Exam 2 Acct 3312
Four essential defining characteristics of Revenue are:
1. Results from an ongoing activity 2. Results in an asset inflow or liability settlement 3. Results from a major/central business activity 4. Is created by an earnings process
13. The entry to record billings made during YR07 would be:
Accounts Receivable - CIP Dr XX Billings on CIP CrXX
Billed Purchaser Co. $1200
Accounts Receivable -CIP Dr XX Billings on CIP Cr XX
Determined that the project would be completed on April 1, YR08 and billed Purchaser Co. for the balance of the contract price.
Accounts Receivable -CIP DrXX Billings on CIP CrXX
Gross Profit Method 16. The journal entry to record sales revenue
Accounts Receivable Dr XX Sales Revenue Cr XX Unearned Int. Revenue Cr XX
Which of the following items do not require separate disclosure as a component of deferred tax expense?
Adjustments of DTA and DTL accounts for a change in the discount rate used to estimate future taxes.
Assume that Amazon n returned 10% of the books (retail value $8, cost basis $6) on February 1, YR02, and as of this date Amazon had not yet paid for the books. What journal entry should Publisher record at the return date (ignore dollar amounts)?
Allowance for Sales Ret. & Allowances DrXX Returned Inv DrXX AR CrXX Est Inv Returns CrXX
The journal entry to record the purchase of the bonds is:
Available-for-Sale Securities Dr XX Accrued Interest Receivable Dr XX Cash Cr XX
The entry to record amortization at December 31, YR10 would be in the following form (ignore dollar amounts):
Available-for-Sale Securities XX Interest Income XX
Select the best answer below regarding the preferred method of accounting for an investment in bonds. Available-for-Sale Held-to-Maturity Trading
Bond investment is classified as Available-for-Sale = Fair Value Bond investment is classified as Held-to-Maturity = Amortized Cost Bond investment is classified as Trading = Fair Value
Received a payment of $900 from Purchaser Co
Cash Dr XX AR -CIP Cr XX
Received $70 in dividends related to the investment in Adams Inc. common stock.
Cash Dr XX Dividend Income Cr XX
Received interest on Dell Inc. bonds
Cash DrXX Accrued Interest Rec CrXX
Received $4,000 in dividends related to the investment in Investee Co. common stock
Cash DrXX Investment in Affiliate Investee Co CrXX
Made all necessary adjusting journal entries
Construction Exp, DrXX CIP CrXX Billings on CIP DrXX Rev. from LT Contract CrXX
Paid subcontractors
Construction In Process Dr XX Cash Cr XX
The adjusting journal entry at December 31, YR03 to record profit (loss) for the year would be
Construction In Process XX Construction Expenses XX Cr Revenue from Long-term Construction Contract XX
The YR08 journal entry to record the effect of the carryforward (before consideration of any valuation account) would be:
Deferred Tax Asset DR XX Tax Benefit of NOL Carryforward Cr XX
5. When an investment is transferred from the held-to-maturity portfolio to the available-for-sale portfolio, the carrying value assigned to the security in the available-for-sale portfolio should be:
E. Transfers are recorded at fair market value on the date of transfer
Select the best answer below regarding where gains and losses are reported for an investment in Held-to-Maturity securities which is still owned by the investor (i.e., investment has not been sold).
Gains from temporary changes in value = Not recorded Losses from temporary changes in value = Not recorded Gains from permanent changes in value = Not recorded Losses from permanent changes in value = Net Income
3. Select the best answer below regarding where unrealized gains and losses are reported for an equity investment where the investor has no control and no influence over the issuer (investee) of the equity security.
Gains from temporary fluctuations in value = Net Income Losses from temporary fluctuations in value = Net Income Losses from permanent decline in value = Net Income
Purchased $20,000 of bonds issued by Dell Inc. at 95. These bonds pay interest on January 1 and July 1 of each year (coupon rate = 4%). The bond mature on January 1, YR07. Ford Co. expects, and has the ability, to hold the bonds until they mature. At the purchase date these bond have an effective yield of 4.5%. Note: The accounting policy of Ford Co. is to accrue interest and amortize discount/premium each June 30 and December 31. Amortization is on a straight-line basis.
Held-to-Maturity Sec DrXX Accrued Interest Rec DrXX Cash CrXX
Some sales contracts include provisions that vary the contract consideration. Examples include adjustments in the amount the buyer owes due to rebates, volume discounts, or a performance bonus for the seller. How should revenue be measured when the contract includes potential adjustments in the contract consideration?
