Deck 4: Revenue Recognition

Question 1

Explain how revenue should be allocated to the components in a multiple deliverable sales arrangement.

Answer 1

While IAS 18 paragraph 13 makes it clear that enterprises should allocate revenue to the components of arrangements with multiple deliverables, the standard does not specify how this allocation should be made. Different methods can result in different amounts allocated to each component and different timing of recognition.
In principle, there are two reasonable ways to make this allocation. The first is the relative fair value method (also called the proportional method), meaning that we allocate revenue in proportion to the estimated fair values of the components.
The second method is the residual value method, meaning that one of the components picks up the portion of the sale price that remains after allocating to all the other components.

Question 2

Discuss where judgment needs to be applied in the residual value and relative fair value methods.

Answer 2

It is a matter of professional judgment how one chooses the order of the residual value allocation and how one chooses between the relative fair value method and the residual fair value method.
That judgment should take into consideration the reliability of the fair value estimates. If the fair values of all the components were measured with about the same degree of reliability or accuracy, then it would make more sense to apply the relative fair value method.
On the other hand, big differences in the reliability of the measurements suggests that it would make sense to first allocate the price to those components that are measured with the greatest reliability, with the least reliably measured component taking the remaining unallocated value.

Question 3

Fancy Cars sold a car for $35,000. In addition, the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years. The normal selling prices are as follows:
a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Answer 3

a. The residual value method is appropriate since the fair value for all components is not determinable.
b. Revenue for the car should be recognized upon delivery. Revenue for the oil changes will recorded as each of the 20 oil changes is performed (1,000/ (4/yr*5yrs)). The revenue for the warranty would be recognized over the 5 years.

Question 4

An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

A)The entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
B)It is probable that the economic benefits associated with the transaction will flow to the entity.
C)Stage of completion - either the coverage period has not yet begun or the period has not elapsed.
D)The amount of revenue can be measured reliably.

Question 5

Simply Manufacturers has signed an order to supply 10,000 chairs at a price to be determined in the future. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

A)The entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
B)It is probable that the economic benefits associated with the transaction will flow to the entity.
C)Stage of completion - either the coverage period has not yet begun or the period has not elapsed.
D)The amount of revenue can be measured reliably.

Question 6

Hedley Corporation sold hardware and software for $70,000. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The normal selling prices are as follows:
a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Question 7

Which of the following statements about the value creation process is not correct?

A)The value creation process reflects the wide range of possible points at which revenue could be recognized.
B)Recognizing revenue early in the value creation process is more conservative than waiting until cash is received.
C)Recognizing revenue early in the value creation process involves more uncertainties and lower reliability about cash flows.
D)Permitting too much choice in accounting policies impairs comparability of financial statements.

Question 8

Explain how the timing of revenue recognition is affected by multiple deliverables in the arrangement. Explain how revenue is ultimately recognized in a multiple deliverable sales transaction.

Question 9

Which of the following best explains what recognition means in financial reporting?

A)Recognition is the process of reporting an item that is due within 12 months in the current section of the balance sheet.
B)Recognition is the process of reporting an item in the notes to the financial statements.
C)Recognition is the process of presenting an item in the financial statements.
D)Recognition refers to the choice between using fair value and historical cost in the financial statements.

Question 10

Superior Cars sold a car for $35,000. In addition, the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years. The normal selling prices are as follows:
a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Question 11

Discuss advantages and disadvantages of using the cash basis to recognize revenues. Provide three valid reasons in your discussion.

Question 12

Here are the general definition and recognition criteria for assets. For each criterion, provide the related revenue recognition criteria.
a. The entity gives up the future benefits embodied in the asset.
b. The entity gives up control of the resource and therefore removes the item as an asset.
c. The future inflows of resources (e.g., from accounts receivable)are reasonably measurable.
d. The future inflows of resources (e.g., from accounts receivable)are probable.

Question 13

A city transit authority issues 200,000 monthly passes at $80 each for sale at various retailers. Retailers act as consignees for these passes. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

A)The entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
B)It is probable that the economic benefits associated with the transaction will flow to the entity.
C)Stage of completion - either the coverage period has not yet begun or the period has not elapsed.
D)The amount of revenue can be measured reliably.

Question 14

Which statement is correct about multiple deliverable sales arrangements?

