Question 1

Which of the following methods could not be used to recognize revenue on a real estate sale?

Accepted Answer

The completed contract method is not typically used to recognize revenue on a real estate sale. Instead, revenue recognition in real estate often occurs over time as payments are received (installment method), after certain costs are recovered (cost recovery method), or when a significant deposit is forfeited (deposit method), aligning with the principle of recognizing revenue when it is earned and realizable.

Question 2

Which one of the following statements is not true?

Accepted Answer

Deferred gross profit is typically disclosed as a current or long-term asset on the balance sheet, depending on when the related revenue is expected to be recognized, not as a current liability.

Question 3

In real estate sales, what method of revenue recognition must be used if the sale is not consummated?

Accepted Answer

The deposit method must be used for revenue recognition if the sale is not consummated. This method recognizes that the transaction has not been completed, and therefore, revenue cannot be fully recognized. Instead, any payments received are treated as deposits.

Question 4

If the consignment-in account has a credit balance, it is reported on the consignee's balance sheet as a(n)

Accepted Answer

A credit balance in the consignment-in account represents goods that have been received by the consignee but have not yet been sold. This means that the consignee has a liability to the consignor for the value of the goods held in inventory. Therefore, the consignment-in account is reported as a liability account on the consignee's balance sheet.

Question 5

French Company sells its subsidiary, Spanish Company, to Italian, Inc.French has net assets of $50 million and Spanish has net assets of $5 million.The sales price is $2 million down and a 10% note for $4 million.Italian has the right to cancel over the next year and uses the deposit method.The proper accounting for this transaction by French Company is

Accepted Answer

Since Italian, Inc. uses the deposit method and has the right to cancel the transaction over the next year, the $2 million received is not recognized as revenue but rather as a deposit from the purchaser. This means the sale is not yet recognized on the books of French Company.

Question 6

If a company had an agreement to deliver software that requires significant production, modification, or customization, which method of revenue recognition should it use?

Accepted Answer

The percentage-of-completion method is appropriate when delivering software that requires significant production, modification, or customization because it allows revenue to be recognized as progress is made towards completion of the project. This method requires the company to estimate the percentage of completion and recognize that percentage of the contract revenue as earned each period.

Question 7

Exhibit 18-5 Morris Co.sold a franchise at an initial franchise fee of $5, 000.A down payment of $800 was received with the balance covered by the issuance of a $4, 200, 6% note, payable by the franchisee in four equal annual installments.The refund period has expired and the collectibility of the note is reasonably assured.
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Refer to Exhibit 18-5.If all material services have not been substantially performed, which entry to record the franchise is correct?

Accepted Answer

Since all material services have not been substantially performed, the entire amount of $5,000 (both the cash received and the note receivable) should be recorded as Unearned Franchise Fees. This reflects that the revenue cannot be recognized until the services are performed.

Question 8

Exhibit 18-4 The following information is provided for Tampa Company:

- 
Refer to Exhibit 18-4.How much gross profit did Tampa Company report in 2011?

Accepted Answer

Gross profit can be calculated by subtracting the cost of goods sold from the total revenue. In 2011, the total revenue from installment sales was $9,500 ($7,000 + $2,500). The cost of goods sold was $8,000. Therefore, gross profit is $1,500 ($9,500 - $8,000).

Question 9

When there is a very high degree of uncertainty about the collectibility of the sales price in a sale, the preferred method of revenue recognition is the

Accepted Answer

The cost recovery method is preferred when there is significant uncertainty about the collectibility of the sales price, as it recognizes revenue only after all costs have been recovered.

Question 10

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

When a sufficient transfer of the risks and benefits of ownership does not exist in a sales transaction, the deposit method is preferred for revenue recognition. This method recognizes that the transaction does not yet meet the criteria for revenue recognition, treating payments received as deposits.

Question 11

The entry that the consignee makes to record the commission earned on a sale of goods held on consignment is

Accepted Answer

The commission earned on a sale of goods held on consignment should be recorded as a credit to Consignment-in account and a debit to Commissions Earned account. This is because the consignee is essentially earning a commission on the sale of goods belonging to the consignor. There is no cash transaction involved unless payment is received from the buyer, in which case a separate entry would be needed to record the receipt of cash. Option B correctly reflects this accounting treatment.

Question 12

Exhibit 18-4 The following information is provided for Tampa Company:

- 
Refer to Exhibit 18-4.How much deferred gross profit is still on the books at the end of 2011?

Accepted Answer

From the information given, we know that the company used the installment sales method, but we do not have the details on individual sales or payments made. However, we do know that there was some deferred gross profit on the books. To find out how much deferred gross profit is still on the books at the end of 2011, we would need more information. The answer choice closest to the typical amount of deferred gross profit for a company using the installment sales method is C, $2,700.

Question 13

If Consignment-out has a debit balance, the account should be disclosed on the balance sheet as a(n)

Accepted Answer

A consignment-out with a debit balance represents goods sent out on consignment that are still owned by the consignor, thus it should be disclosed as inventory on the balance sheet.

Question 14

Givens, Inc.repossessed an item it sold in 2010 with a gross profit of 40%.The fair value of the repossessed item was $140.The remaining receivable amounted to $400.What account had the smallest amount debited to it?

