Test Bank, Intermediate Accounting, 14

th
ed. 229
CHAPTER 7
Complexities of
Revenue Recognition
MULTIPLE CHOICE QUESTIONS
Theory/Definitiona Q!e"tion"
1 Revenue recognition criteria
2 Revenue recognition criteria
3 nternational revenue recognition criteria
4 !roportional performance method of revenue recognition
" !roportional performance method of revenue recognition
# $se of percentage%of%completion method
& !resentation of progress 'illings and construction in progress
( )ppl*ing percentage%of%completion method
+ )ppl*ing completed%contract method
1, )ppl*ing percentage%of%completion method
11 $se of installment method
12 -isclosure of earned 'ut un'illed revenues
13 .ross profit deferred under the installment sales method
14 $ses of completed%contract method
1" /lements necessar* for use of percentage%of%completion method
1# !ercentage%of%completion and completed%contract methods of accounting
1& !ercentage%of%completion method of accounting for long%term construction
1( !ercentage%of%completion method of accounting for long%term construction
1+ !ercentage%of%completion method of accounting for long%term construction
2, !ercentage%of%completion and completed%contract methods of accounting
21 $se of cost recover* method
22 Recognition of franchise fees
23 .oods on consignment%inventor* of consignor
24 Recognition of sales and cost of goods sold of consigned goods
2" Recognition of progress 'illings under percentage%of%completion method
2# Comparison of asset 'alances under percentage%of%completion and
completed% contract methods
Co#$!tationa Q!e"tion"
2%& Chapter & Complexities of Revenue Recognition
2& Computation of contract costs under percentage%of%completion method
2( Computation of recogni0ed income under percentage%of%completion method
2+ Computation of loss recogni0ed under percentage%of%completion method
3, Computation of recogni0ed income under percentage%of%completion method
31 Reporting assets1lia'ilities under completed%contract method
32 Computation of gross profit using percentage%of%completion method
33 Computation of gross profit using percentage%of%completion method
34 Computation of gross profit under completed%contract method
3" Computation of gross profit under percentage%of%completion method
3# Computation of 'alance in Construction in !rogress using percentage%of%
completion method
3& Computation of loss using percentage%of%completion method
3( Computation of gross profit using installment sales method
3+ Computation of 'alance in Construction in !rogress using completed%
contract method
4, Computation of cash collected on contract given 'alances
41 Computation of reali0ed gross profit under installment method
42 Computation of total installment sales for *ear
43 Computation of 'alance of deferred gross profit account
44 Computation of revenue from franchise fees
4" Computation of reali0ed gross profit under installment method
4# Computation of amount of consignment sales revenue
4& Computation of contract costs under percentage%of%completion method
4( Computation of reali0ed gross profit under installment method
4+ Computation of amount of consigned inventor*
PRO'LEMS
1 2ournali0e construction under completed%contract and percentage%of%
completion methods
2 2ournali0e construction under percentage%of%completion method
3 2ournali0e gross profit under completed%contract and percentage%of%
completion method
4 Computation of income1loss under installment or cost recover* methods
" Computation of gross profit under cost recover* method
# 2ournali0e sales of maintenance contracts
& -etermine cash collected and estimated income under percentage%of%
completion method
( 2ournali0e consignment transactions
+ 2ournali0e installment sales transactions
1, 2ournali0e franchise fees under variet* of circumstances
11 Computation of revenue, gross profit, 'alance of Construction in !rogress
account, and 'alance of !rogress Billings account using percentage%of%
completion cost%to%cost method
Test Bank, Intermediate Accounting, 14
th
ed. 2%(
12 Computation of revenue, gross profit, 'alance of Construction in !rogress
account, and 'alance of !rogress Billings account using percentage%of%
completion cost%to%cost method
13 3)4B definition of revenue
14 5easuring percentage of completion
1" !roportional revenue recognition
MULTIPLE CHOICE QUESTIONS
a 1. )n ad6usting entr* in 7hich revenue is recogni0ed and a receiva'le is
891 esta'lished indicates that revenue has 'een
/arned Collected
a. :es ;o
'. :es :es
c. ;o :es
d. ;o ;o
' 2. <hich of the follo7ing 'est descri'es the condition=s> that must 'e present
for
891 the recognition of revenue?
a. The revenue must 'e earned, measura'le, and collected.
'. The revenue must 'e earned, measura'le, and collecti'le.
c. The revenue must 'e earned and collecti'le.
d. The revenue must 'e measura'le and collecti'le.
c 3. <hich of the follo7ing is true regarding the nternational )ccounting
891 4tandards Board revenue recognition principles?
a. The international standards do not address the issue of su'stantial
completion of the earnings process.
'. The international standards do not address the issue of revenue 'eing
reali0ed or reali0a'le.
c. The international standards do not address the peculiarities of revenue
recognition in specific industries.
d. The international standards do not address the measura'ilit* of revenue
prior to recognition.
' 4. ) compan* providing maintenance services on e@uipment for a fixed
periodic
894 fee 7ould
2%2 Chapter & Complexities of Revenue Recognition
a. recogni0e an e@ual amount of service revenue for each act.
'. recogni0e service revenue over the fixed period '* the straight%line
method.
c. recogni0e service revenue in proportion to the direct costs to the
provider of the services to perform each act.
d. recogni0e service revenue onl* 7hen the fixed period has ended.
' ". <hich of the follo7ing t*pes of service transactions is most likel* to re@uire
the
894 proportional performance method of revenue recognition 'ased on the
sellerAs
direct costs to perform each act?
a. !rocessing of monthl* mortgage pa*ments '* a mortgage 'anker.
'. !roviding lessons, examinations, and grading '* a correspondence
school.
c. !roviding maintenance services on e@uipment for a fixed periodic fee.
d. -elivering freight ='* a trucking firm>.
' #. -illa Construction Compan*As pro6ects extend over several *ears and
collection
892 of receiva'les is reasona'l* certain. /ach pro6ect has a contract that
specifies a price and the rights and o'ligations of all parties. Both the
contractor and the customer are expected to fulfill their contractual
o'ligations on each pro6ect. Relia'le estimates can 'e made of the extent
of progress and cost to complete each pro6ect. The method that the
compan* should use to account for construction revenue is
a. installment sales.
'. percentage%of%completion.
c. completed%contract.
d. cost recover*.
d &. Bo7 should the 'alances of !rogress Billings and Construction in !rogress
'e
893 sho7n at reporting dates prior to the completion of a long%term contract?
a. !rogress Billings as income, Construction in !rogress as inventor*.
'. ;et, as income from construction if credit 'alance, and loss from
construction if de'it 'alance.
c. !rogress Billings as deferred income, Construction in !rogress as a
current asset.
d. ;et, as a current asset if de'it 'alance and current lia'ilit* if credit
'alance.
Test Bank, Intermediate Accounting, 14
th
ed. 2%%
c (. f the percentage%of%completion method is used, 7hat is the 'asis for
893 determining the gross profit to 'e recogni0ed in the second *ear of a three%
*ear contract?
a. Cumulative actual costs incurred onl*.
'. ncremental cost for the second *ear onl*.
c. Cumulative actual costs and estimated costs to complete.
d. ;o gross profit 7ould 'e recogni0ed in *ear 2.
d +. f the completed%contract method is used, 7hat is the 'asis for determining
the
893 income to 'e recogni0ed in the second *ear of a three%*ear contract?
a. Cumulative actual costs incurred onl*.
'. ncremental cost for the second *ear onl*.
c. 8atest availa'le estimated costs.
d. ;o income 7ould 'e recogni0ed in *ear 2.
' 1,. <hich of the follo7ing 7ould 'e used in the calculation of the gross profit
893 recogni0ed in the third and final *ear of a construction contract that is
accounted for using the percentage%of%completion method?
)ctual ncome
Contract Total !reviousl*
!rice Costs Recogni0ed
a. :es :es ;o
'. :es :es :es
c. :es ;o :es
d. ;o :es :es
a 11. The installment method of recogni0ing revenue
89" a. should 'e used onl* in cases in 7hich no reasona'le 'asis exists for
estimating the collecti'ilit* of receiva'les.
'. is not a generall* accepted accounting principle under an*
circumstances.
c. should 'e used for 'ook purposes onl* if it is used for tax purposes.
d. is an accepta'le alternative accounting principle for a firm that makes
installment sales.