A)The revenue recognition criteria no longer apply to these transactions.
B)The revenue must be allocated to the components of the sale evenly over the life of the contract.
C)The revenue must be recognized evenly over the life of the contract.
D)Identifying the different sources of revenue increases the representational faithfulness.

Question 15

On March 1, Pendant Textbook Publications delivers 100 copies of one of its accounting textbooks to the First University bookstore. The bookstore can return all unsold copies to Pendant. The retail price of each copy is $110, while the price charged to the bookstore is $80. Each book costs Pendant $40 to produce. On April 15, the distributor returns 30 unsold copies to Pendant. Based on these facts, how much revenue would Pendant recognize on April 15?

A)$2,800
B)$5,600
C)$7,700
D)$2,400

Question 16

You are an accountant working at Phantastic Pharmaceutical Inc. and have been asked to explain to your controller the possible points at which revenue could be recognized by your organization. Identify two alternatives that are conceptually valid for recognizing revenue at Phantastic.

Question 17

Explain why accounting standards generally prescribe a smaller set of alternatives for revenue recognition.

Question 18

Which of the following is correct about the value creation process?

A)The value creation process is the same for all entities.
B)The value creation process is the same for all industries.
C)Any point on the value creation process is acceptable for revenue recognition.
D)The value creation process is specific to each entity.

Question 19

Which statement is correct about multiple deliverable sales arrangements?

A)The residual value method must be used.
B)The relative fair value method must be used.
C)There is no specific method that must be used.
D)The relative fair value method increases moral hazard.

Question 20

Explain why a company should allocate revenue to multiple deliverables in a sales transaction even if the company delivers all of the products or services in the same accounting period.

Question 21

Which revenue recognition criterion is not satisfied when goods are sold on an installment basis?

A)Transfer of risks and rewards of ownership.
B)Transfer of control over the goods sold.
C)Costs incurred or to be incurred can be reliably measured.
D)Probability that economic benefits will flow to the entity.

Question 22

Which revenue recognition criterion is not satisfied when goods are sold on consignment?

A)The stage of completion can be reliably measured.
B)The transfer of risks and rewards of ownership.
C)Costs incurred can be reliably measured.
D)Managerial control over the goods sold.

Question 23

On December 1, 2012, SuperTech sold 100 locks for laptop computers at $50 each with a 90-day unconditional right of return. Since this is a new product for SuperTech, it has no past history regarding estimated returns. Which of the following is true regarding SuperTech's December 31, 2012 financial statements?

A)Sales of $5,000 should only be recognized in 2013 when the return privilege expires.
B)Sales of $5,000 should be recognized in 2012 as long as there is a reserve for returns.
C)Sales of $5,000 should be recognized in 2012, with future costs accrued as an estimated liability.
D)Sales should only be recognized as the related cash is collected.

Question 24

The publisher of TV Weekly received the following 52-week subscriptions during the first quarter of fiscal 2012. Each subscription is $110, which is a 47% discount off the newsstand price of $4 per issue. Each subscription becomes effective in the calendar month after the company receives the subscription. The company has a December 31 fiscal year. What amount of revenue will the company record in 2012 for the subscriptions received in January? (Round your response to the nearest dollar).

A)$247,142
B)$250,690
C)$433,583
D)$1,279,500

Question 25

On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. The cost of each unit is $600 and the unit selling price is $750. At the end of June, TV World sold 50 units. How much cost of sales should be recorded by Electronics Distribution for the month of June?

A)$37,500
B)$30,000
C)$60,000
D)$75,000

Question 26

In September, Fast-Foods Inc. (FF)sells a franchise for an initial fee of $150,000 and ongoing fees based on 3% of gross profit. FF estimates that 20% of the initial fee relates to initial training, store design and opening activities; the remaining 80% relate to activities to be performed over 3 years. How much revenue should be recorded in September?

A)$4,500
B)$30,000
C)$120,000
D)$150,000

Question 27

Which condition is not necessary to recognize revenue from the sale of goods?

A)When the entity has transferred ownership to the buyer.
B)When the amount of revenue can be measured reliably.
C)When it is probable that the economic benefits will be flow to the entity.
D)When the entity retains no managerial control over the assets.

