Acct 303 Ch 18

Bradley, Inc. a car dealer sells cars on January 1, 2017 to Stephens Company for $500,000. Bradley agrees to repurchase the cars (an unconditional obligation) from Stephens on December 31, 2017 for a price of $510,000. Which of the following is true regarding the transaction? A. An imputed interest rate will have to be used to record interest revenue by Bradley. B. The transaction should be accounted for as a lease. C. An imputed interest rate will have to be used to record interest expense by Bradley. D. On January 1, 2017 Bradley will have a credit entry to InventoryCars.

C

Bretts Construction Company had a contract starting April 2017, to construct a $6,000,000 building that is expected to be completed in September 2018, at an estimated cost of $5,500,000. At the end of 2017, the costs to date were $2,530,000 and the estimated total costs to complete had not changed. The progress billings during 2017 were $1,200,000 and the cash collected during 2017 was $800,000. At December 31, 2017, Bretts would report Construction in Process in the amount of: A. $ 230,000. B. $2,530,000. C. $2,760,000. D. $2,360,000.

C

On April 4, Rudek Company enters into a contract to transfer a product to Gwinner Company on June 12. The contract is modified on May 6 with the price terms changing and transfer of the product changed to June 22. The modified contract is structured such that Gwinner is required to pay the full contract price of $3,500 on July 10. The cost of goods transferred is $2,700. Rudek delivers the product to Gwinner on June 22. When should Rudek recognize revenue on the transaction? A. Rudek should recognize revenue on April 4 only. B. Rudek should recognize revenue on April 4, but then enter an adjusting entry to reflect the modified contract terms on May 6. C. Rudek should recognize revenue on June 22. D. Rudek should recognize on July 10.

C

Companies often make payments to their customers such as discounts, volume rebates, coupons and free products. These elements have no effect on revenue but should be accordingly expensed

F

Revenue should be recognized when the two parties have signed the contract even if neither party has started to perform under the contract.

F

A billandhold sale results when the buyer has not taken title nor billing but has taken delivery of the item.

F - Billandhold sales result when the buyer is not yet ready to take delivery but does take title and accepts billing.

The best measure of fair value is what the company could sell the good or service for on a standalone basis, referred to as the standalone selling price. If this information is not available, companies should use their best estimate of what the good or service might sell for as a standalone unit. The referred allocation approach is the: A. adjusted market assessment approach. B. expected cost plus a margin approach. C. estimated standalone market approach. D. residual approach.

A

Which of the following is not a condition in the determination of when a valid contract exists: A. The contract has to be in writing. B. The payment terms are identified. C. The parties have approved the contract. D. It is probable that the consideration will be collected

A

Which of the following is false concerning the identification of separate performance obligations? A. When two goods are not distinct within a contract, a company should still separate them into distinct performance obligations because products should never be combined and reported as one performance obligation. B. To determine whether a company has to account for multiple performance obligations, the company's promise to sell the good or service to the customer must be separately identifiable from other promises with the contract. C. When two goods are not distinct within a contract, a company should combine and report them as one performance obligation. D. A product or service is distinct when a customer is typically able to benefit from a good or service on its own or together with other readily available resources.

A - When two goods are not distinct within a contract, that is, they are highly interdependent or interrelated within the contract, the products should be combined and reported as one performance obligation (similar to answer D). Therefore, answer A is false. Answers B and C are true statements in the determination of identifying separate performance obligations.

