Question 1

IFRS and GAAP will sometimes differ in the method of revenue recognition applied to construction contracts. Three different methods are involved: percentage of completion, cost recovery, and completed contract. The fastest to slowest revenue recognition among the methods is

Accepted Answer

The fastest method of revenue recognition is percentage of completion, where revenue is recognized as work progresses. The second method is cost recovery, where revenue is recognized only after all costs have been recovered. The slowest method is completed contract, where revenue is not recognized until the contract is completed. Therefore, the correct order of revenue recognition from fastest to slowest is percentage of completion, cost recovery, and completed contract. Choice C is the only option that presents this order.

Question 2

When revenue is recognized in the period of the sale, generally

Accepted Answer

The recognition of revenue in the period of the sale means that a sale has been made and the customer has accepted the goods or services provided. This indicates that realization has occurred, which means that the seller has fulfilled its obligation and revenue can be earned. Cash may or may not have been received at the time of the sale.

Question 3

When a sufficient transfer of the risks and benefits of ownership does not exist in a sales transaction, the preferred revenue recognition method is the

Accepted Answer

The deferral method is the most appropriate in situations where sufficient transfer of risks and benefits of ownership does not occur in a sales transaction, as revenue recognition is deferred until the transfer occurs. The other methods may not be appropriate in such cases.

Question 4

When a company uses the percentage-of-completion method for revenue recognition, the most difficult approach to determine the percentage completed is using

Accepted Answer

The answer of When a company uses the percentage-of-completion method...

Question 5

Anticipated losses are recognized immediately under which of the following methods of recognizing revenue?

Accepted Answer

The answer of Anticipated losses are recognized immediately under which...

Question 6

Which method of revenue recognition do IFRS require for construction contracts when the percentage-of-completion method cannot be applied?

Accepted Answer

When the percentage-of-completion method cannot be applied, IFRS requires the use of the cost recovery method. This means that revenue cannot be recognized until the costs of the construction contract are fully recovered.

Question 7

Which of the following revenue recognition methods can be used by long-term construction companies in most circumstances?

Accepted Answer

The answer of Which of the following revenue recognition methods...

Question 8

When Partial Billings exceeds Construction in Progress, under the completed-contract method the two accounts are reported together on the balance sheet in the

Accepted Answer

When Partial Billings exceeds Construction in Progress under the completed-contract method, the excess is reported as a liability because it represents an amount received in excess of the earnings to date. Therefore, it is shown in the current liabilities section of the balance sheet.

Question 9

Under the completed-contract method of revenue recognition, the partial billings account is closed out against the

Accepted Answer

The answer of Under the completed-contract method of revenue recognition,...

Question 10

Inventory is reported at cost plus gross profit recognized to date under which of the following revenue recognition methods?

Accepted Answer

The percentage of completion method recognizes revenue and gross profit based on the proportion of work completed. Under this method, inventory is reported at cost plus gross profit recognized to date, which reflects the progress made towards completing the contract. Therefore, option D is the correct choice. The other options (A, B, and C) do not involve reporting inventory at cost plus gross profit recognized to date.

Question 11

When a down payment is received, the deposit from purchaser account used under the deferral method is reported on the balance sheet of the seller as a(n)

Accepted Answer

When a down payment is received, the deposit from purchaser account is initially recorded as a liability in the balance sheet of the seller. This is because the seller has not yet fulfilled its obligation under the contract, so the deposit represents an obligation to the purchaser. As the contract is fulfilled and revenue is earned, the liability is gradually reduced, and the revenue is recognized in the income statement. Therefore, the correct answer is B) liability.

Question 12

The deferral method is usually associated with

Accepted Answer

The answer of The deferral method is usually associated with
...

Question 13

For long-term construction contracts, when there is not assurance that the buyer can be expected to satisfy its obligations under a contract, which of the following revenue recognition methods is preferable?

Accepted Answer

The completed-contract method is the best choice for long-term construction contracts when there is uncertainty regarding the buyer's ability to satisfy their obligations. This is because revenue is only recognized upon completion of the contract, reducing the risk of recognizing revenue that may not be collected. This method also allows for more accurate matching of expenses with revenue.

Question 14

The installment method is usually associated with

Accepted Answer

The installment method recognizes revenue after the period of sale, as it allows revenue and profit to be recognized as the cash payments are received from customers, rather than at the point of sale.

Question 15

Specific industry guidance regarding revenue recognition is prevalent in

Accepted Answer

Industry-specific guidance for revenue recognition is provided in ASC 606-10-55 for the following topics: 1. Software 2. Real Estate 3. Time-share arrangements 4. Non-monetary exchanges 5. Construction 6. Telecommunications 7. Extractive industries 8. Healthcare 9. Entertainment and media 10. Airlines 11. Asset management

Question 16

Under the percentage of completion method of revenue recognition, Partial Billings could be reported on the balance sheet as a

Accepted Answer

The answer of Under the percentage of completion method of...

Question 17

A Provision for Loss on Contract is reported in the financial statements as a(n)

Accepted Answer

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Question 18

The proportional performance method is usually associated with

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Question 19

Exhibit 17-1 In 2014, Omega Construction began work on a contract with a price of $850,000 and estimated costs of $595,000. Data for each year of the contract are as follows:

- Refer to Exhibit 17-1. Under the percentage-of-completion method of revenue recognition, gross profit in 2014 would be

Accepted Answer

The answer of Exhibit 17-1 In 2014, Omega Construction began...

Question 20

Revenue recognition prior to period of sale is used to reflect

Accepted Answer

Revenue recognition prior to period of sale is used to reflect economic substance instead of legal form. This means that the revenue is recognized based on the substance of the transaction rather than the legal form. This approach ensures that the financial information is more reliable and accurately reflects the actual economic activity of the company.

Quiz 17: Advanced Issues in Revenue Recognition