How To Do Revenue Working

CHAPTER 18
REVENUE RECOGNITION
TRUE-FALSEConceptual
Anse! No" #esc!$pt$on
F 1. Recognition of revenue.
T 2. Realization of revenue.
T 3. Delayed recognition of revenue.
F 4. Recognizing revenue when right of return exists.
T 5. Recognizing revenue rior to roduct co!letion.
F ". #se of ercentage$of$co!letion !ethod.
T %. &nut !easure for contract rogress.
T '. Reorting (onstruction in )rocess and *illings on (onstruction in )rocess.
F +. (onstruction in )rocess account ,alance.
F 1-. Recognition of revenue under co!leted$contract !ethod.
T 11. )rincial advantage of co!leted$contract !ethod.
F 12. Recognizing loss on an unrofita,le contract.
F 13. Recognizing current eriod loss on a rofita,le contract.
T 14. Recognizing revenue under co!letion$of$roduction ,asis.
F 15. Recording a loss on an unrofita,le contract.
F 1". Deferring revenue under install!ent$sales !ethod.
T 1%. Deferring gross rofit under install!ent$sales !ethod.
T 1'. (lassification of deferred gross rofit.
F 1+. Recognizing revenue under cost$recovery !ethod.
T 2-. Recognizing rofit under cost$recovery !ethod.
%ULTIPLE CHOICEConceptual
c 21. Revenue recognition rincile.
, 22. Definition of .realized..
a 23. Definition of .earned..
,
/
24. Revenue recognition reresentations.
d
)
25. Definition of recognition.
,
)
2". Revenue recognition rincile.
d 2%. Recognizing revenue at oint of sale.
d 2'. Recording sales when right of return exists.
c 2+. Revenue recognition when right of return exists.
d 3-. Revenue recognition when right of return exists.
, 31. 0roriate accounting !ethod for long$ter! contracts.
c 32. )ercentage$of$co!letion !ethod.
, 33. )ercentage$of$co!letion !ethod.
c 34. (lassification of rogress ,illings and construction in rocess.
, 35. (alculation of gross rofit using ercentage$of$co!letion.
a 3". Disclosure of earned ,ut un,illed revenues.
, 3%. Disadvantage of using ercentage$of$co!letion.
d
/
3'. )ercentage$of$co!letion inut !easures.
Test &an' (o! Inte!)e*$ate Account$n+, Tel(t- E*$t$on
%ULTIPLE CHOICEConceptual .cont"/
a
/
3+. 0dvantage of co!leted$contract !ethod
c 4-. Revenue1 cost1 and gross rofit under the co!leted$contract !ethod.
a 41. 2oss recognition on a long$ter! contract.
c 42. 0ccounting for long$ter! contract losses.
d 43. (riteria for revenue recognition of co!letion of roduction.
a 44. (o!letion$of$roduction ,asis.
d
/
45. Revenue recognition of co!letion of roduction.
,
/
4". Treat!ent of esti!ated contract cost increase.
c 4%. )resentation of deferred gross rofit.
c 4'. 0roriate use of the install!ent$sales !ethod.
, 4+. 3aluing reossessed assets.
, 5-. 4ross rofit deferred under the install!ent$sales !ethod.
c
/
51. &nco!e realization on install!ent sales.
d
)
52. (onservative revenue recognition !ethod.
, 53. &nco!e recognition under the cost$recovery !ethod.
, 54. &nco!e recognition under the cost$recovery !ethod.
d 55. (ost recovery ,asis of revenue recognition.
d 55". 0llocation of initial franchise fee.
a 55% Recognition of continuing franchise fees.
, 55'. Future ,argain urchase otion.
a 55+. 6tion to urchase franchisee7s ,usiness agree!ent.
d 5"-. Revenue recognition ,y the consignor.
)
These 8uestions also aear in the )ro,le!$/olving /urvival 4uide.
/
These 8uestions also aear in the /tudy 4uide.
5This toic is dealt with in an 0endix to the chater.
%ULTIPLE CHOICECo)putat$onal
c "1. )ercentage$of$co!letion !ethod.
c "2. )ercentage$of$co!letion !ethod.
, "3. Deter!ine cash collected on long$ter! construction contract.
d "4. Deter!ine gross rofit using ercentage$of$co!letion.
c "5. 4ross rofit to ,e recognized using ercentage$of$co!letion.
, "". 4ross rofit to ,e recognized using ercentage$of$co!letion.
c "%. )rofit to ,e recognized using co!leted$contract !ethod.
a "'. 4ross rofit to ,e recognized using ercentage$of$co!letion.
, "+. )rofit to ,e recognized using co!leted$contract !ethod.
a %-. 4ross rofit to ,e recognized using ercentage$of$co!letion.
c %1. 4ross rofit to ,e recognized using co!leted$contract !ethod.
, %2. (o!utation of construction costs incurred.
c %3. 4ross rofit recognized under ercentage$of$co!letion.
a %4. (o!utation of construction in rocess a!ount.
, %5. 2oss recognized using co!leted$contract !ethod.
c %". Revenue recognition using co!leted$contract !ethod.
c %%. Reorting a current lia,ility with co!leted$contract$!ethod.
a %'. Reorting inventory under co!leted$contract !ethod.
18 - 0
Revenue Recognition
%ULTIPLE CHOICECo)putat$onal .cont"/
d %+. 4ain recognized on reossession9install!ent sale.
, '-. (alculate loss on reossessed !erchandise.
a '1. (alculate loss on reossessed !erchandise.
, '2. &nterest recognized on install!ent sales.
, '3. (alculation of deferred gross rofit a!ount.
, '4. (o!utation of realized gross rofit a!ount.
d '5. (o!utation of loss on reossession.
d '". (alculation of gross rofit rate.
a '%. (o!utation of net inco!e fro! install!ent sales.
d ''. (o!utation of realized and deferred gross rofit.
a '+. Revenue recognized under the cost$recovery !ethod.
d 5+-. (ancellation of franchise agree!ent.
c 5+1. 0ccounting for initial and annual continuing franchise fees.
, 5+2. Franchise fee with a ,argain urchase otion.
d 5+3. /ales on consign!ent.
a 5+4. Reorting inventory on consign!ent.
%ULTIPLE CHOICECPA A*apte*
a +5. F0/*7s definition of .recognition..
, +". Deter!ine contract costs incurred during year.
d +%. 4ross rofit to ,e recognized using ercentage$of$co!letion.
d +'. )rofit to ,e recognized using co!leted$contract !ethod.
c ++. Revenue recognized under co!leted$roduction !ethod.
, 1--. Deter!ine ,alance of install!ent accounts receiva,le.
c 1-1. (alculate deferred gross rofit9install!ent sales.
c 1-2. (alculate deferred gross rofit9install!ent sales.
c 1-3. *alance of deferred gross rofit9install!ent sales.
c 1-4. Reorting deferred gross rofit9install!ent sales.
a 1-5. :ffect of collections received on service contracts.
E1ERCISES
Ite) #esc!$pt$on
:1'$1-" Revenue recognition ;essay<.
:1'$1-% Revenue recognition ;essay<.
:1'$1-' 2ong$ter! contracts ;essay<.
:1'$1-+ =ournal entries9ercentage$of$co!letion.
:1'$11- )ercentage$of$co!letion !ethod.
:1'$111 )ercentage$of$co!letion !ethod.
:1'$112 )ercentage$of$co!letion and co!leted$contract !ethods.
:1'$113 &nstall!ent sales.
5:1'$11" Franchises.
18 - 2
PRO&LE%S
Ite) #esc!$pt$on
)1'$11% 2ong$ter! construction ro>ect accounting.
)1'$11' 0ccounting for long$ter! construction contracts.
)1'$11+ 2ong$ter! contract accounting9co!leted$contract.
)1'$12- &nstall!ent sales.
CHAPTER LEARNING O&3ECTIVES
1. 0ly the revenue recognition rincile.
2. Descri,e accounting issues for revenue recognition at oint of sale.
3. 0ly the ercentage$of$co!letion !ethod for long$ter! contracts.
4. 0ly the co!leted$contract !ethod for long$ter! contracts.
5. &dentify the roer accounting for losses on long$ter! contracts.
". Descri,e the install!ent$sales !ethod of accounting.
%. :xlain the cost$recovery !ethod of accounting.
5'. :xlain revenue recognition for franchises and consign!ent sales.
18 - 4
Revenue Recognition
SU%%AR5 OF LEARNING O&3ECTIVES &5 6UESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Lea!n$n+ O78ect$9e 1
1. TF 3. TF 22. ?(
/
24. ?(
)
2". ?( 1-". :
2. TF 21. ?( 23. ?(
)
25. ?( +5. ?( 1-%. :
4. TF ". TF 2'. ?( 3-. ?(
5. TF 2%. ?( 2+. ?( 1-%. :
%. TF 33. ?(
/
3'. ?( "5. ?( %3. ?( 1-+. : 11'. )
'. TF 34. ?( "1. ?( "". ?( %4. ?( 11-. :
+. TF 35. ?( "2. ?( "'. ?( +". ?( 111. :
31. ?( 3". ?( "3. ?( %-. ?( +%. ?( 112. :
32. ?( 3%. ?( "4. ?( %2. ?( 1-'. : 11%. )
1-. TF 4-. ?( %1. ?( %%. ?( 1-'. : 11+. )
11. TF "%. ?( %5. ?( %'. ?( 112. :
/
3+. ?( "+. ?( %". ?( +'. ?( 11'. )
Lea!n$n+ O78ect$9e :
12. TF 14. TF 41. ?( 43. ?(
/
45. ?( ++. ?( 11'. )
13. TF 15. TF 42. ?( 44. ?(
/
4". ?( 11%. )
Lea!n$n+ O78ect$9e ;
1". TF 4'. ?( %+. ?( '3. ?( '%. ?( 1-2. ?( 113. :
1%. TF 4+. ?( '-. ?( '4. ?( ''. ?( 1-3. ?( 114. :
1'. TF 5-. ?( '1. ?( '5. ?( 1--. ?( 1-4. ?( 115. :
4%. ?(
/
51. ?( '2. ?( '". ?( 1-1. ?( 1-5. ?( 12-. )
Lea!n$n+ O78ect$9e <
1+. TF 2-. TF
)
52. ?( 53. ?( 54. ?( 55. ?( '+. ?(
Lea!n$n+ O78ect$9e 8=
5". ?( 5'. ?( "-. ?( +1. ?( +3. ?( 11". :
5%. ?( 5+. ?( +-. ?( +2. ?( +4. ?(
@oteA TF B True$False
?( B ?ultile (hoice
: B :xercise
) B )ro,le!
18 - :
TRUE-FALSEConceptual
1. (o!anies should recognize revenue when it is realized and when cash is received.
2. Revenues are realized when a co!any exchanges goods and services for cash or
clai!s to cash.
3. Delayed recognition of revenue is aroriate if the sale does not reresent su,stantial
co!letion of the earnings rocess.
4. &f a co!any sells its roduct ,ut gives the ,uyer the right to return it1 the co!any should
not recognize revenue until the sale is collected.
5. (o!anies can recognize revenue rior to co!letion and delivery of the roduct under
certain circu!stances.
". (o!anies !ust use the ercentage$of$co!letion !ethod when esti!ates of rogress
toward co!letion are reasona,ly deenda,le.
%. The !ost oular inut !easure used to deter!ine the rogress toward co!letion is the
cost$to$cost ,asis.
'. &f the difference ,etween the (onstruction in )rocess and the *illings on (onstruction in
)rocess account ,alances is a de,it1 the difference is reorted as a current asset.
