Intermediate II Chapter1

If based on past experience only a remote likelihood exists that a previously sold gift card will still be redeemed, the seller should recognize a future liability. deferred revenue. revenue. expense.

revenue.

The billings on construction account is a contra account to accounts receivable cost of goods sold. construction in progress. sales.

construction in progress. sales.

Rice Corp. recognizes revenue over time to account for long-term contracts and has the following information for the first year of the contract:Contract price$500,000Total expected costs on contract400,000Costs incurred in current year60,000Costs incurred in previous years0What is the amount of revenue recognized in year 1? $75,000 $60,000 $300,000 $100,000 $500,000

$75,000 Reason:Revenue Recognized = (Cost Incurred to date/Estimated total

When should the initial franchise fee be recognized by the franchisor? A) After substantial performance of the initial services by the franchisor. B) In the period the contract is signed. C) At the end of the franchise contract when all terms are completed.

A) After substantial performance of the initial services by the franchisor.

The account name "contract liability" is another name for A) deferred revenue. B) service or sales revenue. C) accounts payable.

A) deferred revenue.

A license for symbolic intellectual property (Select all that apply.)Multiple select question. A) provides the customer with the right of access to the intellectual property B) does not have significant standalone functionality C) provides the customer with the right of use of the intellectual property D) does have significant standalone functionality

A) provides the customer with the right of access to the intellectual property B) does not have significant standalone functionality

Ronin Corp. recognizes revenue over time related to a long-term contract. The contract price is $5,000,000, total expected construction costs are $3,000,000, and actual costs incurred during the first year are $300,000. Actual costs for year 2 are $900,000 and estimated cost to complete is $1,800,000. The amount of previously recognized revenue is $500,000. Revenue recognized for year 2 is: A. $1.5 million B. $2 million C. $1.2 million D. $5 million

A. $1.5 million ($1.2 mill/3 mill) x (5 mill) - $500,000

Lorna Corp. recognizes revenue over time for long-term contracts. At the date the contract is signed, the contract price is $600,000 and the expected costs to complete the contract are $400,000. The following information is available:Year 1Year 2Year 3Costs incurred to date$100,000$300,000$500,000Estimated costs to complete300,000200,0000Progress billings200,000200,000200,000What is the amount of revenue recognized during year 2? A. $210,000 B. $360,000 C. $240,000 D.$600,000

A. $210,000 Reason: The cost-to-cost ratio for year 2 is $300,000/$500,000 = 60%. $600,000 x 60% = 360,000 -150,000= 210,000

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. For year one, Jones recognizes $1 million of revenue and $800,000 of cost. During year 2, Jones incurs $1.2 million in cost and estimates that during year 3 an additional $1.1 million will be necessary to complete the project. For year 2, Jones will recognize a loss of: A. $300,000 B. $100,000 C. $0 D.$200,000

A. $300,000 Reason: $100,000 total loss + $200,000 gross profit recognized during year 1

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. For year one, Jones recognizes $1 million of revenue and $800,000 of cost. During year 2, Jones incurs $1.2 million in cost and estimates that during year 3 an additional $1.1 million will be necessary to complete the project. For year 2, Jones will recognize revenue of A. $950,000 B.$0 C. $1.2 million D.$1.95 million

A. $950,000

Which of the following must a seller recognize as separate line items on the balance sheet? (Select all that apply.) A. Accounts receivable B. Bad debt expense C. Contract assets D. Contract liabilities

A. Accounts receivable C. Contract assets D. Contract liabilities

Which of the following is most commonly used to estimate progress toward completion of a long-term contract? A. Cost-to-cost ratio B. Billings-to-total revenue ratio C. Percentage of production method

A. Cost-to-cost ratio

What is the correct journal entry to recognize profit for a long-term construction project for which revenue is recognized over time? A. Debit construction in progress and debit cost of construction; credit revenue from long-term contracts B. Debit billings on construction contract; credit construction in progress C. Debit billings on construction and debit accounts receivable; credit revenue from long-term contracts D. Debit cost of construction; credit revenue from long-term contracts

