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Documente Cultură
REVENUE RECOGNITION
MULTIPLE CHOICEConceptual
Answer
c
b
a
d
d
c
d
b
c
b
c
b
a
c
b
a
c
d
a
c
c
b
b
b
b
d
d
a
b
a
d
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
*27.
*28
*29.
*30.
*31.
Description
Revenue recognition principle.
Definition of "realized."
Definition of "earned."
Recognizing revenue at point of sale.
Recording sales when right of return exists.
Revenue recognition when right of return exists.
Revenue recognition when right of return exists.
Appropriate accounting method for long-term contracts.
Percentage-of-completion method.
Percentage-of-completion method.
Classification of progress billings and construction in process.
Calculation of gross profit using percentage-of-completion.
Disclosure of earned but unbilled revenues.
Revenue, cost, and gross profit under completed contract.
Disadvantage of using percentage-of-completion.
Loss recognition on a long-term contract.
Accounting for long-term contract losses.
Criteria for revenue recognition of completion of production.
Completion-of-production basis.
Presentation of deferred gross profit.
Appropriate use of the installment-sales method.
Valuing repossessed assets.
Gross profit deferred under the installment-sales method.
Income recognition under the cost-recovery method.
Income recognition under the cost-recovery method.
Cost recovery basis of revenue recognition.
Allocation of initial franchise fee.
Recognition of continuing franchise fees.
Future bargain purchase option.
Option to purchase franchisee's business agreement.
Revenue recognition by the consignor.
MULTIPLE CHOICEComputational
Answer
c
c
b
d
c
No.
Description
32.
33.
34.
35.
36.
Percentage-of-completion method.
Percentage-of-completion method.
Determine cash collected on long-term construction contract.
Determine gross profit using percentage-of-completion.
Gross profit to be recognized using percentage-of-completion.
18 - 2
No.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
*50.
*51.
*52.
*53.
*54.
Description
Gross profit to be recognized using percentage-of-completion.
Profit to be recognized using completed-contract method.
Gross profit to be recognized using percentage-of-completion.
Profit to be recognized using completed-contract method.
Loss recognized using completed-contract method.
Revenue recognition using completed-contract method.
Reporting a current liability with completed-contract-method.
Reporting inventory under completed-contract method.
Gain recognized on repossessioninstallment sale.
Calculate loss on repossessed merchandise.
Calculate loss on repossessed merchandise.
Interest recognized on installment sales.
Revenue recognized under the cost-recovery method.
Cancellation of franchise agreement.
Accounting for initial and annual continuing franchise fees.
Franchise fee with a bargain purchase option.
Sales on consignment.
Reporting inventory on consignment.
No.
Description
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
EXERCISES
Item
E18-66
E18-67
E18-68
E18-69
E18-70
E18-71
E18-72
E18-73
E18-74
E18-75
*E18-76
Description
Revenue recognition (essay).
Revenue recognition (essay).
Long-term contracts (essay).
Journal entriespercentage-of-completion.
Percentage-of-completion method.
Percentage-of-completion method.
Percentage-of-completion and completed-contract methods.
Installment sales.
Installment sales.
Installment sales.
Franchises.
Revenue Recognition
18 - 3
PROBLEMS
Item
Description
P18-77
P18-78
P18-79
P18-80
2.
3.
4.
5.
6.
7.
*8.
Type
Item
Type
Item
1.
MC
2.
MC
3.
4.
MC
5.
MC
6.
8.
9.
10.
11.
MC
MC
MC
MC
12.
13.
15.
32.
MC
MC
MC
MC
33.
34.
35.
36.
8.
10.
14.
MC
MC
MC
38.
40.
41.
MC
MC
MC
42.
43.
44.
16.
MC
17.
MC
18.
20.
21.
22.
MC
MC
MC
23.
45.
46.
MC
MC
MC
47.
48.
60.
Type
Item
Type
Item
Learning Objective 1
MC
55. MC
66.
Learning Objective 2
MC
7. MC
67.
Learning Objective 3
MC
37. MC
68.
MC
39. MC
69.
MC
56. MC
70.
MC
57. MC
71.
Learning Objective 4
MC
58. MC
72.
MC
59. MC
77.
MC
68.
E
79.
