Deck 18: Revenue Recognition

Question 1

The installment-sales method defers only the gross profit instead of both the sales price and cost of goods sold.

Answer 1

True

Question 2

If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset.

Answer 2

True

Question 3

The Construction in Process account includes only construction costs under the percentage-of-completion method.

Answer 3

False

Question 4

Under the installment-sales method, companies defer revenue and income recognition until the period of cash collection.

Question 5

Under the completion-of-production basis, companies recognize revenue when agricul-tural crops are harvested since the sales price is reasonably assured and no significant costs are involved in product distribution.

Question 6

Companies can recognize revenue prior to completion and delivery of the product under certain circumstances.

Question 7

The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not completed-contract.

Question 8

Deferred gross profit is generally treated as unearned revenue and classified as a current liability under the installment-sales method.

Question 9

Under the cost-recovery method, a company recognizes no revenue until cash payments by the buyer exceed the cost of the merchandise sold.

Question 10

If a company sells its product but gives the buyer the right to return it, the company should not recognize revenue until the sale is collected.

Question 11

A loss in the current period on a profitable contract must be recognized under both the percentage-of-completion and completed-contract method.

Question 12

Companies recognize profit under the cost-recovery method only when cash collections exceed the total cost of the goods sold.

Question 13

Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the completed-contract method.

Question 14

Companies should recognize revenue when it is realized and when cash is received.

Question 15

Under the completed-contract method, companies recognize costs only when the contract is completed.

Question 16

The principal advantage of the completed-contract method is that reported revenue reflects final results rather than estimates.

Question 17

The most popular input measure used to determine the progress toward completion in long-term contracts is the cost-to-cost basis.

Question 18

Revenues are realized when a company exchanges goods and services for cash or claims to cash.

Question 19

Once the separate units of accounting are determined under multiple-deliverable arrangement, the amount paid for the arrangement is allocated among the separate units based on cost of manufacturing the separate unit.

Question 20

Trade loading is a practice through which manufacturers try to show sales, profits, and market share they don't actually have.

Question 21

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.

Question 22

The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it

A) is unacceptable for income tax purposes.
B) gives results based upon estimates which may be subject to considerable uncertainty.
C) is likely to assign a small amount of revenue to a period during which much revenue was actually earned.
D) None of these answers are correct.

Question 23

When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are considered

A) earned.
B) realized.
C) recognized.
D) All of these answers are correct.

Question 24

The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of these 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.

Question 25

Which of the following is not a reason why revenue is recognized at the time of sale?

A) Realization has occurred.
B) The sale is the critical event.
C) Title legally passes from seller to buyer.
D) All of these are reasons to recognize revenue at the time of sale.

Question 26

Which of the following is not an accurate representation concerning revenue recognition?

A) Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers.
B) Revenue from services rendered is recognized when cash is received or when services have been performed.
C) Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used.
D) Revenue from disposing of assets other than products is recognized at the date of sale.

Question 27

One of the more popular input measures used to determine the progress toward completion in the percentage-of-completion method is the

A) revenue-percentage basis.
B) cost-percentage basis.
C) progress completion basis.
D) cost-to-cost basis.

Question 28

Under the completed-contract method

A) revenue, cost, and gross profit are recognized during the production cycle.
B) revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed.
C) revenue, cost, and gross profit are recognized at the time the contract is completed.
D) None of these answers are correct.

Question 29

Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as

A) service revenue.
B) deferred service revenue.
C) a reduction in installment accounts receivable.
D) a direct addition to retained earnings.

Question 30

The process of formally recording or incorporating an item in the financial statements of an entity is

A) allocation.
B) articulation.
C) realization.
D) recognition.

Question 31

When goods or services are exchanged for cash or claims to cash (receivables), revenues are considered

A) earned.
B) realized.
C) recognized.
D) All of these answers are correct.

Question 32

In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the

A) total costs incurred to date.
B) total estimated cost.
C) unbilled portion of the contract price.
D) total contract price.

Question 33

In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be

A) the terms of payment in the contract.
B) the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
C) the method commonly used by the contractor to account for other long-term construction contracts.
D) the inherent nature of the contractor's technical facilities used in construction.

Question 34

The principal advantage of the completed-contract method is that

A) reported revenue is based on final results rather than estimates of unperformed work.
B) it reflects current performance when the period of a contract extends into more than one accounting period.
C) it is not necessary to recognize revenue at the point of sale.
D) a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used.