Bretts Construction Company had a contract starting April 2017, to construct a $6,000,000 building that is expected to be completed in September 2018, at an estimated cost of $5,500,000. At the end of 2017, the costs to date were $2,530,000 and the estimated total costs to complete had not changed. The progress billings during 2017 were $1,200,000 and the cash collected during 2017 was $800,000. _____ *21. (L.O. 5) For the year ended December 31, 2017, Bretts would recognize gross profit on the building of: A. $210,833. B. $230,000. C. $270,000. D. $ 0

B

Cain Company offers its customers a 2% volume discount if they purchase at least $600,000 of its product during the calendar year. On May 31, 2017 Cain has made sales of $400,000 to Kao Co. In the previous 2 years, Cain has made sales of on average of $800,000 to Kao Co. in the period June 1 to December 31. Which of the following will be part of a correct entry by Cain? A. On May 31, 2017 Cain should recognize a debit to Sales Revenue of $400,000. B. On May 31, 2017 Cain should recognize a credit to Sales Revenue of $392,000. C. On May 31, 2017 Cain should recognize a credit to Sales Revenue of $588,000. D. On May 31, 2017 Cain should recognize a credit to Sales Revenue of $400,000.

B

On February 1, 2017 Whitus Company sells 300 hard drives for $200 each on account to Walsh Company. Whitus allows Walsh to return any used hard drives within 30 days of purchase. The cost to Whitus of each hard drive is $120. On February 24, 2017 Walsh returns six hard drives because they are defective. On February 28, 2017, Whitus prepares financial statements and determines that it is likely that only two more hard drives will be returned. Which of the following will be part of a correct entry by Whitus? A. On February 1, 2017 Whitus should record a credit to Inventory in the amount of $35,040. B. On February 24, 2017 Whitus should record a credit to Accounts Receivable of $1,200. C. On February 28, 2017 Whitus should record a credit to Sales Revenue of $400. D. On February 28, 2017 Whitus should record a debit to Allowance for Sales Returns and Allowances of $400.

B

Ostro Company enters into a contract with Zelman Company to give financial advice for a one year term. Ostro will receive a weekly set fee and in addition will receive a performance based incentive at the end of the year based on complicated formula but generally based on the investment profits Zelman Company receives related to the assets that Ostro manages. At what point should Ostro recognize the management fee and the performancebased incentive related to Zelman? A. Ostro should not recognize the weekly fee and the performance based incentive until at the end of the year. B. Ostro should recognize the weekly fee each week after Ostro performed its obligation, but should not recognize the performancebased incentive until at the end of the year. C. Ostro should recognize both the weekly fee and an estimate of the performancebased incentive each week. D. Ostro should recognize both the weekly fee and an estimate of the performancebased incentive at each financial reporting period—with adjustments taking into account the previously reported amounts.

B

Ringo Company sold 2,000 televisions on June 1, 2017 at a total price of $2,000,000, with a warranty guarantee that they were free of defects. The cost of the televisions is $1,200,000. The term of this assurance warranty is 3 years with an estimated cost of $100,000. In addition Ringo sold extended warranties related to 600 televisions for 2 years beyond the 3year period for $40,000. On December 12, 2017, Ringo incurred labor costs of $5,000 and part costs of $12,000 related to the assurance warranties. Ringo prepares financial statements on December 31, 2017. It estimates that the future assurance warranty costs will total $50,000 at December 31, 2017. Which of the following entries is correct? A. On June 1, 2017 Ringo will make a credit to Sales Revenue of $2,040,000. B. On December 12, 2017 Ringo will make a debit to Warranty Expense of $17,000. C. On December 31, 2017 Ringo will make a debit to Warranty Expense of $67,000. D. On December 31, 2017 Ringo will make a debit to Warranty Expense of $50,000.

B

The converged standard on revenue recognition entitled Revenue from Contracts with Customers was developed because: A. GAAP had only one basic standard on revenue recognition B. GAAP had numerous standards related to revenue recognition C. IFRS had numerous inconsistent standards on revenue recognition. D. GAAP had more of a principlesbased approach.

B

To entice more customers into the store on Mondays, Strassberg Company is selling a slice of pizza for $1 less on Mondays. Normally a slice of pizza sells for $3. When Barbara buys a slice of pizza from Strassberg Company on a Monday with cash, how should Strassberg Company recognize the transaction? A. Revenue of $3 should be recognized and $1 as a discount expense. B. Revenue of $2 should be recognized. C. Revenue of $2 should be recognized and $1 of unrealized revenue recognized. D. Revenue of $2 should be recognized and $1 of discount liability recognized.