+. The (onstruction in )rocess account includes only construction costs under the
ercentage$of$co!letion !ethod.
1-. #nder the co!leted$contract !ethod1 co!anies recognize revenue and costs only
when the contract is co!leted.
11. The rincial advantage of the co!leted$contract !ethod is that reorted revenue
reflects final results rather than esti!ates.
12. (o!anies !ust recognize a loss on an unrofita,le contract under the ercentage$of$
co!letion !ethod ,ut not the co!leted$contract !ethod.
13. 0 loss in the current eriod on a rofita,le contract !ust ,e recognized under ,oth the
ercentage$of$co!letion and co!leted$contract !ethod.
14. #nder the co!letion$of$roduction ,asis1 co!anies recognize revenue when agricul$
tural cros are harvested since the sales rice is reasona,ly assured and no significant
costs are involved in roduct distri,ution.
15. The rovision for a loss on an unrofita,le contract !ay ,e co!,ined with the
(onstruction in )rocess account ,alance under ercentage$of$co!letion ,ut not
co!leted$contract.
1". #nder the install!ent$sales !ethod1 co!anies defer revenue and inco!e recognition
until the eriod of cash collection.
18 - ;
Revenue Recognition
1%. The install!ent$sales !ethod defers only the gross rofit instead of ,oth the sales rice
and cost of goods sold.
1'. Deferred gross rofit is generally treated as an unearned revenue and classified as a
current lia,ility.
1+. #nder the cost$recovery !ethod1 a co!any recognizes no revenue or rofit until cash
ay!ents ,y the ,uyer exceed the cost of the !erchandise sold.
2-. (o!anies recognize rofit under the cost$recovery !ethod only when cash collections
exceed the total cost of the goods sold.
T!ue-False Anse!sConceptual
Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans"
1. F ". F 11. T 1". F
2. T %. T 12. F 1%. T
3. T '. T 13. F 1'. T
4. F +. F 14. T 1+. F
5. T 1-. F 15. F 2-. T
%ULTIPLE CHOICEConceptual
21. The revenue recognition rincile rovides that revenue is recognized when
a. it is realized.
,. it is realiza,le.
c. it is realized or realiza,le and it is earned.
d. none of these.
22. Chen goods or services are exchanged for cash or clai!s to cash ;receiva,les<1 revenues
are
a. earned.
,. realized.
c. recognized.
d. all of these.
23. Chen the entity has su,stantially acco!lished what it !ust do to ,e entitled to the
,enefits reresented ,y the revenues1 revenues are
a. earned.
,. realized.
c. recognized.
d. all of these.
18 - <
/
24. Chich of the following is not an accurate reresentation concerning revenue recognitionD
a. Revenue fro! selling roducts is recognized at the date of sale1 usually interreted to
!ean the date of delivery to custo!ers.
,. Revenue fro! services rendered is recognized when cash is received or when
services have ,een erfor!ed.
c. Revenue fro! er!itting others to use enterrise assets is recognized as ti!e asses
or as the assets are used.
d. Revenue fro! disosing of assets other than roducts is recognized at the date of
sale.
)
25. The rocess of for!ally recording or incororating an ite! in the financial state!ents of
an entity is
a. allocation.
,. articulation.
c. realization.
d. recognition.
)
2". Dot )oint1 &nc. is a retailer of washers and dryers and offers a three$year service contract
on each aliance sold. 0lthough Dot )oint sells the aliances on an install!ent ,asis1
all service contracts are cash sales at the ti!e of urchase ,y the ,uyer. (ollections
received for service contracts should ,e recorded as
a. service revenue.
,. deferred service revenue.
c. a reduction in install!ent accounts receiva,le.
d. a direct addition to retained earnings.
2%. Chich of the following is not a reason why revenue is recognized at ti!e of saleD
a. Realization has occurred.
,. The sale is the critical event.
c. Title legally asses fro! seller to ,uyer.
d. 0ll of these are reasons to recognize revenue at ti!e of sale.
2'. 0n alternative availa,le when the seller is exosed to continued risEs of ownershi
through return of the roduct is
a. recording the sale1 and accounting for returns as they occur in future eriods.
,. not recording a sale until all return rivileges have exired.
c. recording the sale1 ,ut reducing sales ,y an esti!ate of future returns.
d. all of these.
2+. 0 sale should not ,e recognized as revenue ,y the seller at the ti!e of sale if
a. ay!ent was !ade ,y checE.
,. the selling rice is less than the nor!al selling rice.
c. the ,uyer has a right to return the roduct and the a!ount of future returns cannot ,e
reasona,ly esti!ated.
d. none of these.
3-. The F0/* concluded that if a co!any sells its roduct ,ut gives the ,uyer the right to
return the roduct1 revenue fro! the sales transaction shall ,e recognized at the ti!e of
sale only if all of six conditions have ,een !et. Chich of the following is not one of these
six conditionsD
18 - 8
Revenue Recognition
a. The a!ount of future returns can ,e reasona,ly esti!ated.
,. The seller7s rice is su,stantially fixed or deter!ina,le at ti!e of sale.
c. The ,uyer7s o,ligation to the seller would not ,e changed in the event of theft or
da!age of the roduct.
d. The ,uyer is o,ligated to ay the seller uon resale of the roduct.
31. &n selecting an accounting !ethod for a newly contracted long$ter! construction ro>ect1
the rincial factor to ,e considered should ,e
a. the ter!s of ay!ent in the contract.
,. the degree to which a relia,le esti!ate of the costs to co!lete and extent of rogress
toward co!letion is ractica,le.
c. the !ethod co!!only used ,y the contractor to account for other long$ter! construc$
tion contracts.
d. the inherent nature of the contractor7s technical facilities used in construction.
32. The ercentage$of$co!letion !ethod !ust ,e used when certain conditions exist. Chich
of the following is not one of those necessary conditionsD
a. :sti!ates of rogress toward co!letion1 revenues1 and costs are reasona,ly
deenda,le.
,. The contractor can ,e exected to erfor! the contractual o,ligation.
c. The ,uyer can ,e exected to satisfy so!e of the o,ligations under the contract.
d. The contract clearly secifies the enforcea,le rights of the arties1 the consideration to
,e exchanged1 and the !anner and ter!s of settle!ent.
33. Chen worE to ,e done and costs to ,e incurred on a long$ter! contract can ,e esti!ated
deenda,ly1 which of the following !ethods of revenue recognition is refera,leD
a. &nstall!ent$sales !ethod
,. )ercentage$of$co!letion !ethod
c. (o!leted$contract !ethod
d. @one of these
34. Fow should the ,alances of rogress ,illings and construction in rocess ,e shown at
reorting dates rior to the co!letion of a long$ter! contractD
a. )rogress ,illings as deferred inco!e1 construction in rogress as a deferred exense.
,. )rogress ,illings as inco!e1 construction in rocess as inventory.
c. @et1 as a current asset if de,it ,alance1 and current lia,ility if credit ,alance.
d. @et1 as inco!e fro! construction if credit ,alance1 and loss fro! construction if de,it
,alance.
35. &n accounting for a long$ter! construction$tye contract using the ercentage$of$
co!letion !ethod1 the gross rofit recognized during the first year would ,e the
esti!ated total gross rofit fro! the contract1 !ultilied ,y the ercentage of the costs
incurred during the year to the
a. total costs incurred to date.
,. total esti!ated cost.
c. un,illed ortion of the contract rice.
d. total contract rice.
3". Fow should earned ,ut un,illed revenues at the ,alance sheet date on a long$ter!
construction contract ,e disclosed if the ercentage$of$co!letion !ethod of revenue
recognition is usedD
18 - >
a. 0s construction in rocess in the current asset section of the ,alance sheet.
,. 0s construction in rocess in the noncurrent asset section of the ,alance sheet.
c. 0s a receiva,le in the noncurrent asset section of the ,alance sheet.
d. &n a note to the financial state!ents until the custo!er is for!ally ,illed for the ortion
of worE co!leted.
3%. The rincial disadvantage of using the ercentage$of$co!letion !ethod of recognizing
revenue fro! long$ter! contracts is that it
a. is unacceta,le for inco!e tax uroses.
,. gives results ,ased uon esti!ates which !ay ,e su,>ect to considera,le uncertainty.
c. is liEely to assign a s!all a!ount of revenue to a eriod during which !uch revenue
was actually earned.
d. none of these.
/
3'. 6ne of the !ore oular inut !easures used to deter!ine the rogress toward
co!letion in the ercentage$of$co!letion !ethod is
a. revenue$ercentage ,asis.
,. cost$ercentage ,asis.
c. rogress co!letion ,asis.
d. cost$to$cost ,asis.
/
3+. The rincial advantage of the co!leted$contract !ethod is that
a. reorted revenue is ,ased on final results rather than esti!ates of unerfor!ed worE.
,. it reflects current erfor!ance when the eriod of a contract extends into !ore than
one accounting eriod.
c. it is not necessary to recognize revenue at the oint of sale.
d. a greater a!ount of gross rofit and net inco!e is reorted than is the case when the
ercentage$of$co!letion !ethod is used.
4-. #nder the co!leted$contract !ethod
a. revenue1 cost1 and gross rofit are recognized during the roduction cycle.
,. revenue and cost are recognized during the roduction cycle1 ,ut gross rofit
recognition is deferred until the contract is co!leted.
c. revenue1 cost1 and gross rofit are recognized at the ti!e the contract is co!leted.
d. none of these.
41. (ost esti!ates on a long$ter! contract !ay indicate that a loss will result on co!letion of
the entire contract. &n this case1 the entire exected loss should ,e
a. recognized in the current eriod1 regardless of whether the ercentage$of$co!letion
or co!leted$contract !ethod is e!loyed.
,. recognized in the current eriod under the ercentage$of$co!letion !ethod1 ,ut the
co!leted$contract !ethod should defer recognition of the loss to the ti!e when the
contract is co!leted.
c. recognized in the current eriod under the co!leted$contract !ethod1 ,ut the
ercentage$of$co!letion !ethod should defer the loss until the contract is co!leted.
d. deferred and recognized when the contract is co!leted1 regardless of whether the
ercentage$of$co!letion or co!leted$contract !ethod is e!loyed.
18 - 1?
Revenue Recognition
42. (ost esti!ates at the end of the second year indicate a loss will result on co!letion of
the entire contract. Chich of the following state!ents is correctD
a. #nder the co!leted$contract !ethod1 the loss is not recognized until the year the
construction is co!leted.
,. #nder the ercentage$of$co!letion !ethod1 the gross rofit recognized in the first
year !ust not ,e changed.
c. #nder the co!leted$contract !ethod1 when the ,illings exceed the accu!ulated
costs1 the a!ount of the esti!ated loss is reorted as a current lia,ility.
d. #nder the co!leted$contract !ethod1 when the (onstruction in )rocess ,alance
exceeds the ,illings1 the esti!ated loss is added to the accu!ulated costs.
43. The criteria for recognition of revenue at the co!letion of roduction of recious !etals
and far! roducts include
a. an esta,lished !arEet with 8uoted rices.
,. low additional costs of co!letion and selling.
c. units are interchangea,le.
d. all of these.
44. &n certain cases1 revenue is recognized at the co!letion of roduction even though no
sale has ,een !ade. Chich of the following state!ents is not trueD
a. :xa!les involve recious !etals or far! e8ui!ent.
,. The roducts ossess i!!ediate !arEeta,ility at 8uoted rices.
c. @o significant costs are involved in selling the roduct.
d. 0ll of these state!ents are true.
