Question 1

Baywatch Construction contracted to build a ship over a two year period.The contract price was $21,000,000 with an estimate total cost of $18,400,000.The following cost data relate to the construction period.
  Prepare the necessary journal entries for 2014,2015,and 2016 assuming Baywatch uses the percentage-of-completion method.

Accepted Answer

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Question 2

On November 30,Monet Company consigned 90 freezers to Vangogh Company for sale at $1,600 each and paid $1,200 in transportation costs.A report of sales was received on December 30 from Vangogh reporting the sale of 20 freezers,together with a remittance of the $27,200 balance due.The remittance was net of the agreed 15% commission.How much,and in what month,should Monet recognize as consignment sales revenue? November December
A) $0 $32,000
B) $0 $27,200
C) $144,000 $0
D) $142,800 $0

Accepted Answer

Monet should recognize consignment sales revenue in December when the sales were reported and the remittance was received. No revenue is recognized in November because the freezers were only consigned, not sold, at that point. The sales revenue in December is $32,000, calculated as $1,600 per freezer times 20 freezers sold.

Question 3

The Yoder Supply Company sells maintenance contracts to the purchasers of the equipment they sell.The cost of the contract is $1,450,payable at the signing of the contract.The contract covers a three-year period with regularly scheduled inspection visits (every six months)plus any emergency visits.Experience shows that,on the average,one emergency visit per contract is required each year.Assume that 2,200 contracts were sold in 2014 and that contract sales were made evenly over the year.
Give the entries required for 2014 and 2015 to account for the 2,200 contracts.

Accepted Answer

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Question 4

In 2014,Charlotte Engineering entered into an agreement to construct an office building at a contract price of $5,100,000.Construction data were as follows:
  Prepare the necessary entries for each year,assuming the firm uses the:

Accepted Answer

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Question 5

Hussong,Inc. ,appropriately uses the installment sales method of revenue recognition.The company sold $1,500,000 on installment accounts during 2014.The cost of items sold was $900,000.At December 31,2014,Hussong reported a balance of $100,000 in the Deferred Gross Profit account.How much cash did Hussong collect on installment contracts during 2014?
A) $600,000
B) $500,000
C) $250,000
D) $1,250,000

Accepted Answer

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Question 6

On January 3,2014,Continental Services,Inc. ,signed an agreement authorizing Peen Company to operate as a franchisee over a 20-year period for an initial franchise fee of $200,000 received when the agreement was signed.Peen commenced operations on July 1,2014,at which date all of the initial services required of Continental had been performed.The agreement also provides that Peen must pay a continuing franchise fee equal to 6% of the revenue from the franchise annually to Continental.Peen's franchise revenue for 2014 was $900,000.For the year ended December 31,2014,how much should Continental record as revenue from franchise fees from the Peen franchise?
A) $100,000
B) $106,000
C) $254,000
D) $266,000

Accepted Answer

The initial franchise fee of $200,000 is recognized when the agreement is signed. The continuing franchise fee is recognized as revenue when earned. For 2014, the continuing franchise fee is 6% of $900,000, or $54,000. Therefore, the total revenue from franchise fees for 2014 is $200,000 + $54,000 = $254,000.

Question 7

Johann Builders has a fixed -price contract providing $120,000 of revenue.Construction on the contract was begun in 2013 and was completed in 2014.Information relating to the contract is as follows:  What amount of income should Johann recognize in 2014 assuming that the company appropriately uses the percentage-of-completion method of income recognition?
A) $9,286
B) $15,000
C) $17,000
D) $7,000

Accepted Answer

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Question 8

The completed-contract method (as opposed to the percentage-of-completion method)of accounting for revenue from long-term construction contracts should be used in which of the following circumstances?
A) The contractor has been in business for many years and has completed many contracts in the past.
B) Reasonably accurate estimates of the degree of completion cannot be made due to the lack of experience with similar types of contracts.
C) Reasonable accurate estimates of the degree of completion can be made based on past experience.
D) The contracts are of a relatively long duration.

Accepted Answer

The completed-contract method is appropriate when reasonably accurate estimates of the degree of completion cannot be made, as in choice B. This method defers all revenue and expense recognition until the contract is completed, which is suitable when the outcome of a contract cannot be reliably estimated.

Question 9

When a contractor determines that a contract will result in an overall loss,when should that loss be recognized within the completed-contract and percentage-of-completion methods? Completed-Contract Percentage-of-Completion
A) Immediately Over the remainder of the contract
B) At the completion of the contract At the completion of the contract
C) At the completion of the contract Immediately
D) Immediately Immediately

Accepted Answer

Under the completed-contract method, losses are recognized immediately to reflect the expectation of a loss as soon as it is anticipated. Similarly, under the percentage-of-completion method, losses are recognized immediately for the same reason, ensuring that financial statements reflect the most accurate and current information.

