Deck 5: Income Measurement

Question 1

Revenue from the sale of computer software is always recognized at the point of sale.

Answer 1

False

Question 2

Revenue is not recognized under the realization principle unless the earnings process is complete or virtually complete and there is reasonable certainty about collectibility of the asset received.

Answer 2

True

Question 3

When the right of return exists, revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns.

Answer 3

True

Question 4

Initial franchise fees are always recognized on the date they are received.

Question 5

Use of the installment sales method indicates little uncertainty about collection of the receivable.

Question 6

When collectibility of accounts receivable is difficult to estimate, companies must use the cost recovery method.

Question 7

Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment method and the cost recovery method.

Question 8

Under the percentage-of-completion method, amounts billed and the cash actually received affect income recognition.

Question 9

Under the cost recovery method used to account for long-term contracts under IFRS, equal amounts of revenue and cost are recognized until all costs are recovered.

Question 10

The percentage-of-completion and completed contract methods calculate different amounts of total profit or loss for a particular contract.

Question 11

Under the percentage-of-completion method, the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete.

Question 12

Under the completed contract method, gross profit or loss is never recognized until the contract is completed.

Question 13

Recognition of franchise fee revenue is dependent on judgments of both substantial performance and fee collectibility.

Question 14

Use of the installment sales method requires that firms track the gross-profit percentage associated with a particular sale.

Question 15

The first disclosure note to the financial statements is typically the summary of significant accounting policies.

Question 16

Use of the percentage-of-completion method is dependent on a firm's ability to make dependable forecasts of future costs.

Question 17

When the right of return exists and a seller cannot make reliable estimates of future returns, they can use the installment method.

Question 18

Estimated losses on long-term contracts are recognized ratably over the contract term regardless of the revenue recognition method used.

Question 19

Firms have free choice as to whether they use the percentage-of-completion method or the completed contract method to account for a long-term contract.

Question 20

SAB 101 was issued by the FASB to clarify its guidelines on revenue recognition.

Question 21

At December 31, 2010, Rigsby would report in its balance sheet:

A)Realized gross profit of $500,000.
B)Deferred gross profit of $400,000.
C)Realized gross profit of $400,000.
D)Cost of installment sales $1,600,000.Balance sheet: Deferred gross profit: $800,000 400,000 = $400,000
Realized gross profit of $400,000 would be reported in the income statement.

Question 22

In its December 31, 2009, balance sheet, Rigsby would report:

A)Realized gross profit of $100,000.
B)Deferred gross profit of $100,000.
C)Installment receivables (net) of $3,200,000.
D)Installment receivables (net) of $4,000,000.

Question 23

Merchandise sold FOB destination indicates that:

A)The seller holds title until the merchandise is received at the buyer's location.
B)The buyer is responsible for delivery of the merchandise to the destination.
C)The full order is back ordered to its destination.
D)The buyer pays the freight to the destination.

Question 24

A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection.

Question 25

Merchandise sold FOB shipping point indicates that:

A)The seller pays the freight.
B)The buyer holds title after the merchandise leaves the seller's location.
C)The common carrier holds title until the merchandise is delivered.
D)The sale is not consummated until the merchandise reaches the point to which it is being shipped.

Question 26

For a typical manufacturing company, the most common critical point for recognizing revenue is the date:

A)An order is received.
B)Production is completed.
C)The product is delivered.
D)Payment is received.

Question 27

Bert's Meat Market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:

A)Point of sale.
B)Installment sales.
C)Cost recovery.
D)Answer B or C is correct.

Question 28

Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:

A)Installment sales method.
B)Point of sales method.
C)Cost recovery method.
D)Answer A or C is correct.

Question 29

In 2008, Reliable would recognize gross profit of:

A)$ 0.
B)$25,000.
C)$ 8,090.
D)$ 8,333.Costs not yet recovered.