2%) Chapter & Complexities of Revenue Recognition
c 12. )ssume the percentage%of%completion method of revenue recognition is
used
893 on a long%term construction contract. $nder this method, revenues that are
earned 'ut un'illed at the 'alance sheet date should 'e disclosed
a. as a long%term receiva'le in the noncurrent assets section of the
'alance sheet.
'. onl* as a footnote disclosure until the customer is 'illed for the
percentage of 7ork completed.
c. as construction in progress in the current assets section of the 'alance
sheet.
d. as construction in progress in the noncurrent assets section of the
'alance sheet.
d 13. <hen using the installment sales method,
89" a. gross profit is deferred until all cash is received, 'ut revenues and costs
are recogni0ed in proportion to the cash collected from the sale.
'. gross profit is recogni0ed onl* after the amount of cash collected
exceeds the cost of the item sold.
c. revenue, costs, and gross profit are recogni0ed proportionall* as the
cash is received from the sale of product.
d. total revenues and costs are recogni0ed at the point of sale, 'ut gross
profit is deferred in proportion to the cash that is uncollected from the
sale.
d 14. The completed%contract method of accounting for long%term construction%
t*pe
892 contracts is prefera'le 7hen
a. a contractor is involved in numerous pro6ects.
'. the contracts are of a relativel* long duration.
c. estimates of costs to complete and extent of progress to7ard completion
are reasona'l* dependa'le.
d. there are inherent uncertainties in the contract 'e*ond normal 'usiness
risks.
a 1". <hich of the follo7ing is not an element identified '* the )C!) as 'eing
892 necessar* in order to use percentage%of%completion accounting?
a. The construction period can 'e reasona'l* estimated.
'. The 'u*er can 'e expected to satisf* o'ligations under the contract.
c. -ependa'le estimates can 'e made of the extent of progress to7ard
completion.
d. -ependa'le estimates can 'e made of contract costs.
Test Bank, Intermediate Accounting, 14
th
ed. 2%*
c 1#. <hich of the follo7ing is not a difference 'et7een the percentage%of
892 completion and completed%contract methods of accounting for long%term
construction contracts?
a. The* report different amounts for inventor* during the construction
period.
'. The* report different amounts for progress 'illings during the
construction period.
c. The* cause a different cash inflo7 during the construction period.
d. The* report different amounts for accounts receiva'le during the
construction period.
d 1&. The theoretical support for using the percentage%of%completion method of
892 accounting for long%term construction pro6ects is that it
a. is more conservative than the completed%contract method.
'. reports a lo7er ;et ncome figure than the completed%contract method.
c. more closel* conforms to the cost principle.
d. produces a realistic matching of expenses 7ith revenues.
c 1(. f a compan* uses the completed%contract method of accounting for long%
term
892 construction contracts, then during the period of construction, financial
information related to a long%term contract 7ill
a. appear on 'oth the income statement and 'alance sheet during the
construction period.
'. appear onl* on the income statement during the period of construction.
c. appear onl* on the 'alance sheet during the period of construction.
d. not appear on the financial statements.
' 1+. <hen the percentage%of%completion method of accounting for long%term
892 construction pro6ects is used, 7h* is Construction in !rogress increased '*
the annual recogni0ed gross profit on long%term construction contracts?
a. The cost of the contract has increased.
'. The pro6ectAs value has increased a'ove cost.
c. The econom* experiences inflation over the construction period.
d. Construction in !rogress is not increased '* the annual recogni0ed
profit.
a 2,. <hen comparing the percentage%of%completion and completed%contract
893 methods of accounting for long%term construction contracts, 'oth methods
7ill report
a. the same 'alances each period in the !rogress Billings account.
2%+ Chapter & Complexities of Revenue Recognition
'. the same expense for cost of construction each *ear.
c. the same amount of income in the *ear of completion.
d. the same inventor* carr*ing value each *ear during the construction
period.
a 21. The cost recover* method
89" a. is used onl* 7hen circumstances surrounding a sale are so uncertain
that earlier recognition is impossi'le.
'. is the most common method of accounting for real estate sales.
c. is similar to percentage%of%completion accounting.
d. is never accepta'le under generall* accepted accounting principles.
d 22. 3ranchise fees are properl* recogni0ed as revenue
89# a. 7hen received in cash.
'. 7hen a contractual agreement has 'een signed.
c. after the franchise 'usiness has 'egun operations.
d. after the franchiser has su'stantiall* performed its service.
a 23. .oods on consignment should 'e included in the inventor* of
89# a. the consignor 'ut not the consignee.
'. 'oth the consignor and the consignee.
c. the consignee 'ut not the consignor.
d. neither the consignor nor the consignee.
c 24. n accounting for sales on consignment, sales revenue and the related cost
of
89# goods sold should 'e recogni0ed '* the
a. consignor 7hen the goods are shipped to the consignee.
'. consignee 7hen the goods are shipped to the third part*.
c. consignor 7hen notification is received the consignee has sold the
goods.
d. consignee 7hen cash is received from the customer.
d 2". ) compan* uses the percentage%of%completion method to account for a four
893 *ear construction contract. !rogress 'illings sent in the second *ear that
7ere collected in the third *ear 7ould
a. 'e included in the calculation of the income recogni0ed in the second
*ear.
'. 'e included in the calculation of the income recogni0ed in the third *ear.
c. 'e included in the calculation of the income recogni0ed in the fourth
*ear.
d. not 'e included in the calculation of the income recogni0ed in an* *ear.
c 2#. n accounting for a long%term construction contract for 7hich there is a
Test Bank, Intermediate Accounting, 14
th
ed. 2%7
893 pro6ected profit, the 'alance in the Construction in !rogress account at the
end of the first *ear of 7ork using the percentage%of%completion method
7ould 'e
a. 0ero.
'. the same as the completed%contract method.
c. higher than the completed%contract method.
d. lo7er than the completed%contract method.
c 2&. 9n 5a* 1, 2,,2, .reen Construction Compan* entered into a fixed%price
893 contract to construct an apartment 'uilding for C3,,,,,,,,. .reen
appropriatel* accounts for this contract under the percentage%of%completion
method. nformation relating to the contract is as follo7sD
2,,2 2,,3
)t -ecem'er 31D
!ercentage of completion................................ 2,E #,E
/stimated costs at completion......................... C2,2",,,,, C2,4,,,,,,
ncome recogni0ed =cumulative>..................... C1",,,,, C3#,,,,,
<hat is the amount of contract costs incurred during the *ear ended
-ecem'er 31, 2,,3?
a. C#,,,,,,
'. C+#,,,,,
c. C++,,,,,
d. C1,44,,,,,
' 2(. C F 2 Construction, nc. has consistentl* used the percentage%of%
completion
893 method of recogni0ing income. 8ast *ear C F 2 started 7ork on a
C4,",,,,,, construction contract, 7hich 7as completed this *ear. The
accounting records disclosed the follo7ing data for last *earD
!rogress 'illings.................................................................... C1,#",,,,,
Costs incurred....................................................................... 1,3",,,,,
Collections............................................................................. 1,,",,,,,
/stimated cost to complete................................................... 2,&,,,,,,
Bo7 much income should C F 2 have recogni0ed on this contract last *ear?
a. C1,",,,,
'. C1",,,,,
c. C3,,,,,,
d. C3",,,,,
2%, Chapter & Complexities of Revenue Recognition
c 2+. 2essup Construction, nc. has consistentl* used the percentage%of%
completion
893 method of recogni0ing income. -uring 2,,2, 2essup started 7ork on a
C1,",,,,,, fixed%price construction contract. The accounting records
disclosed the follo7ing data for the *ear ended -ecem'er 31, 2,,2D
Costs incurred....................................................................... C 4#",,,,
/stimated cost to complete................................................... 1,,(",,,,
!rogress 'illings.................................................................... "",,,,,
Collections............................................................................. 3",,,,,
Bo7 much loss should 2essup have recogni0ed in 2,,2?
a. C1",,,,
'. C3",,,,
c. C",,,,,
d. C11",,,,
a 3,. 4hepard Construction Compan* has consistentl* used the percentage%of%
893 completion method. 9n 2anuar* 1,, 2,,2, 4hepard 'egan 7ork on a
C3,,,,,,,, construction contract. )t the inception date, the estimated cost
of construction 7as C2,2",,,,,. The follo7ing data relate to the progress
of the contractD
.ross profit recogni0ed at -ecem'er 31, 2,,2.................... C 3,,,,,,
Costs incurred 2an. 1,, 1+++, through -ec. 31, 2,,3.......... 1,(,,,,,,
/stimated cost to complete at -ecem'er 31, 2,,3.............. #,,,,,,
Bo7 much gross profit should 4hepard recogni0e for the *ear ended
-ecem'er 31, 2,,3?
a. C1",,,,,
'. C2#2,",,
c. C3,,,,,,
d. C4",,,,,
d 31. 3or a construction firm using the completed%contract method, if costs
exceed
893 'illings on some contracts '* C1,,,,,,,, and 'illings exceed costs '*
C(,,,,,, on others, the contracts should ordinaril* 'e reported as a
a. current asset of C2,,,,,,.