/
45. For which of the following roducts is it aroriate to recognize revenue at the
co!letion of roduction even though no sale has ,een !adeD
a. 0uto!o,iles
,. 2arge aliances
c. /ingle fa!ily residential units
d. )recious !etals
/
4". Chen there is a significant increase in the esti!ated total contract costs ,ut the increase
does not eli!inate all rofit on the contract1 which of the following is correctD
a. #nder ,oth the ercentage$of$co!letion and the co!leted$contract !ethods1 the
esti!ated cost increase re8uires a current eriod ad>ust!ent of excess gross rofit
recognized on the ro>ect in rior eriods.
,. #nder the ercentage$of$co!letion !ethod only1 the esti!ated cost increase re8uires
a current eriod ad>ust!ent of excess gross rofit recognized on the ro>ect in rior
eriods.
c. #nder the co!leted$contract !ethod only1 the esti!ated cost increase re8uires a
current eriod ad>ust!ent of excess gross rofit recognized on the ro>ect in rior
eriods.
d. @o current eriod ad>ust!ent is re8uired.
4%. Deferred gross rofit on install!ent sales is generally treated as a;n<
a. deduction fro! install!ent accounts receiva,le.
,. deduction fro! install!ent sales.
c. unearned revenue and classified as a current lia,ility.
d. deduction fro! gross rofit on sales.
18 - 11
4'. The install!ent$sales !ethod of recognizing rofit for accounting uroses is acceta,le if
a. collections in the year of sale do not exceed 3-G of the total sales rice.
,. an unrealized rofit account is credited.
c. collection of the sales rice is not reasona,ly assured.
d. the !ethod is consistently used for all sales of si!ilar !erchandise.
4+. The !ethod !ost co!!only used to reort defaults and reossessions is
a. rovide no ,asis for the reossessed asset there,y recognizing a loss.
,. record the reossessed !erchandise at fair value1 recording a gain or loss if aroriate.
c. record the reossessed !erchandise at ,ooE value1 recording no gain or loss.
d. none of these.
5-. #nder the install!ent$sales !ethod1
a. revenue1 costs1 and gross rofit are recognized roortionate to the cash that is
received fro! the sale of the roduct.
,. gross rofit is deferred roortionate to cash uncollected fro! sale of the roduct1 ,ut
total revenues and costs are recognized at the oint of sale.
c. gross rofit is not recognized until the a!ount of cash received exceeds the cost of
the ite! sold.
d. revenues and costs are recognized roortionate to the cash received fro! the sale of
the roduct1 ,ut gross rofit is deferred until all cash is received.
/
51. The realization of inco!e on install!ent sales transactions involves
a. recognition of the difference ,etween the cash collected on install!ent sales and the
cash exenses incurred.
,. deferring the net inco!e related to install!ent sales and recognizing the inco!e as
cash is collected.
c. deferring gross rofit while recognizing oerating or financial exenses in the eriod
incurred.
d. deferring gross rofit and all additional exenses related to install!ent sales until cash
is ulti!ately collected.
)
52. 0 !anufacturer of large e8ui!ent sells on an install!ent ,asis to custo!ers with
8uestiona,le credit ratings. Chich of the following !ethods of revenue recognition is least
liEely to overstate the a!ount of gross rofit reortedD
a. 0t the ti!e of co!letion of the e8ui!ent ;co!letion of roduction !ethod<
,. 0t the date of delivery ;sales !ethod<
c. The install!ent$sales !ethod
d. The costHrecovery !ethod
53. 0 seller is roerly using the cost$recovery !ethod for a sale. &nterest will ,e earned on
the future ay!ents. Chich of the following state!ents is not correctD
a. 0fter all costs have ,een recovered1 any additional cash collections are included in
inco!e.
,. &nterest revenue !ay ,e recognized ,efore all costs have ,een recovered.
c. The deferred gross rofit is offset against the related receiva,le on the ,alance sheet.
d. /u,se8uent inco!e state!ents reort the gross rofit as a searate ite! of revenue
when it is recognized as earned.
18 - 10
Revenue Recognition
54. #nder the cost$recovery !ethod of revenue recognition1
a. inco!e is recognized on a roortionate ,asis as the cash is received on the sale of
the roduct.
,. inco!e is recognized when the cash received fro! the sale of the roduct is greater
than the cost of the roduct.
c. inco!e is recognized i!!ediately.
d. none of these.
55. Cinser1 &nc. is engaged in extensive exloration for water in #tah. &f1 uon discovery of
water1 Cinser does not recognize any revenue fro! water sales until the sales exceed the
costs of exloration1 the ,asis of revenue recognition ,eing e!loyed is the
a. roduction ,asis.
,. cash ;or collection< ,asis.
c. sales ;or accrual< ,asis.
d. cost recovery ,asis.
55". /o!e of the initial franchise fee !ay ,e allocated to
a. continuing franchise fees.
,. interest revenue on the future install!ents.
c. otions to urchase the franchisee7s ,usiness.
d. 0ll of these !ay reduce the a!ount of the initial franchise fee that is recognized as
revenue.
55%. (ontinuing franchise fees should ,e recorded ,y the franchisor
a. as revenue when earned and receiva,le fro! the franchisee.
,. as revenue when received.
c. in accordance with the accounting rocedures secified in the franchise agree!ent.
d. as revenue only after the ,alance of the initial franchise fee has ,een collected.
55'. 6ccasionally a franchise agree!ent grants the franchisee the right to !aEe future ,argain
urchases of e8ui!ent or sulies. Chen recording the initial franchise fee1 the
franchisor should
a. increase revenue recognized fro! the initial franchise fee ,y the a!ount of the
exected future urchases.
,. record a ortion of the initial franchise fee as unearned revenue which will increase
the selling rice when the franchisee su,se8uently !aEes the ,argain urchases.
c. defer recognition of any revenue fro! the initial franchise fee until the ,argain
urchases are !ade.
d. @one of these.
55+. 0 franchise agree!ent grants the franchisor an otion to urchase the franchisee7s
,usiness. &t is ro,a,le that the otion will ,e exercised. Chen recording the initial
franchise fee1 the franchisor should
a. record the entire initial franchise fee as a deferred credit which will reduce the
franchisor7s invest!ent in the urchased outlet when the otion is exercised.
,. record the entire initial franchise fee as unearned revenue which will reduce the
a!ount of cash aid when the otion is exercised.
c. record the ortion of the initial franchise fee which is attri,uta,le to the ,argain
urchase otion as a reduction of the future a!ounts receiva,le fro! the franchisee.
d. @one of these.
18 - 12
5"-. Revenue is recognized ,y the consignor when the
a. goods are shied to the consignee.
,. consignee receives the goods.
c. consignor receives an advance fro! the consignee.
d. consignor receives an account sales fro! the consignee.
%ult$ple C-o$ce Anse!sConceptual
Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans"
21. c 2%. d 33. , 3+. a 45. d 51. c 55%. a
22. , 2'. d 34. c 4-. c 4". , 52. d 55'. ,
23. a 2+. c 35. , 41. a 4%. c 53. , 55+. a
24. , 3-. d 3". a 42. c 4'. c 54. , 5"-. d
25. d 31. , 3%. , 43. d 4+. , 55. d
2". , 32. c 3'. d 44. a 5-. , 55". d
%ULTIPLE CHOICECo)putat$onal
"1. Reese (onstruction (ororation contracted to construct a ,uilding for I115--1---.
(onstruction ,egan in 2--% and was co!leted in 2--'. Data relating to the contract are
su!!arized ,elowA
Jear ended
Dece!,er 311
2--% 2--'
(osts incurred I"--1--- I45-1---
:sti!ated costs to co!lete 4--1--- 9
Reese uses the ercentage$of$co!letion !ethod as the ,asis for inco!e recognition.
For the years ended Dece!,er 311 2--%1 and 2--'1 resectively1 Reese should reort
gross rofit of
a. I2%-1--- and I1'-1---.
,. I+--1--- and I"--1---.
c. I3--1--- and I15-1---.
d. I- and I45-1---.
"2. Cinsor (onstruction (o!any uses the ercentage$of$co!letion !ethod of accounting.
&n 2--%1 Cinsor ,egan worE on a contract it had received which rovided for a contract
rice of I151---1---. 6ther details followA
2--%
(osts incurred during the year I%12--1---
:sti!ated costs to co!lete as of Dece!,er 31 41'--1---
*illings during the year "1"--1---
(ollections during the year 31+--1---
Chat should ,e the gross rofit recognized in 2--%D
a. I"--1---
,. I%1'--1---
c. I11'--1---
d. I31---1---
18 - 14
Revenue Recognition
#se the following infor!ation for 8uestions "3 and "4.
&n 2--%1 (rane (ororation ,egan construction worE under a three$year contract. The contract
rice is I214--1---. (rane uses the ercentage$of$co!letion !ethod for financial accounting
uroses. The inco!e to ,e recognized each year is ,ased on the roortion of costs incurred to
total esti!ated costs for co!leting the contract. The financial state!ent resentations relating to
this contract at Dece!,er 311 2--%1 followA
*alance /heet
0ccounts receiva,le9construction contract ,illings I1--1---
(onstruction in rogress I3--1---
2ess contract ,illings 24-1---
(osts and recognized rofit in excess of ,illings "-1---
&nco!e /tate!ent
&nco!e ;,efore tax< on the contract recognized in 2--% I"-1---
"3. Fow !uch cash was collected in 2--% on this contractD
a. I1--1---
,. I14-1---
c. I2-1---
d. I24-1---
"4. Chat was the initial esti!ated total inco!e ,efore tax on this contractD
a. I3--1---
,. I32-1---
c. I4--1---
d. I4'-1---
"5. :aton (onstruction (o. uses the ercentage$of$co!letion !ethod. &n 2--%1 :aton ,egan
worE on a contract for I313--1--- and it was co!leted in 2--'. Data on the costs areA
Jear :nded Dece!,er 31
2--% 2--'
(osts incurred I111%-1--- I'4-1---
:sti!ated costs to co!lete %'-1--- 9
For the years 2--% and 2--'1 :aton should recognize gross rofit of
2--% 2--'
a. I- I112+-1---
,. I%%41--- I51"1---
c. I'1-1--- I4'-1---
d. I'1-1--- I112+-1---
#se the following infor!ation for 8uestions "" and "%.
Ra!os1 &nc. ,egan worE in 2--% on contract K3'141 which rovided for a contract rice of
I%12--1---. 6ther details followA
2--% 2--'
(osts incurred during the year I112--1--- I31"%51---
:sti!ated costs to co!lete1 as of Dece!,er 31 31"--1--- -
*illings during the year 1135-1--- 514--1---
(ollections during the year +--1--- 51'5-1---
18 - 1:
"". 0ssu!e that Ra!os uses the ercentage$of$co!letion !ethod of accounting. The
ortion of the total gross rofit to ,e recognized as inco!e in 2--% is
a. I45-1---.
,. I"--1---.
c. I11'--1---.
d. I214--1---.
"%. 0ssu!e that Ra!os uses the co!leted$contract !ethod of accounting. The ortion of
the total gross rofit to ,e recognized as inco!e in 2--' is
a. I+--1---.
,. I1135-1---.
c. I213251---.
d. I%12--1---.
#se the following infor!ation for 8uestions "' and "+.
?iley1 &nc. ,egan worE in 2--% on a contract for I'14--1---. 6ther data are as followsA
2--% 2--'
(osts incurred to date I31"--1--- I51"--1---
:sti!ated costs to co!lete 214--1--- 9
*illings to date 21'--1--- '14--1---
(ollections to date 21---1--- %12--1---
"'. &f ?iley uses the ercentage$of$co!letion !ethod1 the gross rofit to ,e recognized in
2--% is
a. I1144-1---.
,. I11"--1---.
c. I211"-1---.
d. I214--1---.