Question 30

Return on Shareholders' Equity is increased if a firm can maintain its return on assets but increase its leverage.

Question 31

When accounting for multiple-element software arrangements, the revenue for each element is based on the separate prices stated for each element in the software contract.

Question 32

In 2010, Reliable would recognize gross profit of:

A)$ 0.
B)$ 6,000.
C)$ 8,000.
D)$20,000.The entire $20,000 payment received in 2010 is recognized as gross profit.

Question 33

When accounting for multiple-deliverable arrangements, EITF 00-21 indicates that sellers can separately record revenue for a part of an arrangement even if the part does not have value to the customer on a stand-alone basis.

Question 34

In 2009, Rigsby would recognize realized gross profit of:

A)$500,000.
B)$ 0.
C)$900,000.
D)$100,000.Gross profit % = ($4,500,000 3,600,000)/$4,500,000 = 20% 2009: 20% $500,000 = $100,000

Question 35

Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and:

A)Revenue is realized.
B)Any receivable is collected.
C)Collection is reasonably certain.
D)Collection is absolutely assured.

Question 36

Which of the following was not a criterion for revenue recognition in SAB 101?

A)Cash has been collected.
B)Collectiblity is reasonably assured.
C)Persuasive evidence of an arrangement exists.
D)The seller's price to the buyer is fixed or determinable.

Question 37

A company could improve its return on assets by increasing its income or by increasing its total assets.

Question 38

The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high.

Question 39

In 2010, Rigsby would recognize realized gross profit of:

A)$ 0.
B)$450,000.
C)$300,000.
D)$400,000.Gross profit % = ($4,500,000 3,600,000)/$4,500,000 = 20% 2009: 20% $500,000 = $100,000
2010: 20% [($4,500,000 500,000)/2] = $400,000

Question 40

In 2009, Reliable would recognize gross profit of:

A)$ 0.
B)$ 6,000.
C)$ 5,000.
D)$10,000.

Question 41

When using the percentage-of-completion method of accounting for long-term contracts, the percentage of completion used to recognize gross profit in the first year usually is determined by measuring:

A)Costs incurred in the first year, divided by estimated remaining costs to complete the project.
B)Costs incurred in first year, divided by estimated total costs of the completed project.
C)Costs incurred in first year, divided by estimated gross profit.
D)None of these is correct.

Question 42

In 2008, Lake would recognize realized gross profit of:

A)$150,000.
B)$ 0.
C)$300,000.
D)$450,000.$450,000 cost $300,000 collections = $150,000 unrecovered costs

Question 43

In 2010, Lake would recognize realized gross profit of:

A)$ 0.
B)$300,000.
C)$310,000.
D)$700,000.2008 sales: Cost = $450,000; $300,000 collected in each year 2008-2010.$300,000 of cost recovered in 2008, the other $150,000 of cost recovered in 2009, so $150,000 of gross profit recognized in 2009, leaving $300,000 recognized in 2010.2009 sales:
Cost = $900,000; $500,000 collected in 2009, $400,000 collected in 2010.$500,000 of cost recovered in 2009, the other $400,000 of cost recovered in 2009, so $0 of gross profit recognized in 2010.Total: $300,000 + $0 = $300,000

Question 44

In 2011, Lake would record a loss on repossession of:

A)$45,000.
B)$200,000.
C)$120,000.
D)$80,000 Installment receivable = $200,000
Deferred gross profit = $80,000 ($200,000 40%)
Fair value = $75,000

Question 45

When using the completed contract method of accounting for long-term contracts:

A)Estimated losses on the overall contract are recognized before the contract is completed.
B)Expenses are recorded each period, but revenue is only recognized when the contract is completed.
C)Use of this method is not permitted under generally accepted accounting principles.
D)Neither gains nor losses are recognized until the contract is completed.

Question 46

Sweeney most likely should recognize revenue when:

A)He paints the painting, as the painting is accreting.
B)When he transfers a painting to a barbershop.
C)When the barbershop sells the painting.
D)When the barbershop's right of return expires.

