Question 1

Companies that engage in long-term sales contracts such as construction projects often use the cost-to-cost method to recognize revenue. This means that revenue is recognized in proportion to the project's completion.

Accepted Answer

The cost-to-cost method is a common approach for recognizing revenue in long-term contracts, such as construction projects, where revenue is recognized based on the proportion of costs incurred to the estimated total costs, reflecting the project's stage of completion.

Question 2

A seller, acting as an agent for another company by selling the company's goods on consignment, recognizes the gross amount of the sale as revenue.

Accepted Answer

The seller should recognize only the commission earned on the sale as revenue, not the gross amount of the sale, since the goods are sold on consignment and ownership does not transfer to the seller.

Question 3

Bed Bath and Beyond has a return policy which states that the customer "may return a purchase for a refund, merchandise credit, or exchange to any of our stores nationwide or to our returns processing center". The company can report revenue on the full amount as soon as the merchandise is sold.

Accepted Answer

Revenue can only be recognized when it is earned and realizable, and the return policy implies that there is a possibility of returns, which affects the timing of revenue recognition.

Question 4

Revenue from a foreign subsidiary will be smaller in U.S. dollars when the dollar strengthens relative to the foreign currency.

Accepted Answer

When the U.S. dollar strengthens relative to a foreign currency, it means that each dollar can buy more of the foreign currency. Therefore, when converting the revenue earned in the foreign currency back to U.S. dollars, the amount will be smaller because the stronger dollar decreases the foreign currency's value in dollar terms.

Question 5

Accounts receivables (net) reported in the current asset section of a company's balance sheet represents the total amount owed by customers within the next year.

Accepted Answer

The answer of Accounts receivables (net) reported in the current...

Question 6

In order to report accounts receivable, net, companies estimate the amount they do not expect to collect from their credit customers.

Accepted Answer

Companies estimate the amount they do not expect to collect from their credit customers to report accounts receivable, net. This estimation is known as the allowance for doubtful accounts, which is subtracted from the total accounts receivable to reflect the net realizable value.

Question 7

Overestimating the allowance for uncollectible accounts receivable can shift income from the current period into one or more future periods.

Accepted Answer

Overestimating the allowance for uncollectible accounts receivable reduces current period income by increasing the expense for bad debts, which can lead to higher income in future periods as actual bad debts turn out to be less than anticipated.

Question 8

The financial statement effects for uncollectible accounts occur when the company writes off the account because that is when all the uncertainty is resolved.

Accepted Answer

The financial statement effects for uncollectible accounts begin with the recognition of an allowance for doubtful accounts, which estimates future uncollectible amounts. This estimation process introduces the effects before the actual write-off, acknowledging the uncertainty in advance.

Question 9

Which of the following items creates complications related to revenue recognition?
A) Bonuses tied to sales goals
B) Long-term construction contracts
C) Multiple element sales contracts
D) Consignment goods
E) All of the above

Accepted Answer

All of the options listed create complications related to revenue recognition. Bonuses tied to sales goals can affect when revenue is recognized, long-term construction contracts often involve recognizing revenue over time and require estimates of progress towards completion, multiple element sales contracts involve allocating the transaction price to different performance obligations, and consignment goods involve recognizing revenue when control of the goods has been transferred, which can be complex to determine.

Question 10

On December 31, 2017, State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State Construction anticipates the construction will take three years.
The company's accountants provide the following contract details relating to the project:
 During the three-year construction period, State Construction incurred costs as follows:
 State Construction uses the cost-to-cost method to recognize revenue.
Which of the following represent the revenue recognized in 2018, 2019, and 2020?
A) $225 million, $300 million, $2550 million
B) $60 million, $240 million, $120 million
C) $33 million, $198 million, $99 million
D) $78 million, $468 million, $234 million
E) None of the above

Accepted Answer

The answer of On December 31, 2017, State Construction Inc....