Question 10

Marshland,Inc.had the following consignment transactions during December:  No sales of consigned goods were made through December 31.Marshland's December 31 balance sheet should include consigned inventory at
A) $18,900.
B) $18,000.
C) $12,500.
D) $12,000.

Accepted Answer

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Question 11

Warthog Enterprises,which began operations on January 1,appropriately uses the installment method of accounting.The following information is available for its first year:  What is the total amount of Warthog's installment sales for the first year?
A) $300,000
B) $345,000
C) $425,000
D) $525,000

Accepted Answer

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Question 12

Cantor Company sold $400,000 to customers on account during 2014,and collected $200,000 during the year.The company properly uses the installment sales method of revenue recognition due to the uncertainty of collection of these installment receivables.The company has determined that cost of sales for the $400,000 of sales was $340,000. What is the correct balance of the company's Deferred Gross Profit account at the end of 2014,after the recognition of revenue for that year?
A) $0
B) $30,000
C) $60,000
D) $140,000

Accepted Answer

Deferred Gross Profit = Gross Profit x Uncollected Sales / Total Sales= ($400,000 - $340,000) x ($400,000 - $200,000) / $400,000= $60,000 x $200,000 / $400,000= $30,000

Question 13

When Progress Billings are made by a contractor on a long-term contract,what account is credited?
A) Contract Billings,a contra-asset account
B) Contract Revenue,a revenue account
C) Contract Receivable,an asset account
D) Contract Billings,a contra-revenue account

Accepted Answer

Progress Billings represent amounts billed to the customer for work performed to date but not yet invoiced. Therefore, the contra-asset account Contract Billings is credited to record the increase in the amount billed but not yet earned.

Question 14

Assume the Abokair Corporation sold $30,000 worth of merchandise on the installment basis.The cost of the merchandise was $24,000,and collectibility of the receivable is uncertain.Collection in the current year on the account is $8,000.How much gross profit should be reported as realized?
A) $1,600
B) $2,000
C) $6,000
D) $8,000

Accepted Answer

The gross profit on the sale is calculated as the difference between the sales amount and the cost of the merchandise, which is $30,000 - $24,000 = $6,000. However, because collectibility is uncertain, the gross profit is recognized as cash is collected. The gross profit percentage is $6,000 / $30,000 = 20%. Therefore, of the $8,000 collected, 20% represents the realized gross profit, which is $8,000 * 20% = $1,600.

Question 15

Santos Company allows a liberal return privilege on its normal sales.Products purchased by customers may be returned within 90 days of purchase if in resalable condition,for a full refund.The following information relates to 2014: Average gross profit percentage 25%
Total sales (including actual returns) $100,000
Actual returns $ 15,000
Historical ratio of actual returns to sales 20%
Sales whose return privilege has expired at
The end of 2014 (does not include actual
Returns) $ 40,000
Assuming that all criteria of SFAS No.48,"Revenue Recognition When Right of Return Exists," are not met,what is the gross margin to be reported by the company in 2014?
A) $4,000
B) $10,000
C) $40,000
D) $2,000

Accepted Answer

The company cannot recognize revenue for sales with return privileges until the return privilege has expired or it is unlikely that a return will be made. Therefore, the company can only recognize revenue for sales that occurred in 2014 but have not yet had their return privilege expire. This amount would be calculated as follows:

Total sales (including actual returns) = $100,000 
Less: Actual returns = $15,000 
Net sales = $85,000

Sales whose return privilege has expired at the end of 2014 = $40,000

Therefore, the revenue that can be recognized for 2014 is $40,000.

Gross margin can be calculated as follows:

Net sales - Cost of goods sold = Gross margin

We know that the average gross profit percentage is 25%, so we can calculate the cost of goods sold:

Net sales x (100% - Average gross profit percentage) = Cost of goods sold

$40,000 x 75% = $30,000

Therefore, the gross margin for 2014 is:

$40,000 - $30,000 = $10,000

Question 16

Tussle Company began operations on January 1,2014,and appropriately uses the installment method of accounting.The following data are available for 2014 and 2015:  The realized gross profit for 2015 is
A) $440,000.
B) $240,000.
C) $390,000.
D) $600,000.

Accepted Answer

To calculate the realized gross profit for 2015, we need to first calculate the total realized gross profit for both 2014 and 2015.