'. current lia'ilit* of C2,,,,,,.
c. current asset of C1,,,,,,,, less a contra%current asset of C(,,,,,,.
d. current asset of C1,,,,,,,, and a current lia'ilit* of C(,,,,,,.
Test Bank, Intermediate Accounting, 14
th
ed. 2%9
' 32. 4almon Construction Compan* uses the percentage%of%completion method
of
893 accounting. n 2,,2, 4almon 'egan 7ork on a pro6ect 7hich had a contract
price of C1,#,,,,,, and estimated costs of C1,2,,,,,,. )dditional
information is as follo7sD
2,,2 2,,3
Costs incurred during the *ear............................. C24,,,,, C1,,#,,,,,
/stimated costs to complete, as of 121311,2........ +#,,,,,
Billings during the *ear......................................... 2+,,,,, 1,31,,,,,
Collections during the *ear................................... 2",,,,, 1,2,,,,,,
The amount of gross profit 4almon should recogni0e on this contract during
2,,2 is
a. C4,,,,,.
'. C(,,,,,.
c. C1,,,,,,.
d. C2,,,,,,.
' 33. Bro7n Construction Compan* uses the percentage%of%completion method
for
893 long%term construction contracts. ) specific 6o' 7as 'egun in 2,,2 and
completed in 2,,4. The contract price 7as C1,4,,,,,, and cost
information as of each *ear%end is given 'elo7D
2,,2 2,,3 2,,4
/nd of *ear estimated cost
to complete................................ C4,,,,,, C2,,,,,, C ,
)nnual cost incurred....................... 4,,,,,, 4,,,,,, 12,,,,,
)ssuming Bro7n correctl* recorded gross profit in 2,,2, ho7 much gross
profit should the compan* record in 2,,3?
a. C,
'. C2,,,,,
c. C3,,,,,,
d. C32,,,,,
2)& Chapter & Complexities of Revenue Recognition
a 34. The follo7ing data relate to a construction 6o' started '* <orthington Co.
893 during 2,,2D
Total contract price................................................................ C3,,,,,,
)ctual costs incurred during 2,,2........................................ #,,,,,
/stimated remaining costs.................................................... 12,,,,,
Billed to customer during 2,,2............................................. +,,,,,
Received from customer during 2,,3................................... 3,,,,,
$nder the completed%contract method, ho7 much should <orthington
recogni0e as gross profit for 2,,2?
a. C,
'. C3,,,,,
c. C4,,,,,
d. C+,,,,,
' 3". The follo7ing data relate to a construction 6o' started '* <orthington Co.
893 during 2,,2D
Total contract price................................................................ C3,,,,,,
)ctual costs incurred during 2,,2........................................ #,,,,,
/stimated remaining costs.................................................... 12,,,,,
Billed to customer during 2,,2............................................. +,,,,,
Received from customer during 2,,2................................... 3,,,,,
$nder the percentage%of%completion method, ho7 much should
<orthington recogni0e as gross profit for 2,,2?
a. C,
'. C4,,,,,
c. C(,,,,,
d. C1,,,,,,
c 3#. Rain'o7 Construction Compan* uses the percentage%of%completion
method 893 ............................................................................................for long%term
construction contracts. The compan* started a pro6ect 7ith a contract price
of C2,&", in 2,,2. .iven the follo7ing data, 7hat is the 'alance in
Construction in !rogress for this contract at the end of 2,,2?
2,,2 2,,3
Costs incurred this *ear...................................................C 4,, C ",,
Total estimated costs remaining at end of *ear......... 1,#,, 1,,,,
a. C1",
'. C4,,
c. C"",
d. C1,&",
Test Bank, Intermediate Accounting, 14
th
ed. 2)(
c 3&. 8ake Construction Compan* uses the percentage%of%completion method for
893 long%term construction contracts. The compan* has a pro6ect 7ith a
contract price of C&,,,, on 7hich C#,, of gross profit has 'een recogni0ed
in prior *ears. nformation for the current *ear is as follo7sD
Total cost incurred through current *ear............................... C",,,,
/stimated costs remaining at end of current *ear................ 2,(,,
<hat is the loss that 8ake should recogni0e in the current *ear?
a. C#,,
'. C(,,
c. C1,4,,
d. ;o loss should 'e recogni0ed.
' 3(. Brooke Compan* 'egan operations on 2anuar* 1, 2,,2, and uses the
89" installment sales method of accounting. The compan* has the follo7ing
information availa'le for 2,,2 and 2,,3D
2,,2 2,,3
nstallment sales................................................. C4,",,,,,, C",4,,,,,,
.ross profit on sales.......................................... 3,E 4,E
Cash collections on 2,,2 sales......................... 1,",,,,,, 3,#,,,,,,
Cash collections on 2,,3 sales......................... 4,2,,,,,,
The reali0ed gross profit for 2,,3 7ould 'e
a. C1,#(,,,,,.
'. C2,&#,,,,,.
c. C3,12,,,,,.
d. C4,32,,,,,.
c 3+. 8ake Construction Compan* uses the completed%contract method for long%
term
893 construction contracts. The information for a specific contract as of 2anuar*
1, 2,,2, is sho7n 'elo7.
Costs incurred to date........................................................... C &,,,,,,
Contract price........................................................................ 2,,,,,,,,
/stimated remaining cost to complete.................................. (,,,,,,
C#,,,,,, of cost 7as incurred during 2,,2 and on -ecem'er 31, 2,,2, the
estimated remaining cost to complete 7as still C(,,,,,,. The correct
'alance for the Construction in !rogress at -ecem'er 31, 2,,2 is
a. C#,,,,,,.
'. C&,,,,,,.
c. C1,2,,,,,,.
d. C1.3,,,,,,.
a 4,. n 2,,2, )ldaus Corp. 'egan construction 7ork under a three%*ear contract.
893 The contract price is C(,,,,,,. )ldaus used the percentage%of%completion
method for financial accounting purposes. The income to 'e recogni0ed
each *ear is 'ased on the proportion of costs incurred to total estimated
costs for completing the contract. The financial presentations relating to this
contract at -ecem'er 31, 2,,2, appear 'elo7.
Balance 4heet
)ccounts receiva'le%%construction contract 'illings........ C1",,,,
Construction in progress.................................................. C",,,,,
8ess contract 'illings....................................................... =4&,,,,>
Cost of uncompleted contract in excess of 'illings......... 3,,,,
ncome 4tatement
ncome ='efore tax> on the contract recogni0ed in *ear 1 C1,,,,,
Bo7 much cash 7as collected in 2,,2 on this contract?
a. C32,,,,
'. C3",,,,
c. C4&,,,,
d. C",,,,,
c 41. !aral Compan* 'egan operations on 2anuar* 2, 1+++, and appropriatel*
used
89" the installment sales method of accounting. The follo7ing data are
availa'le for 2,,2 and 2,,3D
2,,2 2,,3
nstallment sales............................................. C3,,,,,,,, C3,#,,,,,,
.ross profit on sales...................................... 3,E 4,E
Cash collections fromD
2,,2 sales............................................ C1,,,,,,,, C1,2,,,,,,
2,,3 sales............................................ %% C1,4,,,,,,
The reali0ed gross profit for 2,,3 is
a. C1,44,,,,,.