B

(L.O. 5) At the end of the first year which of the following entries would be made to recognize revenue and gross profit on the contract? A. Accounts Receivable—Construction Contracts Revenue from LongTerm Contracts B. Billings on Construction in Process Revenue from LongTerm Contracts C. Construction in Process Construction Expenses Revenue from LongTerm Contracts D. Billings on Contraction in Process

C

On January 1, 2017 Heybach Company sold goods to Barshinger Company for $400,000 in exchange for $100,000 in cash and a 5year zerointerest bearing note with a face amount of $401,468 and a present value of $300,000. Heybach also determined that the note has an imputed interest rate of 6%. The goods have an inventory cost on Heybach's books of $275,000. Which of the following will be part of a correct entry by Heybach? A. On January 1, 2017 Heybach should record a debit to Notes Receivable in the amount of $300,000. B. On January 1, 2017 Heybach should record a debit to Inventory of $275,000. C. On December 31, 2017 Heybach should record a credit to Interest Revenue of $18,000. D. On January 1, 2017 Heybach should record a credit to Sales Revenue of $401,468.

C

The new standard, Revenue from Contracts with Customers, recognizes revenue based on a(n): A. Revenue expense approach. B. Liability Equity approach. C. Asset Liability approach. D. Asset Equity approach.

C

When the price of a good or service is dependent on future events (such as price increases, volume discounts, and rebates) companies estimate the amount of variable consideration using either the expected value method (probability weighted amount) or the most likely amount (in a range of possible amounts)method. Which of the following indicates that the most likely amount method should be used? A. If a company has a large number of contracts with similar characteristics. B. The variable consideration can be based on a limited number of discrete outcomes and probabilities. C. The contract has only two possible outcomes. D. The goods or services are not highly interdependent.

C - When companies select among the expected value method or the most likely amount method they should look at which approach better predicts the amount of consideration to which a company is entitled. The expected value method would be preferred when a company has a large number of contracts with similar characteristics (answer A) or the variable consideration can be based on a limited number of discrete outcomes and probabilities (answer B). The most likely amount method would be appropriate if the contract has only two possible outcomes (answer C). The issue of interdependency of goods or services is related to separate performance obligations.

Under the percentageofcompletion 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 contra asset if a credit.

F - 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 current liability if a credit.

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 $1,050,000 of the costs were incurred during the first year. _____ *19. (L.O. 5) The amount of gross profit recognized at the end of the first year using the percentage of completion method is: A. $1,500,000. B. $1,050,000. C. $ 735,000. D. $ 450,000.

D

Franiuk Hotdogs and Grill normally sells hotdogs for $2.00 but also tshirts with the name of the business and its logo prominently displayed for $10. The tshirts haven't been selling that well lately, so Franiuk has decided to sell a combination of the tshirt for $10 with a free hot dog. Donovan buys the combination of the tshirt and hot dog for $10 in cash. How should Franiuk account for the transaction? A. Franiuk should recognize $10 revenue, comprised of $10 for the tshirt and $0 for the hot dog. B. Franiuk should recognize $12 revenue, comprised of $10 for the tshirt, $2 for the hot dog, and $2 for discount expense. C. Franiuk should recognize $12 revenue, comprised of $10 for the tshirt, $2 for the hot dog and $2 as a liability. D. Franiuk should recognize $10 revenue, comprised of $8.33 for the tshirt and $1.67 for the hot dog.