Learning Objective 5
MC
19. MC
72.
Learning Objective 6
MC
61. MC
64.
MC
62. MC
65.
MC
63. MC
73.
Type
E
Item
Type
67.
72.
78.
79.
E
P
P
78.
MC
MC
E
74.
75.
80.
E
E
P
Item
Type
E
E
E
E
E
E
P
P
79.
18 - 4
24.
MC
25.
MC
26.
27.
28.
MC
MC
29.
30.
MC
MC
31.
50.
Note:
Learning Objective 7
MC
49. MC
Learning Objective 8*
MC
51. MC
53.
MC
52. MC
54.
MC
MC
76.
MC = Multiple Choice
E = Exercise
P = Problem
MULTIPLE CHOICEConceptual
1.
2.
When goods or services are exchanged for cash or claims to cash (receivables), revenues
are
a. earned.
b. realized.
c. recognized.
d. all of these.
3.
When the entity has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues, revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.
4.
Which of the following is not a reason why revenue is recognized at 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 time of sale.
5.
Revenue Recognition
18 - 5
6.
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.
7.
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.
8.
9.
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.
10.
When work to be done and costs to be incurred on a long-term contract can be estimated
dependably, which of the following methods of revenue recognition is preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these
11.
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, as a current asset if debit balance and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit
balance.
18 - 6
12.
In accounting for a long-term construction-type contract using the percentage-ofcompletion 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.
13.
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.
14.
15.
16.
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.
Revenue Recognition
18 - 7
17.
Cost estimates at the end of the second year indicate 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.
18.
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.
19.
20.
21.
22.
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.
23.
18 - 8
24.
A seller is properly 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.
25.
26.
Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of
water, Winser does not recognize any revenue from water sales until the sales exceed the
costs of exploration, the basis of revenue recognition being employed is the
a. production basis.
b. cash (or collection) basis.
c. sales (or accrual) basis.
d. cost recovery basis.
*27.
*28.
*29.
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.
Revenue Recognition
18 - 9
*30.
*31.
1.
2.
3.
4.
5.
Ans.
c
b
a
d
d
Item
6.
7.
8.
9.
10.
Ans.
c
d
b
c
b
Item
11.
12.
13.
14.
15.
Ans.
c
b
a
c
b
Item
16.
17.
18.
19.
20.
Ans.
a
c
d
a
c
Item
21.
22.
23.
24.
25.
Ans.
Item
Ans.
Item
Ans.
c
b
b
b
b
26.
27.
*28.
*29.
*30.
d
d
a
b
a
*31.
MULTIPLE CHOICEComputational
32.
Petry uses the percentage-of-completion method as the basis for income recognition. For
the years ended December 31, 2004, and 2005, respectively, Petry should report gross
profit of
a. $432,000 and $288,000.
b. $1,440,000 and $960,000.
c. $480,000 and $240,000.
d. $0 and $720,000.
$175,000
$525,000
420,000
Income Statement
Income (before tax) on the contract recognized in 2004
105,000
$105,000
34.
35.
What was the initial estimated total income before tax on this contract?
a. $525,000.
b. $560,000.
c. $700,000.
d. $840,000.
36.
Doyle Construction Co. uses the percentage-of-completion method. In 2004, Doyle began
work on a contract for $2,750,000 and it was completed in 2005. Data on the costs are:
Year Ended December 31
2004
2005
Costs incurred
$975,000
$700,000
Estimated costs to complete
650,000
Revenue Recognition
18 - 11
For the years 2004 and 2005, Doyle should recognize gross profit of
a.
b.
c.
d.
2004
$0
$645,000
$675,000
$675,000
2005
$1,075,000
$430,000
$400,000
$1,075,000
Assume that Nunez uses the percentage-of-completion method of accounting. The portion
of the total gross profit to be recognized as income in 2004 is
a. $300,000.
b. $400,000.
c. $1,200,000.
d. $1,600,000.
38.
Assume that Nunez uses the completed-contract method of accounting. The portion of the
total gross profit to be recognized as income in 2005 is
a. $600,000.
b. $900,000.
c. $1,550,000.
d. $4,800,000.
2005
$4,200,000
6,300,000
5,400,000
39.
40.