"+. &f ?iley uses the co!leted$contract !ethod1 the gross rofit to ,e recognized in 2--' is
a. I113"-1---.
,. I21'--1---.
c. I114--1---.
d. I51"--1---.
#se the following infor!ation for 8uestions %- and %1.
%-. )arEer (onstruction (o. uses the ercentage$of$co!letion !ethod. &n 2--%1 )arEer
,egan worE on a contract for I515--1---L it was co!leted in 2--'. The following cost
data ertain to this contractA
Jear :nded Dece!,er 31
2--% 2--'
(ost incurred during the year I11+5-1--- I114--1---
:sti!ated costs to co!lete at the end of year 113--1--- 9
The a!ount of gross rofit to ,e recognized on the inco!e state!ent for the year ended
Dece!,er 311 2--' is
a. I'--1---.
,. I'"-1---.
c. I+--1---.
d. I2115-1---.
18 - 1;
Revenue Recognition
%1. &f the co!leted$contract !ethod of accounting was used1 the a!ount of gross rofit to ,e
recognized for years 2--% and 2--' would ,e
2--% 2--'
a. I2125-1---. I-.
,. I2115-1---. I;1--1---<.
c. I-. I2115-1---.
d. I-. I2125-1---.
%2. Cillingha! (onstruction (o!any uses the ercentage$of$co!letion !ethod. During
2--%1 the co!any entered into a fixed$rice contract to construct a ,uilding for Rich!an
(o!any for I3-1---1---. The following details ertain to the contractA
0t Dece!,er 311 2--% 0t Dece!,er 311 2--'
)ercentage of co!letion 25G "-G
:sti!ated total cost of contract I2215--1--- I251---1---
4ross rofit recognized to date 11'%51--- 31---1---
The a!ount of construction costs incurred during 2--' was
a. I151---1---.
,. I+13%51---.
c. I51"251---.
d. I215--1---.
#se the following infor!ation for 8uestions %3 and %4.
(arter (onstruction (o!any had a contract starting 0ril 2--'1 to construct a I151---1---
,uilding that is exected to ,e co!leted in /ete!,er 2--+1 at an esti!ated cost of
I131%5-1---. 0t the end of 2--'1 the costs to date were I"13251--- and the esti!ated total costs
to co!lete had not changed. The rogress ,illings during 2--' were I31---1--- and the cash
collected during 2--' was I21---1---. (arter uses the ercentage$of$co!letion !ethod.
%3. For the year ended Dece!,er 311 2--'1 (arter would recognize gross rofit on the
,uilding of
a. I-.
,. I52%1-'3.
c. I5%51---.
d. I"%51---.
%4. 0t Dece!,er 311 2--'1 (arter would reort (onstruction in )rocess in the a!ount of
a. I"1+--1---.
,. I"13251---.
c. I51+--1---.
d. I5%51---.
%5. Mir,y *uilders1 &nc. is using the co!leted$contract !ethod for a I51"--1--- contract that
will taEe two years to co!lete. Data at Dece!,er 311 2--%1 the end of the first year1 are
as followsA
(osts incurred to date I215"-1---
:sti!ated costs to co!lete 312'-1---
*illings to date 214--1---
(ollections to date 21---1---
The gross rofit or loss that should ,e recognized for 2--% is
18 - 1<
a. I-.
,. a I24-1--- loss.
c. a I12-1--- loss.
d. a I1-51"-- loss.
#se the following infor!ation for 8uestions %" through %'.
?elton (onstruction (o. ,egan oerations in 2--%. (onstruction activity for 2--% is shown ,elow.
?elton uses the co!leted$contract !ethod.
*illings (ollections :sti!ated
(ontract Through Through (osts to (osts to
(ontract )rice 12N31N-% 12N31N-% 12N31N-% (o!lete
1 I312--1--- I3115-1--- I21"--1--- I2115-1--- 9
2 31"--1--- 115--1--- 11---1--- '2-1--- I11''-1---
3 313--1--- 11+--1--- 11'--1--- 2125-1--- 112--1---
%". Chich of the following should ,e shown on the inco!e state!ent for 2--% related to
(ontract 1D
a. 4ross rofit1 I45-1---
,. 4ross rofit1 I11---1---
c. 4ross rofit1 I11-5-1---
d. 4ross rofit1 I"--1---
%%. Chich of the following should ,e shown on the ,alance sheet at Dece!,er 311 2--%
related to (ontract 2D
a. &nventory1 I"'-1---
,. &nventory1 I'2-1---
c. (urrent lia,ility1 I"'-1---
d. (urrent lia,ility1 I115--1---
%'. Chich of the following should ,e shown on the ,alance sheet at Dece!,er 311 2--%
related to (ontract 3D
a. &nventory1 I2--1---
,. &nventory1 I35-1---
c. &nventory1 I211--1---
d. &nventory1 I2125-1---
%+. Far,er (o. uses the install!ent$sales !ethod. Chen an account had a ,alance of I'14--1
no further collections could ,e !ade and the dining roo! set was reossessed. 0t that
ti!e1 it was esti!ated that the dining roo! set could ,e sold for I214-- as reossessed1
or for I31--- if the co!any sent I3-- reconditioning it. The gross rofit rate on this sale
was %-G. The gain or loss on reossession was a
a. I51''- loss.
,. I"1--- loss.
c. I"-- gain.
d. I1'- gain.
'-. Jar,ow (ororation has a nor!al gross rofit on install!ent sales of 3-G. 0 2--" sale
resulted in a default early in 2--'. 0t the date of default1 the ,alance of the install!ent
receiva,le was I241---1 and the reossessed !erchandise had a fair value of I1315--.
0ssu!ing the reossessed !erchandise is to ,e recorded at fair value1 the gain or loss on
reossession should ,e
18 - 18
Revenue Recognition
a. I-.
,. a I313-- loss.
c. a I313-- gain.
d. a I%15-- loss.
'1. /ee!an Furniture uses the install!ent$sales !ethod. @o further collections could ,e
!ade on an account with a ,alance of I1'1---. &t was esti!ated that the reossessed
furniture could ,e sold as is for I514--1 or for I"13-- if I3-- were sent reconditioning it.
The gross rofit rate on the original sale was 4-G. The loss on reossession was
a. I41'--.
,. I415--.
c. I121---.
d. I121"--.
'2. Cagner (o!any sold so!e !achinery to 4ranger (o!any on =anuary 11 2--%. The
cash selling rice would have ,een I5"'1"2-. 4ranger entered into an install!ent sales
contract which re8uired annual ay!ents of I15-1---1 including interest at 1-G1 over five
years. The first ay!ent was due on Dece!,er 311 2--%. Chat a!ount of interest inco!e
should ,e included in Cagner7s 2--' inco!e state!ent ;the second year of the contract<D
a. I151---
,. I4%154'
c. I3-1---
d. I411'"2
'3. 2a!,erson (o!any has used the install!ent !ethod of accounting since it ,egan
oerations at the ,eginning of 2--'. The following infor!ation ertains to its oerations
for 2--'A
&nstall!ent sales I 114--1---
(ost of install!ent sales +'-1---
(ollections of install!ent sales 5"-1---
4eneral and ad!inistrative exenses 14-1---
The a!ount to ,e reorted on the Dece!,er 311 2--' ,alance sheet as Deferred 4ross
)rofit should ,e
a. I1"'1---.
,. I2521---.
c. I33"1---.
d. I'4-1---.
'4. ?aris1 &nc. aroriately used the install!ent !ethod of accounting to recognize inco!e
in its financial state!ent. /o!e ertinent data relating to this !ethod of accounting
includeA
2--% 2--'
&nstall!ent sales I%5-1--- I+--1---
(ost of sales 45-1--- "3-1---
4ross rofit I3--1--- I2%-1---
(ollections during yearA
6n 2--% sales 25-1--- 25-1---
6n 2--' sales 3--1---
Chat a!ount to ,e realized gross rofit should ,e reorted on ?arisOs inco!e state!ent
for 2--'D
18 - 1>
a. I1"51---
,. I1+-1---
c. I22-1---
d. I2%-1---
'5. /inger (o!any sells las!a$screen televisions on an install!ent ,asis and arori$
ately uses the install!ent$sales !ethod of accounting. 0 custo!er with an account
,alance of I51"-- refuses to !aEe any !ore ay!ents and the !erchandise is
reossessed. The gross rofit rate on the original sale is 4-G. /inger esti!ates that the
television can ,e sold as is for I11%5-1 or for I211-- if I14- is sent to refur,ish it. The
loss on reossession is
a. I31'5-.
,. I2124-.
c. I11"1-.
d. I114--.
#se the following infor!ation for 8uestions '"$''.
During 2--'1 /teele (ororation sold !erchandise costing I115--1--- on an install!ent ,asis for
I21---1---. The cash receits related to these sales were collected as followsA 2--'1 I'--1---L
2--+1 I%--1---L 2-1-1 I5--1---.
'". Chat is the rate of gross rofit on the install!ent sales !ade ,y /teele (ororation during
2--'D
a. %5G
,. "-G
c. 4-G
d. 25G
'%. &f exenses1 other than the cost of the !erchandise sold1 related to the 2--' install!ent
sales a!ounted to I+-1---1 ,y what a!ount would /teeleOs net inco!e for 2--' increase
as a result of install!ent salesD
a. I11-1---
,. I1%%15--
c. I2--1---
d. I%1-1---
''. Chat a!ount would ,e shown in the Dece!,er 311 2--+ financial state!ent for realized
gross rofit on 2--' install!ent sales1 and deferred gross rofit on 2--' install!ent sales1
resectivelyD
a. I1%51--- and I3%51---
,. I3251--- and I1%51---
c. I3%51--- and I1251---
d. I1%51--- and 1251---
'+. 6n =anuary 11 2--%1 Dole (o. sold land that cost I21-1--- for I2'-1---1 receiving a note
,earing interest at 1-G. The note will ,e aid in three annual install!ents of I11215+5
starting on Dece!,er 311 2--%. *ecause collection of the note is very uncertain1 Dole will
use the cost$recovery !ethod. Fow !uch revenue fro! this sale should Dole recognize in
2--%D
18 - 0?