Total contract price for both years = $3,600,000 ($2,000,000 for 2014 and $1,600,000 for 2015) 
Total cost of goods sold for both years = $2,640,000 ($1,460,000 for 2014 and $1,180,000 for 2015)

Realized gross profit for both years = Total contract price - Total cost of goods sold = $960,000 ($540,000 for 2014 and $420,000 for 2015)

To calculate the realized gross profit for 2015, we need to subtract the realized gross profit for 2014 from the total realized gross profit for both years:

Realized gross profit for 2015 = Total realized gross profit - Realized gross profit for 2014 = $420,000 - $30,000 = $390,000

Therefore, the answer is C) $390,000.

Question 17

Carson Distributing,which began operating on January 1,appropriately uses the installment method of accounting.The following information pertains to Carson's operations for the first year:  The balance in the deferred gross profit account at December 31 should be
A) $400,000.
B) $320,000.
C) $240,000.
D) $200,000.

Accepted Answer

The installment method of accounting recognizes revenue and cost of sales as payments are received from the customer. The gross profit is then deferred and recorded in a separate account called deferred gross profit.

Using the data provided in the table, the total amount of gross profit earned during the year is $960,000 ($3,200,000 - $2,240,000 - $960,000). This amount is then multiplied by the percentage of total payments received during the year, which is 75% (($3,200,000 - $240,000) / $4,000,000).

Therefore, the amount of gross profit recognized during the year is $720,000 ($960,000 x 75%) and the balance in the deferred gross profit account at December 31 is $240,000 ($960,000 - $720,000).

Therefore, the correct choice is B, $320,000.

Question 18

Under which of the following circumstances is the installment sales method appropriate for the recognition of revenue in the income statement?
A) For any sales where collection is spread over a reasonable long period of time.
B) In any situation where management wishes to delay the recognition of revenue in order to smooth its income.
C) For sales where collection is spread over a reasonable long period of time and significant doubt exists about the ultimate collection of the receivables.
D) For sales where collection is spread over a reasonable long period of time and no significant doubt exists concerning ultimate collection of the receivables.

Accepted Answer

The installment sales method is appropriate for recognizing revenue when collection is spread over a long period and there is significant doubt about the ultimate collection of receivables. This method allows revenue and cost recognition to occur as cash is collected, which is suitable under conditions of high uncertainty regarding collectability.

Question 19

A construction company uses the percentage-of-completion method for long-term construction contracts.A particular job was begun in 2014 and completed in 2015.During 2014,it appeared that the project would cost 25 percent more than originally expected.Data at the end of each year are given below:  The contract price was $700,000.Assuming the company properly recorded income in 2013,how much income should be recorded in 2014?
A) $10,000
B) $42,000
C) $160,000
D) $192,000

Accepted Answer

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Question 20

Antoine Construction Company has consistently used the percentage-of completion method of recognizing income.During 2014,Antoine entered into a fixed-price contract to construct an office building for $10,000,000.Information relating to the contract is as follows:  Contract costs incurred during 2015 were
A) $3,200,000.
B) $3,300,000.
C) $3,500,000.
D) $4,800,000.

Accepted Answer

The answer of Antoine Construction Company has consistently used the...

Quiz 8: Revenue Recognition

In 2014,Charlotte Engineering entered into an agreement to construct an office building at a contract price of $5,100,000.Construction data were as follows: Prepare the necessary entries for each year,assuming the firm uses the:

The completed-contract method (as opposed to the percentage-of-completion method) of accounting for revenue from long-term construction contracts should be used in which of the following circumstances?

When a contractor determines that a contract will result in an overall loss,when should that loss be recognized within the completed-contract and percentage-of-completion methods? Completed-Contract Percentage-of-Completion

Marshland,Inc.had the following consignment transactions during December: No sales of consigned goods were made through December 31.Marshland's December 31 balance sheet should include consigned inventory at

Warthog Enterprises,which began operations on January 1,appropriately uses the installment method of accounting.The following information is available for its first year: What is the total amount of Warthog's installment sales for the first year?

When Progress Billings are made by a contractor on a long-term contract,what account is credited?

Assume the Abokair Corporation sold $30,000 worth of merchandise on the installment basis.The cost of the merchandise was $24,000,and collectibility of the receivable is uncertain.Collection in the current year on the account is $8,000.How much gross profit should be reported as realized?

Tussle Company began operations on January 1,2014,and appropriately uses the installment method of accounting.The following data are available for 2014 and 2015: The realized gross profit for 2015 is

Carson Distributing,which began operating on January 1,appropriately uses the installment method of accounting.The following information pertains to Carson's operations for the first year: The balance in the deferred gross profit account at December 31 should be

Under which of the following circumstances is the installment sales method appropriate for the recognition of revenue in the income statement?