'. C1,,4,,,,,.
c. C+2,,,,,.
d. C&(,,,,,.
d 42. <edtec /nterprises, 7hich 'egan operations on 2anuar* 1, appropriatel*
uses
89" the installment method of accounting. The follo7ing information is availa'le
for its first *earD
.ross profit on sales............................................................. 4,E
-eferred gross profit at -ecem'er 31................................... C12,,,,,
Cash collected, including do7n pa*ments............................ C22",,,,
<hat is the total amount of <edtecAs installment sales for the first *ear?
a. C3,,,,,,
'. C34",,,,
c. C42",,,,
d. C"2",,,,
' 43. 8eno -istri'uting, 7hich 'egan operating on 2anuar* 1, appropriatel* uses
the
89" installment method of accounting. The follo7ing information pertains to
8enoAs operations for the first *earD
nstallment sales.................................................................... C1,,,,,,,,
Cost of installment sales....................................................... #,,,,,,
.eneral and administrative expenses................................... 1,,,,,,
Collections on installment sales............................................ 2,,,,,,
The 'alance in the deferred gross profit account at -ecem'er 31 should 'e
a. C4,,,,,,.
'. C32,,,,,.
c. C24,,,,,.
d. C2,,,,,,.
a 44. 9n 2anuar* 3, 2,,2, 8incoln 4ervices, nc., signed an agreement
authori0ing
89# 8isa Compan* to operate as a franchisee over a 2,%*ear period for an initial
franchise fee of C1,,,,,, received 7hen the agreement 7as signed. 8isa
commenced operations on 2ul* 1, 2,,2, at 7hich date all of the initial
services re@uired of 8incoln had 'een performed. The agreement also
provides that 8isa must pa* a continuing franchise fee e@ual to "E of the
revenue from the franchise annuall* to 8incoln. 8isaAs franchise revenue for
2,,2 7as C(,,,,,,. 3or the *ear ended -ecem'er 31, 2,,2, ho7 much
should 8incoln record as revenue from franchise fees in respect of the 8isa
franchise?
a. C14,,,,,
'. C+,,,,,
c. C4",,,,
d. C42,",,
a 4". )ssume the Randall Corporation sold C3,,,,, 7orth of merchandise on the
89" installment 'asis. The cost of the merchandise 7as C24,,,,, and
collecti'ilit* of the receiva'le is uncertain. Collection in the current *ear on
the account is C(,,,,. Bo7 much gross profit should 'e reported as
reali0ed?
a. C1,#,,
'. C2,,,,
c. C#,,,,
d. C(,,,,
a 4#. 9n ;ovem'er 3,, ;orthrup Compan* consigned +, free0ers to <atson
89# Compan* for sale at C1,#,, each and paid C1,2,, in transportation costs. )
report of sales 7as received on -ecem'er 3, from <atson reporting the
sale of 2, free0ers, together 7ith a remittance of the C2&,2,, 'alance due.
The remittance 7as net of the agreed 1"E commission. Bo7 much, and in
7hat month, should ;orthrup recogni0e as consignment sales revenue?
;ovem'er -ecem'er
a. C, C32,,,,
'. C, C2&,2,,
c. C144,,,, C,
d. C142,(,, C,
' 4&. 8a*ton Construction Compan* has consistentl* used the percentage%of
893 completion method of recogni0ing income. -uring 2,,3, 8a*ton entered
into a fixed%price contract to construct an office 'uilding for C1,,,,,,,,,.
nformation relating to the contract is as follo7sD
-ecem'er 31
2,,2 2,,3
!ercentage of completion........................ 2,E #,E
/stimated total cost at completion.......... C&,",,,,,, C(,,,,,,,,
ncome recogni0ed =cumulative>............. ",,,,,, 1,2,,,,,,
Contract costs incurred during 2,,3 7ere
a. C3,2,,,,,,.
'. C3,3,,,,,,.
c. C3,",,,,,,.
d. C4,(,,,,,,.
' 4(. Billson Compan* 'egan operations on 2anuar* 1, 2,,2, and appropriatel*
89" uses the installment method of accounting. The follo7ing data are availa'le
for 2,,2 and 2,,3D
2,,2 2,,3
nstallment sales...................................... C1,2,,,,,, C1,",,,,,,
Cash collections fromD
2,,2 sales.......................................... 4,,,,,, ",,,,,,
2,,3 sales.......................................... %% #,,,,,,
.ross profit on sales............................... 3,E 4,E
The reali0ed gross profit for 2,,3 is
a. C24,,,,,.
'. C3+,,,,,.
c. C44,,,,,.
d. C#,,,,,,.
a 4+. 4eaha7ks, nc. had the follo7ing consignment transactions during
-ecem'erD
89# nventor* shipped on consignment to )she Compan*.......... C1(,,,,
3reight paid '* 4eaha7ks..................................................... +,,
nventor* received on consignment from 3enn Compan*.... 12,,,,
3reight paid '* 3enn............................................................. ",,
;o sales of consigned goods 7ere made through -ecem'er 31. 4eaha7ksG
-ecem'er 31 'alance sheet should include consigned inventor* at
a. C1(,+,,.
'. C1(,,,,.
c. C12,",,.
d. C12,,,,.
PRO'LEMS
Problem 1
n 2,,2, 3a*ette /ngineering entered into an agreement to construct an office
'uilding at a contract price of C",1,,,,,,. Construction data 7ere as follo7sD
2,,2 2,,3 2,,4
Construction costs incurred.................. C &",,,,, C2,&,,,,,, C #3,,,,,
/stimated costs to complete................. 3,,,,,,,, (#2,",, %%
!rogress 'illings................................... "&,,,,, 3,#,,,,,, +3,,,,,
Collections from client.......................... 4",,,,, 3,3,,,,,, 1,3",,,,,
!repare the necessar* entries for each *ear, assuming the firm uses theD
=1> completed%contract method
=2> percentage%of%completion method.
Solution 1
893
=1> 2,,2
Construction in !rogress............................................ &",,,,,
5aterials, Cash, etc........................................... &",,,,,
)ccounts Receiva'le.................................................. "&,,,,,
!rogress Billings on Construction Contracts..... "&,,,,,
Cash............................................................................ 4",,,,,
)ccounts Receiva'le.......................................... 4",,,,,
2,,3
Construction in !rogress............................................ 2,&,,,,,,
5aterials, Cash, etc. ......................................... 2,&,,,,,,
)ccounts Receiva'le.................................................. 3,#,,,,,,
!rogress Billings on Construction Contracts..... 3,#,,,,,,
Cash............................................................................ 3,3,,,,,,
)ccounts Receiva'le.......................................... 3,3,,,,,,
2,,4
Construction in !rogress............................................ #3,,,,,
5aterials, Cash, etc. ......................................... #3,,,,,
)ccounts Receiva'le.................................................. +3,,,,,
!rogress Billings on Construction Contracts..... +3,,,,,
Cash............................................................................ 1,3",,,,,
)ccounts Receiva'le.......................................... 1,3",,,,,
!rogress Billings on Construction Contracts............. ",1,,,,,,
Revenue from 8ong%Term Construction Contracts. ",1,,,,,,
Cost of 8ong%Term Construction Contracts................ 4,,(,,,,,
Construction in !rogress.................................... 4,,(,,,,,
=2> 2,,2
Construction in !rogress............................................ &",,,,,
5aterials, Cash, etc. ......................................... &",,,,,
)ccounts Receiva'le.................................................. "&,,,,,
!rogress Billings on Construction Contracts..... "&,,,,,
Cash............................................................................ 4",,,,,
)ccounts Receiva'le.......................................... 4",,,,,
Cost of 8ong%Term Construction Contracts................ &",,,,,
Construction in !rogress............................................ 2&,,,,,
Revenue from 8ong%Term Construction Contracts. 1,,2,,,,,
2,,3
Construction in !rogress............................................ 2,&,,,,,,
5aterials, Cash, etc .......................................... 2,&,,,,,,
)ccounts Receiva'le.................................................. 3,#,,,,,,
!rogress Billings on Construction Contracts..... 3,#,,,,,,
Cash............................................................................ 3,3,,,,,,
)ccounts Receiva'le.......................................... 3,3,,,,,,
Cost of 8ong%Term Construction Contracts................ 2,&,,,,,,
Construction in !rogress............................................ 3#,,,,,
Revenue from 8ong%Term Construction Contracts. 3,,#,,,,,
2,,4
Construction in !rogress............................................ #3,,,,,
5aterials, Cash, etc. ......................................... #3,,,,,
)ccounts Receiva'le.................................................. +3,,,,,
!rogress Billings on Construction Contracts..... +3,,,,,
Cash............................................................................ 1,3",,,,,
)ccounts Receiva'le.......................................... 1,3",,,,,
Cost of 8ong%Term Construction Contracts................ #3,,,,,
Construction in !rogress............................................ 3+,,,,,
Revenue from 8ong%Term Construction Contracts. 1,,2,,,,,
!rogress Billings on Construction Contracts............. ",1,,,,,,
Construction in !rogress.................................... ",1,,,,,,
Problem 2
B*7ater Construction contracted to 'uild a ship over a t7o *ear period. The
contract price 7as C21,,,,,,,, 7ith an estimate total cost of C1(,4,,,,,,. The
follo7ing cost data relate to the construction period.
