Question 1

The revenue recognition principle adopted by the FASB provides that revenue is recognized when (a) it is collected and (b) the earnings process is complete.

Accepted Answer

The revenue recognition principle states that revenue is recognized when the earnings process is complete or virtually complete and the revenue is realizable or realized, not necessarily when it is collected.

Question 2

Transactions for which sales recognition is postponed because of a high ratio of returned merchandise should not be recognized as sales until the return privilege has substantially expired.

Accepted Answer

Revenue recognition principles dictate that sales should only be recognized when they are realized or realizable, and the earnings process is complete. If there's a high likelihood of returns, the sale is not considered complete until the return period expires.

Question 3

Trade loading and channel stuffing are management and marketing policy decisions and actions that hype sales, distort operating results, and window dress financial statements.

Accepted Answer

Trade loading and channel stuffing involve pushing more products through the distribution channels than the market can absorb, artificially inflating sales figures to make a company's financial performance appear better than it actually is. This can mislead investors and distort the true financial health of the company.

Question 4

Under the cost-to-cost basis, the percentage of completion is measured by comparing costs incurred to date with the most recent estimate of revenues collected to date.

Accepted Answer

Under the cost-to-cost basis, the percentage of completion is measured by comparing costs incurred to date with the most recent estimate of the total costs expected to be incurred for the project.

Question 5

The principal advantage of the completed-contract method in accounting for long-term construction contracts is that reported income is based on final results rather than on estimates of unperformed work.

Accepted Answer

The completed-contract method defers all revenue and expense recognition until a contract is fully completed, thus basing reported income on actual, final results rather than on estimates of unperformed work, which can be subject to significant changes.

Question 6

The major disadvantage of the completed-contract method as compared with the percentage of-completion method is that total net income over the life of the construction contract is normally smaller under the completed-contract method.

Accepted Answer

The total net income over the life of the construction contract is the same under both the completed-contract method and the percentage-of-completion method; the difference lies in the timing of when the income is recognized.

Question 7

Because payment for a product sold on an installment basis is spread over a relatively long period, the risk of loss resulting from uncollectible accounts is greater in installment sales transactions than in ordinary sales.

Accepted Answer

In installment sales, payments are spread over a period, increasing the duration of exposure to credit risk, thus making the risk of loss from uncollectible accounts higher compared to ordinary sales where payments are typically made in a shorter timeframe.

Question 8

Under the installment-sales method, emphasis is placed on collection rather than on sale, and revenue is considered unrealized until the entire sales price has been collected.

Accepted Answer

Under the installment-sales method, revenue and cost of goods sold are recognized at the point of sale, but profit is recognized as cash payments are received, not when the entire sales price has been collected.

Question 9

The difference between realized gross profit and deferred gross profit on installment sales is based on the cash collections related to the installment sales.

Accepted Answer

The difference arises because realized gross profit is recognized based on the cash collections from installment sales, while deferred gross profit represents the portion of gross profit not yet recognized, awaiting future cash collections.

Question 10

The deposit method postpones recognizing a sale until a determination can be made as to whether a sale has occurred for accounting purposes.

Accepted Answer

The deposit method is used in accounting when there is significant uncertainty about whether a sale has actually occurred or will occur, thus recognition of the sale is postponed until that determination can be made.

Question 11

The annual entries to record costs of construction, progress billings, and collections from customers under the completed-contract method would be identical to those illustrated under the percentage-of- completion method with the significant exclusion of the recognition of revenue and gross profit.

Accepted Answer

Under the completed-contract method, revenue and gross profit are recognized only when the contract is completed, unlike the percentage-of-completion method where they are recognized as the work progresses. However, the entries for costs, billings, and collections are similar in both methods.

Question 12

Repossessed merchandise as a result of a defaulted installment sales contract should be recorded at the best possible estimate of what the item can ultimately be resold for in the second-hand market.

Accepted Answer

Repossessed merchandise should be recorded at the lower of its cost or market value, not just the estimated resale value in the second-hand market. This approach ensures that the asset is not overstated on the balance sheet.

Question 13

When interest is involved in installment sales, it should be accounted for as an addition to gross profit recognized on the installment sales collections during the period.

Accepted Answer

Interest should be accounted for separately from gross profit in installment sales, as it represents a financing component rather than a part of the sales revenue.

Question 14

Which of the following is not an accurate representation concerning revenue recognition?
A) Companies recognize revenue from selling products at the date of sale, usually interpreted to mean the date of delivery to customers.
B) Companies recognize revenue from services rendered when cash is received or when services have been performed.
C) Companies recognize revenue from permitting others to use enterprise assets as time passes or as the assets are used.
D) Companies recognize revenue from disposing of assets other than products at the date of sale.

Accepted Answer

Revenue from services is recognized when the services are performed, not necessarily when cash is received.

Question 15

The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions?
A) The amount of future returns can be reasonably estimated.
B) The seller's price is substantially fixed or determinable at time of sale.
C) The buyer's obligation to the seller would not be changed in the event of theft or damage of the product.
D) The buyer is obligated to pay the seller upon resale of the product.

Accepted Answer

The condition that the buyer is obligated to pay the seller upon resale of the product is not one of the six conditions for recognizing revenue at the time of sale when there is a right of return. The conditions focus on estimations of returns, price determinability, and the seller's and buyer's rights and obligations at the time of the original sale, not upon the resale of the product.

Question 16

Which of the following is not a condition that must be present for a company to recognize revenue at the time of sale when the company gives the buyer the right to return the product?
A) The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.
B) The present value of the future returns can be reasonably estimated.
C) The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
D) The seller's price to the buyer is substantially fixed or determinable at the date of sale.

Accepted Answer

The correct condition that does not need to be present for a company to recognize revenue at the time of sale, even when the buyer has the right to return the product, is that the present value of the future returns can be reasonably estimated. Revenue recognition principles focus on the transfer of control and risks and rewards of ownership, not on the ability to estimate future returns' present value.

Question 17

The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions?
A) Estimates of progress toward completion, revenues, and costs are reasonably dependable.
B) The contractor can be expected to perform the contractual obligation.
C) The buyer can be expected to satisfy some of the obligations under the contract.
D) The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.

Accepted Answer

The percentage-of-completion method focuses on the ability to make reliable estimates of progress, costs, and revenues, the enforceability of the contract, and the contractor's ability to complete the obligation. The expectation that the buyer will satisfy some of the obligations under the contract is not a necessary condition for using this accounting method.

Question 18

Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be
A) recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.
B) recognized in the current period under the percentage-of-completion method, but the completed-contract method should defer recognition of the loss to the time when the contract is completed.
C) recognized in the current period under the completed-contract method, but the percentage-of-completion method should defer the loss until the contract is completed.
D) deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

Accepted Answer

When a loss is expected on a long-term contract, accounting standards require that the entire expected loss be recognized immediately in the current period, regardless of whether the percentage-of-completion or completed-contract method is used. This approach ensures that financial statements reflect the most accurate and current information about the company's financial health.

Question 19

When there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract, which of the following is correct?
A) Under both the percentage-of-completion and the completed-contract methods, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
B) Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
C) Under the completed-contract method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
D) No current period adjustment is required.

Accepted Answer

Under the percentage-of-completion method, an increase in estimated costs requires a current period adjustment to correct previously recognized gross profit based on the new estimates. The completed-contract method does not recognize profit until the project is complete, so no adjustment for prior periods is needed.

Question 20

Under the completed-contract method of accounting for long-term construction contracts, interim charges and/or credits to the income statement are made for

Accepted Answer

The answer of Under the completed-contract method of accounting for...

Quiz 7: Revenue Recognition