Question 47

In its 2008 year-end balance sheet, Reliable would report installment receivables (net) of:

A)$20,000.
B)$35,000.
C)$25,909.
D)$10,000.

Question 48

Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy, and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:

A)When Boomerang delivers a computer to a customer.
B)When Boomerang receives cash from the customer.
C)When a customer returns a computer.
D)Never, because the right of return is unconditional.Returns can be estimated at delivery, so an allowance can be created and revenue recognized at that point.

Question 49

In 2010, Lake would recognize realized gross profit of:

A)$ 0.
B)$450,000.
C)$310,000.
D)$700,000.2008 sales: Gross profit % = ($900,000 $450,000)/$900,000 = 50%
50% $300,000 received in 2010 = $150,000
2009 sales:
Gross profit % = ($1,500,000 $900,000)/$1,500,000 = 40%
40% $400,000 received in 2010 = $160,000
Total: $150,000 + $160,000 = $310,000

Question 50

After Sweeney has transferred a painting to a barbershop, the painting:

A)Should be counted in Sweeney's inventory until the barbershop sells it.
B)Should be counted in the barbershop's inventory, as they now possess it.
C)Should be counted in either Sweeney's or the barbershop's inventory, depending on which incurred the cost of preparing the painting for display.
D)None of these.

Question 51

The rationale for adoption of the percentage-of-completion method is that:

A)Results are more conservative.
B)It provides a measure of periodic accomplishment.
C)It is a better match with legal ownership.
D)It results in a lower income tax.

Question 52

The percentage-of-completion method is preferable to the completed contract method and should only be avoided if

A)Completion rates are certain.
B)Profits are low.
C)Projects are more than five years to completion.
D)There is a lack of dependable estimates or inherent hazards cause forecasts to be doubtful.

Question 53

In its December 31, 2009, balance sheet, Lake would report:

A)Deferred gross profit of $700,000.
B)Deferred gross profit of $1,050,000.
C)Installment receivables (net) of $750,000.
D)Installment receivables (net) of $900,000.As of 12/31/2009, the installment receivable would be as follows:

Question 54

In its December 31, 2009, balance sheet, Lake would report:

A)Deferred gross profit of $700,000.
B)Deferred gross profit of $600,000.
C)Installment receivables (net) of $700,000.
D)Installment receivables (net) of $400,000.As of 12/31/2009, the installment receivable would be as follows:

Question 55

Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy, and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing gross profit associated with one of these sales?

A)No time delay, recognize gross profit upon delivery.
B)Gunk should recognize gross profit as cash is received under the installment method.
C)Gunk should defer gross until costs are recovered under the cost recovery method.
D)Three years, after the right of return has expired.If returns can't be estimated, revenue should be deferred until they can or until the return right expires.

Question 56

Total cash collections on installment sales during 2009 would be:

A)$700,000.
B)$300,000.
C)$800,000.
D)$0.$300,000 (2008 sales) + $500,000 (2009 sales) = $800,000

Question 57

In 2008, Lake would recognize realized gross profit of:

A)$150,000.
B)$ 0.
C)$300,000.
D)$450,000.Gross profit % = ($900,000 $450,000)/$900,000 = 50% 2008: 50% $300,000 = $150,000

Question 58

In 2008, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of :

A)$0.
B)$(100,000).
C)$ 56,000.
D)$ 73,000.total estimated gross profit ($2,200,000 250,000 1,550,000 = $400,000), so don't need to recognize any contract loss.

Question 59

In its 2009 year-end balance sheet, Reliable would report installment receivables (net) of:

A)$ 0.
B)$20,000.
C)$ 4,000.
D)$15,000.

Question 60

In 2009, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:

A)$ (223,000).
B)$ (150,000).
C)$ (206,000).
D)$0.2009: $2,200,000 ($250,000 + 1,600,000 + 500,000) = $(150,000) gross loss.