Revenue Recognition
a. I-
,. I211---
c. I2'1---
d. I%-1---
5+-. 6n 0ril 11 2--% Reagan1 &nc. entered into a franchise agree!ent with a local ,usiness$
!an. The franchisee aid I24-1--- and gave a I1"-1---1 'G1 3$year note aya,le with
interest due annually on ?arch 31. Reagan recorded the I4--1--- initial franchise fee as
revenue on 0ril 11 2--%. 6n Dece!,er 3-1 2--%1 the franchisee decided not to oen an
outlet under Reagan7s na!e. Reagan canceled the franchisee7s note and refunded
I12'1---1 less accrued interest on the note1 of the I24-1--- aid on 0ril 1. Chat entry
should Reagan !aEe on Dece!,er 3-1 2--%D
a. 2oss on Reossessed Franchise......................................... 12'1---
(ash......................................................................... 12'1---
,. 2oss on Reossessed Franchise......................................... 11'14--
(ash......................................................................... 11'14--
c. 2oss on Reossessed Franchise......................................... 2%'14--
(ash......................................................................... 11'14--
@ote Receiva,le....................................................... 1"-1---
d. Revenue fro! Franchise Fees............................................. 4--1---
&nterest &nco!e........................................................ +1"--
(ash......................................................................... 11'14--
@ote Receiva,le....................................................... 1"-1---
Revenue fro! Reossessed Franchise................... 1121---
5+1. 6n =anuary 11 2--% Tasty Delight1 &nc. entered into a franchise agree!ent with a
co!any allowing the co!any to do ,usiness under Tasty Delight7s na!e. Tasty Delight
had erfor!ed su,stantially all re8uired services ,y =anuary 11 2--%1 and the franchisee
aid the initial franchise fee of I5"-1--- in full on that date. The franchise agree!ent
secifies that the franchisee !ust ay a continuing franchise fee of I4'1--- annually1 of
which 2-G !ust ,e sent on advertising ,y Tasty Delight. Chat entry should Tasty Delight
!aEe on =anuary 11 2--% to record receit of the initial franchise fee and the continuing
franchise fee for 2--%D
a. (ash.................................................................................... "-'1---
Franchise Fee Revenue........................................... 5"-1---
Revenue fro! (ontinuing Franchise Fees............... 4'1---
,. (ash.................................................................................... "-'1---
#nearned Franchise Fees........................................ "-'1---
c. (ash.................................................................................... "-'1---
Revenue fro! (ontinuing Franchise Fees............... 3'14--
#nearned Franchise Fees........................................ +1"--
d. )reaid 0dvertising.............................................................. +1"--
(ash.................................................................................... "-'1---
Revenue fro! (ontinuing Franchise Fees............... 4'1---
#nearned Franchise Fees........................................ +1"--
18 - 01
5+2. Jount &nc. charges an initial franchise fee of I+2-1---1 with I2--1--- aid when the
agree!ent is signed and the ,alance in five annual ay!ents. The resent value of the
future ay!ents1 discounted at 1-G1 is I5451'%2. The franchisee has the otion to
urchase I12-1--- of e8ui!ent for I+"1---. Jount has su,stantially rovided all initial
services re8uired and collecti,ility of the ay!ents is reasona,ly assured. The a!ount of
revenue fro! franchise fees is
a. I2--1---.
,. I%211'%2.
c. I%451'%2.
d. I+2-1---.
#se the following infor!ation for 8uestions +3 and +4.
6n ?ay 11 2--%1 T3 &nc. consigned '- T3s to 0l7s T3. The T3s cost I2%-. Freight on the
shi!ent aid ,y 0lOs T3 was I"--. 6n =uly 1-1 T3 &nc. received an account sales and I121+--
fro! 0l7s T3. Thirty T3s had ,een sold and the following exenses were deductedA
Freight I"--
(o!!ission ;2-G of sales rice< D
0dvertising 3+-
Delivery 21-
5+3. The total sales rice of the T3s sold ,y 027s T3 was
a. I1513%5.
,. I1"1125.
c. I1"13''.
d. I1%1"25.
5+4. The inventory of T3s will ,e reorted on whose ,alance sheet and at what a!ountD
*alance /heet of 0!ount of &nventory
a. T3 &nc. I131'%5
,. T3 &nc. I1315--
c. 0l7s T3 I131'%5
d. 0l7s T3 I1315--
%ult$ple C-o$ce Anse!sCo)putat$onal
Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans"
"1. c "". , %1. c %". c '1. a '". d 5+1. c
"2. c "%. c %2. , %%. c '2. , '%. a 5+2. ,
"3. , "'. a %3. c %'. a '3. , ''. d 5+3. d
"4. d "+. , %4. a %+. d '4. , '+. a 5+4. a
"5. c %-. a %5. , '-. , '5. d 5+-. d
18 - 00
Revenue Recognition
%ULTIPLE CHOICECPA A*apte*
+5. 0ccording to the F0/*7s concetual fra!eworE1 the rocess of reorting an ite! in the
financial state!ents of an entity is
a. recognition.
,. realization.
c. allocation.
d. !atching.
+". Flynn (onstruction (o. has consistently used the ercentage$of$co!letion !ethod of
recognizing revenue. During 2--%1 Flynn entered into a fixed$rice contract to construct
an office ,uilding for I121---1---. &nfor!ation relating to the contract is as followsA
0t Dece!,er 31
2--% 2--'
)ercentage of co!letion 15G 45G
:sti!ated total cost at co!letion I+1---1--- I+1"--1---
4ross rofit recognized ;cu!ulative< "--1--- 1144-1---
(ontract costs incurred during 2--' were
a. I21''-1---.
,. I21+%-1---.
c. I3115-1---.
d. I4132-1---.
+%. @oland (onstructors1 &nc. has consistently used the ercentage$of$co!letion !ethod of
recognizing inco!e. &n 2--%1 @oland started worE on a I351---1--- construction contract
that was co!leted in 2--'. The following infor!ation was taEen fro! @oland7s 2--%
accounting recordsA
)rogress ,illings I111---1---
(osts incurred 1-15--1---
(ollections %1---1---
:sti!ated costs to co!lete 211---1---
Chat a!ount of gross rofit should @oland have recognized in 2--% on this contractD
a. I315--1---
,. I213331334
c. I11%5-1---
d. I111""1""%
+'. During 2--%1 :aton (or. started a construction >o, with a total contract rice of
I315--1---. The >o, was co!leted on Dece!,er 151 2--'. 0dditional data are as followsA
2--% 2--'
0ctual costs incurred I1135-1--- I115251---
:sti!ated re!aining costs 1135-1--- 9
*illed to custo!er 112--1--- 213--1---
Received fro! custo!er 11---1--- 214--1---
#nder the co!leted$contract !ethod1 what a!ount should :aton recognize as gross
rofit for 2--'D
a. I2251---
,. I31215--
c. I4%51---
d. I"251---
18 - 02
++. )enny Far!s roduced '--1--- ounds of cotton during the 2--% season. )enny sells all
of its cotton to *ye (o.1 which has agreed to urchase )enny7s entire roduction at the
revailing !arEet rice. Recent legislation assures that the !arEet rice will not fall ,elow
I.%- er ound during the next two years. )enny7s costs of selling and distri,uting the
cotton are i!!aterial and can ,e reasona,ly esti!ated. )enny reorts its inventory at
exected exit value. During 2--%1 )enny sold and delivered to *ye "--1--- ounds at the
!arEet rice of I.%-. )enny sold the re!aining 2--1--- ounds during 2--' at the !arEet
rice of I.%2. Chat a!ount of revenue should )enny recognize in 2--%D
a. I42-1---
,. I4321---
c. I5"-1---
d. I5%"1---
1--. Mlugg1 &nc. aroriately uses the install!ent$sales !ethod of accounting to recognize
inco!e in its financial state!ents. /o!e ertinent data relating to this !ethod of
accounting includeA
2--% 2--'
&nstall!ent sales I%5-1--- I%2-1---
(ost of install!ent sales 5%-1--- 5-41---
4ross rofit I1'-1--- I21"1---
Rate of gross rofit 24G 3-G
*alance of deferred gross rofit at year endA
2--% I1-'1--- I 3"1---
2--' 1+'1---
Total I1-'1--- I2341---
Chat a!ount of install!ent accounts receiva,le should ,e resented in Mlugg7s
Dece!,er 311 2--' ,alance sheetD
a. I%2-1---
,. I'1-1---
c. I%'-1---
d. I'""1"""
1-1. @e,er (o.1 which ,egan oerations on =anuary 11 2--%1 aroriately uses the
install!ent$sales !ethod of accounting. The following infor!ation ertains to @e,er7s
oerations for the year 2--%A
&nstall!ent sales I112--1---
Regular sales 4'-1---
(ost of install!ent sales %2-1---
(ost of regular sales 2''1---
4eneral and ad!inistrative exenses +"1---
(ollections on install!ent sales 2''1---
The deferred gross rofit account in @e,er7s Dece!,er 311 2--% ,alance sheet should ,e
a. I11512--.
,. I1+21---.
c. I3"41'--.
d. I4'-1---.
18 - 04
Revenue Recognition
1-2. 6n =anuary 11 2--%1 /tein (o. sold a used !achine to ?ays1 &nc. for I35-1---. 6n this
date1 the !achine had a dereciated cost of I2451---. ?ays aid I5-1--- cash on
=anuary 11 2--% and signed a I3--1--- note ,earing interest at 1-G. The note was
aya,le in three annual install!ents of I1--1--- ,eginning =anuary 11 2--'. /tein
aroriately accounted for the sale under the install!ent !ethod. ?ays !ade a ti!ely
ay!ent of the first install!ent on =anuary 11 2--' of I13-1---1 which included interest of
I3-1--- to date of ay!ent. 0t Dece!,er 311 2--'1 /tein has deferred gross rofit of
a. I%-1---.
,. I""1---.
c. I"-1---.
d. I511---.
1-3. 4rant (o. ,egan oerations on =anuary 11 2--% and aroriately uses the install!ent
!ethod of accounting. The following infor!ation ertains to 4rant7s oerations for 2--%A
&nstall!ent sales 11'--1---
(ost of install!ent sales 11-'-1---
4eneral and ad!inistrative exenses 1'-1---
(ollections on install!ent sales '251---
The ,alance in the deferred gross rofit account at Dece!,er 311 2--% should ,e
a. I33-1---.
,. I4+51---.
c. I3+-1---.
d. I%2-1---.
1-4. 2ott (o. records all sales using the install!ent !ethod of accounting. &nstall!ent sales
contracts call for 3" e8ual !onthly cash ay!ents. 0ccording to the F0/*7s concetual
fra!eworE1 the a!ount of deferred gross rofit relating to collections 12 !onths ,eyond
the ,alance sheet date should ,e reorted in the
a. current lia,ilities section as a deferred revenue.
,. noncurrent lia,ilities section as a deferred revenue.
c. current assets section as a contra account.
d. noncurrent assets section as a contra account.
1-5. 0lton1 &nc. is a retailer of ho!e aliances and offers a service contract on each aliance
sold. 0lton sells aliances on install!ent contracts1 ,ut all service contracts !ust ,e aid
in full at the ti!e of sale. (ollections received for service contracts should ,e recorded as
an increase in a
a. deferred revenue account.
,. sales contracts receiva,le valuation account.
c. stocEholders7 valuation account.
d. service revenue account.
%ult$ple C-o$ce Anse!sCPA A*apte*
Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans" Ite) Ans"
+5. a +%. d ++. c 1-1. c 1-3. c 1-5. a
+". , +'. d 1--. , 1-2. c 1-4. c
18 - 0:
#ERIVATIONS Co)putat$onal
No" Anse! #e!$9at$on
"1. c I"--1---
9999999999 P ;I115--1--- H I11---1---< B I3--1---
I"--1--- Q I4--1---
;I115--1--- H I11-5-1---< H I3--1--- B I15-1---.
"2. c I%12--1---
99999999999 P ;I151---1--- H I121---1---< B I11'--1---.
I%12--1--- Q I41'--1---
"3. , I24-1--- H I1--1--- B I14-1---.
"4. d I3--1--- H I"-1--- B I24-1---
I24-1---
999999999 P ;I214--1--- H Total esti!ated cost< B I"-1---
Total esti!ated cost
Total esti!ated cost B I11+2-1---
I214--1--- H I11+2-1--- B I4'-1---.
"5. c I111%-1---
99999$ P ;I313--1--- H I11+5-1---< B I'1-1---
I11+5-1---
;I313--1--- H I21-1-1---< H I'1-1--- B I4'-1---.
"". , I112--1---
99999 P ;I%12--1--- H I41'--1---< B I"--1---.
I41'--1---
"%. c I%12--1--- H I41'%51--- B I213251---.
"'. a I31"--1---
99999 P ;I'14--1--- H I"1---1---< B I1144-1---.
I"1---1---
"+. , I'14--1--- H I51"--1--- B I21'--1---.
%-. a RI11+5-1--- S ;I11+5-1--- Q I113--1---<T P I2125-1--- B I1135-1---
;I515--1--- H I3135-1---< H I1135-1-- B I'--1---.
