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Exam 8: Revenue Recognition

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Question 41

Multiple Choice

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The installment method of recognizing revenue

A) should be used only in cases in which no reasonable basis exists for estimating the collectibility of receivables.
B) is not a generally accepted accounting principle under any circumstances.
C) should be used for book purposes only if it is used for tax purposes.
D) is an acceptable alternative accounting principle for a firm that makes installment sales.

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Question 42

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Sailor Construction Company has consistently used the percentage-of- completion method.On January 10,2014,Sailor began work on a $3,000,000 construction contract.At the inception date,the estimated cost of construction was $2,250,000.The following data relate to the progress of the contract: How much gross profit should Sailor recognize for the year ended December 31,2015?

A) $150,000
B) $262,500
C) $300,000
D) $450,000

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Question 43

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The collection of credit sales is usually predictable and reasonably assured as a result of credit approval,collections procedures,and historical evidence.In such cases,revenue is appropriately recognized at the point of sale.If a company makes credit sales to customers of relatively poor credit risk,however,recognition of revenue at the point of sale may be inappropriate.Although revenue may have been earned and is measurable,ultimate collection of the proceeds on the sale are highly uncertain.The creditor in such circumstances may defer the recognition of revenue until the amount due is collected.The installment sales method thus may be used.Under the installment sales method,both sales and cost of sales are recognized in the period of sale,but the related gross margin is deferred to those periods in which cash is collected.The gross margin rate for the installment sales is computed and multiplied times the cash collection to determine the portion of deferred gross margin to be recognized. Required: Evaluate the conceptual soundness of the installment sales method.

The cost recovery method is

A company uses the percentage-of-completion method to account for a four-year construction contract.Progress billings sent in the second year that were collected in the third year would

Which of the following would be used in the calculation of the gross profit recognized in the third and final year of a construction contract that is accounted for using the percentage-of-completion method?

Marshland,Inc.had the following consignment transactions during December: No sales of consigned goods were made through December 31.Marshland's December 31 balance sheet should include consigned inventory at

Gunner Construction,Inc.has consistently used the percentage-of-completion method of recognizing revenue.During 2014,Gunner started work on a $2,500,000 fixed-price construction contract.The accounting records disclosed the following data for the year ended December 31,2014: How much loss should Gunner have recognized in 2014?

The completed-contract method (as opposed to the percentage-of-completion method) of accounting for revenue from long-term construction contracts should be used in which of the following circumstances?

Tundra Electronics Company sends appliances to dealers on a consignment basis.The selling price per unit is $920 and the dealer earns a 30% commission.The manufacturing cost of the appliance to Tundra Electronics is $570.Assume that in 2014,800 units were sent on consignment to Farber Hardware.Four hundred of these units were sold for cash,and by December 31,2011,remittance had been made to Tundra Electronics for 380 units. Prepare the required journal entries on the books of Tundra Electronics Company and Farber Hardware for the transactions in 2014.

On May 1,2014,Lavender Construction Company entered into a fixed-price contract to construct an apartment building for $3,000,000.Lavender appropriately accounts for this contract under the percentage-of-completion method.Information relating to the contract is as follows: What is the amount of contract costs incurred during the year ended December 31,2015?

When the percentage-of-completion method of accounting for long-term construction projects is used,why is Construction in Progress increased by the annual recognized gross profit on long-term construction contracts?

In accounting for sales on consignment,sales revenue and the related cost of goods sold should be recognized by the

On January 3,2014,Continental Services,Inc.,signed an agreement authorizing Peen Company to operate as a franchisee over a 20-year period for an initial franchise fee of $200,000 received when the agreement was signed.Peen commenced operations on July 1,2014,at which date all of the initial services required of Continental had been performed.The agreement also provides that Peen must pay a continuing franchise fee equal to 6% of the revenue from the franchise annually to Continental.Peen's franchise revenue for 2014 was $900,000.For the year ended December 31,2014,how much should Continental record as revenue from franchise fees from the Peen franchise?

When a contractor determines that a contract will result in an overall loss,when should that loss be recognized within the completed-contract and percentage-of-completion methods?

In 2014,Charlotte Engineering entered into an agreement to construct an office building at a contract price of $5,100,000.Construction data were as follows: Prepare the necessary entries for each year,assuming the firm uses the: (1)completed-contract method (2)percentage-of-completion method.

Franchise fees are properly recognized as revenue

Franklyn Publishing Company is marketing a new principles of accounting text.The new text is quite revolutionary in its approach.The use of the new approach raises some question as to the marketability of the text,however. On July 31,2014,Franklyn sold 5,000 copies of the new text to college bookstores at a unit price of $60.The textbooks have a unit cost to Franklyn of $40.Franklyn uses a perpetual inventory system.The company's accounting period ends on December 31. In view of the uncertainty regarding the marketability of the text,Franklyn sold the text with terms of net 30 days,but has allowed the bookstores until January 31,2015,to return any unsold texts for a cash refund.Franklyn has no means of estimating the number of texts that will be returned. On September 12,2014,Franklyn collected $260,000 on the account receivable.On November 15,2014,350 texts were returned by the bookstore to Franklyn. Required: 1.Prepare the appropriate journal entries for each of the dates given above. 2.Explain the appropriate treatment on the financial statements of any accounts unique to this sales transaction. 3.Provide authoritative support for the journal entries you made in part 1 above both for public and private companies.

Astor Construction Company uses the percentage-of-completion method for long-term construction contracts.A specific job was begun in 2014 and completed in 2016.The contract price was $1,400,000 and cost information as of each year-end is given below: Assuming Astor correctly recorded gross profit in 2014,how much gross profit should the company record in 2015?

Samuels Company began operations on January 1,2014,and uses the installment sales method of accounting.The company has the following information available for 2014 and 2015: The realized gross profit for 2015 would be