Deck 8: Revenue Recognition

Question 1

Builder Construction Company's projects extend over several years and collection of receivables is reasonably certain.Each project has a contract that specifies a price and the rights and obligations of all parties.Both the contractor and the customer are expected to fulfill their contractual obligations on each project.Reliable estimates can be made of the extent of progress and cost to complete each project.The method that the company should use to account for construction revenue is

A) installment sales.
B) percentage-of-completion.
C) completed-contract.
D) cost recovery.

Answer 1

B

Question 2

If a company uses the completed-contract method of accounting for long-term construction contracts,then during the period of construction,financial information related to a long-term contract will

A) appear on both the income statement and balance sheet during the construction period.
B) appear only on the income statement during the period of construction.
C) appear only on the balance sheet during the period of construction.
D) not appear on the financial statements.

Answer 2

C

Question 3

Which of the following is NOT an element identified by the AICPA as being necessary in order to use percentage-of-completion accounting?

A) The construction period can be reasonably estimated.
B) The buyer can be expected to satisfy obligations under the contract.
C) Dependable estimates can be made of the extent of progress toward completion.
D) Dependable estimates can be made of contract costs.

Answer 3

A

Question 4

The cost recovery method is

A) used only when circumstances surrounding a sale are so uncertain that earlier recognition is impossible.
B) the most common method of accounting for real estate sales.
C) similar to percentage-of-completion accounting.
D) never acceptable under generally accepted accounting principles.

Question 5

If the percentage-of-completion method is used,what is the basis for determining the gross profit to be recognized in the second year of a three-year contract?

A) Cumulative actual costs and estimated costs to complete
B) Incremental cost for the second year only
C) Cumulative actual costs incurred only
D) No gross profit would be recognized in year 2

Question 6

The completed-contract method of accounting for long-term construction-type contracts is preferable when

A) a contractor is involved in numerous projects.
B) the contracts are of a relatively long duration.
C) estimates of costs to complete and extent of progress toward completion are reasonably dependable.
D) there are inherent uncertainties in the contract beyond normal business risks.

Question 7

Assume the percentage-of-completion method of revenue recognition is used on a long-term construction contract.Under this method,revenues that are earned but unbilled at the balance sheet date should be disclosed

A) as a long-term receivable in the noncurrent assets section of the balance sheet.
B) only as a footnote disclosure until the customer is billed for the percentage of work completed.
C) as construction in progress in the current assets section of the balance sheet.
D) as construction in progress in the noncurrent assets section of the balance sheet.

Question 8

When the percentage-of-completion method of accounting for long-term construction projects is used,why is Construction in Progress increased by the annual recognized gross profit on long-term construction contracts?

A) The cost of the contract has increased.
B) The project's value has increased above cost.
C) The economy experiences inflation over the construction period.
D) Construction in Progress is not increased by the annual recognized profit.

Question 9

When using the installment sales method,

A) total revenues and costs are recognized at the point of sale,but gross profit is deferred in proportion to the cash that is uncollected from the sale.
B) gross profit is recognized only after the amount of cash collected exceeds the cost of the item sold.
C) revenue,costs,and gross profit are recognized proportionally as the cash is received from the sale of product.
D) gross profit is deferred until all cash is received,but revenues and costs are recognized in proportion to the cash collected from the sale.

Question 10

Which of the following is NOT a difference between the percentage-of completion and completed-contract methods of accounting for long-term construction contracts?

A) They report different amounts for inventory during the construction period.
B) They report different amounts for progress billings during the construction period.
C) They cause a different cash inflow during the construction period.
D) They report different amounts for accounts receivable during the construction period.

Question 11

The theoretical support for using the percentage-of-completion method of accounting for long-term construction projects is that it

A) is more conservative than the completed-contract method.
B) produces a realistic matching of expenses with revenues.
C) more closely conforms to the cost principle.
D) reports a lower Net Income figure than the completed-contract method.