Question 11

In spring 2017, Parmac Engineering Company signed a $240 million contract with the city of Parkersburg, to construct a new city hall. Parmac expects to construct the building within two years and incur expenses of $180 million. The city of Parkersburg paid $60 million when the contract was signed, $120 million within the next six months, and the final $60 million exactly one year from the signing of the contract. Parmac incurred $72 million in costs during 2017 and rest in 2018 to complete the contract on time.
Using the cost-to-cost method how much revenue should Parmac recognize in 2017?
A) $ 60 million
B) $108 million
C) $ 96 million
D) $180 million
E) None of the above

Accepted Answer

The cost-to-cost method recognizes revenue based on the percentage of costs incurred to date relative to the total estimated costs of the project. In this case, Parmac incurred $72 million in costs during 2017, which represents 40% of the total estimated costs of $180 million. Therefore, Parmac should recognize 40% of the total contract revenue of $240 million, which is $96 million.

Question 12

Costco Wholesale Corporation collects annual non-refundable membership fees from customers. When should Costco recognize revenue for these membership fees?
A) Immediately when cash is received because the fees are nonrefundable
B) Evenly over the membership year
C) Evenly over the current fiscal year
D) At the end of the membership year when Costco has discharged its obligation to the customer
E) Pro rata over the customer's actual purchasing pattern

Accepted Answer

Revenue from membership fees should be recognized evenly over the membership year because the fee entitles the customer to benefits over the entire period, aligning with the revenue recognition principle that revenue is recognized as the service is provided.

Question 13

Ticketmaster contracts with the producer of Blue Man Group to sell tickets online. Ticketmaster charges each customer a fee of $9 per ticket and receives $22 per ticket from the producer. Ticketmaster does not take control of the ticket inventory. Average ticket price for the event is $105.
How much revenue should Ticketmaster recognize for each Blue Man Group ticket sold?
A) $9 because the $22 from the producer is similar to a negative cost of goods sold
B) $105 because the $83 is cost of goods sold paid to the Blue Man Group producer
C) $31 because both the fee from the customer and the Blue Man Group producer are earned
D) $114 because the $83 is cost of goods sold paid to the Blue Man Group producer
E) None of the above

Accepted Answer

Ticketmaster should recognize $31 in revenue for each ticket sold because it earns a $9 fee from the customer and receives $22 from the producer, totaling $31. The company does not take control of the ticket inventory, so it acts as an agent rather than a principal in the transaction, meaning it recognizes revenue for the services it provides (the $9 fee) plus any additional amounts received from the producer ($22), not the full ticket price.

Question 14

The 2016 annual report of Leahy Enterprises included the following disclosure:
During fiscal 2016, the U.S. dollar strengthened relative to the other principal currencies in which we transact business with the exception of the Indian rupee.
What effect did these currency fluctuations have on Leahy Enterprises' 2016 consolidated income statement?
A) Net profit of the Indian subsidiary will be higher
B) Net profit of the Indian subsidiary will be lower
C) Net assets of the subsidiaries that report in the other principal currencies will be higher
D) Net assets of the subsidiaries that report in the other principal currencies will be lower
E) Both A and D

Accepted Answer

The answer of The 2016 annual report of Leahy Enterprises...

Question 15

The 2016 financial statements of Leggett & Platt, Inc. include the following information in a footnote. What are the company's current gross accounts and other receivables at the end of 2016?
 A) $486.6 million
B) $479.4 million
C) $452 million
D) $493.8 million
E) None of the above

Accepted Answer

The answer of The 2016 financial statements of Leggett &...

Question 16

The 2016 financial statements of Leggett & Platt include the accounts receivable footnote:
Total accounts and other receivables at December 31 consisted of the following:
 The balance sheet reports total assets of $2,984.1 million at December 31, 2016.
The common-size amount for gross accounts and other receivables are:
A) $486.6 million
B) $493.8 million
C) 16.5%
D) 5.0%
E) None of the above

Accepted Answer

The answer of The 2016 financial statements of Leggett &...