%1. c I515--1--- H I3135-1--- B I2115-1---.
%2. , ;I251---1--- P ."-< H ;I2215--1--- P .25< B I+13%51---.
%3. c ;I"13251--- S I131%5-1---< P I1125-1--- B I5%51---.
%4. a ;I"13251--- S I131%5-1---< P I1125-1--- B I5%51---.
I"13251--- Q I5%51--- B I"1+--.---.
%5. , I51"--1--- H ;I215"-1--- Q I312'-1---< B HI24-1---.
18 - 0;
Revenue Recognition
#ERIVATIONS Co)putat$onal .cont"/
%". c I312--1--- H I2115-1--- B I11-5-1---.
%%. c I115--1--- H I'2-1--- B I"'-1---.
%'. a ;I2125-1--- H I15-1---< H I11+--1--- B I2--1---.
%+. d I'14-- H I51''- B I2152-
;I31--- H I3--< H I2152- B I1'- gain.
'-. , I241--- H I%12-- B I1"1'--
I1"1'-- H I1315-- B I313-- loss.
'1. a I1'1--- H I%12-- B I1-1'--
;I"13-- H I3--< H I1-1'-- B I41'-- loss.
'2. , 2--%A I15-1--- H ;I5"'1"2- P 1-G< B I+3113'.
2--'A ;I5"'1"2- H I+3113'< P 1-G B I4%154'.
'3. , R;I114--1--- H I+'-1---< S I114--1---T P I'4-1--- B I2521---.
'4. , ;I3--1--- S I%5-1---< P I25-1--- B I1--1---
R;I2%-1--- S I+--1---< P I3--1---T Q I1--1--- B I1+-1---.
'5. d RI51"-- P ;1 H .4-<T H ;I211-- H I14-< B I114--.
'". d ;I21---1--- H I115--1---< S I21---1--- B 25G
'%. a ;I'--1--- P .25< H I+-1--- B I11-1---1
''. d I%--1--- P .25 B I1%51---L I5--1--- P .25 B I1251---.
'+. a I-.
5+-. d Revenue B I4--1---
&nterest inco!e B I1"-1--- P 'G P +N12 B I+1"--
(ash B I12'1--- H I+1"-- B I11'14--
Reossession revenueA I24-1--- H I12'1--- B I1121---.
5+1. c (ash B I5"-1--- Q I4'1--- B I"-'1---
Franchise Fee Revenue B I5"-1---
#nearned Franchise Fees B I4'1--- P 2-G B I+1"--
Revenue fro! (ontinuing Franchise Fees B I4'1--- H I+1"-- B I3'14--.
5+2. , I2--1--- Q I5451'%2 H I241--- B I%211'%2.
5+3. d /ales H ;/ales P 2-G< H I"-- H I3+- H I21- B I121+--
.' /ales B I1411--
/ales B I1%1"25.
18 - 0<
#ERIVATIONS Co)putat$onal .cont"/
5+4. a ;I2%- P 5-< Q R;I"-- S '-< P 5-T B I131'%5.
#ERIVATIONS CPA A*apte*
+5. a (oncetual.
+". , ;I+1"--1--- P 45G< H ;I+1---1--- P 15G< B I21+%-1---.
I1-15--1---
+%. d 999999 P ;I351---1--- H I3115--1---< B I111""1""%.
I3115--1---
+'. d I315--1--- H I1135-1--- H I115251--- B I"251---.
++. c '--1--- l,s. P I.%- B I5"-1---.
1--. , ;I3"1--- S 24G< Q ;I1+'1--- S 3-G< B I'1-1---.
1-1. c I112--1--- H I%2-1--- B I4'-1--- gross rofit ;4-G gross rofit rate<
I4'-1--- H ;I2''1--- P .4< B I3"41'--.
1-2. c I3--1--- Q I5-1--- B I35-1---
I35-1--- H I2451--- B I1-51--- gross rofit ;3-G gross rofit rate<
;I3--1--- H I1--1---< P 3-G B I"-1---.
1-3. c I11'--1--- H I11-'-1--- B I%2-1--- ;4-G gross rofit rate<
I%2-1--- H ;I'251--- P 4-G< B I3+-1---.
1-4. c (oncetual.
1-5. a (oncetual.
E1ERCISES
E@" 18-1?;9 Revenue recognition ;essay<.
The revenue recognition rincile rovides that revenue is recognized when ;1< it is realized or
realiza,le and ;2< it is earned.
Inst!uct$ons
:xlain when revenues are ;a< realized1 ;,< realiza,le1 and ;c< earned.
18 - 08
Revenue Recognition
Solut$on 18-1?;
;a< Revenues are realized when goods or services are exchanged for cash or clai!s to cash
;receiva,les<.
;,< Revenues are realizable when assets received in exchange are readily converti,le to Enown
a!ounts of cash or clai!s to cash.
;c< Revenues are earned when the earnings rocess is co!lete or virtually co!lete.
E@" 18-1?<9Revenue recognition ;essay<.
The earning of revenue ,y a ,usiness is recognized for accounting uroses when the
transaction is recorded. Revenue is often recognized at ti!e of sale.
Inst!uct$ons
0t what ti!es1 other than at ti!e of sale1 !ay it ,e aroriate to recognize revenueD :xlain
and >ustify each of these ti!es.
Solut$on 18-1?<
Revenue is also recognized ;1< during roduction1 ;2< at co!letion1 and ;3< at collection.
;1< During roduction. The !ost co!!on situation is the use of the ercentage$of$co!letion
!ethod for long$ter! construction contracts. The oint of sale is !uch less significant than
roduction activity. &f the contractor can exect to erfor! the contractual o,ligation1 the
revenue is assured ,y the contract. To defer recognition until co!letion of the entire
contract !isreresents the efforts ;costs< and acco!lish!ents ;revenues< of the interi!
eriods. &f rogress toward co!letion can ,e esti!ated with reasona,le accuracy1 the
ercentage$of$co!letion !ethod should ,e used.
;2< 0t co!letion. :xa!les of revenue recognition at co!letion of roduction involve recious
!etals and agricultural roducts with 8uoted rices. These sales rices are reasona,ly
assured1 there are low additional costs of distri,ution1 and unit costs cannot ,e deter!ined
,ecause of >oint costs.
;3< 0t collection. Chen collection is highly uncertain and there is no reasona,ly o,>ective ,asis
for esti!ating the degree of collecti,ility1 revenue should not ,e recognized until cash is
received. &n addition1 if collection costs and ,ad de,ts are exected to ,e high and their
a!ount cannot ,e reasona,ly esti!ated1 revenue recognition should ,e deferred.
E@" 18-1?892ong$ter! construction contracts ;essay<.
&n accounting for long$ter! construction contracts ;those taEing longer than one year to
co!lete<1 the two !ethods co!!only followed are ercentage$of$co!letion and co!leted$
contract.
Inst!uct$ons
;a< Discuss how earnings on long$ter! construction contracts are recognized and co!uted
under these two !ethods.
;,< #nder what circu!stances should one !ethod ,e used over the otherD
;c< Fow are >o, costs and interi! ,illings reflected on the ,alance sheet under the ercentage$
of$co!letion !ethod and the co!leted$contract !ethodD
18 - 0>
Solut$on 18-1?8
;a< The revenue recognized on a long$ter! construction contract under the ercentage$of$
co!letion !ethod is deter!ined ,y alying a ercentage reresenting the degree of
co!letion to the total contract rice at the end of the accounting eriod. The ercentage
!ay ,e derived ,y dividing the costs incurred to date ,y the total esti!ated costs of the
entire contract ,ased on the !ost recent infor!ation. The revenue so derived is then
reduced ,y the direct contract costs to deter!ine the gross rofit recognized in the initial
eriod.
&n su,se8uent eriods1 since the ercentage$of$co!letion !ethod descri,ed roduces
cu!ulative results1 revenue and gross rofit recognized in rior eriods !ust ,e su,tracted
to o,tain current revenue and gross rofit to ,e recognized.
#nder the co!leted$contract !ethod1 no earnings are recognized until the contract is
su,stantially co!leted. For the eriod in which co!letion occurs1 gross revenues include
the total contract rice. Total >o, costs incurred are deducted fro! gross revenues1 resulting
in recognition of the entire a!ount of gross rofit in the co!letion eriod. &f it is exected
that a loss will occur on the contract1 a rovision for loss should ,e recognized i!!ediately
under ,oth the co!leted$contract !ethod and the ercentage$of$co!letion !ethod.
;,< The ercentage$of$co!letion !ethod should ,e used when esti!ates of the ,ases uon
which rogress is !easured are reasona,ly deenda,le and all the following conditions
existA
1. The contract clearly secifies the enforcea,le rights regarding goods or services to ,e
rovided and received ,y the arties1 the consideration to ,e exchanged1 and the
!anner and ter!s of settle!ent.
2. The ,uyer can ,e exected to satisfy all o,ligations under the contract.
3. The contractor can ,e exected to erfor! the contractual o,ligation.
The co!leted$contract !ethod should ,e used when inherent hazards or lacE of deend$
a,le esti!ates cause the forecasts to ,e of dou,tful value.
;c< #nder the ercentage$of$co!letion !ethod1 a schedule is !ade of the contracts in
rocess1 showing the total costs incurred as of the end of a given eriod1 the esti!ated
gross rofit recognized ,ased on the degree of co!letion1 and the total ,illings rendered
on each individual contract. &f costs incurred lus recognized rofits exceed the related
,illings on a contract1 this net figure is shown as a current asset. This treat!ent shows that
the contractor has not fully ,illed the custo!er for worE erfor!ed to date and has a clai!
against the custo!er for that ortion of worE co!leted ,ut not yet ,illed. &f ,illings on a
contract exceed costs incurred lus esti!ated rofits1 this net figure is shown as a current
lia,ility1 which !eans that the contractor has over,illed the custo!er for worE done to date
and !ust co!lete the worE reresented ,y the excess ,illings.
#nder the co!leted$contract !ethod1 the treat!ent of excess costs and ,illings is the
sa!e as under the ercentage$of$co!letion !ethod excet that esti!ated rofits are not
co!uted ,ecause rofit recognition is deferred until a contract is co!leted. The excess of
costs over related ,illings on a contract is a current asset while the excess of ,illings over
related costs on a contract is a current lia,ility.
18 - 2?
Revenue Recognition
E@" 18-1?>9=ournal entries9ercentage$of$co!letion.
4rant (onstruction (o!any was awarded a contract to construct an interchange at the >unction
of #./. +4 and Fighway 3- at a total contract rice of I'1---1---. The esti!ated total costs to
co!lete the ro>ect were I"1---1---.
Inst!uct$ons
;a< ?aEe the entry to record construction costs of I31"--1---1 on construction in rocess to
date.
;,< ?aEe the entry to record rogress ,illings of I21---1---.
;c< ?aEe the entry to recognize the rofit that can ,e recognized to date1 on a ercentage$of$
co!letion ,asis.
Solut$on 18-1?>
;a< (onstruction in )rocess................................................................ 31"--1---
?aterials1 (ash1 )aya,les1 :tc......................................... 31"--1---
;,< 0ccounts Receiva,le.................................................................... 21---1---
*illings on (onstruction in )rocess................................... 21---1---
;c< (onstruction :xenses................................................................. 31"--1---
(onstruction in )rocess ;"-G co!lete<...................................... 112--1---
Revenue fro! 2ong$Ter! (ontracts................................. 41'--1---
E@" 18-11?9)ercentage$of$co!letion !ethod.