A. Debit construction in progress and debit cost of construction; credit revenue from long-term contracts

Which method provides a better measure of a company's economic activity each period? A. Revenue recognition over time B. Revenue recognition upon completion C. Both methods provide the same measure of economic activity each period

A. Revenue recognition over time

What is the difference between journal entries to recognize gross profits when revenue is recognized over time and when revenue is recognized upon completion of a long-term project? A. Timing B. Gross profit C. Revenue D. Cost

A. Timing

Star Inc. licenses use of its intellectual property to customers. The benefit the customer receives from the license is not affected by Star's ongoing activity. Star should recognize revenue: A. at the beginning of the license period B. over the entire license period C. at the end of the license period

A. at the beginning of the license period

If a contract qualifies for revenue recognition over time, the income statement for each year reports related: A. cost of construction B .revenue C. construction in progress

A. cost of construction B .revenue

which of the following are included in the journal entry required to record construction costs for a long-term construction contract? (Select all that apply.) A. credit raw materials B. credit billings on construction contract C.debit construction in progress D. debit cash

A. credit raw materials C.debit construction in progress

If the customer controls the work-in-process related to a long-term contract, the seller should probably recognize revenue A. over time. B. when the project is complete. C. when the project begins.

A. over time.

The cost-to-cost ratio is the most common approach used to estimate ______. A. progress toward completion B. billings to date C. accounts receivable

A. progress toward completion

Revenue related to royalties based on sales or usage of a license are recognized when A. the sales or usage has actually occurred. B. the license period expired. C. the customer pays the seller for the related usage.

A. the sales or usage has actually occurred.

As compared to revenue recognition over time, the total amount of gross profit recognized related to revenue upon completion is: A. the same. B. smaller. C. greater.

A. the same.

For licenses of functional intellectual property, revenue is typically recognized A.at the start of the license period. B.at the end of the license period. C.over the license period.

A.at the start of the license period.

Jones signs a three-year contract to construct a new office building for Smith. The contract price is $3 million and estimated cost $2 million. For year one, Jones recognizes $1 million of revenue and $800,000 of cost. During year 2, Jones incurs $1.2 million in cost and estimates that during year 3 an additional $1.1 million will be necessary to complete the project. Jones will recognize a loss on the project by __________ construction in progress A. debiting loss from construction B.crediting construction in progress C.debiting construction in progress D.crediting cost of construction

B.crediting construction in progress

What journal entry should be made to recognize accounts receivable for long-term construction projects? A) Debit: Accounts Receivable and Credit Construction in Progress B) Debit Accounts Receivable and Credit Billings on Construction Contract C) Debit Billings on Construction Contract and Credit Construction in Progress

B) Debit Accounts Receivable and Credit Billings on Construction Contract

In a bill-and-hold arrangement, the ____ requests that the ____ ship the products ______.Multiple choice question. A) seller; buyer; at a later date B) buyer; seller; at a later date C) seller; buyer; immediately D) buyer; seller; immediately

B) buyer; seller; at a later date

Emil Company evaluates gift cards that it sold two years ago. Based on past experience, it is highly unlikely that gift cards outstanding for two years or longer will be redeemed. Related to these gift cards, Emil should A) recognize a deferred liability. B) recognize revenue. C) recognize an extraordinary gain. D) recognize revenue and an equal amount of expense

B) recognize revenue.

Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million total construction costs are $3.75 million and actual cost incurred during the first year are $1.5 million. Calculate the revenue recognized during year 1. A. 0 B. $2 million C.$3.5 million D. $5 million

B. $2 million The cost-to-cost ratio is $1.5/$3.75 = 40%. Multiply 40% (the percentage completed) by the total expected gross profit on the contract ($5) = $2 million revenue recognized in year 1.

