Ch18 Revenue Recognition
The IASB: >indicates that the present state of reporting for revenue is satisfactory. >All of the above. >has issued over 100 standards related to revenue recognition. >has issued one standard related to revenue recognition.
>has issued one standard related to revenue recognition.
When goods or services are exchanged for cash or claims to cash (receivables), revenues are >realized. >earned. >recognized. >all of these.
>realized. When goods or services are exchanged for cash or claims to cash (receivables), revenues are realized.
When a loss occurs in the current period on a profitable long-term contract, the loss is: >recognized under the percentage-of-completion 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 completed-contract method.
>recognized under the percentage-of-completion method.
Repossessed merchandise on an installment sale should be recorded at: >net realizable value. >its original cost. >zero. >fair market value.
>fair market value.
The Billings on Construction in Process account is reported as: >a current liability only. >revenue on the income statement. >either a current asset or current liability. >a current asset only.
>either a current asset or current liability.
On July 1, 2011, Fletcher Co. sold equipment that cost $84,000 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, 2012. Because collection of the note is very uncertain, Fletcher will use the cost-recovery method. How much revenue from this sale should Fletcher recognize in 2012? >$5,600 >$0 >$4,200 >$28,000
>$0 Until the cost of goods sold, $84,000, is collected, no profits are recognized.
Under the completed contract method, the Construction in Process account balance will consist of >construction costs only. >gross profit only. >construction costs and gross profit. >construction costs and billings.
>construction costs only. Under the completed contract method, the Construction in Process account balance consists of construction costs only.
On September 1, 2011, Shalimar Co. sold manufacturing equipment that cost $620,500 for $910,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $365,933.75 starting on August 31, 2012. Because collection of the note is very uncertain, Shalimar will use the cost-recovery method. How much revenue from this sale should Shaw recognize in 2012? >$96,500 >$0 >$33,900 >$62,600
>$0 under the cost-recovery method a company recognizes no profit until cash payments by the buyer exceed the cost of the merchandise sold.
On January 1, 2011, Draper Co. sold land that cost $420,000 for $560,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $225,190 starting on December 31, 2011. Because collection of the note is very uncertain, Draper will use the cost-recovery method. How much revenue from this sale should Draper recognize in 2011? >$70,000 >$42,000 >$0 >$56,000
>$0 Until the cost of goods sold, $420,000, is collected, no profits are recognized.
Swallow Corp. has a contract to construct a $5,000,000 cruise ship at an estimated cost of $4,000,000. The company will begin construction of the cruise ship in early January 2011 and expects to complete the project sometime in late 2014. Swallow Corp. has never constructed a cruise ship before, and the customer has never operated a cruise ship. Due to this and other circumstances, Swallow Corp. believes there are inherent hazards in the contract beyond the normal, recurring business risks. Swallow Corp. expects to recover all its costs under the contract. During 2011 and 2012, the company has the following activity: 2011 2012 Costs to date $980,000 $2,040,000 Estimated costs to compete 3,020,000 1,960,000 Progress billings during the year 1,000,000 1,000,000 Cash collected during the year 648,000 1,280,000 For the year ended December 31, 2012, how much revenue should Swallow Corp. recognize on its income statement? >$2,040,000. >$1,060,000. >$980,000. >$1,300,000.
>$1,060,000. Solution: Estimated costs to compete 2011 - Estimated costs to compete 2012
Carroll Co. began operations on July 1, 2011 and appropriately uses the installment method of accounting. The following information pertains to Carroll's operations for 2011: Installment sales $720,000 Cost of installment sales 432,000 General and administrative expenses 72,000 Collections on installment sales 330,000 The balance in the deferred gross profit account at December 31, 2011 should be >$156,000. >$288,000. >$115,200. >$90,000.
>$156,000. Solution: Installment sales - Cost of installment sales = Gross profit Gross profit/Installment sales = Rate of gross profit sales Gross profit - (Collections on installment sales x Rate of gross profit sales)
Which of the following transactions results in the recognition of revenue? >Sale of assets other than inventory. >Permitting use of an asset. >Rendering a service. >All of the above.
>All of the above.
The completed-contract method should be used only when: >the conditions for using the percentage-of-completion method cannot be met. >All of the options are correct. >there are inherent hazards in the contract beyond normal, recurring business risks. >an entity has primarily short-term contracts.
>All of the options are correct.