If Logan uses the completed-contract method, the gross profit to be recognized in 2005 is
a. $1,020,000.
b. $2,100,000.
c. $1,050,000.
d. $4,200,000.
Kirby Builders, Inc. is using the completed-contract method for a $4,900,000 contract that
will take two years to complete. Data at December 31, 2004, the end of the first year, are:
Costs incurred to date
Estimated costs to complete
Billings to date
Collections to date
$2,240,000
2,870,000
2,100,000
1,750,000
Contract
1
2
3
Contract
Price
$1,920,000
2,160,000
1,980,000
Billings
Through
12/31/04
$1,890,000
900,000
1,140,000
Collections
Through
12/31/04
$1,560,000
600,000
1,080,000
Costs to
12/31/04
$1,290,000
492,000
1,350,000
Estimated
Costs to
Complete
$1,128,000
720,000
42.
Which of the following should be shown on the income statement for 2004 related to
Contract 1?
a. Gross profit, $270,000.
b. Gross profit, $600,000.
c. Gross profit, $630,000.
d. Gross profit, $360,000.
43.
Which of the following should be shown on the balance sheet at December 31, 2004
related to Contract 2?
a. Inventory, $408,000.
b. Inventory, $492,000.
c. Current liability, $408,000.
d. Current liability, $900,000.
44.
Which of the following should be shown on the balance sheet at December 31, 2004
related to Contract 3?
a. Inventory, $120,000.
b. Inventory, $210,000.
c. Inventory, $1,260,000.
d. Inventory, $1,350,000.
45.
Harber Co. uses the installment sales method. When an account had a balance of $5,600,
no further collections could be made and the dining room set was repossessed. At that
time, it was estimated that the dining room set could be sold for $1,600 as repossessed,
or for $2,000 if the company spent $200 reconditioning it. The gross profit rate on this sale
was 70%. The gain or loss on repossession was a
a. $3,920 loss.
b. $4,000 loss.
c. $400 gain.
d. $120 gain.
Revenue Recognition
18 - 13
46.
Yarbow Corporation has a normal gross profit on installment sales of 30%. A 2002 sale
resulted in a default early in 2004. At the date of default, the balance of the installment
receivable was $40,000, and the repossessed merchandise had a fair value of $22,500.
Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss on
repossession should be
a. $0.
b. a $5,500 loss.
c. a $5,500 gain.
d. a $17,500 loss.
47.
Seeman Furniture uses the installment sales method. No further collections could be
made on an account with a balance of $12,000. It was estimated that the repossessed
furniture could be sold as is for $3,600, or for $4,200 if $200 were spent reconditioning it.
The gross profit rate on the original sale was 40%. The loss on repossession was
a. $3,200.
b. $3,000.
c. $8,000.
d. $8,400.
48.
Lowell Company sold some machinery to Granger Company on January 1, 2004. The
cash selling price would have been $473,850. Granger entered into an installment sales
contract which required annual payments of $125,000, including interest at 10%, over five
years. The first payment was due on December 31, 2004. What amount of interest income
should be included in Lowell's 2005 income statement (the second year of the contract)?
a. $12,500.
b. $39,624.
c. $25,000.
d. $34,885.
49.
On January 1, 2004, Carr Co. sold land that cost $150,000 for $200,000, receiving a note
bearing interest at 10%. The note will be paid in three annual installments of $80,425
starting on December 31, 2004. Because collection of the note is very uncertain, Carr will
use the cost recovery method. How much revenue from this sale should Carr recognize in
2004?
a. $0.
b. $15,000.
c. $20,000.
d. $50,000.
*50.
On April 1, 2004 Stiner, Inc. entered into a franchise agreement with a local businessman. The franchisee paid $150,000 and gave a $100,000, 8%, 3-year note payable with
interest due annually on March 31. Stiner recorded the $250,000 initial franchise fee as
revenue on April 1, 2004. On December 30, 2004, the franchisee decided not to open an
outlet under Stiner's name. Stiner canceled the franchisee's note and refunded $80,000,
less accrued interest on the note, of the $150,000 paid on April 1. What entry should
Stiner make on December 30, 2004?
80,000
80,000
74,000
74,000
174,000
74,000
100,000
250,000
6,000
74,000
100,000
70,000
*51.
