Question 1

Which type of business would be most likely to use the instalment method to record revenue?

Accepted Answer

Real estate developers often use the installment method to record revenue since they sell properties on an installment basis, meaning that the buyer pays in installments rather than one lump sum. This method allows them to recognize revenue gradually as payments are received. The other businesses listed generally do not sell their products or services on an installment basis.

Question 2

Which of the following is not a condition that must be met under AASB 118 'Revenue' before revenue from the sale of goods is recorded?

Accepted Answer

AASB 118 requires the seller to transfer ownership, and for the amount of revenue and related costs to be reliably measured, but cash receipt is not a condition before recording revenue from the sale of goods.

Question 3

Table 17-1
 In 2016, a developer sells land for $ \$ 800,000 $. The cost of the land was $ \$ 500,000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300,000 $, $ \$ 200000 $ and $ \$ 100,000 $ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.
-Refer to Table 17-1.What is the developer's gross profit?

Accepted Answer

The answer of Table 17-1
 In 2016, a developer sells...

Question 4

Which business would be most likely to use the percentage of completion method to record income?

Accepted Answer

The percentage of completion method is typically used in industries where long-term contracts and projects are common, such as construction firms. It allows for revenue and expenses to be recognized over time, based on the percentage of completion of the project.

Question 5

Table 17-1
 In 2016, a developer sells land for $ \$ 800,000 $. The cost of the land was $ \$ 500,000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300,000 $, $ \$ 200000 $ and $ \$ 100,000 $ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.
-Refer to Table 17-1.What amount of profit will be recorded when the 2019 payment is received?

Accepted Answer

The profit is recognized proportionally as payments are received. By 2019, the developer has received all payments. The total profit is $300,000 ($800,000 - $500,000). The 2019 payment is $100,000, which is 1/8 of the total payments ($800,000). Thus, 1/8 of the profit is recognized in 2019, which is $37,500. However, the interest component must be deducted. The interest for 2019 is $28,409 ($100,000 - $71,591 present value of $100,000 at 10% for 3 years). Therefore, the profit recorded in 2019 is $37,500 - $28,409 = $9,091.

Question 6

A construction firm was contracted to build a bridge for $100 000 000.It is estimated that the total cost will be roughly $95 000 000 spread over five years,but it is unable to estimate reliably the yearly percentage of completion.Under the completed contract method,what amount of profit will be recorded in Year 2?

Accepted Answer

Under the completed contract method, revenue, expenses, and profit are recognized only when the project is completed. Therefore, no profit will be recorded in Year 2 as the project is not yet completed.

Question 7

The total contract price to build an office building is $4 200 000,with estimated costs of $2 800 000.The construction firm's costs for Year 1 were $800 000.Under the percentage of completion method,gross profit reported in Year 1 is:

Accepted Answer

Under the percentage of completion method, the gross profit is calculated based on the proportion of costs incurred to total estimated costs. In Year 1, the costs incurred are $800,000 out of the total estimated costs of $2,800,000, which is 28.57%. The total gross profit expected is $1,400,000 ($4,200,000 - $2,800,000). Therefore, the gross profit for Year 1 is 28.57% of $1,400,000, which is approximately $400,000.

Question 8

Alpha Hardware sells on the instalment plan.Sales-related figures for Alpha hardware for 2017 were as follows: sales,$700 000;down payments on the sales,$70 000;collections on instalments $300 000;beginning inventory,$50 000;ending inventory,$40 000;and purchases,$410 000.What is Alpha Hardware's gross profit for 2017 using the instalment method?

Accepted Answer

Using the instalment method, gross profit is determined as (collections on instalments - cost of goods sold), where cost of goods sold is determined as (beginning inventory + purchases - ending inventory). 
Therefore, gross profit = ($300,000 - ($50,000 + $410,000 - $40,000)) = $280,000. 
Therefore, the correct answer is B.

Question 9

In 2017,Amana sold 10 refrigerators that cost $825 each for a price of $1 285 each.Payments are made in 10 equal instalments with no down payment.During 2018,Amana collected $10 285 on the 2017 sales.Using the instalment method and assuming an interest rate of 10%,how much gross profit will Amana recognise in 2018?

Accepted Answer

In 2017, the total sales were $12,850 (10 refrigerators x $1,285). The cost was $8,250 (10 refrigerators x $825), resulting in a gross profit of $4,600. The gross profit percentage is $4,600 / $12,850 = 35.8%. In 2018, Amana collected $10,285, so the recognized gross profit is 35.8% of $10,285, which is approximately $3,680. However, the question asks for the gross profit recognized in 2018, which is the difference between the total gross profit and the amount recognized in 2017. Since the total gross profit is $4,600, and $3,680 is recognized in 2018, the remaining $920 was recognized in 2017. Therefore, the gross profit recognized in 2018 is $4,600 - $3,680 = $920. However, the closest option to this calculation is $790, which might be due to rounding or a slight error in the provided options.

Question 10

Which profit recognition method is the most conservative?

Accepted Answer

The collection (receipt of cash) method is the most conservative because it recognizes profit only when cash is actually received, minimizing the risk of recognizing revenue that may not be collected.

Question 11

Table 17-1
 In 2016, a developer sells land for $ \$ 800,000 $. The cost of the land was $ \$ 500,000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300,000 $, $ \$ 200000 $ and $ \$ 100,000 $ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.
-Refer to Table 17-1.What amount of profit will be recorded when the 2017 payment is received?

