Question 1

When it is probable that total contract costs will exceed total contract revenue,the expected loss should not be recognised as an expense until the future economic sacrifice eventuates.

Accepted Answer

According to accounting standards such as IFRS and GAAP, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized immediately as an expense, not delayed until the loss eventuates.

Question 2

In most cases dividend revenue should not be recognised until the dividend proposed has been ratified by the shareholders at the annual general meeting:

Accepted Answer

False

Question 3

Where the percentage of completion method is based on costs,costs that relate to the contract activity generally and are not normally related to specific contracts,such as finance costs,should be allocated across the projects currently in progress:

Accepted Answer

Under the percentage-of-completion method, costs that are general and administrative in nature or cannot be directly linked to a specific contract, such as finance costs, are typically not allocated to individual projects but are expensed as incurred.

Question 4

With the 'percentage-of-completion' method of accounting for construction contracts,profit is recognised in proportion to the work performed in each reporting perioD.

Accepted Answer

This is the correct definition of the percentage-of-completion method of accounting for construction contracts. Profit is recognised based on the progress made towards completion of the project in each reporting period.

Question 5

Gains must be reported net of related expenses:

Accepted Answer

The answer of Gains must be reported net of related...

Question 6

If the borrower prepays interest,the inflow of future economic benefits represented by the prepayment would not constitute an item of revenue to the lender because the lender has a present obligation to the borrower to provide finance for the period to which the prepayment relates.

Accepted Answer

If the borrower prepays interest, the lender has a present obligation to provide finance for the period to which the prepayment relates, so the inflow of future economic benefits represented by the prepayment would not be recognized as revenue.

Question 7

Revenues may be generated by:

Accepted Answer

Revenues can be generated through various means, including ordinary activities, holding and disposing of inventory, having a liability forgiven, and receiving donations.

Question 8

Construction costs plus gross profit earned to date from a construction contract are accumulated in the construction in progress account less progress billings and these are disclosed in the liability section of the statement of financial position.

Accepted Answer

Construction in progress (CIP) is an asset account on the balance sheet, reflecting the costs incurred plus gross profit earned to date on a construction contract, less progress billings. It is not disclosed in the liability section but rather in the assets section, as it represents the ongoing investment in construction projects not yet completed.

Question 9

When the gross method is used to record the interest inherent in a sales transaction,it is typical for the accrued interest to be offset against the note receivable:

Accepted Answer

In the gross method, the interest inherent in a sales transaction is typically recorded separately and not offset against the note receivable. The note receivable is recorded at its face value, and the interest income is recognized over time as it accrues.

Question 10

Gains never arise from the ordinary activities of an entity:

Accepted Answer

Gains can arise from the ordinary activities of an entity, such as increasing sales or reducing costs. However, gains can also arise from non-routine or extraordinary activities, such as the sale of an asset or the settlement of a lawsuit.

Question 11

When making a provision for doubtful debts,debtors' subsidiary ledgers are not adjusted,as the provision is made in anticipation of likely unrecoverability of amounts owing,although the identity of who will not pay is unknown:

Accepted Answer

This statement is true. When making a provision for doubtful debts, the debtors' subsidiary ledgers are not adjusted as the provision is made in anticipation of likely unrecoverability of amounts owing, although the identity of who will not pay is unknown. The provision is based on an estimate or approximation of the expected loss. Adjusting the subsidiary ledgers would be unnecessary and time-consuming, as it is not feasible to identify which specific debtors are unlikely to pay at the time of making the provision.

Question 12

AASB 118 requires revenues to be measured in terms of historical cost to improve reliability:

Accepted Answer

AASB 118 requires revenues to be measured at the fair value of the consideration received or receivable, except in limited circumstances, rather than in terms of historical cost. This is because fair value is considered to provide a more relevant and reliable measure of revenue than historical cost.

Question 13

The AASB Framework now divides revenues into 'income' and 'gains':

Accepted Answer

The AASB Framework does not specifically divide revenues into 'income' and 'gains'; rather, it defines income as encompassing both revenue and gains.

Question 14

Unearned revenues are assets treated as liabilities,as these are received by a business for services to be performed at a future date.

Accepted Answer

Unearned revenues refer to the cash received by a business in advance for services that it is obligated to perform at a later date. Since the service has not yet been provided, the money received in advance is treated as a liability until the service is performed, at which point it is recognized as revenue.

Question 15

Accounting standards require that the provision for doubtful debts should be shown as a deduction from the class of assets to which it relates.The net expense in relation to bad and doubtful debts must also be disclosed

Accepted Answer

This statement accurately reflects the accounting standards for provisions for doubtful debts. The amount must be deducted from the relevant class of assets (usually accounts receivable) and the net expense related to bad and doubtful debts must be disclosed in the financial statements.

Question 16

An entry to an asset revaluation reserve is an example of the general rule that indicates that holding gains are not typically included as income:

Accepted Answer

An entry to an asset revaluation reserve is an example of the general rule that holding gains should not be recognized as income, as it represents an increase in the value of an asset that has not yet been realized through a sale or disposal, and therefore should not be considered as earnings.

Question 17

Transactions that result in an inflow of economic benefits such as the purchase of assets can be classified as a gain:

Accepted Answer

Purchasing assets does not classify as a gain; it is considered an investment or an expense, depending on the nature of the asset. Gains typically refer to increases in economic benefits from the sale of assets or the settlement of liabilities at an amount more than their carrying amount.

Question 18

Under the AASB Framework a saving in an outflow through the reduction of a liability that is not a contribution by equity participants,and results in an increase in equity during the reporting period,was income:

Accepted Answer

According to the AASB Framework, a saving in an outflow through the reduction of a liability that is not a contribution by equity participants and results in an increase in equity during the reporting period is recognized as income. Hence, option A is correct.

Question 19

When the outcome of a construction contract can be estimated reliably,contract revenue and contract costs associated with the construction contract shall be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date.

Accepted Answer

This statement is in accordance with International Financial Reporting Standards (IFRS 15) and is true.

Question 20

If a company sells its product but gives the buyer the right to return the product,AASB 118 requires revenue from the sales transaction to be recognised at the time of sale.

Accepted Answer

AASB 118 states that revenue from sales transactions should only be recognized if it is probable that the economic benefits associated with the transaction will flow to the seller and the amount of revenue can be reliably measured. If a company sells a product but gives the buyer the right to return the product, then it is not certain that the economic benefits will flow to the seller and the amount of revenue cannot be reliably measured at the time of the sale. Therefore, revenue recognition should be deferred until it is certain that the buyer will not exercise their right to return the product.

Quiz 16: Revenue Recognition Issues