When recording the initial franchise fee, the franchisor should

a. *record the entire initial franchise fee as a deferred credit which will reduce the franchisor's investment in the purchased outlet when the option is exercised.* b. record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid when the option is exercised. c. record the portion of the initial franchise fee which is attributable to the bargain purchase option as a reduction of the future amounts receivable from the franchisee. d. None of these.

Under IFRS, revenue for the sale of goods is recognized when the seller has transferred to the buyer:

a. A signed invoice. b. *The risks and rewards of ownership.* c. Compelling evidence that substantive installation has occurred. d. None of the above.

A seller is properly using the cost-recovery method for a sale. Interest will be earned on the future payments. Which of the following statements is not correct?

a. After all costs have been recovered, any additional cash collections are included in income. b. *Interest revenue may be recognized before all costs have been recovered.* c. The deferred gross profit is offset against the related receivable on the balance sheet. d. Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.

A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported?

a. At the time of completion of the equipment (completion of production method) b. At the date of delivery (sales method) c. The installment-sales method d. *The cost-recovery method*

Which of the following is NOT an indicator that control of a good has passed from the seller to the buyer?

a. Buyer has an unconditional obligation to pay. b. Buyer has legal title. c. *Buyer has scheduled delivery.* d. Buyer has assumed the risk and rewards of ownership.

. Which of the following is NOT a required disclosure for interim period reporting? .

a. Earnings per share. b. Extraordinary items. *c. General and administrative expenses.* d. Sales

The percentage-of-completion method must be used when certain conditions exist. Which of the following is NOT one of those 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

Which of the following is NOT one of the steps for recognizing revenue?

a. Identify the separate performance obligations of the contract. b. Identify the contract with the customer. c. *Estimate the total transaction price of the contract based on fair value.* d. Allocate the transaction price to the separate performance obligations.

Under the ASU, bad debts:

a. Must be recognized as an expense. b.* Must be recognized as a contra revenue.* c. Must be able to be estimated in order to recognize revenue. d. Reduce the transaction price that is allocated to separate performance obligations.

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. Progress billings as income, construction in process as inventory. c. *Net, as a current asset if debit balance, and current liability if credit balance.* d. Net, as income from construction if credit balance, and loss from construction if debit balance.

Which of the following is NOT a reason why revenue is recognized at 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 time of sale.*

Assume a prepayment is made six months in advance of delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?

a. Recognize interest expense. b. Recognize interest revenue. c. *Ignore the time value of money.* d. None of the above.

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.

When IFRS uses the cost recovery method to account for a long-term contract,

a. Revenue typically is recognized in excess of costs incurred early in the life of the contract. b. Costs in excess of revenue are typically recognized early in the life of the contract. c. *Revenue equal to costs are typically recognized early in the life of the contract.* d. Revenue is based on contract completion, not on costs, early in the life of the contract

Which of the following is NOT one of the characteristics of a contract for purposes of revenue recognition?

a. Rights. *b. Reasonable profit margin.* c. Approval. d. Commercial substance.

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.*

When accounting for a long-term construction contract under IFRS, if the percentage-of-completion method is not appropriate, the seller should account for revenue using:

a. The cost recovery method. b. *The completed contract method* c. Either the cost recovery method or the completed contract method d. Neither the cost recovery method or the completed contract method

Assume a seller is not enhancing an asset that the buyer controls or that has an alternative use to the seller. Which of the following is not an indicator that revenue for a service can be recognized continuously?

a. The customer receives a benefit as the seller performs the service. b. Another seller would not need to reperform the tasks performed to date if that other seller were to fulfill the remaining obligation. c. The seller has the right to payment for performance even if the customer could cancel the contract. d. *The seller has significant experience with the customer and anticipates fulfillment of the contract.*

Which of the following is true about the new revenue ASU?

a. The realization principle guides the ASU. b. Construction contracts are typically broken into the various separate goods and services that are included in them for purposes of revenue recognition. c. The time value of money is considered when estimating all transaction prices. d. *Collectibility of the receivable is not considered when determining whether revenue can be recognized.*

In general, revenue is recognized as earned when there is reasonable certainty as to the collectibility of the asset to be received and:

a. The sales price has been collected. b. *The earnings process is virtually complete.* c. Production is completed. d. A purchase order has been received.