On January 1, 2004 Dairy Delight, Inc. entered into a franchise agreement with a
company allowing the company to do business under Dairy Delight's name. Dairy Delight
had performed substantially all required services by January 1, 2004, and the franchisee
paid the initial franchise fee of $420,000 in full on that date. The franchise agreement
specifies that the franchisee must pay a continuing franchise fee of $36,000 annually, of
which 20% must be spent on advertising by Dairy Delight. What entry should Dairy Delight
make on January 1, 2004 to record receipt of the initial franchise fee and the continuing
franchise fee for 2004?
a. Cash .................................................................................. 456,000
Franchise Fee Revenue ..........................................
420,000
Revenue from Continuing Franchise Fees ..............
36,000
b. Cash .................................................................................. 456,000
Unearned Franchise Fees .......................................
456,000
c. Cash .................................................................................. 456,000
Franchise Fee Revenue ..........................................
420,000
Revenue from Continuing Franchise Fees ..............
28,800
Unearned Franchise Fees .......................................
7,200
d. Prepaid Advertising .............................................................
7,200
Cash .................................................................................. 456,000
Franchise Fee Revenue ..........................................
420,000
Revenue from Continuing Franchise Fees ..............
36,000
Unearned Franchise Fees .......................................
7,200
*52.
Watts Inc. charges an initial franchise fee of $690,000, with $150,000 paid when the
agreement is signed and the balance in five annual payments. The present value of the
future payments, discounted at 10%, is $409,404. The franchisee has the option to
purchase $90,000 of equipment for $72,000. Watts has substantially provided all initial
services required and collectibility of the payments is reasonably assured. The amount of
revenue from franchise fees is
a. $150,000.
b. $541,404.
c. $559,404.
d. $690,000.
Revenue Recognition
18 - 15
*54.
The inventory of TVs will be reported on whose balance sheet and at what amount?
a.
b.
c.
d.
Balance Sheet of
TV Inc.
TV Inc.
Ed's TV
Ed's TV
Amount of Inventory
$9,250
$9,000
$9,250
$9,000
32.
33.
34.
35.
Ans.
c
c
b
d
Item
36.
37.
38.
39.
Ans.
c
b
c
a
Item
40.
41.
42.
43.
Ans.
b
b
c
c
Item
44.
45.
46.
47.
Ans.
a
d
b
a
Item
48.
49.
50.
51.
Ans.
Item
Ans.
b
a
d
c
*52.
*53.
*54.
b
d
a
According to the FASB's conceptual framework, the process of reporting an item in the
financial statements of an entity is
a. recognition.
b. realization.
c. allocation.
d. matching.
56.
$4,400,000
4,200,000
2,800,000
8,400,000
What amount of gross profit should Milner have recognized in 2004 on this contract?
a. $1,400,000.
b. $933,334.
c. $700,000.
d. $466,667.
58.
During 2004, Eaton Corp. started a construction job with a total contract price of
$2,100,000. The job was completed on December 15, 2005. Additional data are as follows:
Actual costs incurred
Estimated remaining costs
Billed to customer
Received from customer
2004
$810,000
810,000
720,000
600,000
2005
$ 915,000
1,380,000
1,440,000
Under the completed-contract method, what amount should Eaton recognize as gross
profit for 2005?
a. $135,000.
b. $187,500.
c. $285,000.
d. $375,000.
59.
Sandy Farms produced 500,000 pounds of cotton during the 2004 season. Sandy sells all
of its cotton to Bye Co., which has agreed to purchase Sandy's entire production at the
prevailing market price. Recent legislation assures that the market price will not fall below
$.70 per pound during the next two years. Sandy's costs of selling and distributing the
cotton are immaterial and can be reasonably estimated. Sandy reports its inventory at
expected exit value. During 2004, Sandy sold and delivered to Bye 375,000 pounds at the
market price of $.70. Sandy sold the remaining 125,000 pounds during 2005 at the market
price of $.72. What amount of revenue should Sandy recognize in 2004?
a. $262,500.
b. $270,000.
c. $350,000.
d. $360,000.
Revenue Recognition
60.