Estimated losses on the entire long-term project are recognized immediately because otherwise the CIP account would be valued at an amount ____ the amount the company expects to realize on the contract. A. less than B.greater than C. equal to

B.greater than

Which of the following conditions or situations make the timing of revenue recognition for long-term contracts especially critical? (Select all that apply.)There tends to be a considerable difference between recognition over time and when the performance obligation is completed. A. In most cases, the project is of little value until completed. B. Delayed recognition doesn't provide information to financial statement users in a timely manner. C. There tends to be a considerable difference between recognition over time and when the performance obligation is completed.Delayed recognition doesn't provide information to financial statement users in a timely manner.

B. Delayed recognition doesn't provide information to financial statement users in a timely manner. C. There tends to be a considerable difference between recognition over time and when the performance obligation is completed.Delayed recognition doesn't provide information to financial statement users in a timely manner.

Which of the following provide the conceptual foundation for recognizing revenue related to long-term contracts over time? (Select all that apply.) A. The goods or services cannot be utilized by the customer until completed. B. The seller provides a product or service that is customized to the customer's specifications. C. The customer controls the work-in-progress.

B. The seller provides a product or service that is customized to the customer's specifications. C. The customer controls the work-in-progress.

Which of the following differs between revenue recognized over time and revenue recognized at completion? A. Total profit B. The timing of recognition C. Total expense D.Total revenue

B. The timing of recognition

In a consignment, the entity who owns the goods, referred to as the ______, physically transfers the goods to another company, called the ______, who will attempt to sell the goods. A. owner; purchaser B. consignor; consignee C. consignee; consignor D. purchaser; owner

B. consignor; consignee

The billings on construction account is a contra account to __________. A. sales. B. construction in progress. C. accounts receivable. D.cost of goods sold.

B. construction in progress.

If a seller satisfies a performance obligation but the payment depends on something other than the passage of time, the seller should recognize a(n) A. contract liability. B. contract asset. C.accounts receivable.

B. contract asset.

On February 15, Speedy Construction Company has completed a significant portion of the promised construction. Consistent with the related contract, Speedy may bill the customer on March 15. On February 15, Speedy Construction may recognize a(n) __________. A. contract liability. B. contract asset. C. no related amounts. D. accounts receivable.

B. contract asset.

The closing entry for a long-term construction project when revenue is recognized either over time or upon completion includes which of the following? (Select all that apply.) A. credit billings on construction contract B. credit construction in progress C. debit billings on construction contract D. debit construction in progress

B. credit construction in progress C. debit billings on construction contract

When revenue is recognized over time in a long-term contract, a loss may have to be recognized in at least one period A. only if the project as a whole is expected to be unprofitable. B. even if the project as a whole is expected to be profitable. C. requiring a restatement if prior profits were recorded.

B. even if the project as a whole is expected to be profitable.

Revenue is typically recognized _____ for a license that provides the customer with the right of access to the seller's intellectual property. A. at the start of the license period B. over the license period C. at the end of the license period

B. over the license period

The formula: total estimated revenue times percentage completed to date less revenue recognized in prior periods is used to measure: A. revenue recognized over the contract period B. revenue recognized for the current period C. progress made toward completion of performance obligation

B. revenue recognized for the current period

On a long-term construction project, the amount in the construction in progress account represents the costs of construction plus the gross profit recognized to date, and the billings on construction represents A. the total revenue recognized to date. B. the amounts billed to the customer. C.the net realizable value of the contract. D.the amounts paid by the customer.

B. the amounts billed to the customer.

Why are estimated losses on an entire long-term project fully recognized in the first period the loss is anticipated? A. Construction in progress should be measured consistent with measuring inventory at the higher of its cost or market value. B.Construction in progress would be valued at an amount less than the company expects to realize from the contract. C.Construction in progress would be valued at an amount greater than the company expects to realize from the contract.

B.Construction in progress would be valued at an amount less than the company expects to realize from the contract.