4arnet (onstruction (o. contracted to ,uild a ,ridge for I51---1---. (onstruction ,egan in 2--%
and was co!leted in 2--'. Data relating to the construction areA
2--% 2--'
(osts incurred I11"5-1--- I113%51---
:sti!ated costs to co!lete 1135-1--- 9
4arnet uses the ercentage$of$co!letion !ethod.
Inst!uct$ons
;a< Fow !uch revenue should ,e reorted for 2--%D /how your co!utation.
;,< ?aEe the entry to record rogress ,illings of I11"5-1--- during 2--%.
;c< ?aEe the entry to record the revenue and gross rofit for 2--%.
;d< Fow !uch gross rofit should ,e reorted for 2--'D /how your co!utation.
Solut$on 18-11?
;a< I11"5-1---
99999 P I51---1--- B I21%5-1---
I31---1---
;,< 0ccounts Receiva,le.................................................................... 11"5-1---
*illings on (onstruction in )rocess .................................. 11"5-1---
18 - 21
Solut$on 18-11? ;cont.<
;c< (onstruction :xenses................................................................. 11"5-1---
(onstruction in )rocess................................................................ 111--1---
Revenue fro! 2ong$Ter! (ontracts................................. 21%5-1---
;d< Revenue I51---1---
(osts 31-251---
Total gross rofit 11+%51---
Recognized in 2--% ;111--1---<
Recognized in 2--' I '%51---
6r
Total revenue I51---1---
Recognized in 2--% ;21%5-1---<
Recognized in 2--' 2125-1---
(osts in 2--' ;113%51---<
4ross rofit in 2--' I '%51---
E@" 18-1119)ercentage$of$co!letion !ethod.
/tiner *uilders contracted to ,uild a high$rise for I141---1---. (onstruction ,egan in 2--% and is
exected to ,e co!leted in 2-1-. Data for 2--% and 2--' areA
2--% 2--'
(osts incurred to date I11'--1--- I512--1---
:sti!ated costs to co!lete %12--1--- 41'--1---
/tiner uses the ercentage$of$co!letion !ethod.
Inst!uct$ons
;a< Fow !uch gross rofit should ,e reorted for 2--%D /how your co!utation.
;,< Fow !uch gross rofit should ,e reorted for 2--'D
;c< ?aEe the >ournal entry to record the revenue and gross rofit for 2--'.
Solut$on 18-111
;a< I11'--1---
99999 P I51---1--- B I11---1---
I+1---1---
;,< I512--1---
999999 P I41---1--- B I21-'-1---
I1-1---1---
2ess 2--% gross rofit 11---1---
4ross rofit in 2--' I11-'-1---
;c< (onstruction in )rocess................................................................ 11-'-1---
(onstruction :xenses................................................................. 314--1---
Revenue fro! 2ong$Ter! (ontracts................................. 414'-1---
18 - 20
Revenue Recognition
E@" 18-1109)ercentage$of$co!letion and co!leted$contract !ethods.
6n Fe,ruary 11 2--%1 @ance (ontractors agreed to construct a ,uilding at a contract rice of
I"1---1---. @ance esti!ated total construction costs would ,e I41---1--- and the ro>ect would
,e finished in 2--+. &nfor!ation relating to the costs and ,illings for this contract is as followsA
2--% 2--' 2--+
Total costs incurred to date I115--1--- I21"4-1--- I41"--1---
:sti!ated costs to co!lete 215--1--- 11%"-1--- $-$
(usto!er ,illings to date 212--1--- 41---1--- 51"--1---
(ollections to date 21---1--- 315--1--- 515--1---
Inst!uct$ons
Fill in the correct a!ounts on the following schedule. For ercentage$of$co!letion accounting
and for co!leted$contract accounting1 show the gross rofit that should ,e recorded for 2--%1
2--'1 and 2--+.
)ercentage$of$(o!letion (o!leted$(ontract
4ross )rofit 4ross )rofit
2--% UUUUUUUUUUUU 2--% UUUUUUUUUUUU
2--' UUUUUUUUUUUU 2--' UUUUUUUUUUUU
2--+ UUUUUUUUUUUU 2--+ UUUUUUUUUUUU
Solut$on 18-110
)ercentage$of$(o!letion (o!leted$(ontract
4ross )rofit 4ross )rofit
2--% I%5-1---
a
2--% 9
2--' I21-1---
,
2--' 9
2--+ I44-1---
c
2--+ I114--1---
d
a
I115--1---
99999 P I21---1--- B I%5-1---
I41---1---
,
I21"4-1---
99999 P I11"--1--- B I+"-1---
I414--1---
2ess 2--% gross rofit ;%5-1---<
2--' gross rofit I21-1---
c
Total revenue I"1---1---
Total costs 41"--1---
Total gross rofit 114--1---
Recognized to date ;+"-1---<
2--+ gross rofit I 44-1---
d
Total revenue I"1---1---
Total costs 41"--1---
Total gross rofit I114--1---
18 - 22
E@" 18-1129&nstall!ent sales.
(arlin (o. had install!ent sales of I11---1--- and cost of install!ent sales of I%--1--- in 2--%.
0 2--% sale resulted in a default in 2--+1 at which ti!e the ,alance of the install!ent receiva,le
was I3-1---. The reossessed !erchandise had a fair value of I151---.
Inst!uct$ons
;a< (alculate the rate of gross rofit on 2--% install!ent sales.
;,< ?aEe the entry to record the reossession.
Solut$on 18-112
;a< I3--1--- S I11---1--- B 3-G
;,< Reossessed ?erchandise............................................................ 151---
Deferred 4ross )rofit1 2--% ;.3- P I3-1---<.................................. +1---
2oss on Reossession................................................................... "1---
&nstall!ent 0ccounts Receiva,le1 2--% ................................. 3-1---
E@" 18-1149&nstall!ent sales.
Tanner Furniture (o!any concluded its first year of oerations in which it !ade sales of
I'--1---1 all on install!ent. (ollections during the year fro! down ay!ents and install!ents
totaled I3--1---. )urchases for the year totaled I4--1---L the cost of !erchandise on hand at
the end of the year was I'-1---.
Inst!uct$ons
#sing the install!ent$sales !ethod1 !aEe su!!ary entries to recordA
;a< the install!ent sales and cash collectionsL
;,< the cost of install!ent salesL
;c< the unrealized gross rofitL
;d< the realized gross rofit.
Solut$on 18-114
;a< &nstall!ent 0ccounts Receiva,le.................................................. '--1---
&nstall!ent /ales.............................................................. '--1---
(ash............................................................................................. 3--1---
&nstall!ent 0ccounts Receiva,le...................................... 3--1---
;,< (ost of &nstall!ent /ales ;I4--1--- H I'-1---<........................... 32-1---
&nventory........................................................................... 32-1---
;c< &nstall!ent /ales.......................................................................... '--1---
(ost of &nstall!ent /ales.................................................. 32-1---
Deferred 4ross )rofit ;"-G<.............................................. 4'-1---
;d< Deferred 4ross )rofit ;"-G P I3--1---<...................................... 1'-1---
Realized 4ross )rofit on &nstall!ent /ales....................... 1'-1---
18 - 24
Revenue Recognition
E@" 18-11:9&nstall!ent sales.
:d!ond (o!any sells office e8ui!ent. 6n =anuary 11 2--'1 :d!ond entered into an
install!ent sale contract with ?iller (o!any for a six$year eriod exiring =anuary 11 2-14.
:8ual annual ay!ents under the install!ent sale are I+3"1--- and are due on =anuary 1. The
first ay!ent was !ade on =anuary 11 2--'.
0dditional infor!ation is as followsA
The cash selling rice of the e8ui!ent1 i.e.1 the a!ount that would ,e realized on an
outright sale1 is I415'41---.
The cost of sales relating to the e8ui!ent is I31'251---.
The finance charges relating to the install!ent eriod are I11-321--- ,ased on a stated
interest rate of +G which is aroriate. For tax uroses1 :d!ond aroriately uses the
accrual ,asis for recording finance charges.
(ircu!stances are such that the collection of the install!ent sale is reasona,ly assured.
The install!ent sale 8ualified for the install!ent !ethod of reorting for tax uroses.
0ssu!e that the inco!e tax rate is 3-G.
Inst!uct$ons
Chat inco!e ;loss< ,efore inco!e taxes should :d!ond aroriately record as a result of this
transaction for the year ended Dece!,er 311 2--'D /how suorting co!utations in good for!.
Solut$on 18-11:
;@oteA For financial accounting uroses1 the install!ent$sales !ethod is not used1 and the full
gross rofit is recognized in the year of sale1 ,ecause collection of the receiva,le is reasona,ly
assured.<
:d!ond (o!any
(o!utation of &nco!e *efore &nco!e Taxes
6n &nstall!ent /ale (ontract
For the Jear :nded Dece!,er 311 2--'
/ales I415'41---
(ost of /ales 31'251---
4ross )rofit %5+1---
&nterest Revenue ;/chedule &< 32'132-
&nco!e ,efore &nco!e Taxes I11-'%132-
/chedule &
(o!utation of &nterest Revenue on
&nstall!ent /ale (ontract
(ash selling rice ;sales< I415'41---
)ay!ent !ade on =anuary 11 2--' +3"1---
*alance outstanding at 12N31N-' 31"4'1---
&nterest rate +G
&nterest Revenue I 32'132-
18 - 2:
=E@" 18-11;9Franchises.
)asta &nn charges an initial fee of I'--1--- for a franchise1 with I1"-1--- aid when the
agree!ent is signed and the ,alance in four annual ay!ents. The resent value of the annual
ay!ents1 discounted at 1-G1 is I5-%12--. The franchisee has the right to urchase I"-1--- of
Eitchen e8ui!ent and sulies for I5-1---. 0n additional art of the initial fee is for advertising
to ,e rovided ,y )asta &nn during the next five years. The value of the advertising is I11--- a
!onth. (ollecti,ility of the ay!ents is reasona,ly assured and )asta &nn has erfor!ed all the
initial services re8uired ,y the contract.
Inst!uct$ons
)reare the entry to record the initial franchise fee. /how suorting co!utations in good for!.
=Solut$on 18-11;
Total fee I'--1---
Discount I "4-1---
;5-%12--< ;1321'--<
*argain urchase ;1-1---<
0dvertising ;I11--- P "-< ;"-1---<
I5+%12--
(ash.......................................................................................... 1"-1---
@otes Receiva,le...................................................................... "4-1---
Discount on @otes Receiva,le ...................................... 1321'--
Revenue fro! Franchise Fees ...................................... 5+%12--
#nearned Franchise Fees ............................................. %-1---
PRO&LE%S
P!" 18-11<92ong$ter! construction ro>ect accounting.
*enson (onstruction secializes in the construction of co!!ercial and industrial ,uildings. The
contractor is exerienced in ,idding long$ter! construction ro>ects of this tye1 with the tyical
ro>ect lasting fifteen to twenty$four !onths. The contractor uses the ercentage$of$co!letion
!ethod of revenue recognition since1 given the characteristics of the contractor7s ,usiness and
contracts1 it is the !ost aroriate !ethod. )rogress toward co!letion is !easured on a cost
to cost ,asis. *enson ,egan worE on a lu!$su! contract at the ,eginning of 2--'. 0s ,id1 the
statistics were as followsA
2u!$su! rice ;contract rice< I41---1---
:sti!ated costs
2a,or I '5-1---
?aterials and su,contractor 11%5-1---
&ndirect costs 4--1--- 31---1---
I11---1---
18 - 2;
Revenue Recognition
P!" 18-11< ;cont.<
0t the end of the first year1 the following was the status of the contractA
*illings to date I2123-1---
(osts incurred to date
2a,or I 4"41---
?aterials and su,contractor 11-+'1---
&ndirect costs 1+31--- 11%551---
2atest forecast total cost 31---1---
&t should ,e noted that included in the a,ove costs incurred to date were standard electrical and
!echanical !aterials stored on the >o, site1 ,ut not yet installed1 costing I1-51---. These costs
should not ,e considered in the costs incurred to date.