Question 28

Which of the following statements is correct about the revenue recognition criteria for the provision of services?

A)The outcome of the transaction must be reliably estimable before the percentage of completion method can be used to record revenue.
B)Ownership must pass to the buyer before revenue can be recorded.
C)Stage of completion does not need to be reliably measurable.
D)Control must pass to the buyer before revenue can be recorded.

Question 29

In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. The system costs Telly-Rental $400. Telly-Rental generally earns a gross profit of 15%. How much revenue is recorded by Telly-Rental in July?

A)$0
B)$150
C)$400
D)$1,000

Question 30

In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. The cost of goods sold is $400. How much deferred gross profit is recorded by Telly-Rental in July?

A)$0
B)$400
C)$600
D)$1,000

Question 31

On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. The cost of each unit is $500 and the unit selling price is $800. At the end of June, TV World sold 50 units. How much revenue should be recorded by Electronics Distribution for the month of June?

A)$80,000
B)$50,000
C)$40,000
D)$25,000

Question 32

Which of the following statements about the revenue recognition criteria is not correct?

A)Ownership and control are applicable for the provision of services.
B)Revenue recognition criteria are the same for both sale of goods and provision of services.
C)Stage of completion should be reliably estimable in order to use the percentage of completion method.
D)Percentage of completion is an acceptable method of revenue recognition.

Question 33

What accounting issue arises for recognizing non-monetary transactions?

A)Determining when the risks and rewards are transferred.
B)Determining the stage of completion.
C)Determining the costs incurred or still to be incurred.
D)Determining the amount at which to record the transaction.

Question 34

Harris Corporation sold hardware and software for $70,000. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The normal selling prices are as follows:
a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Question 35

On September 1, 2012, Electric Depot sold 100 laptop computers at $750 each with a 120-day unconditional right of return. Customers have 90 days to pay. Based on past experience, Electric Depot estimates that approximately 1% will be returned. Which of the following is true regarding Electric Depot's December 31, 2012 financial statements?

A)Sales of $75,000 should only be recognized after 120 days when the return privilege expires.
B)Sales of $75,000 should be recognized in September with a reserve for returns of $750.
C)Sales of $75,000 should be recognized in September 2012.
D)Sales should only be recognized as the related cash is collected.

Question 36

The publisher of Accounting Digest received the following 12-month subscriptions during 2012. Each subscription is $100. The company has a December 31 year end. Each subscription becomes effective in the calendar month after the company receives the subscription. What amount of revenue will the company record in 2012 for the subscriptions received between January-March? (Round your response to the nearest dollar).

A)$315,000
B)$779,167
C)$1,051,667
D)$1,260,000

Question 37

Which statement best describes a franchise arrangement?

A)An arrangement in which one party licenses its business practices to another party.
B)An arrangement in which one party exchanges goods or services with another party with little or no consideration.
C)An arrangement in which one party provides goods to another party to sell on its behalf and will accept all goods that are not sold.
D)An arrangement in which one party allows the purchaser to make payments over an extended period of time.

Question 38

DB Inc. sells goods on a variety of terms to its customers, such as some sales on credit, some on consignment, and some on an installment basis. Which of the following revenue recognition methods is most applicable for a company like DB?

A)Installment sales method, if the credit risk is low.
B)Installment method, if credit risk is high.
C)At time of shipment to the consignee, for consignment sales.
D)At the point of sale, if credit risk is very high.

Question 39

In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. Telly-Rental generally earns a gross margin of 25%. The customer pays $500 in December. How much revenue is recorded by Telly-Rental in December?

A)$0
B)$125
C)$250
D)$500

Question 40

An apartment owner receives a deposit of $1200 equal to one month's rent. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.

A)The entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
B)It is probable that the economic benefits associated with the transaction will flow to the entity.
C)Stage of completion - either the coverage period has not yet begun or the period has not elapsed.
D)The amount of revenue can be measured reliably.

Question 41

Through non-subscription sales, TV Weekly provides retailers with a 50% margin (or 100% mark up)on its magazines. The newsstand price is $8 per issue. During 2012, the company distributed 1,654,000 copies to retailers, not all of which were sold. Retailers sent a total of 390,000 unsold copies back to the publisher, of which 30,000 copies were for last two issues published in 2011. In January 2013, the company received 27,000 unsold copies for magazines published in the last weeks of December 2012.
Required:
Determine the amount of revenue from non-subscriptions TV Weekly should recognize in 2012.