Question 35

All units in a multiple-deliverable arrangement are considered separate units of accounting, provided that:

A) the customer can avail the unit from a third party.
B) the arrangement includes a general right of repurchase relative to the delivered item.
C) the seller is the sole manufacturer of the separate unit.
D) performance of the undelivered item is in the control of the buyer.

Question 36

The revenue recognition principle provides that revenue is recognized when

A) it is realized.
B) it is realizable.
C) it is realized or realizable and it is earned.
D) None of these answers are correct.

Question 37

A sale should not be recognized as revenue by the seller at the time of sale if

A) payment was made by check.
B) the selling price is less than the normal selling price.
C) the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated.
D) None of these answers are correct.

Question 38

An alternative available when the seller is exposed to continued risks of ownership through return of the product is

A) recording the sale, and accounting for returns as they occur in future periods.
B) not recording a sale until all return privileges have expired.
C) recording the sale, but reducing sales by an estimate of future returns.
D) All of these answers are correct.

Question 39

How should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract?

A) Progress billings as deferred income, construction in progress as a deferred expense.
B) Progress billings as income, construction in process as inventory.
C) Net balance, as a current asset if debit balance, and current liability if credit balance.
D) Net balance, as income from construction if credit balance, and loss from construction if debit balance.

Question 40

How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?

A) As construction in process in the current asset section of the balance sheet.
B) As construction in process in the noncurrent asset section of the balance sheet.
C) As a receivable in the noncurrent asset section of the balance sheet.
D) In a note to the financial statements until the customer is formally billed for the portion of work completed.

Question 41

Under the cost-recovery method of revenue recognition,

A) income is recognized on a proportionate basis as the cash is received on the sale of the product.
B) income is recognized when the cash received from the sale of the product is greater than the cost of the product.
C) income is recognized immediately after the sale is made.
D) None of these answers are correct.

Question 42

The installment-sales method of recognizing profit for accounting purposes is acceptable if

A) collections in the year of sale do not exceed 30% of the total sales price.
B) an unrealized profit account is credited.
C) collection of the sales price is not reasonably assured.
D) the method is consistently used for all sales of similar merchandise.

Question 43

Under the deposit method

A) the seller recognizes revenue or income on the receipt of cash.
B) a company receives cash from the buyer before it transfers the goods or property.
C) the buyer reports the property as an asset on its balance sheet.
D) the seller has performed on the contract and a legitimate claim exists.

Question 44

Deferred gross profit on installment sales is generally treated as a(n)

A) deduction from installment accounts receivable.
B) deduction from installment sales.
C) unearned revenue and classified as a current liability.
D) deduction from gross profit on sales.

Question 45

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 defers 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 defers 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.

Question 46

Under the installment-sales method,

A) revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product.
B) gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale.
C) gross profit is not recognized until the amount of cash received exceeds the cost of the item sold.
D) revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received.

Question 47

Cost estimates at the end of the second year indicate that a loss will result on completion of the entire contract. Which of the following statements is correct?

A) Under the completed-contract method, the loss is not recognized until the year the construction is completed.
B) Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed.
C) Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.
D) Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs.

Question 48

In certain cases, revenue is recognized at the completion of production even though no sale has been made. Which of the following statements is not true?

A) Examples involve precious metals or farm equipment.
B) The products possess immediate marketability at quoted prices.
C) No significant costs are involved in selling the product.
D) All of these statements are true.

Question 49

The deposit method of revenue recognition is used when

A) the product can be marketed at quoted prices and units are interchangeable.
B) cash is received before the sales transaction is complete.
C) the contract is short-term or the percentage-of-completion method can't be used.
D) there are no significant costs of distribution.

Question 50

The method most commonly used to report defaults and repossessions is

A) provide no basis for the repossessed asset thereby recognizing a loss.
B) record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
C) record the repossessed merchandise at book value, recording no gain or loss.
D) None of these answers are correct.

Question 51

The realization of income on installment sales transactions involves

A) recognition of the difference between the cash collected on installment sales and the cash expenses incurred.
B) recording the net income related to installment sales and recognizing the income as cash is collected.
C) deferring gross profit while recognizing operating or financial expenses in the period incurred.
D) deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected.

Question 52

Which of the following methods to account for sales is used when a high degree of uncertainty exists related to the collection of receivables?

