Question 1

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 2021, Shear had sales of $1,800,000. It paid $250,000 for materials and labour to make warranty-related repairs in 2021. What amount should the warranty expense for 2021 be?
A)$18,000
B)$36,000
C)$54,000
D)$250,000

Accepted Answer

The warranty expense for 2021 should include the cost of repairs made in 2021 and the estimated cost of repairs for future years. Since the warranty lasts for 2 years, the estimated cost for future years would be 1% of sales for the first year of the warranty period and 2% of sales for the second year of the warranty period.

Estimated cost for future years:
Year 1: 1% of $1,800,000 = $18,000
Year 2: 2% of $1,800,000 = $36,000

Total estimated cost for future years = $54,000

Therefore, the warranty expense for 2021 would be:
$250,000 (cost of repairs made in 2021) + $54,000 (estimated cost for future years) = $304,000

The best choice is C, $54,000.

Question 2

Which of the following is TRUE when goods are sold on consignment?
A)The customer has taken physical possession of the asset.
B)The selling entity has the present right to payment for the asset.
C)The significant risks and rewards of ownership have been transferred.
D)The customer has accepted the asset.

Accepted Answer

The customer has taken physical possession of the asset.

Question 3

Which of the following is TRUE when goods are sold on on an installment basis?
A)Revenue is recognized at time of the initial sale.
B)Cost of goods sold is debited for the cost of the merchandise sold.
C)Revenue is not recognized until all monies due under the contract have been collected.
D)The deferred gross profit liability is debited as cash is collected.

Accepted Answer

In installment sales, revenue is recognized as cash is collected, and the deferred gross profit liability is reduced (debited) as each installment payment is received.

Question 4

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.

Accepted Answer

A franchise arrangement is a type of licensing agreement where the franchisor (one party) grants the franchisee (another party) the right to use its trademark, products, and processes for a fee or percentage of revenue. The franchisor provides support, ongoing training, and assistance to ensure the franchisee's success while maintaining quality standards across all locations. Examples of well-known franchises include McDonald's, Subway, and Marriott.

Question 5

The publisher of Accounting Digest received the following 12-month subscriptions during 2021. 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 2021 for the subscriptions received between January-March? (Round your response to the nearest dollar). $$\begin{array} { | l | l | } 
\hline { \text { Month } } & \text { Subscription Received } \
\hline \text { Tanuary } & 4,300 \
\hline \text { February } & 4,200 \
\hline \text { March } & 4,100 \
\hline \text { April } & 4,400 \
\hline \text { May } & 6,100 \
\hline
\end{array}$$
A)$315,000
B)$779,167
C)$1,051,667
D)$1,260,000

Accepted Answer

The answer of The publisher of Accounting Digest received the...

Question 6

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

Accepted Answer

Deferred gross profit is the profit that is yet to be earned on installment sales. It is calculated by subtracting the cost of goods sold from the total selling price and dividing the result by the number of installments. In this case, there is only one installment, so the entire gross profit is deferred. Therefore, deferred gross profit is $1,000 - $400 = $600. Hence, the correct answer is (C) $600.

Question 7

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, 2021
•$10,000 of goods shipped F.O.B shipping point on December 28, 2021.
•$20,000 of goods shipped F.O.B. destination point on December 31, 2021.
On its income statement, what amount of net sales should Simple Inc. record for 2021?
A)$1,440,000
B)$1,470,000
C)$1,480,000
D)$1,490,000

Accepted Answer

The consignment sales of $30,000 should be excluded from Simple Inc.'s sales, as they are not owned by the company. The $10,000 of goods shipped F.O.B shipping point should be included as they are considered sold when shipped. The $20,000 of goods shipped F.O.B. destination should not be included as they are not considered sold until they reach the destination. Therefore, net sales = $1,500,000 - $30,000 - $20,000 = $1,480,000.

Question 8

Philips Corp. is unsure how to record the following transactions: •$60,000 of goods shipped F.O.B shipping point on December 28, 2021.
•$50,000 of goods shipped F.O.B. destination point on December 31, 2021.
What amount of sales related to these two transactions should Philips Corp. record in fiscal 2021?
A)$0
B)$50,000
C)$60,000
D)$110,000

Accepted Answer

According to FOB (Free On Board) shipping terms, ownership and responsibility for the goods transfer from the seller to the buyer at a specific point of delivery. For FOB shipping point, the ownership transfers to the buyer once the goods are shipped and leave the seller's facility. For FOB destination point, the ownership transfers to the buyer once the goods are delivered to their final destination.

In the first transaction, since the goods were shipped FOB shipping point on December 28, 2021, the ownership and responsibility for the goods transferred to the buyer on that day. Therefore, Philips Corp. can record the $60,000 as sales revenue for fiscal 2021.

In the second transaction, since the goods were shipped FOB destination point on December 31, 2021, the ownership and responsibility for the goods did not transfer to the buyer until they were delivered to their final destination. Therefore, Philips Corp. cannot record the $50,000 as sales revenue for fiscal 2021 since it was not delivered until after the fiscal year end.

Thus, the best choice is C, which is $60,000.

Question 9

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

Accepted Answer

Since the TVs were sent on consignment, Electronics Distribution still owns the inventory until it is sold by TV World. Therefore, Electronics Distribution should not record any cost of sales until the TVs are sold by TV World. The cost of sales for the 50 units sold by TV World would be $30,000 (50 units x $600 cost per unit).

Question 10

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.

Accepted Answer

The installment method is an acceptable revenue-recognition method when credit risk is high. This method allows revenue and cost recognition to occur as cash is collected, which is appropriate in scenarios where there's significant uncertainty about the collectability of the receivables.