Inst!uct$ons
;a< (o!ute the ercentage of co!letion on the contract at the end of 2--'.
;,< &ndicate the a!ount of gross rofit that would ,e reorted on this contract at the end of
2--'.
;c< ?aEe the >ournal entry to record the inco!e ;loss< for 2--' on *enson7s ,ooEs.
;d< &ndicate the account;s< and the a!ount;s< that would ,e shown on the ,alance sheet of
*enson (onstruction at the end of 2--' related to its construction accounts. 0lso indicate
where these ite!s would ,e classified on the ,alance sheet. *illings collected during the
year a!ounted to I11+'-1---.
;e< 0ssu!e the latest forecast on total costs at the end of 2--' was I41-5-1---. Fow !uch
inco!e ;loss< would *enson reort for the year 2--'D
Solut$on 18-11<
;a< (osts to date I11%551---
2ess !aterials on >o, site ;1-51---<
I11"5-1---
(osts &ncurred to Date
9999999999 B )ercentage of (o!letion
Total :sti!ated (osts
I11"5-1---
99999 B 55G
I31---1---
;,< 55G P I41---1--- B I212--1---
(osts incurred 11"5-1---
4ross rofit I 55-1---
;c< (onstruction :xense.................................................................. 11"5-1---
(onstruction in )rocess................................................................ 55-1---
Revenue fro! 2ong$Ter! )ro>ect..................................... 212--1---
;d< (urrent 0ssets
0ccounts receiva,le I25-1--- ;I2123-1--- H I11+'-1---<
18 - 2<
Solut$on 18-11< ;cont.<
(urrent 2ia,ility
*illings in excess of contract costs and
recognized rofit I3-1--- ;I2123-1--- H I212--1---<
;e< Total loss reorted in 2--'
(ontract rice I41---1---
:sti!ated cost to co!lete 41-5-1---
0!ount of loss to ,e reorted I ;5-1---<
P!" 18-11890ccounting for long$ter! construction contracts.
The ,oard of directors of Dodd (onstruction (o!any is !eeting to choose ,etween the
co!leted$contract !ethod and the ercentage$of$co!letion !ethod of accounting for long$ter!
contracts in the co!any7s financial state!ents. Jou have ,een engaged to assist Dodd7s
controller in the rearation of a resentation to ,e given at the ,oard !eeting. The controller
rovides you with the following infor!ationA
1. Dodd co!!enced doing ,usiness on =anuary 11 2--'.
2. (onstruction activities for the year ended Dece!,er 311 2--'1 were as followsA
Total (ontract *illings Through (ash (ollections
)ro>ect )rice 12N31N-' Through 12N31N-'
0 I 5151--- I 34-1--- I 31-1---
* "+-1--- 21-1--- 21-1---
( 4%51--- 4%51--- 3+-1---
D 2--1--- 1--1--- "51---
: 4'-1--- 4--1--- 4--1---
I213"-1--- I115251--- I113%51---
(ontract (osts :sti!ated
&ncurred Through 0dditional (osts to
)ro>ect 12N31N-' (o!lete (ontracts
0 I 4241--- I1-11---
* 1+51--- 4551---
( 35-1--- $-$
D 1231--- +%1---
: 32-1--- '-1---
I114121--- I%331---
3. :ach contract is with a different custo!er.
4. 0ny worE re!aining to ,e done on the contracts is exected to ,e co!leted in 2--+.
Inst!uct$ons
;a< )reare a schedule ,y ro>ect1 co!uting the a!ount of inco!e ;or loss< ,efore selling1
general1 and ad!inistrative exenses for the year ended Dece!,er 311 2--'1 which would
,e reorted underA
;1< The co!leted$contract !ethod.
;2< The ercentage$of$co!letion !ethod ;,ased on esti!ated costs<.
18 - 28
Revenue Recognition
P!" 18-118 ;cont.<
;,< )reare the general >ournal entry;ies< to record revenue and gross rofit on ro>ect *
;second ro>ect< for 2--'1 assu!ing that the ercentage$of$co!letion !ethod is used.
;c< &ndicate the ,alances that would aear in the ,alance sheet at Dece!,er 311 2--' for the
following accounts for )ro>ect D ;fourth ro>ect<1 assu!ing that the ercentage$of$co!letion
!ethod is used.
0ccounts Receiva,le
*illings on (onstruction in )rocess
(onstruction in )rocess
;d< Fow would the ,alances in the accounts discussed in art ;c< change ;if at all< for )ro>ect D
;fourth ro>ect<1 if the co!leted$contract !ethod is usedD
Solut$on 18-118
;a< ;1< and ;2<
)ro>ects 0 * ( D :
(ontract rice I5151--- I"+-1--- I4%51--- I2--1--- I4'-1---
(ontract costs incurred 4241--- 1+51--- 35-1--- 1231--- 32-1---
0dditional costs
to co!lete 1-11--- 4551--- $-$ +%1--- '-1---
Total cost 5251--- "5-1--- 35-1--- 22-1--- 4--1---
Total gross rofit
or ;loss< I ;1-1---< I 4-1--- I1251--- I ;2-1---< I '-1---
The a!ount reorted as inco!e ;loss< under the co!leted$contract !ethod for 2--' isA
)ro>ect 0 I;1-1---<
* $-$
( 1251---
D ;2-1---<
: $-$
I +51---
The a!ount reorted as inco!e ;loss< under the ercentage$of$co!letion !ethod for 2--' isA
)ro>ect 0 I;1-1---<
* 121--- I4-1--- P ;I1+51--- S I"5-1---<
( 1251---
D ;2-1---<
: "41--- I'-1--- P ;I32-1--- S I4--1---<
I1%11---
;,< (onstruction in )rocess................................................................ 121---
(onstruction :xenses................................................................. 1+51---
Revenue fro! 2ong$ter! (ontracts.................................. 2-%1---
18 - 2>
Solut$on 18-118 ;cont.<
;c< *illings I1--1---
(ash collections "51---
0ccounts receiva,le I 351---
*illings on (onstruction in )rocess 1--1---
(osts incurred I1231---
2oss reorted ;2-1---<
(onstruction in rocess I1-31---
;d< The account ,alances would ,e the sa!e.
P!" 18-11>92ong$ter! contract accounting ;co!leted$contract<.
)once (onstruction1 &nc. exerienced the following construction activity in 2--'1 the first year of
oerations.
(ash (ost :sti!ated
Total *illings (ollections &ncurred 0dditional
(ontract through through through (osts to
(ontract )rice 12N31N-' 12N31N-' 12N31N-' (o!lete
V I2"-1--- I1"51--- I1551--- I1'21--- I "31---
J 33-1--- 1151--- 1151--- 1--1--- 24%1---
W 2331--- 2331--- 1+'1--- 15'1--- $-$
I'231--- I5131--- I4"'1--- I44-1--- I31-1---
:ach of the a,ove contracts is with a different custo!er1 and any worE re!aining at Dece!,er
311 2--' is exected to ,e co!leted in 2--+.
Inst!uct$ons
)reare a artial inco!e state!ent and a artial ,alance sheet to indicate how the a,ove
contract infor!ation would ,e reorted. )once uses the co!leted$contract !ethod.
Solut$on 18-11>
)once (onstruction1 &nc.
&nco!e /tate!ent
For the Jear 2--'
Revenue fro! long$ter! contracts ;contract W< I2331---
(ost of construction ;contract W< 15'1---
4ross rofit I %51---
)rovision for loss ;contract J<5 1%1---
5(ontract costs through 12N31N-' I1--1---
:sti!ated costs to co!lete 24%1---
Total esti!ated costs 34%1---
Total contract rice 33-1---
2oss recognized in 2--' I 1%1---
18 - 4?
Revenue Recognition
Solut$on 18-11> ;cont.<
)once (onstruction1 &nc.
*alance /heet
0s of 12N31N-'
(urrent assetsA
0ccounts receiva,le ;I5131--- H I4"'1---< I 451---
&nventories
(onstruction in rocess ;contract V< I1'21---
2essA *illings 1"51---
#n,illed contract costs 1%1---
(urrent lia,ilitiesA
*illings ;I1151---< in excess of contract costs ;I1--1---< 151---
:sti!ated loss fro! long$ter! contracts 1%1---
P!" 18-10?9&nstall!ent sales.
Dexter 0liances accounts for all sales of its !erchandise on the install!ent ,asis. Following is
the unadjusted trial ,alance at 12N31N-+.
(ash I451---
&nstall!ent accounts receiva,le92--% 2-1---
&nstall!ent accounts receiva,le92--' 5-1---
&nstall!ent accounts receiva,le92--+ +-1---
&nventory 2%14--
Reossessed !erchandise 41"--
0ccounts aya,le I 3%1"--
Deferred gross rofit92--% 121---
Deferred gross rofit92--' 2"14--
(o!!on stocE 1251---
Retained earnings 1-1---
&nstall!ent sales 12-1---
(ost of install!ent sales %'1---
2oss on reossessions 31---
6erating exenses 131---
I3311--- I3311---
0dditional infor!ationA
2--% gross rofit rateA 25G
Total cash receits during 2--+A I11'1---
?erchandise sold in 2--' was reossessed in 2--+ and the following entry was rearedA
Deferred 4ross )rofit92--'..................................................... 214--
Reossessed ?erchandise....................................................... 41"--
2oss on Reossessions............................................................. 31---
&nstall!ent 0ccounts Receiva,le92--'........................ 1-1---
18 - 41
P!" 18-10? ;cont.<
Inst!uct$ons
;a< Chat is the gross rofit rate for 2--'D /how suorting co!utations.
;,< Chat is the gross rofit rate for 2--+D /how suorting co!utations.
;c< 6f the total cash receits in 2--+1 how !uch reresents collections fro! install!ent sales
ofA ;/how suorting co!utations.<
;1< 2--%D
;2< 2--'D
;3< 2--+D
;d< Chat is the total realized gross rofit in 2--+D /how suorting co!utations.
Solut$on 18-10?
;a< Deter!ined fro! the reossession entryA
Deferred gross rofit I214--
9999 B 24G
&nstall!ent accounts receiva,le I1-1---
,< &nstall!ent sales I12-1---
(ost of sales %'1---
4ross rofit I 421---
4ross rofit I421---
9999$ B 35G gross rofit rate
&nstall!ent sales I12-1---
;c< 2--% Deferred gross rofit ,alance I 121---
4ross rofit rate S 25G
*eginning accounts receiva,le I 4'1---
*eginning accounts receiva,le I 4'1---
:nding accounts receiva,le ;2-1---<
(ash collected I 2'1---
2--' Deferred gross rofit ,alance I 2"14--
4ross rofit rate S 24G
*eginning accounts receiva,le5 I11-1---
*eginning accounts receiva,le5 I11-1---
:nding accounts receiva,le5 ;5-1---<
(ash collected I "-1---
2--+ &nstall!ent sales92--+ I12-1---
0ccounts receiva,le92--+ ;+-1---<
(ash collected I 3-1---
;d< Total realized gross rofit in 2--+
Fro! 2--% I2'1--- P 25G B I %1---
2--' I"-1--- P 24G B 1414--
2--+ I3-1--- P 35G B 1-15--
I311+--
5:xcluding accounts receiva,le for reossessed !erchandise.
18 - 40

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CHAPTER 18

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