Accepted Answer

The profit recorded when the 2017 payment is received is the difference between the amount of the payment and the cost of the land multiplied by the percentage of the payment that represents profit. The cost of the land is $ \$ 500,000 $ and the amount of the payment is $ \$ 300,000 $. The percentage of the payment that represents profit is $ 100 \% - 10 \% = 90 \% $. Therefore, the profit recorded when the 2017 payment is received is $ \$ 300,000 \times 90 \% = \$ 270,000 $.

Question 12

On 1 April 2017,Babies Unlimited sold a crib with accessories,which cost $1 000,for $1 500.It was sold for 10% deposit,with the balance to be paid in six equal payments beginning on 1 May 2017.How much sales revenue is recognised in the calendar year 2017 under the instalment method?

Accepted Answer

The answer of On 1 April 2017,Babies Unlimited sold a...

Question 13

Table 17-1
 In 2016, a developer sells land for $ \$ 800,000 $. The cost of the land was $ \$ 500,000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300,000 $, $ \$ 200000 $ and $ \$ 100,000 $ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.
-Refer to Table 17-1.What amount of profit will be recorded when the developer makes the sale and receives the down payment?

Accepted Answer

The answer of Table 17-1
 In 2016, a developer sells...

Question 14

Helen Hines,Solicitor,performed bankruptcy services for a client and billed the full fee of $6 000 on 20 September 2017.Hines is uncertain if she will collect the fee.At 31 December 2017,she had collected $900 and in 2018 has collected an additional $2 000.How much service revenue should Hines report in 2017 and 2018,respectively?

Accepted Answer

The correct answer is B because the revenue recognition principle states that revenue should be recognized when it is earned and not when it is collected. In this case, Hines earned the revenue when she performed the services in 2017, so she should recognize $900 of revenue in 2017 and $2,000 of revenue in 2018.

Question 15

Saunders Hardware sells on the instalment plan.Sales-related figures for Saunders Hardware for 2017 were as follows: sales,$600 000;down payments on the sales,$60 000;collections on instalments,$250 000;beginning inventory,$90 000;ending inventory $60 000;and purchases,$400 000.What is Saunders Hardware's gross profit using the sales method of income recognition?

Accepted Answer

To calculate the gross profit using the sales method of income recognition, we only consider the sales made during the year and the cost of goods sold related to those sales. We ignore the collections on instalments and down payments on sales.

The cost of goods sold can be calculated as:

Beginning inventory + Purchases - Ending inventory 
= $90,000 + $400,000 - $60,000 
= $430,000

Therefore, gross profit = Sales - Cost of goods sold 
= $600,000 - $430,000 
= $170,000

Hence, the correct answer is B.

Question 16

Build-it-Better Constructions received a contract to build a convention centre for $23 000 000.It estimated total costs to be $16 000 000 over a three-year construction period: $5 000 000 in Year 1,$7 000 000 in Year 2,and $4 000 000 in Year 3.What is the total project revenue from the convention centre?

Accepted Answer

The total project revenue is the amount they received for the contract, which is $23 000 000.

Question 17

When both the total profit on the contract and the progressive degree of completion during construction can be reliably estimated,a construction firm should record income on a long-term construction project using the:

Accepted Answer

The percentage of completion method should be used when both the total profit on the contract and the progressive degree of completion during construction can be reliably estimated. Under this method, revenue is recognized based on the percentage of work completed. This method provides a more accurate picture of the financial performance of the project and matches expenses with revenue as they are incurred, resulting in a more accurate measurement of profitability.

Question 18

Luke's Construction receives a contract to build a bridge for $6 000 000,with an estimated cost of $4 000 000.Over the three-year construction period,the costs are estimated to be $500 000 in Year 1,$3 200 000 in Year 2 and $300 000 in Year 3.How much construction revenue would be reported in Year 2 using the percentage of completion method?

Accepted Answer

The answer of Luke's Construction receives a contract to build...

Question 19

Table 17-1
 In 2016, a developer sells land for $ \$ 800,000 $. The cost of the land was $ \$ 500,000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300,000 $, $ \$ 200000 $ and $ \$ 100,000 $ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.
-Refer to Table 17-1.What amount of profit will be recorded when the 2018 payment is received?

Accepted Answer

The answer of Table 17-1
 In 2016, a developer sells...

Question 20

In 2017,Amana sold 10 washing machines,which cost $700 each,for a price of $1 300 each.All sales are made on credit and $7 000 was collected in 2017.Using the sales method,how much gross profit will Amana recognise in 2017?

Accepted Answer

Gross profit = Sales revenue - Cost of goods sold= (10 x $1,300) - (10 x $700)= $13,000 - $7,000= $6,000

Quiz 17: The Framework of Accounting

Which type of business would be most likely to use the instalment method to record revenue?

Which of the following is not a condition that must be met under AASB 118 'Revenue' before revenue from the sale of goods is recorded?

Which business would be most likely to use the percentage of completion method to record income?

The total contract price to build an office building is $4 200 000,with estimated costs of $2 800 000.The construction firm's costs for Year 1 were $800 000.Under the percentage of completion method,gross profit reported in Year 1 is:

Which profit recognition method is the most conservative?

On 1 April 2017,Babies Unlimited sold a crib with accessories,which cost $1 000,for $1 500.It was sold for 10% deposit,with the balance to be paid in six equal payments beginning on 1 May 2017.How much sales revenue is recognised in the calendar year 2017 under the instalment method?

When both the total profit on the contract and the progressive degree of completion during construction can be reliably estimated,a construction firm should record income on a long-term construction project using the:

In 2017,Amana sold 10 washing machines,which cost $700 each,for a price of $1 300 each.All sales are made on credit and $7 000 was collected in 2017.Using the sales method,how much gross profit will Amana recognise in 2017?