Costs ncurred /stimated Cost Cash
:ear in :ear to Complete Billings Collected
2,,2 C+,,,,,,,, C1,,,,,,,,, C11,,,,,,,, C&,",,,,,,
2,,3 +,",,,,,, , (,,,,,,,, +,,,,,,,,
2,,4 , , 2,,,,,,,, 4,",,,,,,
!repare the necessar* 6ournal entries for 2,,2, 2,,3, and 2,,4 assuming B*7ater
uses the percentage%of%completion method.
Solution 2
893
2,,2
Construction in !rogress............................................ +,,,,,,,,
5aterials, Cash, etc........................................... +,,,,,,,,
)ccounts Receiva'le.................................................. 11,,,,,,,,
!rogress Billings on Construction Contracts..... 11,,,,,,,,
Cash............................................................................ &,",,,,,,
)ccounts Receiva'le.......................................... &,",,,,,,
Cost of 8ong%Term Construction Contracts................ +,,,,,,,,
Construction in !rogress =C+,,,,,,,, 1 C1+,,,,,,,,> x
C2,,,,,,,,...................................................................... +4&,3#(
Revenue from 8ong%Term Construction Contracts. +,+4&,3#(
2,,3
Construction in !rogress............................................ +,",,,,,,
5aterials, Cash, etc........................................... +,",,,,,,
)ccounts Receiva'le.................................................. (,,,,,,,,
!rogress Billings on Construction Contracts..... (,,,,,,,,
Cash............................................................................ +,,,,,,,,
)ccounts Receiva'le.......................................... +,,,,,,,,
Cost of 8ong%Term Construction Contracts................ +,",,,,,,
Construction in !rogress =C21,,,,,,,, % C1(,",,,,,,
total costs> % C+4&,3#(................................................ 1,""2,#32
Revenue from 8ong%Term Construction Contracts. 11,,"2,#32
2,,4
)ccounts Receiva'le.................................................. 2,,,,,,,,
!rogress Billings on Construction Contracts..... 2,,,,,,,,
Cash............................................................................ 4,",,,,,,
)ccounts Receiva'le.......................................... 4,",,,,,,
!rogress Billings on Construction Contracts............. 21,,,,,,,,
Construction in !rogress.................................... 21,,,,,,,,
Problem 3
8*therma Construction entered into a contract to construct a floating 'ridge across
a lake. The contract price for the 'ridge is C&,",,,,,,. -uring 2,,2, costs of
C1,(,,,,,, 7ere incurred representing 3,E of total expected costs.
!repare the necessar* entries for 2,,2 to recogni0e gross profit for the *ear
assuming the firm uses the
=1> completed%contract method.
=2> percentage%of%completion method.
Solution 3
893
=1> $sing the completed%contract method, no gross profit is recogni0ed on the
contract until the 'ridge is completed. Thus, no entr* is needed.
=2> Cost of 8ong%Term Construction Contracts................ 1,(,,,,,,
Construction in !rogress............................................ 4",,,,, H
Revenue from 8ong%Term Construction Contracts. 2,2",,,,,
H C1,(,,,,,, 1 3,E I C#,,,,,,,,
C&,",,,,,, % C#,,,,,,,, I C1,",,,,,,
C1,",,,,,, x 3,E I C4",,,,,
Problem 4
Tappan ndustrial sells machiner* on the installment plan. 9n 4eptem'er 1, 2,,2,
Tappan entered into an installment sale contract 7ith <estern !roductions for a
six%*ear period. /@ual annual pa*ments under the installment sale are C1(&,",,
and are due on )ugust 31 of each *ear 'eginning in 2,,3.
)dditional informationD
=a> The cost of the machiner* sold to <estern 7as C#3&,",,.
='> The implicit interest rate on the installment sale is 1,E.
Compute the income or loss 'efore taxes that Tappan should record for the *ear
ended -ecem'er 31, 2,,2, as a result of the a'ove transaction, assuming that
circumstances are such that the collection of the installments due under the
contract
=1> is reasona'l* assured.
=2> cannot 'e reasona'l* assured.
Solution 4
89"
=1> )ccrual 'asisD full gross profit recogni0ed in the *ear of the sale.
-etermination of selling priceD
!J
n
I R=!J)3
n1i
> Table IV
!J
n
I C1(&,",, x 4.3""3 n I #, i I 1,E
!J
n
I C(1#,#1+ =rounded>
.ross profit on saleD
4ale..................................................................... C(1#,#1+
Cost of sales....................................................... #3&,",,
.ross profit......................................................... C1&+,11+
nterest revenue%%4 monthsD C(1#,#1+ x 1,E x 4112 I C2&,221
Total income for 2,,2 I C1&+,11+ K C2&,221 I C2,#,34,
=2> nstallment saleD .ross profit =C1&+,11+1C(1#,#1+> I 22E =rounded>
.ross profit earned in 2,,2 =C, x 22E>......................... C ,
nterest revenue.............................................................. 2&,221
Total income for 2,,2..................................................... C2&,221
Problem 5
Lamus 5edical Center uses the cost recover* method in accounting for
recogni0ing revenue. The follo7ing information is availa'leD
2,,2 2,,3 2,,4
4ales..................................................... C4",,,, C#,,,,, C(",,,,
.ross profit percentage........................ 3&E 41E 4,E
Cash collectionsD
2,,2.............................................. C24,,,, C1+,,,, C 2,,,,
2,,3.............................................. 4,,,,, 1&,,,,
2,,4.............................................. "3,,,,
-etermine the amount of gross profit to 'e recogni0ed for 2,,2, 2,,3, and 2,,4.
Solution 5
89"
<hen the cost recover* method is used, gross profit is recogni0ed onl* after all
costs have 'een recovered.
2,,2
C4",,,, x #3E I C2(,3", Cost of sale
C2(,3", % C24,,,, I C4,3", ;o gross profit is recogni0ed in 2,,2.
Costs still to 'e recovered.
2,,3
Relating to 2,,2 salesD
C1+,,,, % C4,3", I C14,#", .ross profit recogni0ed
Relating to 2,,3 salesD
C#,,,,, x "+E I C3",4,, Cost of sale
C4,,,,, % C3",4,, I 4,#,, .ross profit recogni0ed
C1+,2", Recogni0ed in 2,,3
2,,4
Relating to 2,,2 salesD
4ince all costs have 'een recovered, all cash
collected is recogni0ed as gross profit......... C 2,,,,
Relating to 2,,3 salesD
4ince all costs have 'een recovered, all cash
collected is recogni0ed as gross profit......... 1&,,,,
Relating to 2,,4 salesD
C(",,,, x #,E I C"1,,,, Cost of sale
C"3,,,, % C"1,,,, I...................................... 2,,,, .ross profit
recogni0ed
C21,,,, Recogni0ed in 2,,4
Problem 6
The <inimucca 4uppl* Compan* sells maintenance contracts to the purchasers of
the e@uipment the* sell. The cost of the contract is C1,4",, pa*a'le at the signing
of the contract. The contract covers a three%*ear period 7ith regularl* scheduled
inspection visits =ever* six months> plus an* emergenc* visits. /xperience sho7s
that, on the average, one emergenc* visit per contract is re@uired each *ear.
)ssume that 2,2,, contracts 7ere sold in 2,,2 and that contract sales 7ere made
evenl* over the *ear.
.ive the entries re@uired for 2,,2 and 2,,3 to account for the 2,2,, contracts.