18 - 17
24%
30%
$72,000
$ 24,000
132,000
$156,000
$72,000
Orson Co., which began operations on January 1, 2004, appropriately uses the
installment-sales method of accounting. The following information pertains to Orson's
operations for the year 2004:
Installment sales
Regular sales
Cost of installment sales
Cost of regular sales
General and administrative expenses
Collections on installment sales
$1,750,000
700,000
1,050,000
420,000
140,000
420,000
The deferred gross profit account in Orson's December 31, 2004 balance sheet should be
a. $168,000.
b. $280,000.
c. $532,000.
d. $700,000.
62.
On January 1, 2004, Rolen Co. sold a used machine to Linn, Inc. for $210,000. On this
date, the machine had a depreciated cost of $147,000. Linn paid $30,000 cash on
January 1, 2004 and signed a $180,000 note bearing interest at 10%. The note was
payable in three annual installments of $60,000 beginning January 1, 2005. Rolen
appropriately accounted for the sale under the installment method. Linn made a timely
payment of the first installment on January 1, 2005 of $78,000, which included interest of
$18,000 to date of payment. At December 31, 2005, Rolen has deferred gross profit of
a. $42,000.
b. $39,600.
c. $36,000.
d. $30,600.
Grant Co. began operations on January 1, 2004 and appropriately uses the installment
method of accounting. The following information pertains to Grant's operations for 2004:
Installment sales
Cost of installment sales
General and administrative expenses
Collections on installment sales
$1,200,000
720,000
120,000
550,000
The balance in the deferred gross profit account at December 31, 2004 should be
a. $220,000.
b. $330,000.
c. $260,000.
d. $480,000.
64.
Lott Co. records all sales using the installment method of accounting. Installment sales
contracts call for 36 equal monthly cash payments. According to the FASB's conceptual
framework, the amount of deferred gross profit relating to collections 12 months beyond
the balance sheet date should be reported in the
a. current liabilities section as a deferred revenue.
b. noncurrent liabilities section as a deferred revenue.
c. current assets section as a contra account.
d. noncurrent assets section as a contra account.
65.
Alton, Inc. is a retailer of home appliances and offers a service contract on each appliance
sold. Alton sells appliances on installment contracts, but all service contracts must be paid
in full at the time of sale. Collections received for service contracts should be recorded as
an increase in a
a. deferred revenue account.
b. sales contracts receivable valuation account.
c. stockholders' valuation account.
d. service revenue account.
55.
56.
Ans.
a
b
Item
57.
58.
Ans.
d
d
Item
59.
60.
Ans.
c
b
Item
61.
62.
Ans.
c
c
Item
63.
64.
Ans.
c
c
Item
65.
Ans.
Revenue Recognition
DERIVATIONS Computational
No.
32.
Answer Derivation
c
$960,000
($2,400,000 $1,600,000) = $480,000
$960,000 + $640,000
($2,400,000 $1,680,000) $480,000 = $240,000.
33.
$4,800,000
($10,000,000 $8,000,000) = $1,200,000.
$4,800,000 + $3,200,000
34.
35.
36.
$975,000
- ($2,750,000 $1,625,000) = $675,000
$1,625,000
($2,750,000 $1,675,000) $675,000 = $400,000.
37.
$800,000
($4,800,000 $3,200,000) = $400,000.
$3,200,000
38.
39.
$2,700,000
($6,300,000 $4,500,000) = $1,080,000.
$4,500,000
40.
41.
42.
43.
44.
45.
46.
18 - 19
Derivations (cont.)
No. Answer Derivation
47.
48.
49.
$0.
*50.
Revenue = $250,000
Interest income = $100,000 8% 9/12 = $6,000
Cash = $80,000 $6,000 = $74,000
Repossession revenue: $150,000 $80,000 = $70,000.
*51.
*52.
*53.
*54.
Answer Derivation
55.
Conceptual.
56.
57.
$4,200,000
($14,000,000 $12,600,000) = $466,667.
$12,600,000
58.
59.
60.
61.
62.
Revenue Recognition
18 - 21
Derivations (cont.)
No. Answer Derivation
63.
64.
Conceptual.
65.
Conceptual.
EXERCISES
Ex. 18-66 Revenue recognition (essay).
The revenue recognition principle provides that revenue is recognized when (1) it is realized or
realizable and (2) it is earned.
