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Problem 3-1 Multiple choice (AICPA Adopted)

1. An entity sells appliances that include a two-year warranty. Service calls under the
warranty are performed by an independent mechanic under contract with the entity.
Based on experience, warranty costs are estimated at a certain amount for each
appliance sold. When should the entity recognize these warranty costs?

a. Evenly over the life of the warranty


b.When the service calls are performed
c. When payments are made to the mechanic
d. When the appliances are sold

2. A department store received cash and issued a gift certificate that is redeemable in
merchandise. When the gift certificate was issued

a. Deferred revenue account should be decreased.


b. Deferred revenue account should be increased.
c. Revenue account should be decreased.
d. Revenue account should be increased.

3. An entity received an advance payment for special order goods that are to be
manufactured and delivered within six months. The advance payment is reported in
the statement of financial position as

a. Deferred charge
b. Contra asset account
c. Current liability
d. Noncurrent liability

4. An entity is a retailer of home appliances and offers a service contract on each


appliance sold. The entity 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. Deferred revenue account


b. Sales contracts receivable valuation account
c. Shareholders equity valuation account
d. Service revenue account

5. At the end of the current year, an entity received an advance payment of 60% of the
sales price for special order goods to be manufactures and delivered within five
months. At the same time, the entity subcontracted for production of the special order
goods at a price equal to 40% of the main contract price. What liabilities should be
reported in the year-end statement of financial position?

a. None
b. Deferred revenue equal to 60% of the main contract price and payable to
subcontractor equal to 40% of the main contract price.
c. Deferred revenue equal to 60% of the main contract price and no payable to
subcontractor.
d. No deferred revenue but payable to subcontractor is reported at 40% of the main
contract price.

6. In June of the current year, an entity sold refundable merchandise coupons. The
entity receives a certain amount for each coupon redeemable from July 1 to
December 31 of the current year, for merchandise with a certain retail price. At June
30 of the current year, how should be the entity report these coupon transaction?

a. Unearned revenue at the merchandises retail price


b. Unearned revenue at the cash received
c. Revenue at the merchandises price
d. Revenue at the cash received.

7. How would the proceeds received from the advance sale of nonrefundable tickets for
a theatrical performance be reported in the statement of financial position before the
performance?

a. Revenue for the entire proceeds


b. Revenue to the extent of related costs expanded
c. Unearned revenue to the extent of related costs expended
d. Unearned revenue for the entire proceeds

8. Magazine subscriptions collected in advance should be treated as

a. A contra account to magazine subscriptions receivable


b. Deferred revenue in the liability section
c. Deferred revenue in the shareholders equity section.
d. Magazine subscription refund in the income statement in the period collected.

9. Under a royalty agreement, an entity will receive royalties from the assignment of a
patent for four years. The royalties received in advance should be recognized as
revenue

a. In the period received


b. In the period earned
c. Evenly over the life of the royalty agreement
d. At the date of the royalty agreement

10. Unearned rent revenue would normally appear in the statement of financial position
as

a. Plant asset
b. Current liability
c. Noncurrent liability
d. Current asset

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