Which of the following is not an indicator that a seller is not reasonably assured to receive an amount?

a. The seller could avoid paying an amount without breeching the contract. b. *The receivable is likely to prove uncollectible due to the customer's financial difficulties.* c. The seller lacks experience selling similar products and so may not be able to estimate uncertain amounts. d. Uncertain amounts are very difficult to estimate due to susceptibility to factors beyond the seller's control.

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.

Cost estimates at the end of the second year indicate a loss will result on completion of the entire contract. Which of the following statements is correct?

a. Under the completed-contract method, the loss is not recognized until the year the construction is completed. b. Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed. c. *Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.* d. Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs.

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.*

The income statement provides investors and creditors with information to predict all of the following EXCEPT the:

a. amount of future cash flows. b.* sources of future cash flows.* c. timing of future cash flows. d. uncertainty of future cash flows.

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. an unrealized profit account is credited. c. *collection of the sales price is not reasonably assured.* d. the method is consistently used for all sales of similar merchandise.

Some of the initial franchise fee may be allocated to

a. continuing franchise fees. b. interest revenue on the future installments. c. options to purchase the franchisee's business. d. *All of these may reduce the amount of the initial franchise fee that is recognized as revenue.*

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.

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

Under the cost-recovery method of revenue recognition,

a. income is recognized on a proportionate basis as the cash is received on the sale of the product. b. *income is recognized when the cash received from the sale of the product is greater than the cost of the product.* c. income is recognized immediately. d. none of these.

Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of equipment or supplies. When recording the initial franchise fee, the franchisor should

a. increase revenue recognized from the initial franchise fee by the amount of the expected future purchases. b. *record a portion of the initial franchise fee as unearned revenue which will increase the selling price when the franchisee subsequently makes the bargain purchases.* c. defer recognition of any revenue from the initial franchise fee until the bargain purchases are made. d. None of these.

The cost-recovery method

a. is prohibited under current GAAP due to its conservative nature. b. requires a company to defer profit recognition until all cash payments are received from the buyer. c. is used by sellers when there is a reasonable basis for estimating collectibility. d.* recognizes total revenue and total cost of goods sold in the period of sale.*

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.

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.

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*.

Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of water, Winser does not recognize any revenue from water sales until the sales exceed the costs of exploration, the basis of revenue recognition being employed is the

a. production basis. b. cash (or collection) basis. c. sales (or accrual) basis. d. *cost recovery basis.*

The method most commonly used to report defaults and repossessions is

a. provide no basis for the repossessed asset thereby recognizing a loss. b. *record the repossessed merchandise at fair value, recording a gain or loss if appropriate.* c. record the repossessed merchandise at book value, recording no gain or loss. d. none of these.

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.

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.*

In consignment sales, the consignee

a. records the merchandise as an asset on its books. b. records a liability for the merchandise held on consignment. c. recognizes revenue when it ships merchandise to the consignor. d. *prepares an "account report" for the consignor which shows sales, expenses, and cash receipts.*

Under the completed-contract method

a. revenue, cost, and gross profit are recognized during the production cycle. b. revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed. c. *revenue, cost, and gross profit are recognized at the time the contract is completed*. d. none of these.

Under the installment-sales method,

a. revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product. b. *gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale.* c. gross profit is not recognized until the amount of cash received exceeds the cost of the item sold. d. revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received.

The deposit method of revenue recognition is used when

a. the product can be marketed at quoted prices and units are interchangeable. b. *cash is received before the sales transaction is complete.* c. the contract is short-term or the percentage-of-completion method can't be used. d. there are no significant costs of distribution.

In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be

a. the terms of payment in the contract. b. *the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.* c. the method commonly used by the contractor to account for other long-term construc-tion contracts. d. the inherent nature of the contractor's technical facilities used in construction.

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.

Income taxes are allocated to

balance sheet adjustments.