A) Cost-recovery method.
B) Percentage-of-completion method.
C) Deposit method.
D) Completed-contract method.

Question 53

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.

Question 54

The cost-recovery method

A) is prohibited under current GAAP due to its conservative nature.
B) requires a company to defer profit recognition until all cash payments are received from the buyer.
C) is used by sellers when there is a reasonable basis for estimating collectibility.
D) recognizes total revenue and total cost of goods sold in the period of sale.

Question 55

Types of franchising arrangements include all of the following except

A) service sponsor-retailer.
B) wholesaler-service sponsor.
C) manufacturer-wholesaler.
D) wholesaler-retailer.

Question 56

In consignment sales, the consignee

A) records the merchandise as an asset on its books.
B) records a liability for the merchandise held on consignment.
C) recognizes revenue when it ships merchandise to the consignor.
D) prepares an "account report" for the consignor which shows sales, expenses, and cash receipts.

Question 57

For which of the following products is it appropriate to recognize revenue at the completion of production even though no sale has been made?

A) Automobiles
B) Large appliances
C) Single family residential units
D) Precious metals

Question 58

A seller is using the cost-recovery method for a sale. Interest will be earned on the future payments. Which of the following statements is not correct?

A) After all costs have been recovered, any additional cash collections are included in income.
B) Interest revenue may be recognized before all costs have been recovered.
C) The deferred gross profit is offset against the related receivable on the balance sheet.
D) Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.

Question 59

The criteria for recognition of revenue at the completion of production of precious metals and farm products include

A) an established market with quoted prices.
B) low additional costs of completion and selling.
C) units are interchangeable.
D) All of these answers are correct.

Question 60

A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported?

A) At the time of completion of the equipment (completion of production method)
B) At the date of delivery (sales method)
C) The installment-sales method
D) The cost-recovery method

Question 61

Hayes Construction Corporation contracted to construct a building for $4,500,000. Construction began in 2014 and was completed in 2015. Data relating to the contract are summarized below: Hayes uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2014, and 2015, respectively, Hayes should report gross profit of

A) $810,000 and $540,000.
B) $2,700,000 and $1,800,000.
C) $900,000 and $450,000.
D) $0 and $1,350,000.

Question 62

Dexter purchases equipment from Ray Company for a price of $5,000,000 and chooses Ray to do the installation. Ray doesn't charge for the installation of equipment. The price of the installation service is estimated to have a fair value of $60,000. Assuming the transaction to be multiple-deliverable arrangement, compute the amount to be allocated to installation.

A) $59,289
B) $60,720
C) $60,000
D) $61,457

Question 63

Use the following information for questions 78 and 79.
Kiner, Inc. began work in 2014 on a contract for $16,800,000. Other data are as follows:
If Kiner uses the percentage-of-completion method, the gross profit to be recognized in 2014 is

A) $2,880,000.
B) $3,200,000.
C) $4,320,000.
D) $4,800,000.

Question 64

Continuing franchise fees should be recorded by the franchisor

A) as revenue when earned and receivable from the franchisee.
B) as revenue when received.
C) in accordance with the accounting procedures specified in the franchise agreement.
D) as revenue only after the balance of the initial franchise fee has been collected.

Question 65

For the year ended December 31, 2015, Cooper would recognize gross profit on the building of:

A) $632,500
B) $690,000
C) $810,000
D) $0

Question 66

Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of equipment or supplies. When recording the initial franchise fee, the franchisor should

A) increase revenue recognized from the initial franchise fee by the amount of the expected future purchases.
B) record a portion of the initial franchise fee as unearned revenue which will increase the selling price when the franchisee subsequently makes the bargain purchases.
C) defer recognition of any revenue from the initial franchise fee until the bargain purchases are made.
D) None of these.

Question 67

Adler Construction Co. uses the percentage-of-completion method. In 2014, Adler began work on a contract for $6,600,000 and it was completed in 2015. Data on the costs are: For the years 2014 and 2015, Adler should recognize gross profit in 2014 and 2015 of

Question 68

Use the following information for questions 78 and 79.
Kiner, Inc. began work in 2014 on a contract for $16,800,000. Other data are as follows:
If Kiner uses the completed-contract method, the gross profit to be recognized in 2015 is

A) $2,720,000.
B) $5,600,000.
C) $2,800,000.
D) $11,200,000.