Instructions
Explain when revenues are (a) realized, (b) realizable, and (c) earned.
Solution 18-66
(a) Revenues are realized when goods or services are exchanged for cash or claims to cash
(receivables).
(b) Revenues are realizable when assets received in exchange are readily convertible to known
amounts of cash or claims to cash.
(c) Revenues are earned when the earnings process is complete or virtually complete.
Solution 18-68
(a)
The revenue recognized on a long-term construction contract under the percentage-ofcompletion method is determined by applying a percentage representing the degree of
completion to the total contract price at the end of the accounting period. The percentage
may be derived by dividing the costs incurred to date by the total estimated costs of the
entire contract based on the most recent information. The revenue so derived is then
reduced by the direct contract costs to determine the gross profit recognized in the initial
period.
In subsequent periods, since the percentage-of-completion method described produces
cumulative results, revenue and gross profit recognized in prior periods must be subtracted
to obtain current revenue and gross profit to be recognized.
Under the completed-contract method, no earnings are recognized until the contract is
substantially completed. For the period in which completion occurs, gross revenues include
the total contract price. Total job costs incurred are deducted from gross revenues, resulting
in recognition of the entire amount of gross profit in the completion period. If it is expected
that a loss will occur on the contract, a provision for loss should be recognized immediately
under both the completed-contract method and the percentage-of-completion method.
(b)
The percentage-of-completion method should be used when estimates of the bases upon
which progress is measured are reasonably dependable and all the following conditions
exist:
Revenue Recognition
18 - 23
The contract clearly specifies the enforceable rights regarding goods or services to be
provided and received by the parties, the consideration to be exchanged, and the
manner and terms of settlement.
The buyer can be expected to satisfy all obligations under the contract.
The contractor can be expected to perform the contractual obligation.
Solution 18-69
(a)
(b)
(c)
2,700,000
1,500,000
3,600,000
Costs incurred
Estimated costs to complete
2005
$825,000
Solution 18-70
(a)
(b)
(c)
(d)
$990,000
$3,000,000 = $1,650,000
$1,800,000
Accounts Receivable ................................................................... 1,000,000
Billings on Construction in Process ..................................
1,000,000
Construction Expenses.................................................................
Construction in Process ...............................................................
Revenue from Long-Term Contracts ................................
1,650,000
Revenue
Costs
Total gross profit
Recognized in 2004
Recognized in 2005
Or
Total revenue
Recognized in 2004
Recognized in 2005
Costs in 2005
Gross profit in 2005
990,000
660,000
$3,000,000
1,815,000
1,185,000
(660,000)
$ 525,000
$3,000,000
(1,650,000)
1,350,000
(825,000)
$ 525,000
2004
$1,800,000
7,200,000
2005
$3,400,000
4,800,000
Revenue Recognition
18 - 25
$1,800,000
$4,000,000 = $800,000
$9,000,000
(b)
$5,200,000
$3,000,000 = $1,560,000
$10,000,000
Less 2004 gross profit
Gross profit in 2005
(c)
800,000
$ 760,000
4,160,000
2003
$1,500,000
2,500,000
2,200,000
2,000,000
2004
$2,640,000
1,760,000
4,000,000
3,500,000
2005
$4,600,000
-05,600,000
5,500,000
Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting
and for completed-contract accounting, show the gross profit that should be recorded for 2003,
2004, and 2005.
Percentage-of-Completion
Completed-Contract
Gross Profit
Gross Profit
2003
____________
2003
____________
2004
____________
2004
____________
2005
____________
2005
____________
2003
2004
2005
Percentage-of-Completion
Gross Profit
$600,000a
$120,000b
$280,000c
2003
2004
2005
Completed-Contract
Gross Profit
$1,000,000d
$1,500,000
$1,600,000 = $600,000
$4,000,000
$2,640,000
$1,200,000 = $720,000
$4,400,000
(600,000)
$120,000
$5,600,000
4,600,000
1,000,000
(720,000)
$ 280,000
$5,600,000
4,600,000
$1,000,000
Total revenue
Total costs
Total gross profit
Recognized to date
2005 gross profit
Total revenue
Total costs
Total gross profit
Solution 18-73
(a) $480,000 $1,200,000 = 40%
(b) Repossessed Merchandise ...........................................................