Under the completion-of-production basis, revenue is recognized if: >the sales price is reasonably assured. >the units produced are interchangeable. >All of these. >no significant costs are involved in distributing the product.
>All of these.
Under the cost recovery method, which of the following is reported in the period of sale? >Cost of goods sold. >Both sales and cost of goods sold. >Gross profit. >Sales.
>Both sales and cost of goods sold.
Under the completed-contract method, which of the following are recorded each period during construction? >Revenues. >Costs. >All of the options. >Gross profit.
>Costs.
In certain cases, revenue is recognized at the completion of production even though no sale has been made. Which of the following statements is not true? >Examples involve precious metals or farm equipment. >All of these statements are false. >No significant costs are involved in selling the product. >The products possess immediate marketability at quoted prices.
>Examples involve precious metals or farm equipment. It is farm products (produce) not equipment that can be considered under the completion-of-production basis.
Cramer Construction Co. began operations in 2011. Construction activity for 2011 is shown below. Cramer uses the completed-contract method. Contract Contract Billings Collections Costs to Price Through through 12/31/11 12/31/11 12/31/11 1 $4,150,000 $3,600,000 $3$4,350,000 ,400,000 2 3 Estimated Costs to Complete 3,600,000 1,500,000 1,000,000 820,000 $1,880,000 3,300,000 1,900,000 1,800,000 2,250,000 1,200,000 Which of the following should be shown on the income statement for 2011 related to Contract 1? >Gross profit, $200,000 >Gross profit, $550,000 >Gross profit, $950,000 >Gross profit, $750,000
>Gross profit, $950,000 Contract price $4,350,000 less total costs $3,400,000 equals a gross profit of $950,000.
Under IFRS, the revenue recognition principle indicates that revenue is recognized when: I. the benefits can be measured reliably. II. the sales transaction is initiated and completed. III. it is probable the benefits will flow to the company. IV. the date of sale, date of delivery, and billing have all occurred. >II and III. >I, II, and III. >I and III. >I, II, III and IV.
>I and III.
With respect to IFRS and revenue recognition, all the following statements are true except: >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. >IFRS does not permit the completed-contract method of accounting for long-term construction contracts. >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.
No profit is recognized until cash receipts exceed the seller's cost of the merchandise under the: >percentage-of-completion method. >cost recovery method and the installment sales method. >installment sales method. >cost recovery method.
>cost recovery method.
A very popular measure used to determine the progress toward completion under the percentage-of-completion method is the: >units of work performed method. >output method. >cost-to-cost method. >efforts expended method.
>cost-to-cost method.
Under the percentage-of-completion method, 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? >Net, as income from construction if credit balance, and loss from construction if debit balance. >Net, as a current asset if a debit balance, and as a current liability if a credit balance. >Progress billings as deferred income, construction in progress as a deferred expense. >Progress billings as income, construction in process as inventory.
>Net, as a current asset if a debit balance, and as a current liability if a credit balance. The balances of progress billings and construction in process should be shown at net, as a current asset if a debit balance, and as a current liability if a credit balance.
Which of the following is not an accurate representation concerning revenue recognition? >Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. >Revenue from disposing of assets other than products is recognized at the date of sale. >Revenue from services rendered is recognized when cash is received or when services have been performed. >Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used.
>Revenue from services rendered is recognized when cash is received or when services have been performed. Revenue from services rendered is recognized when services have been performed and billable, not when cash is collected.
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 amount of future returns can be reasonably estimated. >The seller's price is substantially fixed or determinable at time of sale.
>The buyer is obligated to pay the seller upon resale of the product. buyer is obligated to pay the seller upon resale of the product is not one of these six conditions.
Franklin Builders, Inc. is using the completed-contract method for a $6,250,000 contract that will take three years to complete. Data at December 31, 2011, the end of the first year, are as follows: Costs incurred to date $3,120,000 Estimated costs to complete 3,330,000 Billings to date 2,960,000 Collections to date 2,770,000 The gross profit or loss that should be recognized for 2011 is >a $66,667 loss. >$0. >a $160,000 loss. >a $200,000 loss.
>a $200,000 loss. Solution: (Costs incurred to date + Est. cost to complete) - contract price If costs incurred to date and Est. cost to complete add up to be larger than the original contract price the project will equal a lost, profit is vise versa.
Tri-State Builders, Inc. is using the completed-contract method for a $7,350,000 contract that will take two years to complete. Data at December 31, 2011, the end of the first year, are as follows: Costs incurred to date $3,760,000 Estimated costs to complete 4,030,000 Billings to date 3,220,000 Collections to date 2,990,000 The gross profit or loss that should be recognized for 2011 is >$0. >a $770,000 loss. >a $540,000 loss. >a $440,000 loss.
