Question 1

Table 17-1
 In 2016, a developer sells land for $ \$ 800000 $. The cost of the land was $ \$ 500000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300000 $, $\$200 000$ and $ \$ 100000 $ which will be paid in 2017, 2018 and 2019. He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.

-Refer to Table 17-1.What amount of profit will be recorded when the 2018 payment is received?

Accepted Answer

The answer of Table 17-1
 In 2016, a developer sells...

Question 2

Table 17-1
 In 2016, a developer sells land for $ \$ 800000 $. The cost of the land was $ \$ 500000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300000 $, $\$200 000$ and $ \$ 100000 $ which will be paid in 2017, 2018 and 2019. He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.

-Refer to Table 17-1.What is the developer's gross profit?

Accepted Answer

The developer's gross profit is calculated as the total revenue minus the total cost of goods sold. Total revenue from the table is $1,500,000 and the total cost of goods sold is $1.2m, therefore the gross profit is $300,000.

Question 3

A construction firm was contracted to build a bridge for $100 000 000.It is estimated that the total cost will be roughly $95 000 000 spread over five years,but it is unable to estimate reliably the yearly percentage of completion.Under the completed contract method,what amount of profit will be recorded in Year 2?

Accepted Answer

Under the completed contract method, revenue and expenses are only recognized when the project is completed. Therefore, no profit will be recorded until the end of the project. In Year 2, there may be some progress on the project, but no revenue or expense will be recognized until the project is completed. Therefore, the answer is zero (B).

Question 4

Luke's Construction receives a contract to build a bridge for $6 000 000,with an estimated cost of
$4 000 000.Over the three-year construction period,the costs are estimated to be $500 000 in Year 1,$3 200 000 in Year 2 and $300 000 in Year 3.How much construction revenue would be reported in Year 2 using the percentage of completion method?

Accepted Answer

The answer of Luke's Construction receives a contract to build...

Question 5

Which type of business would be most likely to use the instalment method to record revenue?

Accepted Answer

Real estate developers may use the instalment method to record revenue for long-term projects, where payments are received over an extended period rather than all at once. This method can accurately reflect the revenue earned during the project, as it is received, rather than waiting until the project is complete to record all revenue at once.

Question 6

In 2017,Amana sold 10 washing machines,which cost $700 each,for a price of $1 300 each.All sales are made on credit and $7 000 was collected in 2017.Using the sales method,how much gross profit will Amana recognise in 2017?

Accepted Answer

The answer of In 2017,Amana sold 10 washing machines,which cost...

Question 7

The total contract price to build an office building is $4 200 000,with estimated costs of $2 800 000.The construction firm's costs for Year 1 were $800 000.Under the percentage of completion method,gross profit reported in Year 1 is:

Accepted Answer

The answer of The total contract price to build an...

Question 8

Table 17-1
 In 2016, a developer sells land for $ \$ 800000 $. The cost of the land was $ \$ 500000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300000 $, $\$200 000$ and $ \$ 100000 $ which will be paid in 2017, 2018 and 2019. He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.

-Refer to Table 17-1.What amount of profit will be recorded when the developer makes the sale and receives the down payment?

Accepted Answer

The answer of Table 17-1
 In 2016, a developer sells...

Question 9

Saunders Hardware sells on the instalment plan.Sales-related figures for Saunders Hardware for 2017 were as follows: sales,$600 000; down payments on the sales,$60 000; collections on instalments,$250 000; beginning inventory,$90 000; ending inventory $60 000; and purchases,$400 000.What is Saunders Hardware's gross profit using the sales method of income recognition?

Accepted Answer

Using the sales method of income recognition, gross profit is calculated as sales minus cost of goods sold (COGS). We need to calculate COGS first:
Beginning inventory + purchases - ending inventory = COGS
$90,000 + $400,000 - $60,000 = $430,000
Now:
Sales - (COGS + down payments + collections on instalments) = gross profit
$600,000 - ($430,000 + $60,000 + $250,000) = $170,000

Question 10

Alpha Hardware sells on the instalment plan.Sales-related figures for Alpha hardware for 2017 were as follows: sales,$700 000; down payments on the sales,$70 000; collections on instalments $300 000; beginning inventory,$50 000; ending inventory,$40 000; and purchases,$410 000.What is Alpha Hardware's gross profit for 2017 using the instalment method?

Accepted Answer

To calculate gross profit using the instalment method, we need to use the following formula:
Gross Profit = (Cash collected + Account Receivables - Ending Inventory) - (Beginning Inventory + Cost of Goods Sold)
Cash collected = down payments + collections
Account Receivables = Total Sales - down payments
Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory

Plugging in the given values, we get:
Cash collected = $70,000 + $300,000 = $370,000
Account Receivables = $700,000 - $70,000 = $630,000
Cost of Goods Sold = $50,000 + $410,000 - $40,000 = $420,000

Now, plugging in these values in the formula:
Gross Profit = ($370,000 + $630,000 - $40,000) - ($50,000 + $420,000)
Gross Profit = $960,000 - $470,000 = $490,000

Therefore, the gross profit for Alpha Hardware in 2017 using the instalment method is $280,000 (Option B).