Question 12

The installment method of recognizing revenue

A) should be used only in cases in which no reasonable basis exists for estimating the collectibility of receivables.
B) is not a generally accepted accounting principle under any circumstances.
C) should be used for book purposes only if it is used for tax purposes.
D) is an acceptable alternative accounting principle for a firm that makes installment sales.

Question 13

Which of the following would be used in the calculation of the gross profit recognized in the third and final year of a construction contract that is accounted for using the percentage-of-completion method? Actual Income
Contract Total Previously
Price Costs Recognized

A) Yes Yes No
B) Yes Yes Yes
C) Yes No Yes
D) No Yes Yes

Question 14

An adjusting entry in which revenue is recognized and a receivable is established indicates that revenue has been Earned Collected

A) Yes No
B) Yes Yes
C) No Yes
D) No No

Question 15

When comparing the percentage-of-completion and completed-contract methods of accounting for long-term construction contracts,both methods will report the same

A) balances each period in the Progress Billings account.
B) expense for cost of construction each year.
C) amount of income in the year of completion.
D) inventory carrying value each year during the construction period.

Question 16

Which of the following best describes the condition(s)that must be present for the recognition of revenue?

A) The revenue must be earned,measurable,and collected.
B) The revenue must be earned and collectible.
C) The revenue must be earned,measurable,and collectible.
D) The revenue must be measurable and collectible.

Question 17

How should the balances of Progress Billings and Construction in Progress be shown at reporting dates prior to the completion of a long-term contract?

A) Progress Billings as income,Construction in Progress as inventory
B) Net,as income from construction if credit balance,and loss from construction if debit balance
C) Progress Billings as deferred income,Construction in Progress as a current asset
D) Net,as a current asset if debit balance and current liability if credit balance

Question 18

A company providing maintenance services on equipment for a fixed periodic fee would recognize

A) an equal amount of service revenue for each act.
B) service revenue over the fixed period by the straight-line method.
C) service revenue in proportion to the direct costs to the provider of the services to perform each act.
D) service revenue only when the fixed period has ended.

Question 19

If the completed-contract method is used,what is the basis for determining the income to be recognized in the second year of a three-year contract?

A) Cumulative actual costs incurred only
B) Incremental cost for the second year only
C) Latest available estimated costs
D) No income would be recognized in year 2

Question 20

Which of the following types of service transactions is most likely to require the proportional performance method of revenue recognition based on the seller's direct costs to perform each act?

A) Processing of monthly mortgage payments by a mortgage banker
B) Providing lessons,examinations,and grading by a correspondence school
C) Providing maintenance services on equipment for a fixed periodic fee
D) Delivering freight (by a trucking firm)

Question 21

A company uses the percentage-of-completion method to account for a four-year construction contract.Progress billings sent in the second year that were collected in the third year would

A) be included in the calculation of the income recognized in the second year.
B) be included in the calculation of the income recognized in the third year.
C) be included in the calculation of the income recognized in the fourth year.
D) not be included in the calculation of the income recognized in any year.

Question 22

The following data relate to a construction job started by Harrington Co.during 2014:

See Harrington Co.information above.Under the percentage-of-completion method,how much should Harrington recognize as gross profit for 2014?

A) $0
B) $40,000
C) $80,000
D) $100,000

Question 23

In 2011,Huxley Corp.began construction work under a three-year contract.The contract price is $800,000.Huxley used the percentage-of-completion method for financial accounting purposes.The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract.The financial presentations relating to this contract at December 31,2014,appear below. How much cash was collected in 2014 on this contract?

A) $32,000
B) $35,000
C) $47,000
D) $50,000

Question 24

Sunfish Construction Company uses the percentage-of-completion method of accounting.In 2014,Sunfish began work on a project which had a contract price of $1,600,000 and estimated costs of $1,200,000.Additional information is as follows: The amount of gross profit Sunfish should recognize on this contract during 2014 is

A) $40,000.
B) $80,000.
C) $100,000.
D) $200,000.