Southland Construction. has entered into a three year contract to construct an office plaza for Northville Company for $300,000,000. Southland agrees to bill Northville 50% at the end of the first year, 30% at the end of the second year, and 20% at the end of the third year. At the end of year 1, Southland estimates it has completed 35% of the building and has incurred $55 million in construction costs. Which of the following is the correct entry to record billings for Southland Construction? A. Dr. Construction in progress $55 million; Cr. Billings on construction contract $55 million B.Dr. Accounts receivable $150 million; Cr. Billings on construction contract $150 million C.Dr. Construction in progress $95 million; Cr. Billings on construction contract $95 million

B.Dr. Accounts receivable $150 million; Cr. Billings on construction contract $150 million

When is a loss recognized on a long-term contract? A. When the billings are not collected during the period. B.In the first period in which the loss become evident. C. In the period the contract is completed. D. When the construction costs are in excess of billings.

B.In the first period in which the loss become evident.

If variable consideration is based on sales or usage of a license ("royalties"), it is included in the transaction price A. when the royalties are received in cash. B.when the sales or usage has occurred and royalties are known. C.when the royalty amounts can be reasonably estimated.

B.when the sales or usage has occurred and royalties are known.

Munch Inc. delivers various types of construction materials to a customer's building site. Over an 18-month period, Munch's employees utilize Munch's machinery and tools to construct a new office building for the customer. Munch identifies only one performance obligation related to this contract becauseMultiple choice question. A) the material, labor, and use of machinery and tools are not separately listed in the contract. B) it is very difficult to identify separate performance obligations for each of the inputs to the construction project. C) Munch combines the materials, labor, and use of machinery and tools to construct a single complete building.

C) Munch combines the materials, labor, and use of machinery and tools to construct a single complete building.

When should ongoing franchise fees be recognized by the franchisor? A) At the end of the franchise contract when all terms are completed. B) In the period the contract is signed. C) Over time in the periods the services are performed by the franchisor.

C) Over time in the periods the services are performed by the franchisor.

The construction in progress account is equivalent to which account in a manufacturing environment?Multiple choice question. A) Cost of goods sold B) Fixed overhead C) Work-in-process D) Raw materials

C) Work-in-process

The billings on construction contract account is classified as a(n) .A) asset. B) liability. C) contra asset. D) expense.

C) contra asset.

At the end of a long-term construction project, the amounts in the construction in progress account will be ______ the billings on construction contract A) less than B) greater than C) equal to

C) equal to

A long-term contract that includes many products and services that are capable of being distinct, may be accounted for as a single performance obligation because A) the seller customarily does not sell them separately. B) they are specified in a single explicit contract. C) the seller's role is to combine those products and services prior to delivery or completion.

C) the seller's role is to combine those products and services prior to delivery or completion.

Which of the following are often provided by the franchisor at start-up of a new franchise? (Select those that apply at start-up) A) hiring of franchisee's employees and management B) periodic advertising and promotion C) training of franchisee's employees D) remodeling of franchisee's facilities

C) training of franchisee's employees D) remodeling of franchisee's facilities

To date, Gunter Construction completed 89% of a construction project with a contract price of $1 million. Consistent with the contract provisions, at this time, Gunter may bill 80% of the agreed-upon price. Gunter will report an accounts receivable of $__________. A. $90,000 B. $890,000 C. $800,000

C. $800,000

Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million, total construction costs are $3.75 million, actual costs incurred during the first year are $1.5 million, and the revenue recognized is $2 million. The journal entry to record revenue during year 1 is: A. Credit: Cost of construction $1.5 million B. Credit CIP $500,000 C. Credit: Revenue $2 million D. Debit: CIP $500,000 E. Debit: Cost of construction $1.5 million

C. Credit: Revenue $2 million D. Debit: CIP $500,000 E. Debit: Cost of construction $1.5 million

What is the journal entry to recognize a loss on a long-term contract? A. Dr. Cost of construction; Cr. Construction in progress (CIP) B. Dr. Construction in progess (CIP); Cr. Revenue from long-term contracts C. Dr. Cost of construction; Cr. Revenue from long-term contracts, Cr. Construction in progress (CIP)

C. Dr. Cost of construction; Cr. Revenue from long-term contracts, Cr. Construction in progress (CIP)

For a contract that qualifies for revenue recognition over time, revenue and cost of construction are reported in the A. balance sheet. B. financial statement notes. C. income statement.