Deferred Gross Profit, 2004 (.40 $15,000)..................................
Loss on Repossession ..................................................................
Installment Accounts Receivable, 2004 .................................
5,500
6,000
3,500
15,000
Revenue Recognition
18 - 27
(b)
(c)
(d)
600,000
720,000
1,500,000
600,000
720,000
720,000
780,000
312,000
312,000
Solution 18-75
(Note: For financial accounting purposes, the installment-sales method is not used, and the full
gross profit is recognized in the year of sale, because collection of the receivable is reasonably
assured.)
Farris Company
Computation of Income Before Income Taxes
On Installment Sale Contract
For the Year Ended December 31, 2004
Sales
$3,056,000
Cost of Sales
2,550,000
Gross Profit
506,000
Interest Revenue (Schedule I)
218,880
Income before Income Taxes
$ 724,880
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales)
Payment made on January 1, 2004
Balance outstanding at 12/31/04
Interest rate
Interest Revenue
$3,056,000
624,000
2,432,000
9%
$ 218,880
*Ex. 18-76Franchises.
Pizza Inn charges an initial fee of $600,000 for a franchise, with $120,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the annual
payments, discounted at 10%, is $380,400. The franchisee has the right to purchase $90,000 of
kitchen equipment and supplies for $75,000. An additional part of the initial fee is for advertising
to be provided by Pizza Inn during the next five years. The value of the advertising is $750 a
month. Collectibility of the payments is reasonably assured and Pizza Inn has performed all the
initial services required by the contract.
Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in good form.
Revenue Recognition
18 - 29
*Solution 18-76
Total fee
Discount
$600,000
$ 480,000
(380,400)
Bargain purchase
Advertising ($750 60)
Cash ........................................................................................
Notes Receivable .....................................................................
Discount on Notes Receivable ......................................
Revenue from Franchise Fees ......................................
Unearned Franchise Fees .............................................
(99,600)
(15,000)
(45,000)
$440,400
120,000
480,000
99,600
440,400
60,000
PROBLEMS
Pr. 18-77Long-term contract accounting (completed-contract).
Riley Construction, Inc. experienced the following construction activity in 2004, the first year of
operations.
Cash
Cost
Estimated
Total
Billings
Collections
Incurred
Additional
Contract
through
through
through
Costs to
Contract
Price
12/31/04
12/31/04
12/31/04
Complete
X
$260,000
$175,000
$155,000
$182,000
$ 63,000
Y
335,000
105,000
105,000
95,000
252,000
Z
238,000
238,000
198,000
158,000
-0$833,000
$518,000
$458,000
$435,000
$315,000
Each of the above contracts is with a different customer, and any work remaining at December
31, 2004 is expected to be completed in 2005.
Instructions
Prepare a partial income statement and a partial balance sheet to indicate how the above
contract information would be reported. Riley uses the completed-contract method.
$238,000
158,000
$ 80,000
12,000
$ 95,000
252,000
347,000
335,000
$ 12,000
$ 60,000
$182,000
175,000
7,000
10,000
12,000
$4,000,000
$ 850,000
1,750,000
400,000
3,000,000
$1,000,000
At the end of the first year, the following was the status of the contract:
Billings to date
Costs incurred to date
Labor
Materials and subcontractor
Indirect costs
Latest forecast total cost
$2,230,000
$ 414,000
1,098,000
150,000
1,662,000
3,000,000
Revenue Recognition
18 - 31
Indicate the amount of gross profit that would be reported on this contract at the end of
2004.
(c)
Make the journal entry to record the income (loss) for 2004 on Cherry's books.
(d)
Indicate the account(s) and the amount(s) that would be shown on the balance sheet of
Cherry Construction at the end of 2004 related to its construction accounts. Also indicate
where these items would be classified on the balance sheet. Billings collected during the
year amounted to $1,960,000.
(e)
Assume the latest forecast on total costs at the end of 2004 was $4,100,000. How much
income (loss) would Cherry report for the year 2004?