Question 69

Use the following information for questions 73 and 74.
In 2015, Fargo Corporation began construction work under a three-year contract. The contract price is $4,800,000. Fargo uses 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 statement presentations relating to this contract at December 31, 2015, follow:
How much cash was collected in 2015 on this contract?

A) $200,000
B) $280,000
C) $40,000
D) $480,000

Question 70

Use the following information for questions 73 and 74.
In 2015, Fargo Corporation began construction work under a three-year contract. The contract price is $4,800,000. Fargo uses 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 statement presentations relating to this contract at December 31, 2015, follow:
What was the initial estimated total income before tax on this contract?

A) $600,000
B) $640,000
C) $800,000
D) $960,000

Question 71

Use the following information for questions 65-68:
Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is $14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2014.
Seasons Construction completes the remaining 25% of the building construction on December 31, 2016, as scheduled. At that time the total costs of construction are $15,000,000. What is the total amount of Revenue from Long-Term Contracts and Construction Expenses that Seasons will recognize for the year ended December 31, 2016? The following information relates to questions 69 and 70.Cooper Construction Company had a contract starting April 2015, to construct a $18,000,000 building that is expected to be completed in September 2017, at an estimated cost of $16,500,000. At the end of 2015, the costs to date were $7,590,000 and the estimated total costs to complete had not changed. The progress billings during 2015 were $3,600,000 and the cash collected during 2015 was 2,400,000.

Question 72

Use the following information for questions 76 and 77.
Gomez, Inc. began work in 2014 on contract #3814, which provided for a contract price of $14,400,000. Other details follow:
Assume that Gomez uses the percentage-of-completion method of accounting. The portion of the total gross profit to be recognized as income in 2014 is

A) $900,000.
B) $1,200,000.
C) $3,600,000.
D) $4,800,000.

Question 73

A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable that the option will be exercised. When recording the initial franchise fee, the franchisor should

A) record the entire initial franchise fee as a deferred credit which will reduce the franchisor's investment in the purchased outlet when the option is exercised.
B) record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid when the option is exercised.
C) record the portion of the initial franchise fee which is attributable to the bargain purchase option as a reduction of the future amounts receivable from the franchisee.
D) None of these.

Question 74

At December 31, 2015 Cooper would report Construction in Process in the amount of:

A) $690,000
B) $7,590,000
C) $8,280,000
D) $7,080,000

Question 75

Monroe Construction Company uses the percentage-of-completion method of accounting. In 2015, Monroe began work on a contract it had received which provided for a contract price of $25,000,000. Other details follow: What should be the gross profit recognized in 2015?

A) $1,000,000
B) $13,000,000
C) $3,000,000
D) $5,000,000

Question 76

Use the following information for questions 65-68:
Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is $14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2014.
At December 31, 2015, Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $14,400,000 due to unanticipated price increases. What is the total amount of Construction Expenses that Seasons will recognize for the year ended December 31, 2015?

A) $10,800,000
B) $6,300,000
C) $6,390,000
D) $6,540,000

Question 77

Use the following information for questions 76 and 77.
Gomez, Inc. began work in 2014 on contract #3814, which provided for a contract price of $14,400,000. Other details follow:
Assume that Gomez uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2015 is

A) $1,800,000.
B) $2,700,000.
C) $4,650,000.
D) $14,400,000.

Question 78

Use the following information for questions 65-68:
Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is $14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2014.
At December 31, 2015, Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $14,400,000 due to unanticipated price increases. What is reported in the balance sheet at December 31, 2015 for Seasons as the difference between the Construction in Process and the Billings on Construction in Process accounts, and is it a debit or a credit?

Question 79

Use the following information for questions 80 and 81.
Horner Construction Co. uses the percentage-of-completion method. In 2014, Horner began work on a contract for $16,500,000; it was completed in 2015. The following cost data pertain to this contract: The amount of gross profit to be recognized on the income statement for the year ended December 31, 2015 is

A) $2,400,000.
B) $2,580,000.
C) $2,700,000.
D) $6,450,000.

Question 80

Use the following information for questions 65-68:
Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is $14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2014.
At December 31, 2014, Seasons estimates that it is 30% complete with the construction, based on costs incurred. What is the total amount of Revenue from Long-Term Contracts recognized for 2014 and what is the balance in the Accounts Receivable account assuming Cannon Cafe has not yet made its last quarterly payment?