Solution 6
894
2,,2
Cash =C1,4", x 2,2,,>................................................ 3,1+,,,,,
-eferred 5aintenance Contract Revenue.... 3,1+,,,,,
-eferred 5aintenance Contract Revenue............ 3"4,444
5aintenance Contract Revenue................... 3"4,444 H
H 3irst 1,1,, contracts sold%%one regularl*
scheduled inspection per contract..... 1,1,,
)verage 1,1,, contracts in force during
2,,2%%one emergenc* visit per
contract.............................................. 1,1,,
Total visits expected%%2,,2...................... 2,2,,
Total expected visits over life of
contract =+ visits x 2,2,,>......................... 1+,(,,
=2,2,,11+,(,,> x C3,1+,,,,, I C 3"4,444
2,,3
-eferred 5aintenance Contract Revenue............ 1,,#3,333
5aintenance Contract Revenue................... 1,,#3,333 H
H Contracts in effect for the entire *ear x )verage
visits per *ear I /xpected visits during 2,,,
2,2,, contracts x 3 average visits I #,#,,
!roportion of visits in 2,,3D #,#,,11+,(,, I 113
Recogni0ed revenueD C3,1+,,,,, x 113 I C1,,#3,333
Problem 7
n 2,,2, 2ohnson Builders 'egan construction 7ork under a three%*ear contract at
a price of C&,"2",,,,. The firm uses the percentage%of%completion method for
financial accounting purposes. The income to 'e recogni0ed each *ear is 'ased
on the proportion of cost incurred to the total estimated costs for completing the
contract. The financial statement presentations relating to this contract on
-ecem'er 31, 2,,2, areD
Balance 4heet
)ccounts receiva'le.............................................. C1",,",,
Construction in progress....................................... C#,2,,,,
8ess progress 'illings........................................... "#2,,,, 4,,,,,
ncome 4tatement
.ross profit on construction contracts.................. C3,1,,,,
-etermine the
=1> cash collected in 2,,2.
=2> estimated income on the construction contract.
Solution 7
893
=1> !rogress 'illings on construction contract............ C"#2,,,,
8ess accounts receiva'le..................................... 1",,",,
Cash collected in 2,,2......................................... C411,",,
=2> .ross profit from construction contract K Construction in progress I Revenue
for 2,,2
C3,1,,,, K C#,2,,,, I C+,3,,,,
C+,3,,,,1C&,"2",,,, I 12E !ercentage completed in 2,,2
C3,1,,,,1.12 I C2,",(,333 /stimated income on construction contract
Problem 8
4ummit /lectronics Compan* sends appliances to dealers on a consignment 'asis.
The selling price per unit is C+2, and the dealer earns a 3,E commission. The
manufacturing cost of the appliance to 4ummit /lectronics is C"&,. )ssume that in
2,,2, (,, units 7ere sent on consignment to 3arle* Bard7are. 3our hundred of
these units 7ere sold for cash, and '* -ecem'er 31, 2,,2, remittance had 'een
made to 4ummit /lectronics for 3(, units.
!repare the re@uired 6ournal entries on the 'ooks of 4ummit /lectronics Compan*
and 3arle* Bard7are for the transactions in 2,,2.
Solution 8
89#
4ummit /lectronics Compan*
nventor* on Consignment =(,, M C"&,>................. 4"#,,,,
3inished .oods nventor*............................. 4"#,,,,
Consignment /xpense =C3#(,,,, x 3,E>.................. 11,,4,,
)ccounts Receiva'le%%Consignee 4ales.............. 2"&,#,,
4ales Revenue%%Consignment =C+2, x 4,,>..... 3#(,,,,
Cost of Consigned .oods 4old =C"&, x 4,,>........... 22(,,,,
nventor* on Consignment............................ 22(,,,,
Cash N=C+2, x &,E> x 3(,O........................................... 244,&2,
)ccounts Receiva'le%%Consignee 4ales...... 244,&2,
3arle* Bard7are
;o entr* upon receipt of consigned merchandise.
Cash =C+2, x 4,,>..................................................... 3#(,,,,
Consignor !a*a'le....................................... 2"&,#,,
Commission Revenue................................... 11,,4,,
Consignor !a*a'le................................................ 244,&2,
Cash.............................................................. 244,&2,
Problem 9
The )''ott Corporation sells merchandise on the installment 'asis, and the
uncertainties of cash collection make the use of the installment sales method of
accounting accepta'le. The follo7ing data relate to t7o *ears of operations.
2,,2 2,,3
nstallment sales................................................... C4(,,,,, C"#,,,,,
Cost of installment sales....................................... 3,,,,,, 3#4,,,,
.ross profit............................................................ 1(,,,,, 1+#,,,,
.ross profit percentage........................................ 3&."E 3"E
Cash collectionsD
2,,2 4ales.................................................... C1+,,,,, C21,,,,,
2,,3 4ales.................................................... %% 23",,,,
Record the transactions related to installment sales for 2,,2 and 2,,3.
Solution 9
89"
2,,2
nstallment )ccounts Receiva'le%%2,,2.................. 4(,,,,,
nstallment 4ales............................................. 4(,,,,,
Cost of nstallment 4ales......................................... 3,,,,,,
nventor*.......................................................... 3,,,,,,
Cash......................................................................... 1+,,,,,
nstallment )ccounts Receiva'le%%2,,2.......... 1+,,,,,
nstallment 4ales..................................................... 4(,,,,,
Cost of nstallment 4ales................................. 3,,,,,,
-eferred .ross !rofit%%2,,2............................ 1(,,,,,
-eferred .ross !rofit%%2,,2.................................... &1,2",
Reali0ed .ross !rofit on nstallment 4ales
=C1+,,,,, x 3&."E>................................................ &1,2",
2,,3
nstallment )ccounts Receiva'le%%2,,3.................. "#,,,,,
nstallment 4ales............................................. "#,,,,,
Cost of nstallment 4ales......................................... 3#4,,,,
nventor*.......................................................... 3#4,,,,
Cash......................................................................... 44",,,,
nstallment )ccounts Receiva'le%%2,,2.......... 21,,,,,
nstallment )ccounts Receiva'le%%2,,3.......... 23",,,,
nstallment 4ales..................................................... "#,,,,,
Cost of nstallment 4ales................................. 3#4,,,,
-eferred .ross !rofit%%2,,3............................ 1+#,,,,
-eferred .ross !rofit%%2,,2.................................... &(,&",
-eferred .ross !rofit%%2,,3.................................... (2,2",
Reali0ed .ross !rofit on nstallment 4ales. . . . 1#1,,,,
2,,2D C21,,,,, x 3&."E I C &(,&",
2,,3D C23",,,, x 3"E I (2,2",
C1#1,,,,
Problem 10
)6ax -r* Cleaners, nc. charges an initial franchise fee of C1+",,,,. <hen the
agreement is signed, a pa*ment of C&",,,, is due, follo7ed '* four annual
pa*ments of C3,,,,, at the end of each period. )6axAs normal 'orro7ing rate is
12E. !repare the entries to record the initial franchise fee on the 'ooks of )6ax
under each of the follo7ing circumstances.
=1> The franchiser has su'stantial services to perform and the collection of the
note is extremel* uncertain.
=2> The do7n pa*ment is nonrefunda'le, collection of the note is reasona'l*
assured, and the franchiser has performed su'stantiall* all of the services
re@uired '* the initial fee.
=3> The do7n pa*ment is nonrefunda'le, collection of the note is reasona'l*
assured, the franchiser has performed services e@uivalent to the do7n
pa*ment, 'ut su'stantial services remain to 'e performed.
Solution 10
89#
=1> Cash...................................................................... &",,,,
$nearned 3ranchise 3ee.............................. &",,,,
=2> Cash...................................................................... &",,,,
;ote Receiva'le.................................................... 12,,,,,
-iscount on ;ote Receiva'le....................... 2(,((1
Revenue from 3ranchise 3ee....................... 1##,11+
NC&",,,, K =C3,,,,, x 3.,3&3>O I C11#,11+ =Table IV n I 4, i I 12E>
=3> Cash...................................................................... &",,,,
;ote Receiva'le.................................................... 12,,,,,
-iscount on ;ote Receiva'le....................... 2(,((1
Revenue from 3ranchise 3ee....................... &",,,,
$nearned 3ranchise 3ee.............................. +1,11+
Problem 11
9n 2anuar* 1, 2,,2, Cleveland /nterprises o'tained a contract to construct a
'uilding. t 7as estimated at the 'eginning of the contract that it 7ould take three
*ears to complete the pro6ect at an expected cost of C2,,,,,,. The contract price
7as C2",,,,,. The follo7ing information descri'es the status of the 6o' at the
close of production each *earD
2,,2 2,,3 2,,4
)ctual costs incurred............................ C11,,,,, C12,,,,, C1",,,,
/stimated costs to complete................. 1,,,,,, 2,,,,, ,
Billings on contract............................... 12",,,, 12",,,, ,
Collections on contract......................... 12,,,,, 12,,,,, 1,,,,,
Compute the items listed 'elo7 for each *ear assuming the use of the percentage%
of% completion cost%to%cost method. =Round all percentages to t7o decimals>.