Question 11

Table 17-1
 In 2016, a developer sells land for $ \$ 800000 $. The cost of the land was $ \$ 500000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300000 $, $\$200 000$ and $ \$ 100000 $ which will be paid in 2017, 2018 and 2019. He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.

-Refer to Table 17-1.What amount of profit will be recorded when the 2019 payment is received?

Accepted Answer

The answer of Table 17-1
 In 2016, a developer sells...

Question 12

On 1 April 2017,Babies Unlimited sold a crib with accessories,which cost $1 000,for $1 500.It was sold for 10% deposit,with the balance to be paid in six equal payments beginning on 1 May 2017.How much sales revenue is recognised in the calendar year 2017 under the instalment method?

Accepted Answer

The answer of On 1 April 2017,Babies Unlimited sold a...

Question 13

When both the total profit on the contract and the progressive degree of completion during construction can be reliably estimated,a construction firm should record income on a long-term construction project using the:

Accepted Answer

When both the total profit on the contract and the progressive degree of completion during construction can be reliably estimated, the percentage of completion method is the appropriate method for recognizing income on a long-term construction project. This method recognizes revenue and expenses in proportion to the degree of completion of the project, which provides a more accurate representation of the actual profitability of the project over time. The sales method is not appropriate for long-term construction projects because it recognizes revenue at the time of the sale, which does not reflect the ongoing work and costs associated with the project. The installment method is used when payment is received over an extended period, while the collection method is used when payment is received in whole or part at the time of the sale.

Question 14

Build-it-Better Constructions received a contract to build a convention centre for $23 000 000.It estimated total costs to be $16 000 000 over a three-year construction period: $5 000 000 in Year 1,$7 000 000 in Year 2,and $4 000 000 in Year 3.What is the total project revenue from the convention centre?

Accepted Answer

The contract amount is $23 000 000, which is the total project revenue. The estimated costs are irrelevant to the calculation of total revenue.

Question 15

In 2017,Amana sold 10 refrigerators that cost $825 each for a price of $1 285 each.Payments are made in 10 equal instalments with no down payment.During 2018,Amana collected $10 285 on the 2017 sales.Using the instalment method and assuming an interest rate of 10%,how much gross profit will Amana recognise in 2018?

Accepted Answer

The answer of In 2017,Amana sold 10 refrigerators that cost...

Question 16

Helen Hines,Solicitor,performed bankruptcy services for a client and billed the full fee of $6 000 on 20 September 2017.Hines is uncertain if she will collect the fee.At 31 December 2017,she had collected $900 and in 2018 has collected an additional $2 000.How much service revenue should Hines report in 2017 and 2018,respectively?

Accepted Answer

The answer of Helen Hines,Solicitor,performed bankruptcy services for a client...

Question 17

Which of the following is not a condition that must be met under AASB 118 'Revenue' before revenue from the sale of goods is recorded?

Accepted Answer

The condition that the cash for the sale has been received is not necessary for revenue recognition under AASB 118. The other conditions listed (effective transfer of ownership and reliable measurement of revenue and related costs) must be met before revenue can be recognized.

Question 18

Table 17-1
 In 2016, a developer sells land for $ \$ 800000 $. The cost of the land was $ \$ 500000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300000 $, $\$200 000$ and $ \$ 100000 $ which will be paid in 2017, 2018 and 2019. He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.

-Refer to Table 17-1.What amount of profit will be recorded when the 2017 payment is received?

Accepted Answer

The answer of Table 17-1
 In 2016, a developer sells...

Question 19

Which business would be most likely to use the percentage of completion method to record income?

Accepted Answer

The percentage of completion method is commonly used by construction firms to record income because their projects are typically long-term and involve stages of completion. This method recognizes revenue and expenses for the proportion of work completed during a particular accounting period.

Question 20

Which profit recognition method is the most conservative?

Accepted Answer

The answer of Which profit recognition method is the most...

Quiz 17: The Framework of Accounting

Which type of business would be most likely to use the instalment method to record revenue?

In 2017,Amana sold 10 washing machines,which cost $700 each,for a price of $1 300 each.All sales are made on credit and $7 000 was collected in 2017.Using the sales method,how much gross profit will Amana recognise in 2017?

The total contract price to build an office building is $4 200 000,with estimated costs of $2 800 000.The construction firm's costs for Year 1 were $800 000.Under the percentage of completion method,gross profit reported in Year 1 is:

On 1 April 2017,Babies Unlimited sold a crib with accessories,which cost $1 000,for $1 500.It was sold for 10% deposit,with the balance to be paid in six equal payments beginning on 1 May 2017.How much sales revenue is recognised in the calendar year 2017 under the instalment method?

When both the total profit on the contract and the progressive degree of completion during construction can be reliably estimated,a construction firm should record income on a long-term construction project using the:

Which of the following is not a condition that must be met under AASB 118 'Revenue' before revenue from the sale of goods is recorded?

Which business would be most likely to use the percentage of completion method to record income?

Which profit recognition method is the most conservative?