Question 42

Here are some financial records for Accounting Plus Magazine which started operations in October 2012. Sales for its first month were as follows: What would be the subscription revenue to be recognized for the month of Oct 2012? (Round to the nearest dollar).

A)$68,333
B)$107,667
C)$774,333
D)$882,000

Question 43

RU FIT Centre opened for business on April 5, 2012. For revenue recognition purposes, all memberships are assumed to be issued at the beginning of the month, with 1-year memberships costing $600 and 2-year memberships costing $960. During April, 32 1-year memberships and 25 2-year memberships were sold. RU FIT Centre prepares monthly financial statements. Which of the following statements is correct?

A)Revenue to be recognized as earned for the month of April is $2,600.
B)Revenue to be recognized as earned for the month of April is $3,600.
C)Revenue to be recognized as earned for the month of April is $43,200.
D)Deferred revenue at April 30 would be $43,200.

Question 44

Which of the following is an acceptable revenue-recognition method?

A)At time of shipment, if warranty uncertainty is not reliably measurable.
B)At time of shipment to the consignee, for consignment sales.
C)Installment method, if credit risk is high.
D)At the point of sale, if credit risk is very high.

Question 45

Based on the note disclosure provided below for BMW Group, when would the following types of revenue be recognized?
a)Consignment sales of vehicles (Sales with repurchase commitments).
b)Financial services.
c)Lease rentals.
d)Post-sale services (Multiple-component contracts).
e)Sale of products.
Revenues from the sale of products are recognized when the risks and rewards of ownership of the goods are transferred to the customer, the sales price is agreed or determinable and receipt of payment can be assumed. Revenues are stated net of discounts, allowances, settlement discount and rebates. In the case of long-term construction work, revenues are generally recognized in accordance with IAS 18 (Revenue)and IAS 11 (Construction Contracts)on the basis of the stage of completion of work performed using the percentage of completion method. Revenues also include lease rentals and interest income from financial services. Revenues for the Financial Operations sub-group also include the interest income earned by Group financing companies.
If the sale of products includes a determinable amount for subsequent services ("multiple-component contracts")the related revenues are deferred and recognized as income over the period of the contract. Amounts are normally recognized as income by reference to the expected pattern of related expenditure.
Profits arising on the sale of vehicles for which a Group company retains a repurchase commitment (buy-back contracts)are not recognized until such profits have been realized. The vehicles are included in inventories and stated at cost.

Question 46

Which of the following methods of revenue recognition would be selected when a vendor has another firm acting as its selling agent?

A)Cost recovery method.
B)Returned goods method.
C)Installment sales method.
D)Consignment sales method.

Question 47

Compare and contrast the revenue recognition criteria for a transaction involving the sale of goods with a transaction involving the provision of services.

Question 48

Simple Inc. had sales of $1,500,000, including: •$30,000 of goods sold that were on consignment from an unrelated company on December 28, 2012
•$10,000 of goods shipped F.O.B shipping point on December 28, 2012.
•$20,000 of goods shipped F.O.B. destination point on December 31, 2012.
On its income statement, what amount of net sales should Simple Inc. record for 2012?

A)$1,440,000
B)$1,470,000
C)$1,480,000
D)$1,490,000

Question 49

Philips Corp. is unsure how to record the following transactions: •$60,000 of goods shipped F.O.B shipping point on December 28, 2012.
•$50,000 of goods shipped F.O.B. destination point on December 31, 2012.
What amount of sales related to these two transactions should Philips Corp. record in fiscal 2012?

A)$0
B)$50,000
C)$60,000
D)$110,000

Question 50

Aurora Gold Company produced 650,000 ounces of gold in 2012. Average sales price was $870/oz. The price was $870/oz at the start of the year and $870/oz at the end of the year. Production cost averaged $588/oz, which has been stable for several years. The company had 50,000 ounces in inventory at the beginning of the year, and 20,000 ounces at the end of the year.
Required:
a)Calculate Aurora Gold's revenue, cost of goods sold, and gross profit, assuming the company recognizes revenue at the point of sale/delivery.
b)Determine the amount that should be shown as ending inventory on Aurora's 2012 balance sheet.