2,,2 2,,3 2,,4
1.Revenue recogni0ed during the *ear..............
2..ross profit recogni0ed during the
*ear ......................................................
3.Balance in the construction in progress
account at -ecem'er 31 =after closing
entries>..................................................
4.Balance in the progress 'illings account
at -ecem'er 31 =after closing entries>.
Solution 11
893
2,,2 2,,3 2,,4
Contract price.............................................. C2",,,,, C2",,,,, C2",,,,,
Current *ear costs....................................... 11,,,,, 11",,,, 1",,,,
Costs to date................................................ 11,,,,, 22",,,, 24,,,,,
/stimated cost to complete......................... 1,,,,,, 2,,,,, ,
/stimated total cost..................................... 21,,,,, 24",,,, 24,,,,,
/stimated total gross profit.......................... 4,,,,, ",,,, 1,,,,,
!ercent complete......................................... "2E +2E 1,,E
Revenue to date.......................................... C13,,,,, C23,,,,, C2",,,,,
To -ate !revious Current
at -ecem'er 31 :ears :ear
2,,2D Revenue..................... C13,,,,, C13,,,,,
Costs..................... 11,,,,, 11,,,,,
.ross profit..................... C 2,,,,, C 2,,,,,
2,,3D Revenue..................... C23,,,,, C13,,,,, C1,,,,,,
Costs..................... 22",,,, 11,,,,, 11",,,,
.ross profit..................... C ",,,, C 2,,,,, C =1",,,,>
2,,4D Revenue..................... C2",,,,, C23,,,,, C2,,,,,
Costs..................... 24,,,,, 22",,,, 1",,,,
.ross profit..................... C 1,,,,, C ",,,, C ",,,,
2,,2 2,,3 2,,4
1.Revenue recogni0ed during the *ear.............. C13,,,,, C1,,,,,, C2,,,,,
2..ross profit recogni0ed during the
*ear....................................................... 2,,,,, =1",,,,> ",,,,
3.Balance in the construction in
progress account at -ecem'er 31....... 13,,,,, 23,,,,, ,
4.Balance in the progress 'illings
account at -ecem'er 31....................... 12",,,, 2",,,,, ,
Problem 12
9n 2anuar* 1, 2,,2, /d7ards nc. o'tained a contract to construct a 'uilding. t
7as estimated at the 'eginning of the contract that it 7ould take 3 *ears to
complete the pro6ect at an expected cost of C2,,,,,,. The contract price 7as
C2",,,,,. The follo7ing information descri'es the status of the 6o' at the close of
production each *earD
2,,2 2,,3 2,,4
)ctual costs incurred............................ C1",,,,, C1,,,,,, C1",,,,
/stimated costs to complete................. +,,,,, 2,,,,, ,
Billings on contract............................... 11,,,,, 12,,,,, 2,,,,,
Collections on contract......................... 1,,,,,, 12,,,,, 3,,,,,
Compute the items listed 'elo7 for each *ear assuming the use of the percentage%
of% completion cost%to%cost method. =Round all percentages to t7o decimals.>
2,,2 2,,3 2,,4
1.Construction costs =expense>
recogni0ed during the *ear...................
2..ross profit recogni0ed during the
*ear.......................................................
3.Balance in the construction in
progress account at -ecem'er 31
=after closing entries>............................
4.Balance in accounts receiva'le at
-ecem'er 31 =after closing entries>.....
Solution 12
893
2,,2 2,,3 2,,4
Contract price....................................... C2",,,,, C2",,,,, C2",,,,,
Current *ear costs................................ 1",,,,, 1,,,,,, 1",,,,
Costs to date......................................... 1",,,,, 2",,,,, 2#",,,,
/stimated cost to complete................... +,,,,, 2,,,,, ,
/stimated total cost.............................. 24,,,,, 2&,,,,, 2#",,,,
/stimated total gross profit................... 1,,,,, =2,,,,,> =1",,,,>
!ercent complete.................................. #3E +3E 1,,E
Revenue to date................................... C1"&,",, C232,",, C2",,,,,
To -ate !revious Current
at -ecem'er 31 :ears :ear
2,,2D Revenue..................... C1"&,",, C1"&,",,
Costs..................... 1",,,,, 1",,,,,
.ross profit..................... C &,",, C &,",,
2,,3D Revenue..................... C232,",, C1"&,",, C &",,,,
Costs..................... 2"2,",, 1",,,,, 1,2,",,
.ross profit..................... C =2,,,,,> C &,",, C =2&,",,>
2,,4D Revenue..................... C2",,,,, C232,",, C1&,",,
Costs..................... 2#",,,, 2"2,",, 12,",,
.ross profit..................... C =1",,,,> C =2,,,,,> C ",,,,
2,,2 2,,3 2,,4
1.Construction costs =expense> recogni0ed
during the *ear................................................. C1",,,,, C1,2,",, C12,",,
2. .ross profit recogni0ed during the *ear.......... &,",, =2&,",,> ",,,,
3.Balance in the construction in progress
account at -ecem'er 31 =after closing
entries>............................................................. 1"&,",, 23,,,,, ,
4. Balance in accounts receiva'le at
-ecem'er 31 =after closing entries>................ 1,,,,, 1,,,,, ,
Problem 13
The importance of revenue to a 'usiness enterprise has caused much discussion
among accountants as to ho7 the term PrevenueQ should 'e defined. The 3)4B in
Statement of Financial Accounting Concepts No. 6, P/lements of 3inancial 4tatements,Q
defines revenue as Pinflo7s or other enhancements of assets of an entit* or settlements
of its lia'ilities =or a com'ination of 'oth> from delivering or producing goods, rendering
services, or other activities that constitute the entit*As ongoing ma6or or central
operations.Q
/valuate the soundness of the definition of the term PrevenueQ provided '* the 3)4B in
Statement of Financial Accounting Concepts No. 6.
Solution 13
891
Critics of the 3)4BAs definition have suggested that the inflo7 concept used '* the
3)4B in defining revenue confuses the measurement and timing of revenue 7ith the
actual revenue process. Revenue is vie7ed '* some as a product of the firm resulting
from the creation of goods or services '* an enterprise during a given period of time.
-efining revenue in terms of inflo7s of assets imposes upon revenues the
measurement criteria for assets. The concept of revenue is 'roader than the
measurement criteria for some other financial statement element.
The inflo7 approach re@uires a careful statement of 7hich inflo7s are to 'e considered
revenues and 7hich are not. )ssets ma* increase and lia'ilities ma* decrease for a
num'er of reasons other than revenues. /xceptions to the inflo7 criteria also must 'e
clearl* stated. Revenue ma* 'e reported prior to a sale occurring 7ith the associated
inflo7 of assets.
Problem 14
5easuring progress to7ard completion of long%term construction pro6ects can 'e
accomplished in a num'er of 7a*s. ;onetheless, all of these measurements can 'e
classified into t7o 'asic groupsD input measures and output measures. nput
measures attempt to measure the effort devoted to a pro6ect to date compared to the
total effort expected to 'e re@uired in order to complete the pro6ect. ) common input
measure is the ratio of costs incurred to date to total estimated costs for the pro6ect.
9utput measures attempt to measure the results to date compared to total results 7hen
the pro6ect is completed. ) common output measure 7ould 'e the num'er of stories of
a 'uilding completed compared to the total num'er of stories to 'e 'uilt.
dentif* the general pro'lems associated 7ith input and output measures in determining
the level of completion of a long%term construction pro6ect.