Include variable components in the revenue if they are probable
18. The YR08 journal entry to record the effect of the carryback election would be:
Income Tax Refund Receivable Dr XX Tax Benefit of NOL Carryback CrXX
The YR08 journal entry to record the effect of the carryback election would be:
Income Tax Refund Receivable Dr XX Tax Benefit of NOL Carryback CR XX
10. What journal entry should General Electric record on December 31, YR01?
Interest Expense Dr XX Accrued Int. Payable Cr XX
9. The entry to record amortization at December 31, YR08 would be in the following form (ignore dollar amounts):
Interest Income Dr XX HTM Securities Cr XX
The entry to record the purchase of the Sears Co. stock is:
Investment in Affiliate Dr XX Cash CR XX
Purchased 5,000 common shares of Investee Co. common stock. Paid $20 per share and a broker's fee of $1,000. Investee Co. currently has 15,000 common shares outstanding and this purchase gives Ford the ability to influence the activities of Investee Co. At March 1, YR05 the book value per common share for Investee Co. is $15. The $5 difference between price paid and book value per common share for the Investee Co. stock is determined to relate to the following: (1) 40% of the difference relates to equipment with a remaining life of 5 years, (2) 25% relates to land held by Investee Co., and (3) 35% relates to Investee Co. internally developed goodwil
Investment in Affiliate Investee Co DrXX Cash CrXX
Select the best answer below regarding the preferred method of accounting for an investment in the voting common stock of an investee.
Investor has control over Investee = Cost or Equity Investor has significant influence over Investee = Equity Investor has neither control nor influence over Investee = Fair Value
Estimated the contract would take another $800 to be completed and that the completion date would be July 1, YR08. Made all necessary adjusting journal entries.
ONLY IF THERE IS A LOSS Loss on CP Dr XX CIP Cr XX
Which sales transactions below would qualify for revenue recognition under Generally Accepted Accounting Principles? Performance Obligation Satisfied? Transaction Price Collected? Transaction Price Judged Probable of Collection? Transaction Price is Refundable? Customer Retains a Right to Return the Product Product Returns Can be Accurately Estimated
Performance Obligation Satisfied? Yes; Yes Transaction Price Collected? No; Yes Transaction Price Judged Probable of Collection? Yes; Not applicable Transaction Price is Refundable? No; No Customer Retains a Right to Return the Product Yes; No Product Returns Can be Accurately Estimated Yes; Not applicable
Some sales transactions involve both a principal and an agent. Often in these transactions the agent collects the revenue on behalf of the principal, deducts the agent's fee, and forwards the net collection to the principal. For example, the agent might collect a $1,000 sales price, deduct a 10% agent commission ($100), and forward the net collection of $900 to the principal. In these circumstances, how much revenue should each party report on their respective financial statements?
Principal 1000 Agent 100
Adams Inc. common stock ended the year with a market price of $12 per share
SFVA - Trading Sec. DrXX Unrealized Holding Gain/Loss - Income CrXX
8. What adjusting journal entry should Publisher record at December 31, YR01 related to this sale (ignore dollar amounts)?
Sales Ret. & Allowances DrXX Est. Inv. Returns DrXX Allowance for Sales Ret. & Allowances CrXX COGS CrXX
The YR08 journal entry to record a valuation account, if any, related to deferred tax balances would be:
Tax Benefit of NOL Carryforward DR XX Allowance to Reduce DTA to Expected Realizable Value CR XX
4. Select the best answer below regarding where unrealized gains and losses are reported for a bond investment classified as Held-to-Maturity securities.
Temporary Gains = Not Recorded Temporary Losses = Not Recorded Permanent Losses = Net Income
3. Select the best answer below regarding where unrealized gains and losses are reported for a bond investment classified as Available-For-Sale securities.
Temporary Gains = Other comprehensive income Temporary Losses = Other comprehensive income Permanent Losses = Net Income
If a company sells a product and gives the buyer the right to return the product, in addition to meeting the normal conditions for revenue recognition, revenue from the sales transaction may be recognized at the time of sale only if :
The revenue and cost of goods sold associated with future returns can be reasonably estimated.
Under which of the following circumstances would it be appropriate for a seller to record revenue?