Question 17

The 2016 income statements of Leggett & Platt, Inc. reports net sales of $3,749.9 million. The balance sheet reports accounts receivable, net of $486.6 million at December 31, 2016 and $520.2 million at December 31, 2015.
The days sales outstanding in 2016 was:
A) 49 days
B) 10 days
C) 44 days
D) 8 days
E) None of the above

Accepted Answer

Days sales outstanding = (Average accounts receivable / Net sales) * 365 days= (($486.6 million + $520.2 million) / 2 / $3,749.9 million) * 365 days= 49 days

Question 18

The 2017 Form 10-K of Oracle Corporation, for the May 31, 2017 year-end, included the following information relating to their allowance for doubtful accounts: Balance in allowance at the beginning of the year $327 million, accounts written off during the year of $137 million, balance in allowance at the end of the year $319 million.
What did Oracle Corporation report as bad debt expense for the year?
A) $27 million
B) $129 million
C) $118 million
D) $151 million
E) None of the above

Accepted Answer

The answer of The 2017 Form 10-K of Oracle Corporation,...

Question 19

At what amount will accounts receivable be reported on the balance sheet if the gross receivable balance is $50,000 and the allowance for uncollectible accounts is estimated at 16% of gross receivables?
A) $6,300
B) $42,000
C) $50,000
D) $28,700

Accepted Answer

The accounts receivable will be reported at $42,000 on the balance sheet. This is calculated by subtracting the allowance for uncollectible accounts ($8,000, which is 16% of $50,000) from the gross receivable balance ($50,000), resulting in $42,000.

Question 20

Thomas Company receives information that requires the company to increase its expectations of uncollectible accounts receivable.
Which of the following does not occur on the company's financial statements?
A) Bad debt expense is increased
B) Accounts receivables (gross) is reduced
C) Net income is reduced
D) The allowance account is increased
E) None of the above

Accepted Answer

B) Accounts receivables (gross) is not directly reduced when a company increases its expectations of uncollectible accounts receivable. Instead, the company increases its bad debt expense and the allowance for doubtful accounts, which reduces net income and the net carrying value of accounts receivable, but the gross amount of accounts receivable remains unchanged.

Quiz 5: Revenues, Receivables, and Operating Expenses

Companies that engage in long-term sales contracts such as construction projects often use the cost-to-cost method to recognize revenue. This means that revenue is recognized in proportion to the project's completion.

A seller, acting as an agent for another company by selling the company's goods on consignment, recognizes the gross amount of the sale as revenue.

Bed Bath and Beyond has a return policy which states that the customer "may return a purchase for a refund, merchandise credit, or exchange to any of our stores nationwide or to our returns processing center". The company can report revenue on the full amount as soon as the merchandise is sold.

Revenue from a foreign subsidiary will be smaller in U.S. dollars when the dollar strengthens relative to the foreign currency.

Accounts receivables (net) reported in the current asset section of a company's balance sheet represents the total amount owed by customers within the next year.

In order to report accounts receivable, net, companies estimate the amount they do not expect to collect from their credit customers.

Overestimating the allowance for uncollectible accounts receivable can shift income from the current period into one or more future periods.

The financial statement effects for uncollectible accounts occur when the company writes off the account because that is when all the uncertainty is resolved.

Which of the following items creates complications related to revenue recognition?

Costco Wholesale Corporation collects annual non-refundable membership fees from customers. When should Costco recognize revenue for these membership fees?

The 2016 financial statements of Leggett & Platt, Inc. include the following information in a footnote. What are the company's current gross accounts and other receivables at the end of 2016? A) $486.6 million B) $479.4 million C) $452 million D) $493.8 million E) None of the above

The 2016 income statements of Leggett & Platt, Inc. reports net sales of $3,749.9 million. The balance sheet reports accounts receivable, net of $486.6 million at December 31, 2016 and $520.2 million at December 31, 2015. The days sales outstanding in 2016 was:

At what amount will accounts receivable be reported on the balance sheet if the gross receivable balance is $50,000 and the allowance for uncollectible accounts is estimated at 16% of gross receivables?

Thomas Company receives information that requires the company to increase its expectations of uncollectible accounts receivable. Which of the following does not occur on the company's financial statements?