Solution 14
892
4everal general pro'lems exist 7ith input and output measures generall*, regardless of
the specific methods used to operationali0e these measures. nput measures are
misleading if a relativel* constant relationship does not exist 'et7een the input
measure and productivit*. ) construction compan* 'uilding a large multi%stor* 'uilding
ma* first need to excavate 1,, feet into the ground in order to construct the appropriate
foundation for the 'uilding. The excavation ma* proceed @uite smoothl* for the first ",
feet 'ut ma* 'ecome more difficult* as hard 'edrock is encountered. Costs per foot of
excavation ma* increase. f the higher excavation cost associated 7ith greater depths
7as not included in the original cost estimates, then the use of a cost as a measure of
progress 7ill overstate the progress actuall* made. Cost incurred also poses pro'lems
as a measure of progress 7hen large amounts of expenditures for materials and
supplies are made at the inception of the pro6ect for use throughout the pro6ect. )
distinction thus should 'e made 'et7een costs incurred and cost actuall* contri'uting
to progress. Costs incurred also ma* pose a pro'lem due to the learning curve effectD
)s more units are produced, construction can 'ecome less costl* 'ecause the
contractor learns the most efficient procedures and methods of construction for the
pro6ect. $se of the cost of earlier units to measure the cost of all units ma* also tend to
overstate the actual cost of the progress made.
9utput measures also pose pro'lems, particularl* 7hen different output units re@uire
different amounts of input effort to complete. The first floor of a multi%stor* 'uilding ma*
re@uire more input effort to complete as a result of foundation and su'surface
construction than the second floor. $se of floors completed ma* understate the actual
rate of progress.
Problem 15
The percentage%of%completion method is used to recogni0e revenue and gross profit for
construction and other t*pes of pro6ects that extend 'e*ond one accounting period. )
pro'lem similar to long%term construction pro6ects exists in accounting for service
revenue that is earned for more than one performance act 7here such activit* extends
'e*ond one accounting period.
!rovide examples of service activities that might extend 'e*ond one accounting period
and propose means of recogni0ing revenues for such activities.
Solution 15
894
) proportional measurement approach similar to the percentage%of%completion
approach ma* 'e adopted for recogni0ing service revenues. $nder the proportional
measurement approach, revenue is recogni0ed on the proportional performance of
each act. 4ervice transactions ma* take several different forms, ho7ever. f the
service transaction involves a specified num'er of identical or similar acts, then an
e@ual amount of revenue should 'e recorded for each act performed. ) refuse disposal
compan*, for example, 7ould recogni0e an e@ual amount of revenue for each 7eekl*
removal of a customerAs gar'age.
) service transaction ma* involve a specified num'er of defined 'ut not identical or
similar acts. n this case, revenue recogni0ed for each act should 'e 'ased on the ratio
of the direct cost of the individual act to the total estimated direct costs of the
transaction times the total revenues from the complete transaction. ) correspondence
school, for example, ma* provide lessons, examinations, and grading as part of total
package of educational services. These are different acts that are part of the same
service transaction.
3inall*, a service transaction ma* involve an unspecified num'er of acts over a fixed
time period for performance. n this situation, revenue should 'e recogni0ed over the
period during 7hich the acts 7ill 'e performed '* using the straight%line method unless
a 'etter method of relating revenue and performance is appropriate.
CHAPTER 7 -- QUI. A
;ame RRRRRRRRRRRRRRRRRRRRRRRRR
4ection RRRRRRRRRRRRRRRRRRRRRRRR
T 3 1. Revenues and gains are generall* recogni0ed 7hen the* are reali0ed or
reali0a'le and the* have 'een earned through su'stantial completion of the
activities involved in the earnings process.
T 3 2. The proportional performance method has 'een developed to reflect revenue
earned on service contracts under 7hich man* acts of service are to 'e
performed 'efore the contract is completed.
T 3 3. The completed%contract method 7as developed to relate recognition of
revenue on long%term construction%t*pe contracts to the activities of a firm in
fulfilling these contracts.
T 3 4. Beginning 7ith the Tax Reform )ct of 1+(#, the tax la7s eliminated the use of
the completed%contract method.
T 3 ". The most popular input measure under percentage%of%completion accounting
is the cost%to%cost method.
T 3 #. /stimates of architects and engineers of percentage%of%completion are not
accepta'le under generall* accepted accounting principles.
T 3 &. )t the conclusion of a construction contract, the 'alance in Construction in
!rogress 7ill 'e exactl* e@ual to the amount in !rogress Billings on
Construction Contracts 7hen using the percentage%of%completion method.
T 3 (. f anal*sis of construction contracts indicates that there 7ill 'e an overall loss
on the contract, the loss should immediatel* 'e recogni0ed in full under the
completed%contract method and the percentage%of%completion method.
T 3 +. )s construction contract estimates change, retroactive ad6ustments are
re@uired if the amount is material.
T 3 1,. Change orders are modifications of an original contract that effectivel*
change the provisions of the contract, onl* at the option of the contractor.
2#3
CHAPTER 7 -- QUI. '
;ame RRRRRRRRRRRRRRRRRRRRRRRRR
4ection RRRRRRRRRRRRRRRRRRRRRRRR
T 3 1. Revenue should 'e recogni0ed under the proportional performance method
unless the final act of service to 'e performed is so vital to the contract that
earlier acts are relativel* insignificant.
T 3 2. f no pattern of performance can 'e determined on a service contract,
revenue recognition should 'e deferred until all services have 'een
rendered.
T 3 3. )ccounting for service contracts using the cost%to%cost method of input
measurement re@uires inclusion of onl* direct costs related to the acts of
service.
T 3 4. )ccounting for installment sales using the deferred gross profit approach
re@uires determining a gross profit rate for the sales of each *ear, and
esta'lishing an accounts receiva'le and a deferred revenue account
identified '* the *ear of the sale.
T 3 ". The deferred gross profit accounts are reported as lia'ilities under the
installment sale method.
T 3 #. $nder the cost recover* method, no income is recogni0ed on a sale until the
cost of the item sold is recovered through cash receipts 7ith all su'se@uent
receipts reported as revenues.
T 3 &. The cost recover* method is the most conservative revenue recognition
method.
T 3 (. The cost recover* method is often used 7hen the circumstances surrounding
a sale are too uncertain to use the installment sale method.
T 3 +. f a compan* is heavil* involved in installment sales, the operating c*cle of
the 'usiness is normall* defined as the average period of the installment
contracts.
T 3 1,. The cash method might 'e appropriate for service contracts 7ith high initial
costs and considera'le uncertaint* as to the ultimate collection of the
contract price.
2#4
CHAPTER 7 -- QUI. C
;ame RRRRRRRRRRRRRRRRRRRRRRRRR
4ection RRRRRRRRRRRRRRRRRRRRRRRR
). nstallment sales method
B. Consignment sales
C. Change orders
-. 4u'stantial performance
/. nput measures
3. /fforts%expended methods
.. Cost recover* method
B. Completed%contract method
. !roportional performance method
2. !ercentage%of%completion method
L. -eposit method
8. 9utput measures
4elect the term that 'est fits each of the follo7ing definitions and descriptions. ndicate
*our ans7er '* placing the appropriate letter in the space provided.
RRRR 1. ) revenue recognition method that recogni0es gross profit as cash is
received.
RRRR 2. )n accounting method that recogni0es revenues and expenses on long%term
construction contracts onl* 7hen completed.
RRRR 3. )n accounting method that recogni0es the receipt of cash and the unearned
revenue prior to 'eginning 7ork on the contract.
RRRR 4. 5odifications to the terms of agreement of an original contract.
RRRR ". 5easures of the earning process in percentage%of%completion accounting
'ased on cost or efforts devoted to a contract.
RRRR #. ) revenue recognition method that re@uires the recover* of cost =investment>
prior to the recognition of revenue.
RRRR &. 5easures of the earnings process in percentage%of%completion accounting
'ased on units produced, contract milestones reached, or values added.
RRRR (. ) transfer of propert* 7ithout a transfer of title and risk of o7nership.
RRRR +. )n accounting method for recording service revenue and related expenses
prior to completion of the service contract.
RRRR1,. ) criterion for recogni0ing revenue from a franchising agreement 7hich
re@uires that all provisions of the contract agreement have to 'e su'stantiall*
complete 'efore revenue and related expense ma* 'e recogni0ed.
2#"
CHAPTER 7 -- QUI. SOLUTIONS
Sui0 )
1. T
2. T
3. 3
4. 3
". T
#. 3
&. T
(. T
+. 3
1,. 3
Sui0 B
1. T
2. 3
3. T
4. T
". 3
#. T
&. 3
(. T
+. T
1,. T
Sui0 C
1. )
2. B
3. L
4. C
". /
#. .
&. 8
(. B
+.
1,. -