Question 25

Astor Construction Company uses the percentage-of-completion method for long-term construction contracts.A specific job was begun in 2014 and completed in 2016.The contract price was $1,400,000 and cost information as of each year-end is given below: Assuming Astor correctly recorded gross profit in 2014,how much gross profit should the company record in 2015?

A) $0
B) $20,000
C) $300,000
D) $320,000

Question 26

Gunner Construction,Inc.has consistently used the percentage-of-completion method of recognizing revenue.During 2014,Gunner started work on a $2,500,000 fixed-price construction contract.The accounting records disclosed the following data for the year ended December 31,2014: How much loss should Gunner have recognized in 2014?

A) $15,000
B) $35,000
C) $50,000
D) $315,000

Question 27

The following data relate to a construction job started by Harrington Co.during 2014:

See Harrington Co.information above.Under the completed-contract method,how much should Harrington recognize as gross profit for 2014?

A) $0
B) $30,000
C) $40,000
D) $90,000

Question 28

For a construction firm using the completed-contract method,if costs exceed billings on some contracts by $1,000,000 and billings exceed costs by $800,000 on others,the contracts should ordinarily be reported as a

A) current asset of $200,000.
B) current liability of $200,000.
C) current asset of $1,000,000 less a contra-current asset of $800,000.
D) current asset of $1,000,000 and a current liability of $800,000.

Question 29

F & R Construction,Inc.has consistently used the percentage-of-completion method of recognizing revenue.Last year F & R started work on a $5,000,000 construction contract,which was completed this year.The accounting records disclosed the following data for last year: How much revenue should F & R have recognized on this contract last year?

A) $1,500,000
B) $1,700,000
C) $1,100,000
D) $400,000

Question 30

On May 1,2014,Lavender Construction Company entered into a fixed-price contract to construct an apartment building for $3,000,000.Lavender appropriately accounts for this contract under the percentage-of-completion method.Information relating to the contract is as follows: What is the amount of contract costs incurred during the year ended December 31,2015?

A) $600,000
B) $960,000
C) $990,000
D) $1,440,000

Question 31

Chantal Company began operations on January 2,2014,and appropriately used the installment sales method of accounting.The following data are available for 2014 and 2015: The realized gross profit for 2015 is

A) $1,440,000.
B) $1,040,000.
C) $920,000.
D) $780,000.

Question 32

Sailor Construction Company has consistently used the percentage-of- completion method.On January 10,2014,Sailor began work on a $3,000,000 construction contract.At the inception date,the estimated cost of construction was $2,250,000.The following data relate to the progress of the contract: How much gross profit should Sailor recognize for the year ended December 31,2015?

A) $150,000
B) $262,500
C) $300,000
D) $450,000

Question 33

Goods on consignment should be included in the inventory of

A) the consignor but not the consignee.
B) both the consignor and the consignee.
C) the consignee but not the consignor.
D) neither the consignor nor the consignee.

Question 34

Samuels Company began operations on January 1,2014,and uses the installment sales method of accounting.The company has the following information available for 2014 and 2015: The realized gross profit for 2015 would be

A) $1,680,000.
B) $2,760,000.
C) $3,120,000.
D) $4,320,000.

Question 35

Franchise fees are properly recognized as revenue

A) when received in cash.
B) when a contractual agreement has been signed.
C) after the franchise business has begun operations.
D) after the franchiser has substantially performed its service.

Question 36

Golden Construction Company uses the percentage-of-completion method for long-term construction contracts.The company started a project with a contract price of $2,750 in 2014.Given the following data,what is the balance in Construction in Progress for this contract at the end of 2014?

A) $150
B) $400
C) $550
D) $1,750

Question 37

Steinman Construction Company uses the percentage-of-completion method for long-term construction contracts.The company has a project with a contract price of $7,000 on which $600 of gross profit has been recognized in prior years.Information for the current year is as follows: What is the loss that Steinman should recognize in the current year?

A) $600
B) $800
C) $1,400
D) No loss should be recognized.

