Deck 9: Setting up New Team Members

Question 1

The Jolly Company makes sales on an installment basis. In 2016, it sells items with a cost of $120 million. The total sales price is $125 million. Ignoring interest payments, customers pay in five equal installments, of $25 million each, with one payment in each of 2016, 2017, 2018, 2019, and 2020. If the company uses the cost recovery method of accounting for this sale, the gross profit it will recognize in 2020, the year the last installment is received is

A) Zero
B) $1 million
C) $5 million
D) $25 million

Answer 1

C

Question 2

The Jolly Company makes sales on an installment basis. In 2016, it sells items with a cost of $120 million. The total sales price is $125 million. Ignoring interest payments, customers pay in five equal installments, of $25 million each, with one payment in each of 2016, 2017, 2018, 2019, and 2020. If the company uses the cost recovery method of accounting for this sale, the gross profit it will recognize in 2016 is

A) Zero
B) $1 million
C) $5 million
D) $25 million

Answer 2

A

Question 3

The Jones Company makes sales on an installment basis. In 2016, it sells items with a cost of $20 million. The total sales price is $25 million. Ignoring interest payments, customers pay in five equal installments, of $5 million each, with one payment in each of 2016, 2017, 2018, 2019, and 2020. If the company uses the installment method of accounting for this sale, the gross profit it will recognize in 2020, the year the last installment payment is received, is

A) Zero
B) $1 million
C) $5 million
D) $25 million

Answer 3

B

Question 4

The Jones Company makes sales on an installment basis. In 2016, it sells items with a cost of $20 million. The total sales price is $25 million. Ignoring interest payments, customers pay in five equal installments, of $5 million each, with one payment in each of 2016, 2017, 2018, 2019, and 2020. If the company uses the installment method of accounting for this sale, the gross profit it will recognize in 2016 is

A) Zero
B) $1 million
C) $5 million
D) $25 million

Question 5

Which of the following is not one of the revenue recognition methods used in the situation where a company makes a single sale, and has agreed to receive payments in installments over time?

A) Percentage of completion
B) Cost recovery
C) Installment
D) Immediate recognition

Question 6

On November 20, Routledge Publishing prints 4,000 copies of an accounting textbook. In December, Routledge Publishing ships 1,000 copies to various bookstores, who have the right to return the books if they can't sell them within three months. Historically, the bookstores typically return 4% of the books. Under GAAP, what is the correct accounting for these events?

A) Routledge should record revenues related to 4,000 books in November, when it prints them.
B) Routledge should record revenues in December for 1,000 books, and an allowance for sales returns of 4% of the sales.
C) Routledge should record revenues in December for 1,000 books, and wait until later to record any sales returns.
D) Routledge should wait until after the three-month return period before recording any revenues.

Question 7

Which of the following statements about the SEC's criteria for revenue recognition is incorrect?

A) Normally, collectability needs to be reasonably assured.
B) The seller's price must be fixed or determinable.
C) Delivery of goods or services must have occurred.
D) There must be a written, signed contract as evidence of an agreement between the buyer and seller.

Question 8

Under GAAP rules, a company would not be able to recognize revenue at the time it delivered a product to the customer if

A) It was unable to estimate the likelihood of the product being returned.
B) It had not yet been paid, but felt it could estimate the likelihood of bad debts.
C) It had an obligation to fix the product if it broke, and felt it could estimate the likelihood of having to pay warranty costs.
D) It was being paid in installments.

Question 9

Under GAAP, tax expense is always computed on a cash basis.

Question 10

If a company owns a machine for its entire expected useful life, it will have the same total depreciation expense over the asset's life if it uses the double declining balance method and if it uses the straight-line method.

Question 11

If a company owns a truck for five years, it will have higher depreciation expense every year it owns the truck if it uses the double declining balance method than if it uses the straight-line method.

Question 12

The formula for computing annual depreciation expense using the double declining balance method includes the cost of the asset, its salvage value, and the expected useful life of the asset.

Question 13

The formula for computing annual depreciation expense using the double declining balance method includes the cost of the asset and the expected useful life of the asset, but not the salvage value.

Question 14

The formula for computing annual depreciation expense using the straight-line method includes only the cost of the asset and its expected useful life.

Question 15

The formula for computing annual depreciation expense using the straight-line method includes the cost of the asset, its salvage value, and its expected useful life.