D

Green Co. ships merchandise costing $60,000 on consignment to Butters Company. Green pays $2,500 of freight costs, and Butters pays $3,200 for local advertising costs that are reimbursable from Green. By the end of the period, Butters has sold onefourth of the consigned merchandise for $80,000 cash. Butters notifies Green of the sales, retains a 20% commission, and remits the cash due Green. Which of the following entries is correct? A. When Butters receives the consigned goods from Green, Butters needs to debit Inventory for the amount of the goods received. B. When Butters pays the advertising costs, Butters needs to debit Advertising Expense. C. When Butters sells the consigned inventory, Butters needs to record a debit to Sales Revenue. D. When Butters receives the consigned inventory from Green, no entry should be made by Butters because the goods are still considered an asset on Green's books.

D

Which of the following best describes the current revenue recognition principle? A. Identify separate performance obligations in the contract. B. Recognize revenue in the accounting period when cash is received. C. Recognize revenue when it is earned. D. Recognize revenue in the accounting period when the performance obligation is satisfied.

D

Which of the following is not part of the criteria to determine when a company would recognize revenue over a period of time? A. The company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced. B. The company's performance does not create and asset with an alternative use. C. The customer simultaneously receives and consumes the benefits of the entity's performance as the entity performs. D. The company has no right to payment for its performance completed to date.

D

For revenue arrangements with multiple performance obligationsand it is difficult to estimate what the good or service would sell for as standalone units the company should combine the items into a new aggregated revenue item and allocate the total transaction price to this new separate revenue item.

F

The new standard, Revenue from Contracts with Customers, adopts an expenseliability approach as the basis for revenue recognition.

F

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.

F

An assurance type warranty is a warranty that provides an additional service beyond the servicetype warranty.

F - An assurance type warranty is a warranty that the product meets agreed upon specifications in the contract at the time the product is sold. A service-type warranty is a warranty that provides an additional service beyond the assurance type warranty.

In a principal agent relationship, amounts collected on behalf of the principal are recorded as revenue by the agent.

F - In a principal agent relationship, amounts collected on behalf of the principal are not recorded as revenue by the agent. Instead, revenue for the agent is the amount of commission it receives (usually a percentage of total revenue).

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.

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 completedcontract method. The major difference between the methods is the timing of the recognition of gross profit during the life of the contract.

Under the costtocost basis, the percentage of completion is measured by comparing costs incurred to date with the most recent estimate of revenues collected to date.

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

A company accounts for a contract modification as a new contract if either (1) the promised goods or services are distinct, or (2) the company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services.

F -A company accounts for a contract modification as a new contract if both (1) the promised goods or services are distinct, and (2) the company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services.

When a longterm construction contract exists and a company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced, it should probably use the completedcontract method

F- Under a long-term contract, a company satisfies a performance obligation and recognizes revenue over time if one of three criteria are met and one of the criteria is that "the company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced." Therefore, since one of the criteria is met it should recognize revenue over time—which is better recognized using the percentage of completion method than the completed contract method.

Conditional rights should be reported separately from unconditional rights (receivables) on the balance sheet.

T

During a consignment relationship, the consignee does not record the merchandise as an asset on its books.

T

Output measures can produce inaccurate results if the units used are not comparable in time, effort, or cost to complete.

T

Servicetype warranties represent a separate service and are an additional performance obligation.

T

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 percentageof completion method with significant exclusion of the recognition of revenue and gross profit.

T

The best measure of fair value is what the company could sell the good or service for on a standalone basis

T

The firststep of the fivestep revenue recognition model is to identify the contract with customers

T

The principle advantage of the completed contract method in accounting for longterm construction contracts is that reported income is based on final results rather than on estimates of unperformed work.

T

The revenue recognition principle states that revenue is recognized when the performance obligation is satisfied.

T

Under the revenue guidance—as long as a contract exists (it is probable that the customer will pay)—the amount recognized as revenue is not adjusted for customer credit risk.

T

When a customer gives cash for a shirt at a retail store and takes the shirt from the store after paying, revenue is recognized at that point in time because the performance obligation by the store has been satisfied.

T

When a franchisor provides access to the rights of the franchise rather than transferring control, the franchise revenue is recognized over time, rather than at a point in time

T