Question 11

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

Accepted Answer

The answer of In July, Telly-Rental sells a home theatre...

Question 12

The publisher of TV Weekly received the following 52-week subscriptions during the first quarter of fiscal 2021. 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 2021 for the subscriptions received in January? (Round your response to the nearest dollar). $$\begin{array} { | c | l | } 
\hline  { \text { Month } } & \text { Subscription Received } \
\hline \text { Tanuary } & 4,300 \
\hline \text { February } & 4,200 \
\hline \text { March } & 4,100 \
\hline
\end{array}$$
A)$247,142
B)$250,690
C)$433,583
D)$1,279,500

Accepted Answer

The answer of The publisher of TV Weekly received the...

Question 13

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

Accepted Answer

Only the portion of the initial fee that relates to initial training, store design, and opening activities can be recognized as revenue in September. Therefore, revenue recognized in September would be 20% of the initial fee, which is $30,000 (20% x $150,000). The ongoing fees based on 3% of gross profit cannot be recognized as revenue until the related sales occur.

Question 14

YMN had sales of $1,500,000, including: •$25,000 of goods shipped on consignment to an unrelated company on December 28, 2021 and received by that company on December 31, 2021
•$20,000 of goods shipped F.O.B. shipping point to a different unrelated party on December 31, 2021 and received on January 2, 2022.
On its income statement, what amount of net sales should YMN record for 2021?
A)$1,455,000
B)$1,475,000
C)$1,525,000
D)$1,545,000

Accepted Answer

YMN should not include the $25,000 of goods shipped on consignment in its net sales for 2021 since it has not yet been received by the customer by the end of the year. Therefore, net sales should be $1,475,000 ($1,500,000 - $25,000 consignment shipment + $20,000 F.O.B. shipping point shipment).

Question 15

On September 1, 2021, 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, 2021 financial statements?
A)Sales of $75,000 should only be recognized after 120 days when the return privilege expires.
B)Sales of $74,250 should be recognized and a provision for refund liability of $750 established in September.
C)Sales of $75,000 should be recognized in September 2021.
D)Sales should only be recognized as the related cash is collected.

Accepted Answer

According to the revenue recognition principle, revenue should be recognized when it is earned and the payment is reasonably assured. In this case, Electric Depot sold 100 laptops for $750 each, resulting in total revenue of $75,000. However, since the customers have a 120-day unconditional right of return, the revenue cannot be recognized until this period has elapsed. Therefore, option A is incorrect.

Additionally, since customers have 90 days to pay, the revenue cannot be recognized until payment is reasonably assured. Therefore, option D is incorrect.

Regarding the estimate of returns, Electric Depot estimates a return rate of 1%. Therefore, it is reasonable to assume that out of the 100 laptops sold, 1 will be returned. This means that the actual revenue earned is $74,250 ($75,000 - $750 for the estimated return).

According to the matching principle, a provision for refund liability should be established at the time of sale, and this amount should be deducted from the total revenue. Therefore, option B is correct. By establishing a provision for refund liability of $750 at the time of sale, the net revenue recognized in September 2021 will be $74,250.

Option C is incorrect because revenue cannot be recognized until the right of return period has elapsed, even if it is estimated that only 1% of units will be returned.

Question 16

Harris Corporation sold hardware and software for $70,000 cash. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The observable stand-alone selling prices are as follows:
$$\begin{array} { | l | l | } 
\hline \text { Hardware } & \$ 60,070 \
\hline \text { Software } & \$ 8,900 \
\hline \text { Hardware Maintenance } & \$ 4,000 \
\hline
\end{array}$$ 
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 for the various components of this transaction.

Accepted Answer

The answer of Harris Corporation sold hardware and software for...

Question 17

RU FIT Centre opened for business on April 5, 2021. 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.

Accepted Answer

The answer of RU FIT Centre opened for business on...

Question 18

On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. Electronic Distribution's pays its wholesaler $500 for each TV. It then sells each TV for $800 to its retail customers including TV World. 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

Accepted Answer

Since Electronics Distribution ships the TVs on consignment, it does not recognize revenue for the sale until TV World sells the TVs to its customers. Therefore, no revenue is recognized for the 100 TVs shipped in June. The cost of the 100 TVs shipped in June is $500 x 100 = $50,000. Since TV World sold 50 units, Electronics Distribution will recognize revenue for those 50 units in July. The revenue recognized will be 50 units x $800 per unit = $40,000.

Question 19

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)$125
B)$250
C)$500
D)$1,000

Accepted Answer

Revenue is recognized when it is earned, regardless of when the cash is received. In this case, the entire $1,000 from the sale of the home theatre is recognized as revenue in December when the sale occurs, not just the $500 received.

Question 20

On December 1, 2021, 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, 2021 financial statements?
A)Sales of $5,000 should only be recognized in 2022 when the return privilege expires.
B)Sales of $5,000 should be recognized in 2021 as long as there is a reserve for returns.
C)Sales of $5,000 should be recognized in 2021, with future costs accrued as an estimated liability.
D)Sales should only be recognized as the related cash is collected.

Accepted Answer

Since SuperTech has no past history to estimate returns, it cannot reliably estimate the amount of returns. Therefore, revenue recognition should be deferred until the return privilege expires.

Quiz 4: Revenue and Recognition

Which of the following is TRUE when goods are sold on consignment?

Which of the following is TRUE when goods are sold on on an installment basis?

Which statement best describes a franchise arrangement?

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?

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?

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

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?

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?