Question 61

Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS can recognize revenue associated with the $50,000

A)when Steffi signs the agreement, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.
B)as soon as they have assisted Steffi in setting up the store, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.
C)Gradually as they provide advertising and administration services.
D)When they receive installment payments from Steffi, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.Substantial performance has occurred, and can estimate bad debts.

Question 62

What is the fixed contract price for CCC's project?

A)$120 million
B)$225 million
C)$345 million
D)None of these is correct Gross profit recognized in 2009 of $72 million = 60% of estimated gross project on the project.Therefore, total gross profit is estimated at $72 million/.6 = $120 million.Since Gross profit = Contract price Estimated total construction costs of $225 million, the Contract price = $120 million + $225 million = $345 million.

Question 63

Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS can recognize revenue associated with the $50,000

A)when Steffi signs the agreement and pays the cash.
B)as soon as they have assisted Steffi in setting up the store.
C)gradually as they provide advertising and administration services.
D)none of these.Substantial performance has occurred.

Question 64

What are CCC's estimated remaining construction costs on the project at the end of 2009?

A)$90 million
B)$135 million
C)$225 million
D)None of these is correct Percentage completion to date = 60 % = Actual costs to date of $135 million / Total estimated project costs of $X.Solve for X.Estimated total costs = $225 million; therefore, Estimated remaining costs of construction = $225 million $135 million = $90 million.

Question 65

Assuming BCC uses the percentage-of-completion method of recognition the gross profit recognized in 2009 would be (rounded to the nearest thousand):

A)$ 6,000.
B)$39,000.
C)$42,000.
D)$45,000.2009: Total profit = $450,000 ($180,000 + 195,000) = $75,000 33,159 = $41,841 or $42,000 rounded.

Question 66

What were the construction billings by CCC during 2009?

A)$142.5 million
B)$67.5 million
C)$37.5 million
D)None of these is correct Billings Cash collections = Accounts receivable, so Billings = Accounts receivable at year-end of $37.5 million + Cash collections of $105 million = $142.5 million.

Question 67

In 2010, Indiana incurred costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Using the percentage-of-completion method, Indiana:

A)Recognized $15 million gross profit on the project in 2010.
B)Recognized $13.5 million gross profit on the project in 2010.
C)Recognized $6 million gross profit on the project in 2010.
D)Recognized $1.5 million gross profit on the project in 2010.The project is 70% complete after 2010 (i.e., $94.5 million costs to date/ $135 million estimated total costs).The estimated gross profit is now $15 million (i.e., $150 million $135 million), so gross profit to date is $10.5 million (70% $15 million).$9 million was recognized in 2009, per question 102, so $1.5 million more is recognized in 2010.

Question 68

Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS has no experience estimating uncollectible accounts associated with these sorts of notes. They can recognize

A)$50,000 of revenue when Steffi signs the agreement.
B)$50,000 of revenue as soon as they have assisted Steffi in setting up the store.
C)revenue under the installment method, starting when Steffi signs the agreement.
D)revenue under the installment method, as soon as they have assisted Steffi in setting up the store.Substantial performance has occurred, but can't estimate bad debts, so use the installment method.

Question 69

Assume that at the time of signing the contract, collection of the receivable was assured and that service obligations were substantial. However, by October 20, 2008, substantially all continuing obligations had been met. The journal entry required at October 20, 2008 would include a:

A)Credit to franchise fee receivable for $27,000.
B)Debit to unearned franchise fee revenue for $36,000.
C)Credit to franchise fee revenue for $9,000.
D)Debit to unearned franchise fee revenue for $27,000.

Question 70

Assuming BCC uses the percentage-of-completion method of revenue recognition, the gross profit recognized in 2008 would be (rounded to the nearest thousand):

A)$33,000.
B)$36,000.
C)$69,000.
D)$30,000.$180,000/($180,000 + 200,000) = 47.37% complete 47.37% ($450,000 180,000 200,000) = $33,159 or $33,000 rounded.