Accepted Answer

The Allowance for Doubtful Installment Accounts Receivable would have the smallest amount debited, as it would only be adjusted for any estimated uncollectible portion of the receivable, which is typically smaller than the other amounts involved.

Question 15

If a company has an agreement to deliver software that does not require significant production, modification, or customization, it recognizes revenue when persuasive evidence of an agreement exists and

Accepted Answer

According to the revenue recognition principle, revenue should be recognized when persuasive evidence of an agreement exists, delivery has occurred (which is usually when the software is downloaded or made accessible to the customer), the seller's fee is fixed or determinable (which means that the price is agreed upon or can be estimated with reasonable accuracy), and collectibility is probable (which means that payment is expected to be received). Therefore, all of these conditions must be met before revenue can be recognized for software sales that do not require significant production, modification, or customization.

Question 16

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

Accepted Answer

When a down payment is received, it is not considered revenue for the seller, as the goods or services have not been delivered or performed yet. Instead, it is recorded as a liability on the balance sheet of the seller until the goods or services are delivered or performed. Therefore, the correct answer is B, liability.

Question 17

Exhibit 18-4 The following information is provided for Tampa Company:

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Refer to Exhibit 18-4.How much gross profit did Tampa Company report in 2010?

Accepted Answer

The answer of Exhibit 18-4 The following information is provided...

Question 18

Exhibit 18-5 Morris Co.sold a franchise at an initial franchise fee of $5, 000.A down payment of $800 was received with the balance covered by the issuance of a $4, 200, 6% note, payable by the franchisee in four equal annual installments.The refund period has expired and the collectibility of the note is reasonably assured.
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Refer to Exhibit 18-5.If all material services have been substantially performed, which entry to record the franchise is correct?

Accepted Answer

Since all material services have been substantially performed, the entire franchise fee is recognized as revenue, making option A correct. This includes both the cash received and the note receivable, totaling the initial franchise fee of $5,000.

Question 19

In 2010, Rogers Company offered its goods to retailers on a consignment basis.The following information is provided regarding Rogers Company's 2010 operations: $\begin{array}{ll}
\text { Beginning inventory } & \$ 102,000 \
\text { Purchases } & 560,000 \
\text { Freight in } & 10,000\
\text { Transportation to consignees } & 5,000 \
\text { Freight out } & 35,000 \
\text { Ending inventory-Held by Rogers } & 45,000 \
\text { Ending inventory-Held by consigneess } & 20,000 
\end{array}$
 What is Rogers' cost of goods sold for 2010?

Accepted Answer

Cost of goods sold = Beginning inventory + Purchases + Freight in - Ending inventory= 102,000 + 560,000 + 10,000 - 45,000= $527,000

Question 20

On January 1, 2010, Walters, Inc.purchased a risky investment for $100.It was decided to use the cost recovery method of revenue recognition.Cash collections on accounts receivable related to the asset were as follows: $\begin{array}{ll}
2010 & \$ 70 \
2011 & 40 \
2012 & 30
\end{array}$
 Which of the following represent the realized gross profit that Walters should recognize for each year?
$\begin{array}{llll}
&2010&2011&2012\
\text { I. } & \$ 0 & \$ 10 & \$ 30 \
\text { II. } & \$ 70 & \$ 40 & \$ 30 \
\text { III. } & \$ 0 & \$ 30 & \$ 30 \
\text { IV } & \$ 0 & \$ 110 & \$ 30
\end{array}$

Accepted Answer

The cost recovery method of revenue recognition recognizes revenue only after the initial cost of the asset has been recovered. Since Walters purchased the investment for $100 and all cash collections in each year were less than $100, no gross profit has been realized and thus, no revenue can be recognized. Therefore, the answer is only I as no gross profit was realized in any of the years.

Quiz 18: Income Recognition and Measurement of Net Assets

Which of the following methods could not be used to recognize revenue on a real estate sale?

Which one of the following statements is not true?

In real estate sales, what method of revenue recognition must be used if the sale is not consummated?

If the consignment-in account has a credit balance, it is reported on the consignee's balance sheet as a(n)

If a company had an agreement to deliver software that requires significant production, modification, or customization, which method of revenue recognition should it use?

Exhibit 18-4 The following information is provided for Tampa Company: - Refer to Exhibit 18-4.How much gross profit did Tampa Company report in 2011?

When there is a very high degree of uncertainty about the collectibility of the sales price in a sale, the preferred method of revenue recognition is the

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

The entry that the consignee makes to record the commission earned on a sale of goods held on consignment is

Exhibit 18-4 The following information is provided for Tampa Company: - Refer to Exhibit 18-4.How much deferred gross profit is still on the books at the end of 2011?

If Consignment-out has a debit balance, the account should be disclosed on the balance sheet as a(n)

Givens, Inc.repossessed an item it sold in 2010 with a gross profit of 40%.The fair value of the repossessed item was $140.The remaining receivable amounted to $400.What account had the smallest amount debited to it?

If a company has an agreement to deliver software that does not require significant production, modification, or customization, it recognizes revenue when persuasive evidence of an agreement exists and

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

Exhibit 18-4 The following information is provided for Tampa Company: - Refer to Exhibit 18-4.How much gross profit did Tampa Company report in 2010?