Question 51

In the chart below, identify the revenue recognition method that you feel is most appropriate and also explain why.

Question 52

Soorya Manufacturing makes educational toys that are sold to retailers on the following contractual terms: Each type of toy has a fixed wholesale price, is shipped F.O.B. shipping point, and payment is due 45 days after the shipment. The retailer may return a maximum of 45% of an order at the retailer's expense up to 6 months after delivery. Sales are made only to retailers that have a good credit rating.
Required:
a)Identify four different revenue recognition points that Soorya could use for its sales.
b)What revenue recognition criteria should Soorya use to determine when revenue should be recorded?

Question 53

In the chart below, identify the revenue recognition method that you feel is most appropriate and also explain why.

Question 54

Here are some financial records for Accounting Plus Magazine which started operations in October 2012. Sales for its first month were as follows: What would be the deferred revenue at Oct 31, 2012? (Round to the nearest dollar).

A)$107,667
B)$341,667
C)$774,333
D)$882,000

Question 55

Larimar Computers provides customers the option to purchase products with three installment payments made over 12 months (equal payments at the end of the 4th, 8th, and 12th months). In January 2012, Larimar sold $39,000 of computers to one customer on this installment plan. The cost of these computers is $30,420.
Required:
Using the installment sales method, record the journal entries for Larimar's installment sales made in January 2012 and the subsequent payments received on each installment date. Assume all installment payments are received, and ignore the time value of money.

Question 56

In the chart below, identify the expense recognition method that you feel is most appropriate and also explain why.

Question 57

YMN had sales of $1,500,000, including: •$25,000 of goods shipped on consignment to an unrelated company on December 28, 2012 and received by that company on December 31, 2012
•$20,000 of goods shipped F.O.B. shipping point to a different unrelated party on December 31, 2012 and received on January 2, 2013.
On its income statement, what amount of net sales should YMN record for 2012?

A)$1,455,000
B)$1,475,000
C)$1,525,000
D)$1,545,000

Question 58

Shear Company sells computer equipment with a 2-year warranty. Prior experience indicates that costs associated with this warranty average 1% in the first year and 2% in the second year. In 2012, Shear had sales of $1,800,000. It paid $250,000 for materials and labour to make warranty-related repairs in 2012. What amount should the warranty expense for 2012 be?

A)$18,000
B)$36,000
C)$54,000
D)$250,000

Question 59

Jennifer Furnishings frequently has sales involving "no down payment and no payments for three months." Three months after the purchase date, customers make four equal monthly payments (i.e., they make equal payments 3, 4, 5, and 6 months after purchase). Each payment is one-quarter of the purchase price. The company has a December 31 year-end. During 2012, the company made the following sales on installment plans. Jennifer makes 15% gross profit on these sales.
Required: Using the installment sales method
a)Determine the balance of installment accounts receivable at December 31, 2012.
b)Determine the amount of deferred gross profit as at December 31, 2012. (Round to the nearest whole dollar.)
c)Determine the sales revenue to recognize in 2012 for installment sales made in the year.

Question 60

McNicols started selling franchise locations in April 2012. The franchisee pays continuing fees based on annual sales. The initial fee relates to finding a store location and training the franchisee at McNicols' training facility over a 2-year period.
Required:
a)Explain how McNicols should account for the initial fee.
b)Assume that management estimates that 40% of the value of services related to the initial fee is fulfilled in the first year of signing the franchise agreement. Provide the journal entries to record this revenue in fiscal 2012 and in 2013.
c)Explain how McNicols should account for the ongoing fees.
d)Provide the journal entries to record the ongoing fees in fiscal 2012 and 2013.

Question 61

WestCoast Co. started a contract in June 2011 to build a bridge at a fixed price of $14 million. The bridge was to be completed by October 2013. Total cumulative costs incurred by the end of December 2011 and 2012 were $2 million and $6 million, respectively. WestCoast Co. is unable to estimate the total costs of the project prior to completion. Final costs at the end of the project totaled $11 million.
Required:
Determine the amount of revenue, cost of sales, and gross profit WestCoast Co. would report in 2011, 2012, and 2013.