Solution 18-78
(a)
Costs to date
Less materials on job site
$1,662,000
(102,000)
$1,560,000
52% $4,000,000 =
Costs incurred
Gross profit
(c)
(d)
(e)
$2,080,000
1,560,000
$ 520,000
2,080,000
Current Assets
Accounts receivable
Current Liability
Billings in excess of contract costs and
recognized profit
$4,000,000
4,100,000
$ (100,000)
Project
A
B
C
D
E
3.
4.
Total Contract
Price
$ 520,000
690,000
475,000
200,000
475,000
$2,360,000
Billings Through
12/31/04
$ 350,000
210,000
475,000
90,000
400,000
$1,525,000
Contract Costs
Incurred Through
12/31/04
$ 424,000
224,000
350,000
118,000
320,000
$1,436,000
Estimated
Additional Costs to
Complete Contracts
$116,000
416,000
-097,000
80,000
$709,000
Cash Collections
Through 12/31/04
$ 310,000
210,000
395,000
60,000
400,000
$1,375,000
Instructions
(a) Prepare a schedule by project, computing the amount of income (or loss) before selling,
general, and administrative expenses for the year ended December 31, 2004, which would
be reported under:
(1) The completed-contract method.
(2) The percentage-of-completion method (based on estimated costs).
(b)
Prepare the general journal entry(ies) to record revenue and gross profit on project B
(second project) for 2004, assuming that the percentage-of-completion method is used.
(c)
Indicate the balances that would appear in the balance sheet at December 31, 2004 for the
following accounts for Project D (fourth project), assuming that the percentage-of-completion
method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process
(d)
How would the balances in the accounts discussed in part (c) change (if at all) for Project D
(fourth project), if the completed-contract method is used?
Revenue Recognition
18 - 33
Solution 18-79
(a)
(1) and (2)
Projects
Contract price
Contract costs incurred
Additional costs
to complete
Total cost
Total gross profit
or (loss)
A
$520,000
424,000
B
$690,000
224,000
C
$475,000
350,000
D
$200,000
118,000
E
$475,000
320,000
116,000
540,000
416,000
640,000
-0350,000
97,000
215,000
80,000
400,000
$ 50,000
$125,000
$ (15,000)
$ 75,000
$ (20,000)
The amount reported as income (loss) under the completed-contract method for 2004 is:
Project A
B
C
D
E
$(20,000)
-0125,000
(15,000)
-0$ 90,000
The amount reported as income (loss) under the percentage-of-completion method for 2004 is:
Project A
B
C
D
E
(b)
(c)
$(20,000)
17,500
125,000
(15,000)
60,000
$167,500
$ 90,000
60,000
$ 30,000
90,000
$118,000
(15,000)
$103,000
17,500
224,000
241,500
$ 48,000
20,000
50,000
90,000
25,200
4,800
$ 34,600
10,000
26,400
125,000
10,000
125,000
80,000
3,000
10,000
$331,000
$331,000
Additional information:
2003 gross profit rate: 25%
Total cash receipts during 2005: $125,000
Merchandise sold in 2004 was repossessed in 2005 and the following entry was prepared:
Deferred Gross Profit2004 ....................................................
Repossessed Merchandise ......................................................
Loss on Repossessions ............................................................
Installment Accounts Receivable2004........................
2,200
4,800
3,000
10,000
Instructions
(a) What is the gross profit rate for 2004? Show supporting computations.
(b)
What is the gross profit rate for 2005? Show supporting computations.
(c)
Of the total cash receipts in 2005, how much represents collections from installment sales
of: (Show supporting computations.)
(1) 2003?
(2) 2004?
(3) 2005?
(d)
What is the total realized gross profit in 2005? Show supporting computations.
Revenue Recognition
Solution 18-80
(a)
b)
Installment sales
Cost of sales
Gross profit
Gross profit
Installment sales
(c)
(d)
$ 2,200
= 22%
$10,000
$125,000
80,000
$ 45,000
$45,000
- = 36% gross profit rate
$125,000
2003
$ 10,000
25%
$ 40,000
$ 40,000
(20,000)
$ 20,000
2004
$ 26,400
22%
$120,000
$120,000
(50,000)
$ 70,000
2005
Installment sales2005
Accounts receivable2005
Cash collected
$125,000
(90,000)
$ 35,000
$ 5,000
15,400
12,600
$33,000
*Excluding accounts receivable for repossessed merchandise.
18 - 35