Question 71

Sullivan should recognize revenue for the two parts of the arrangement as follows:

A)Recognize the entire $500 when the customer pays cash to buy the package.
B)Recognize the portion of the $500 attributable to the software program when the customer pays cash to buy the package, defer the portion attributable to technical support and recognize over the support period.
C)Defer the entire $500 and recognize over the support period.
D)None of these.

Question 72

EITF 00-21 covers revenue recognition for multiple-part arrangements, and requires that a seller recognize revenue for a particular part if:

A)the part has value to the stand-alone basis.
B)there is objective, reliable evidence as to the value of undelivered parts.
C)the part constitutes at least a "preponderance of the fair value" of the total arrangement.
D)Two of the above.

Question 73

The amount of revenue that SOP 97-2 would require that Sullivan attribute to the software program (as opposed to the technical support) is:

A)$450.
B)$475.
C)$432.
D)$400.Per SOP 97-2, base on relative fair values, so amount attributable to the program is ($475 / {$475 + $75}) $500 = $432

Question 74

Using the percentage-of-completion method, Indiana:

A)Recognized no gross profit or loss on the project in 2009.
B)Recognized $6 million loss on the project in 2009.
C)Recognized $9 gross profit on the project in 2009.
D)Recognized $36 million loss on the project in 2009.The project is expected to make a gross profit of $30 million (i.e., $150 million - $36 million $84 million) and the % completed is 30% (i.e., $36 million / $120 million).Therefore, 30% $30 million = $9 million.

Question 75

In 2010, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:

A)$(100,000).
B)$ 50,000.
C)$ 123,000.
D)$ 2,000.2010: $2,200,000 ($250,000 + 1,600,000 + 450,000) = $(100,000) $(100,000) (150,000) = $50,000

Question 76

Assume at March 15, 2008, the time of signing the contract, collectibility of the receivable was reasonably assured and there were no significant continuing obligations. The journal entry at signing would include a:

A)Credit to franchise fee revenue for $36,000.
B)Credit to franchise fee revenue for $9,000.
C)Credit to unearned franchise fee revenue for $36,000.
D)Credit to unearned franchise fee revenue for $27,000.

Question 77

Suppose that, in 2010, Indiana incurred costs of $63.75 million and estimated an additional $42.75 million in costs to complete the project. Using the percentage-of-completion method, Indiana:

A)Recognized $3.75 million loss on the project in 2010.
B)Recognized $5.25 million gross profit on the project in 2010.
C)Recognized $7.5 million gross profit on the project in 2010.
D)None of these is correct.The project is 70% complete after 2010 (i.e., $99.75 million costs to date/ $142.5 million estimated total costs).The estimated gross profit is now $7.5 million (i.e., $150 million $142.5 million), so gross profit to date is $5.25 million.$9 million was recognized in 2009, so a $3.75 million loss is recognized in 2010.

Question 78

Assuming that the initial services to be performed by Flapper Jack's subsequent to the signing are substantial and that collection of the receivable is reasonably assured, the journal entry required at signing would include a credit to:

A)Unearned franchise fee revenue for $36,000.
B)Unearned franchise fee revenue for $30,000.
C)Franchise fee revenue for $36,000.
D)Franchise fee revenue for $ 6,000.

Question 79

How much cash remains to be collected by CCC on the project?

A)$70 million
B)$202.5 million
C)$240 million
D)Cannot be determined from the given information Total contract price of $345 million cash collected to date of $105 million = $240 million remaining.

Question 80

What is the amount of gross profit on the project recognized by CCC during 2009?

A)$160 million
B)$72 million
C)$48 million
D)Cannot be determined from the given information.Construction in progress = Actual costs incurred + Gross profit recognized; so $207 million = $135 million + X.Solve for X.X = $72 million.