>a $440,000 loss. Solution: $7,350,000 less ($3,760,000 + $4,030,000) indicates a loss of $440,000.
Revenue is considered to be earned when: >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 claims to cash >when it is realized or realizable. >a company has substantially completed what it must in order to be entitled to the benefits represented by the revenues.
>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 reported on the financial statements as: >other revenue on the income statement. >a deduction from gross profit on the income statement. >a current liability on the balance sheet. >a long-term asset on the balance sheet.
>a current liability on the balance sheet.
Deferred gross profit on installment sales is generally reported as >a current liability. >a contra revenue account. >a contra asset account. >a deduction from gross profit.
>a current liability.
An alternative available when the seller is exposed to continued risks of ownership through return of the product is >not recording a sale until all return privileges have expired. >recording the sale, and accounting for returns as they occur in future periods. >recording the sale, but reducing sales by an estimate of future returns. >all of these.
>all of these. Since a, b, and c are all correct, d is the most correct answer.
Revenue earned from permitting others to use enterprise assets is recognized: >at the point of sale. >when cash is collected. >as time passes. >None of the above.
>as time passes.
Revenue from selling assets other than inventory is generally recognized: >at the date of sale. >after costs are recovered. >at the completion of production. >as cash is collected.
>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 and account for returns as they occur. >at the time of sale only if 6 specific conditions are met. >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 completed-contract method only. >both the completed-contract and the percentage-of-completion methods. >the percentage-of-completion method only. >neither the completed-contract nor the percentage-of-completion methods.
>both the completed-contract and the percentage-of-completion methods.
Under the deposit method: >cash is received before the sales transaction is completed. >cash is received after the sales transaction is completed. >cash is received at the point of sale. >cash is not received until some event occurs in the future.
>cash is received before the sales transaction is completed.
Deferred gross profit on installment sales is generally classified as a (an): >other asset. >contra-account. >current asset. >current liability.
>current liability.
In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be >the method commonly used by the contractor to account for other long-term construction contracts. >the inherent nature of the contractor's technical facilities used in construction. >the terms of payment in the contract. >the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
>the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. The principal factor to be considered should be the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
An initial franchise fee is recognized as revenue by the franchisor when >the initial franchise probationary period has expired. >when it is probable that the franchisee will exercise the option to purchase. >the franchisor has no remaining obligation to refund any cash and has provided all the initial services required under the contract and when collection of the fee is reasonably assured. >the franchise agreement is signed.
>the franchisor has no remaining obligation to refund any cash and has provided all the initial services required under the contract and when collection of the fee is reasonably assured.
A loss in the current period on a contract expected to be profitable upon completion is recognized in the current period under: >the percentage-of-completion method only. >both the completed-contract and the percentage-of-completion methods. >neither the completed-contract nor the percentage-of-completion methods. >the completed-contract method only.
>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 uncollectibility of the sales price. >the method is consistently used for all sales of similar merchandise. >collections in the year of sale do not exceed 30% of the total sales price. >an unrealized profit account is credited.
>there is no reasonable basis of estimating the uncollectibility of the sales price. The installment-sales method of recognizing profit for accounting purposes is acceptable if there is no reasonable basis for estimating the uncollectibility 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. Deferred gross profit on installment sales is generally treated as an 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: >the balance of the installment receivable. >the deferred gross profit. >its original cost. >unrecovered cost of the merchandise.
>unrecovered cost of the merchandise.
Lark Corp. has a contract to construct a $5,000,000 cruise ship at an estimated cost of $4,000,000. The company will begin construction of the cruise ship in early January 2011 and expects to complete the project sometime in late 2012. Lark Corp. has never constructed a cruise ship before, and the customer has never operated a cruise ship. Due to this and other circumstances, Lark Corp. believes there are inherent hazards in the contract beyond the normal, recurring business risks. Lark Corp. expects to recover all its costs under the contract. Under these circumstances, Lark Corp. should: >use the percentage-of-completion method and measure progress toward completion using the units-of-delivery method. >wait until the completion of construction before it recognizes revenue. >use the percentage-of-completion method and measure progress toward completion using the cost-to-cost method. >use the cost-recovery (zero-profit) method.
>use the cost-recovery (zero-profit) method.