Question 62

Queensbridge Corp. started a contract in June 2011 to build a bridge at a fixed price of $45 million. The bridge was to be completed by October 2013 at a total estimated cost of $35 million. Total cumulative costs incurred by the end of December 2011 and 2012 were $7 million and $24 million, respectively. Because of cost overruns in 2012, it is now expected that the project will cost $5,000,000 more than originally estimated. Final costs at the end of the project totaled $36 million. Queensbridge Corp. follows the guidance in IFRS.
Required:
Determine the amount of gross profit to be recognized for the years ended December 31, 2011 and December 31, 2012.

Question 63

Ying Construction Company entered into a contract to build a new airport terminal for $2,500,000. Construction commenced on August 1, 2011, with a planned completion date of December 31, 2013. A summary of the costs, billings, and collections is provided below: Ying uses the percentage of completion method. What amount would appear as accounts receivable on Ying's December 31, 2012 balance sheet?

A)$100,000
B)$140,000
C)$1,000,000
D)$1,400,000

Question 64

Soorya Manufacturing makes educational toys that are sold to retailers on the following terms: Each type of toy has a fixed wholesale price, is shipped f.o.b. shipping point, and payment is due 45 days after the shipment. The retailer may return a maximum of 45% of an order at the retailer's expense up to 6 months after delivery. Sales are made only to retailers that have a good credit rating. In Soorya's 11 years of existence, the company has experienced a return rate of approximately 15%, a bad debt expense of 5% of sales and an average collection period of 90 days. Soorya provides a bonus to its senior managers based on annual revenues, net of returns.
Required:
a. What revenue recognition criteria should Soorya use to determine when revenue should be recorded?
b. Discuss the pros and cons for recording revenue when the goods are manufactured by Soorya. Remember to support your reasoning with case facts.
c. Discuss the pros and cons for recording revenue when the goods are shipped to the retailer. Remember to support your reasoning with case facts.
d. Discuss the pros and cons for recording revenue 45 after shipment when payment is due. Remember to support your reasoning with case facts.
e. Recommend the recognition point that Soorya should use in its financial statements.

Question 65

Pool Contractors (PC)entered into a contract to build a solar heated swimming complex for $1,800,000. Construction commenced on July 1, 2011, with a planned completion date of December 31, 2013. A summary of the related accounting information is provided below: How much gross profit would be recognized in fiscal 2012 if PC uses the percentage of completion method?

A)$50,000
B)$100,000
C)$130,000
D)$180,000

Question 66

Lagory Co. started a contract in June 2011 to build a bridge at a fixed price of $14 million. The bridge was to be completed by October 2013. Total cumulative costs incurred by the end of December 2011 and 2012 were $2 million and $6 million, respectively. Lagory Co. is unable to estimate the total costs of the project prior to completion. Final costs at the end of the project totalled $11 million. How much revenue will Lagory Co. report in 2012?

A)$2,000,000
B)$3,000,000
C)$4,000,000
D)$14,000,000

Question 67

How is revenue recognized on a cost plus 7% contract?

A)Revenue is recognized only after the contract is completed.
B)Revenue and expenses are recognized in proportion to the degree of progress.
C)Record an amount of revenue equal to the costs that are expected to be recovered on the contract.
D)Revenue equal to the cost plus 7% profit will be recorded each year.

Question 68

Algae builds large ships and uses the percentage of completion method of revenue recognition. The following information pertains to the construction contracts it had in place as of its December 31, 2012 year-end. How much revenue will Algae recognize in 2011?

A)$260 million
B)$325 million
C)$433 million
D)$1,300 million

Question 69

Early in 2012, Forest Ltd. signed a contract to construct a warehouse. Forest's management estimated the gross profit on the contract to be $740,000, as indicated by the following: At the end of 2012, the status of the work on the contract was as follows:
How much revenue can be recognized on this contract for 2012, assuming that Forest uses the
Percentage of completion basis for long-term construction contracts (round to nearest dollar)?