C. income statement.

Revenue is recognized upon completion of a long-term contract if: A. the seller chooses to apply this method B. it better reflects the underlying economic substance of the contract C. the contract does not qualify for revenue recognition over time

C. the contract does not qualify for revenue recognition over time

If a long-term contract doesn't qualify for revenue recognition over time, revenue is recognized __________. A. at the time the contract is signed B. when cash is received. C. upon completion

C. upon completion

When a construction contract is closed upon completion of a construction project, the journal entry will include which of the following? A. debit to construction in progress. B. debit to revenue on construction contract. C.debit to billings on construction contract. D. credit to accounts receivable. E. credit to construction in progress.

C.debit to billings on construction contract. E. credit to construction in progress.

Revenue recognized each period is determined by multiplying total estimated revenue by A. percentage completed to date and adding revenue recognized in prior period B. revenue recognized in prior periods C.percentage completed to date and subtracting revenue recognized in prior periods

C.percentage completed to date and subtracting revenue recognized in prior periods

When one party to an agreement grants the right to sell its products and use its name to another party, we refer to the arrangement as a: A) copyright B) trademark C) consignment D) franchise

D) franchise

The journal entries used to recognize the costs of long-term construction contracts are identical when revenue is recognized upon completion and when it is recognized over time; however the two methods differ with respect A) the entry required at the inception of the contract. B) the entries to record the accounts receivable. C) the timing of recognition of billings on contracts. D) to the timing of revenue recognition.

D) to the timing of revenue recognition.

On January 5, Merkel Inc. purchases office equipment for its new branch office from Norbert Company. Merkel requests that the equipment be delivered after the renovation of the branch location is completed. This agreement is referred as a: A. consignment contract B. franchise agreement C. long-term purchase contract D. bill-and-hold arrangement

D. bill-and-hold arrangement

In a consignment, the ______ owns the goods; the ______ holds the goods in order to sell them to a buyer. A. consignor; consignor B. consignee; consignor C. consignee; consignee D. consignor; consignee

D. consignor; consignee

The construction-in-progress account most closely relates to which type of account? __________ A. Accounts Receivable B. Sales C.Equipment D.Inventory

D.Inventory

If a project qualifies for revenue recognition over time and the project as a whole is expected to be profitable, a loss should not ever be recognized in a given period along the way. A. True B. False

False Reason: Even if a project is expected to be profitable, a loss sometimes must be recognized along the way.

Select all that applyWhich of the following will not differ between revenue recognized over time and revenue recognized at completion? (Select all that apply.) A.Total expense B.Total profit C.The timing of recognition D. Total revenue

Total expense Total profit Total revenue

An estimated overall loss on a long-term contract is fully recognized in the first period the loss becomes evident, regardless of the revenue recognition method used. True False

True Reason: The loss is recognized in the first period it is anticipated.

A seller recognizes contract liabilities, contract assets, and accounts receivable on separate lines of its __________.

balance sheet

Cash received from the sale of gift cards is recognized as __________.

deferred

Fuller contracted with the owners of "Healthy Bakeries" to open a bakery, sell its signature products and use its name and logo. This agreement refers to a consignment principle-agent agreement franchise trademark

franchise

In a franchise agreement, the ___________pays franchise fees to obtain the right to use a company's name and sell its products.

franchisee

In a franchise agreement, the franchisor_________ , owns the company and gives an individual the right to use its name and sell its products.

franchisor

Licenses typically allow customers to use the seller's ____ property. personal intellectual real

intellectual

Deferred revenue from the sale of gift cards is classified as a(n) ________, on the balance sheet.

liabilities

Agreements that allow customers to use the seller's intellectual property are referred to as (1). (Enter only one word.)

licenses

A contract liability is a term that refers to a __________ revenue account.

unearned