Question 16

According to the FASB, at any time, the cost minus the accumulated depreciation of a company's machinery will usually equal its net realizable value.

Question 17

Most companies compute depletion on natural resources (such as oil wells) using the units of production method.

Question 18

Most companies compute depletion on natural resources (such as oil wells) using the double declining balance method.

Question 19

The method of depreciation that most companies use for tax purposes results in lower income in the early years of an asset's life than would be computed if the company used straight-line depreciation.

Question 20

If a company has been operating for many years, it is sometimes true that it would report higher income in a year if it used the double declining balance depreciation method than if it used the straight-line method.

Question 21

Companies usually allocate prepaid expenses, such as prepaid insurance, to expense in equal amounts each time period.

Question 22

A company that sells multiple deliverables for a single price should normally allocate the revenue among the various deliverables based on the relative selling prices of these deliverables.

Question 23

Under both GAAP and IFRS, if a company believes that a long-term contract will lose money, it must recognize the expected losses immediately, and should not allocate any losses to future periods.

Question 24

Under GAAP, a company may freely choose whether to use the percentage of completion method, or the completed contract method, of accounting for long-term contracts. Neither method is preferred by the FASB.

Question 25

GAAP requires companies doing work under long-term contracts to use the percentage of completion method, unless they are unable to reliably estimate costs or their percentage of completion.

Question 26

One reason that a company might report a deferred tax liability is because it owns stock in another company that has increased in value.

Question 27

"Allocation" over time involves taking one total number and dividing that total into parts which we then associate with particular time periods.

Question 28

The problem of allocating expenses over time was first considered by accountants in the 1960s.

Question 29

In which of the following cases, under GAAP, will a company usually not be able to recognize revenues at the time of shipment?

A) The customer has the right to return products. In the past, product returns have ranged from 5% to 7% of sales.
B) The customer has bought on credit. In the past, bad debts have ranged from 3% to 5% of sales.
C) The customer has bought on credit and has the right to return the goods for up to one year. This is a new market for the company.
D) The customer has bought on credit, and has one year to pay. In the past, 93% of customers have in fact paid.

Question 30

The basic revenue recognition criteria, under GAAP, are that revenue should not be recognized until:

A) Services have been delivered, and cash has been received
B) Services have been agreed upon, and a price has been agreed upon, even if the services have not yet been delivered
C) An earnings process has been completed, and the revenue is either realized or realizable
D) Cash has been received, and services have been agreed upon, even if not delivered

Question 31

If a company has been in existence for some time, it is sometimes true that income would be higher if it uses the installment method of accounting for sales than if it uses the immediate recognition method.

Question 32

In general, use of the installment method of accounting for a single sale with payments received over a period of time is more conservative than recognition of revenue at the time of shipment.

Question 33

In general, the cost recovery method of accounting for a single installment sale is less conservative than the installment method.

Question 34

When a company sells a product, and receives its payments in installments over time, it should recognize the revenue at the time of sale unless there are major uncertainties regarding the amount of money it will ultimately collect.

Question 35

When a company sells a product, and receives its payments in installments over time, it should never recognize all the revenue at the time of shipment of the product.

Question 36

The SEC would require a company to recognize revenue on a sale once the goods have been delivered, regardless of whether collection of the sales price is reasonably assured.

Question 37

One of the SEC's criteria for revenue to be recognized is that delivery of goods or services has occurred.

Question 38

Normally, the SEC would not expect delivery of goods and services to have occurred by the time revenue is recognized.

Question 39

One of the SEC's criteria for revenue to be recognized is that there must be persuasive evidence of agreement between the buyer and seller.

Question 40

One of the SEC's criteria for revenue to be recognized is that there must always be a written agreement between the buyer and the seller.

Question 41

Under GAAP rules, companies normally recognize revenue at the time they deliver goods or services to the customer, as long as they can reasonably estimate the likelihood of collecting any accounts receivable.

Question 42

Under GAAP, revenue can never be recognized before a company receives cash from the customer.

Question 43

One of the criteria under GAAP for recognizing revenue is that an earnings process must be substantially complete.

Question 44

The straight-line method of allocating asset cost over time is always the theoretically best method.

Question 45

There is no one theoretically best way to allocate costs among time periods.

Question 46

In general, the completed contract method is a more conservative method of accounting for a long-term contract than the percentage of completion method.