The transaction price is collected and nonrefundable, and the performance obligation is satisfied
Purchased 100 shares of Adams Inc. common stock. Paid $10 per share and a broker's fee of $50. This stock was purchased with the intent of earning income from day-to-day fluctuations in stock price, and Ford expects to hold the stock for 4 months to accomplish this objective. Ford Co. has no ability to influence the activities of Adams Inc
Trading Securities DrXX Cash CrXX
11. When the engine is delivered on December 31, YR02, what entry should be recorded?
Unearned Sales Rev. Dr XX Accrued Int. Payable Dr XX Sales Revenue Cr XX
If the time between collection and completion of the performance obligation is more than one year, and the contract involves a significant financing component: a. the time value of money is used to determine the transaction price. b. the time value of money is ignored in determining the transaction price. c. the transaction price should be based on the sales price of goods or services at the date the contract is signed. d. interest income must be accrued when the consideration is collected before the performance obligation is satisfied. e. none of the above.
a. the time value of money is used to determine the transaction price.
When a company holds between 20% and 50% of the voting common stock of an investee, which of the following statements applies?
b. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise significant influence over the investee.
The transaction price: a. excludes discounts, volume rebates, coupons and free products, or services. b. is the amount of consideration that a company expects to receive from a customer. c. excludes time value of money if the contract involves a significant financing component. d. does not consider noncash consideration such as donations, gifts, equipment or labor. e. none of the above
b. is the amount of consideration that a company expects to receive from a customer
When an investment in the available-for-sale portfolio is transferred to the trading portfolio because the company has decided to sell the investment within 60 days, the carrying value assigned to the investment upon entering it in the trading portfolio should be:
b. its fair value at the date of the transfer
When sales are made with a right of return, the company: a. may not record any revenue until the return period has expired. b. may record revenue to the extent that cash is collected from the customer. c. may record revenue so long as returns can be accurately estimated. d. should treat the transaction as a consignment of inventory and record revenue in a manner consistent with consignment accounting procedures. e. none of the above.
c. may record revenue so long as returns can be accurately estimated.
When requirements of the revenue recognition principle have been met but an accurate estimate of the related expenses cannot be obtained GAAP requires that one:
defer recognition of the revenue until such time as the related expenses are known or can be accurately estimated
8. When requirements of the Revenue Recognition Principle have been met but an accurate estimate of the related expenses cannot be obtained GAAP requires that one:
defer recording revenue until the related expenses are known or susceptible to accurate estimation.
Which of the following conditions must be met before revenue is recorded? a. the performance obligation has been satisfied. b. the transaction price has been collected or is judged probable of collection. c. related expenses are known or susceptible to accurate estimation. d. conditions 'a' and 'b' above. e. conditions 'a', 'b', and 'c' above.
e. conditions 'a', 'b', and 'c' above.
10. GAAP requires that deferred tax assets and deferred tax liabilities be classified on the balance sheet as:
e. none of the above. GAAP requires that all deferred tax balances be classified as noncurrent on the balance sheet.
Which of the following items require separate disclosure as components of deferred tax expense? - Investment Tax Credits - Adjustments of DTA and DTL accounts for the effects of enacted changes in tax rates - Adjustment of a DTA valuation account due to a change in judgment about future realizability of the DTA - Benefits of loss carrybacks
e. yes yes yes no
2. Regarding the amortization of a premium or discount on a debt security investment, GAAP requires the
effective interest method of amortization should be used, but other methods can be applied if there is no material difference in the results obtained
1. Unrealized holding gains and losses on held-to-maturity securities are:
not recorded but are disclosed in the footnotes to the financial statements
3. Martin Company began operations on January 1, YR01, and shortly thereafter purchased shares of ABC Company to hold as an available-for-sale investment. The shares of ABC Company are appropriately classified as available-for-sale securities on the December 31, YR01 balance sheet of Martin Company. Martin paid $5,000 for the shares, and at the end of the year the shares were worth $4,000. Martin Company manufacturers bicycles as its core business. The unrealized holding loss should be reflected in the YR01 financial statements as follows:
reported as a component of 'other income' on the income statement.
The reason that income taxes assessed for a particular reporting year cannot be used as total tax expense in the financial records is due to the effect of:
temporary differences between financial and tax records
7. The Revenue Recognition Principle provides that revenue should be recognized when:
the contract is identified and the performance obligation is satisfied