A)$333,000
B)$863,333
C)$1,575,000
D)$1,711,957

Question 70

Soorya Manufacturing makes educational toys that are sold to retailers on the following terms: Each type of toy has a fixed wholesale price, is shipped F.O.B. shipping point, and payment is due 45 days after the shipment. The retailer may return a maximum of 45% of an order at the retailer's expense up to 6 months after delivery. Sales are made only to retailers that have a good credit rating. In Soorya's 11 years of existence, the company has experienced a return rate of approximately 15%, a bad debt expense of 5% of sales and an average collection period of 90 days. Soorya provides a bonus to its senior managers based on annual revenues, net of returns.
Required:
a. Identify three different revenue recognition points that Soorya could use to record revenue.
b. What revenue recognition criteria should Soorya use to determine when revenue should be recorded?
c. Discuss the pros and cons for 2 alternative recognition points mentioned in point (a). Remember to support your reasoning with case facts.
d. Recommend the recognition point that Soorya should use in its financial statements.

Question 71

Tyco Ltd entered into a contract to build a sports arena for $1,800,000. Construction commenced on August 1, 2011, with a planned completion date of December 31, 2013. A summary of the related accounting information is provided below: How much would the balance in accounts receivable be on the balance sheet of Tyco at the end of 2011 if Tyco uses the percentage of completion method?

A)$110,000
B)$60,000
C)$500,000
D)$660,000

Question 72

Which statement about the percentage of completion method is correct?

A)This method recognizes revenue on a straight-line basis.
B)This method can only be used if there are no uncertainties about how much the contract will cost or how long it will take to complete.
C)This method allocates revenue, not construction costs.
D)This method allocates construction costs, not revenue.

Question 73

Nova Construction Company (NCC)entered into a contract to build a school for $1,800,000. Construction commenced on May 1, 2011, with a planned completion date of December 31, 2013. A summary of the related accounting information is provided below: How much gross profit would be recognized in fiscal 2011 if NCC uses the percentage of completion method?

A)$50,000
B)$100,000
C)$130,000
D)$180,000

Question 74

Jones Contractors Inc. agreed to construct a building for $500,000. Construction commenced in 2011 and was completed in 2013.
Required:
For each of the three years, determine the following amounts relating to the above contract: revenue, expenses, gross profit, accounts receivable balance, and construction-in-process inventory balance.

Question 75

Nichols Construction Company (NCC)entered into a contract to build a shopping complex for $1,900,000. Construction commenced on July 1, 2011, with a planned completion date of December 31, 2013. A summary of the related accounting information is provided below: How much would the balance in accounts receivable be on the balance sheet of NCC at the end of 2012 if NCC uses the percentage of completion method?

A)$130,000
B)$390,000
C)$790,000
D)$1,100,000

Question 76

Explain how a company records revenue and expenses for a long-term contract under IFRS. Include an explanation of how changes in estimates are accounted for under this method.

Question 77

Which statement best explains the percentage of completion method?

A)An accounting method that recognizes revenue and expenses on a contract only after it is completed.
B)An accounting method that recognizes revenue and expenses on a contract in proportion to the degree of progress.
C)An accounting method that recognizes an amount of revenue equal to the costs that are expected to be recovered on the contract.
D)An accounting method that recognizes revenue and expenses based on the fair value of the contract.

Question 78

Yang Construction Company entered into a contract to build a new airport terminal for $2,500,000. Construction commenced on August 1, 2011, with a planned completion date of December 31, 2013. A summary of the costs, billings, and collections is provided below: Yang uses the percentage of completion method. How much gross profit would Yang recognize in 2012?

A)$100,000 loss
B)$75,000 loss
C)$50,000 profit
D)$100,000 profit

Question 79

Sunshine Contractors started a contract in January 2011 to build a bridge at a fixed price of $14 million. The bridge was to be completed by October 2013. Total cumulative costs incurred by the end of December 2011 and 2012 were $2 million and $6 million, respectively. Sunshine is unable to estimate the total costs of the project prior to completion. Final costs at the end of the project totaled $11 million. How much cost of sales will Sunshine report in 2013?

A)$3,000,000
B)$5,000,000
C)$8,000,000
D)$11,000,000

Question 80

Nichols Construction Company (NCC)entered into a contract to build a shopping complex for $1,900,000. Construction commenced on July 1, 2011, with a planned completion date of December 31, 2013. A summary of the related accounting information is provided below: How much would the balance in accounts receivable be on the balance sheet of NCC at the end of 2013 if NCC uses the percentage of completion method?

A)$0
B)$250,000
C)$290,000
D)$800,000