Question 38

In accounting for sales on consignment,sales revenue and the related cost of goods sold should be recognized by the

A) consignor when the goods are shipped to the consignee.
B) consignee when the goods are shipped to the third party.
C) consignor when notification is received the consignee has sold the goods.
D) consignee when cash is received from the customer.

Question 39

In accounting for a long-term construction contract for which there is a projected profit,the balance in the Construction in Progress account at the end of the first year of work using the percentage-of-completion method would be

A) zero.
B) the same as the completed-contract method.
C) higher than the completed-contract method.
D) lower than the completed-contract method.

Question 40

Sonnet Construction Company uses the completed-contract method for long-term construction contracts.The information for a specific contract as of January 1,2014,is shown below. $600,000 of cost was incurred during 2014 and on December 31,2014,the estimated remaining cost to complete was still $800,000.The correct balance for the Construction in Progress at December 31,2014 is

A) $600,000.
B) $700,000.
C) $1,200,000.
D) $1,300,000.

Question 41

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.

Question 42

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

Question 43

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.

Question 44

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:

Question 45

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

Question 46

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

Question 47

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

Question 48

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.

Question 49

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

Question 50

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.

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

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.

Question 57

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.

Question 58

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.

Question 59

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

Question 60

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.

Question 61

On January 1,2014 Flora Enterprises obtained a contract to construct a building.It was estimated at the beginning of the contract that it would take three years to complete the project at an expected cost of $200,000.The contract price was $250,000.The following information describes the status of the job at the close of production each year:
Compute the items listed below for each year assuming the use of the percentage-of-completion cost-to-cost method.(Round all percentages to two decimals).

Question 62

Sonny's Dry Cleaners,Inc.charges an initial franchise fee of $195,000.When the agreement is signed,a payment of $75,000 is due,followed by four annual payments of $30,000 at the end of each period.Sonny's normal borrowing rate is 12%.Prepare the entries to record the initial franchise fee on the books of Sonny's under each of the following circumstances.

Question 63

Tundra Electronics Company sends appliances to dealers on a consignment basis.The selling price per unit is $920 and the dealer earns a 30% commission.The manufacturing cost of the appliance to Tundra Electronics is $570.Assume that in 2014,800 units were sent on consignment to Farber Hardware.Four hundred of these units were sold for cash,and by December 31,2011,remittance had been made to Tundra Electronics for 380 units.
Prepare the required journal entries on the books of Tundra Electronics Company and Farber Hardware for the transactions in 2014.

Question 64

The Albert Corporation sells merchandise on the installment basis,and the uncertainties of cash collection make the use of the installment sales method of accounting acceptable.The following data relate to two years of operations.
Record the transactions related to installment sales for 2014 and 2015.

Question 65

In 2014,Amsterdam Builders began construction work under a three-year contract at a price of $7,525,000.The firm uses the percentage-of-completion method for financial accounting purposes.The income to be recognized each year is based on the proportion of cost incurred to the total estimated costs for completing the contract.The financial statement presentations relating to this contract on December 31,2014,are:
Determine the

Question 66

On January 1,2014,Artigas,Inc.obtained a contract to construct a building.It was estimated at the beginning of the contract that it would take 3 years to complete the project at an expected cost of $200,000.The contract price was $250,000.The following information describes the status of the job at the close of production each year:
Compute the items listed below for each year assuming the use of the percentage-of- completion cost-to-cost method.(Round all percentages to two decimals. )

Question 67

The Alliance Corporation introduced a new line of product the profitability of which is quite uncertain.This uncertainty has resulted in Alliance choosing to use the cost recovery method to account for this product.
The following information relating to the new product line is available for the year 2014:
Required:

Question 68

Lennor Company sold inventory to Myers Incorporated and recorded the sale as revenue.Part of the agreement of the sale is that Lennor will repurchase the merchandise at a specified price over a specified period of time.Meanwhile,Myers uses the inventory purchased from Lennor as collateral for a loan.Myers uses the proceeds from the loan to pay Lennor for the inventory purchased.Lennor ultimately repurchases the inventory from Myers.Myers then uses the proceeds of the repayment to pay its loan obligation.
Required: