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Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

1. 

An adjusting entry in which revenue is recognized and a receivable is established indicates that revenue has been

Earned
Collected
a.
 Yes             No
b.
 Yes             Yes
c.
 No              Yes
d.
 No              No
 

2. 

Which of the following best describes the condition(s) that must be present for the recognition of revenue?
a.
The revenue must be earned, measurable, and collected.
b.
The revenue must be earned, measurable, and collectible.
c.
The revenue must be earned and collectible.
d.
The revenue must be measurable and collectible.
 

3. 

Which of the following is true regarding the International Accounting Standards Board revenue recognition principles?
a.
The international standards do not address the issue of substantial completion of the earnings process.
b.
The international standards do not address the issue of revenue being realized or realizable.
c.
The international standards do not address the peculiarities of revenue recognition in specific industries.
d.
The international standards do not address the measurability of revenue prior to recognition.
 

4. 

A company providing maintenance services on equipment for a fixed periodic fee would
a.
recognize an equal amount of service revenue for each act.
b.
recognize service revenue over the fixed period by the straight-line method.
c.
recognize service revenue in proportion to the direct costs to the provider of the services to perform each act.
d.
recognize service revenue only when the fixed period has ended.
 

5. 

Which of the following types of service transactions is most likely to require the proportional performance method of revenue recognition based on the seller's
direct costs to perform each act?
a.
Processing of monthly mortgage payments by a mortgage banker.
b.
Providing lessons, examinations, and grading by a correspondence school.
c.
Providing maintenance services on equipment for a fixed periodic fee.
d.
Delivering freight (by a trucking firm).
 

6. 

Dilla Construction Company's projects extend over several years and collection of receivables is reasonably certain. Each project has a contract that specifies a price and the rights and obligations of all parties. Both the contractor and the customer are expected to fulfill their contractual obligations on each project. Reliable estimates can be made of the extent of progress and cost to complete each project. The method that the company should use to account for construction revenue is
a.
installment sales.
b.
percentage-of-completion.
c.
completed-contract.
d.
cost recovery.
 

7. 

How should the balances of Progress Billings and Construction in Progress be shown at reporting dates prior to the completion of a long-term contract?
a.
Progress Billings as income, Construction in Progress as inventory.
b.
Net, as income from construction if credit balance, and loss from construction if debit balance.
c.
Progress Billings as deferred income, Construction in Progress as a current asset.
d.
Net, as a current asset if debit balance and current liability if credit balance.
 

8. 

If the percentage-of-completion method is used, what is the basis for determining the gross profit to be recognized in the second year of a three-year contract?
a.
Cumulative actual costs incurred only.
b.
Incremental cost for the second year only.
c.
Cumulative actual costs and estimated costs to complete.
d.
No gross profit would be recognized in year 2.
 

9. 

If the completed-contract method is used, what is the basis for determining the income to be recognized in the second year of a three-year contract?
a.
Cumulative actual costs incurred only.
b.
Incremental cost for the second year only.
c.
Latest available estimated costs.
d.
No income would be recognized in year 2.
 

10. 

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?

Actual
 
Income
Contract
Total
Previously
Price
Costs
Recognized
a.
  Yes           Yes            No
b.
  Yes           Yes            Yes
c.
  Yes           No             Yes
d.
  No            Yes            Yes
 

11. 

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.
 

12. 

Assume the percentage-of-completion method of revenue recognition is used on a long-term construction contract. Under this method, revenues that are earned but unbilled at the balance sheet date should be disclosed
a.
as a long-term receivable in the noncurrent assets section of the balance sheet.
b.
only as a footnote disclosure until the customer is billed for the percentage of work completed.
c.
as construction in progress in the current assets section of the balance sheet.
d.
as construction in progress in the noncurrent assets section of the balance sheet.
 

13. 

When using the installment sales method,
a.
gross profit is deferred until all cash is received, but revenues and costs are recognized in proportion to the cash collected from the sale.
b.
gross profit is recognized only after the amount of cash collected exceeds the cost of the item sold.
c.
revenue, costs, and gross profit are recognized proportionally as the cash is received from the sale of product.
d.
total revenues and costs are recognized at the point of sale, but gross profit is deferred in proportion to the cash that is uncollected from the sale.
 

14. 

The completed-contract method of accounting for long-term construction-type contracts is preferable when
a.
a contractor is involved in numerous projects.
b.
the contracts are of a relatively long duration.
c.
estimates of costs to complete and extent of progress toward completion are reasonably dependable.
d.
there are inherent uncertainties in the contract beyond normal business risks.
 

15. 

Which of the following is not an element identified by the AICPA as being necessary in order to use percentage-of-completion accounting?
a.
The construction period can be reasonably estimated.
b.
The buyer can be expected to satisfy obligations under the contract.
c.
Dependable estimates can be made of the extent of progress toward completion.
d.
Dependable estimates can be made of contract costs.
 

16. 

Which of the following is not a difference between the percentage-of completion and completed-contract methods of accounting for long-term construction contracts?
a.
They report different amounts for inventory during the construction period.
b.
They report different amounts for progress billings during the construction period.
c.
They cause a different cash inflow during the construction period.
d.
They report different amounts for accounts receivable during the construction period.
 

17. 

The theoretical support for using the percentage-of-completion method of accounting for long-term construction projects is that it
a.
is more conservative than the completed-contract method.
b.
reports a lower Net Income figure than the completed-contract method.
c.
more closely conforms to the cost principle.
d.
produces a realistic matching of expenses with revenues.
 

18. 

If a company uses the completed-contract method of accounting for long-term construction contracts, then during the period of construction, financial information related to a long-term contract will
a.
appear on both the income statement and balance sheet during the construction period.
b.
appear only on the income statement during the period of construction.
c.
appear only on the balance sheet during the period of construction.
d.
not appear on the financial statements.
 

19. 

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?
a.
The cost of the contract has increased.
b.
The project's value has increased above cost.
c.
The economy experiences inflation over the construction period.
d.
Construction in Progress is not increased by the annual recognized profit.
 

20. 

When comparing the percentage-of-completion and completed-contract methods of accounting for long-term construction contracts, both methods will report
a.
the same balances each period in the Progress Billings account.
b.
the same expense for cost of construction each year.
c.
the same amount of income in the year of completion.
d.
the same inventory carrying value each year during the construction period.
 

21. 

The cost recovery method
a.
is used only when circumstances surrounding a sale are so uncertain that earlier recognition is impossible.
b.
is the most common method of accounting for real estate sales.
c.
is similar to percentage-of-completion accounting.
d.
is never acceptable under generally accepted accounting principles.
 

22. 

Franchise fees are properly recognized as revenue
a.
when received in cash.
b.
when a contractual agreement has been signed.
c.
after the franchise business has begun operations.
d.
after the franchiser has substantially performed its service.
 

23. 

Goods on consignment should be included in the inventory of
a.
the consignor but not the consignee.
b.
both the consignor and the consignee.
c.
the consignee but not the consignor.
d.
neither the consignor nor the consignee.
 

24. 

In accounting for sales on consignment, sales revenue and the related cost of goods sold should be recognized by the
a.
consignor when the goods are shipped to the consignee.
b.
consignee when the goods are shipped to the third party.
c.
consignor when notification is received the consignee has sold the goods.
d.
consignee when cash is received from the customer.
 

25. 

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
a.
be included in the calculation of the income recognized in the second year.
b.
be included in the calculation of the income recognized in the third year.
c.
be included in the calculation of the income recognized in the fourth year.
d.
not be included in the calculation of the income recognized in any year.
 

26. 

In accounting for a long-term construction contract for which there is a projected profit, the balance in the Construction in Progress account at the end of the first year of work using the percentage-of-completion method would be
a.
zero.
b.
the same as the completed-contract method.
c.
higher than the completed-contract method.
d.
lower than the completed-contract method.
 

27. 

On May 1, 2002, Green Construction Company entered into a fixed-price contract to construct an apartment building for $3,000,000. Green appropriately accounts for this contract under the percentage-of-completion method. Information relating to the contract is as follows:

 
2002
2003
At December 31:
  
Percentage of completion ........
20%
60%
Estimated costs at completion ...
$2,250,000
$2,400,000
Income recognized (cumulative) ..
$  150,000
$  360,000

What is the amount of contract costs incurred during the year ended December 31, 2003?
a.
$600,000
b.
$960,000
c.
$990,000
d.
$1,440,000
 

28. 

C & J Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. Last year C & J started work on a $4,500,000 construction contract, which was completed this year. The accounting records disclosed the following data for last year:

Progress billings .....................................
$1,650,000
Costs incurred ........................................
1,350,000
Collections ...........................................
1,050,000
Estimated cost to complete ............................
2,700,000

How much income should C & J have recognized on this contract last year?
a.
$105,000
b.
$150,000
c.
$300,000
d.
$350,000
 

29. 

Jessup Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. During 2002, Jessup started work on a $1,500,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2002:

Costs incurred ........................................
$  465,000
Estimated cost to complete ............................
1,085,000
Progress billings .....................................
550,000
Collections ...........................................
350,000

How much loss should Jessup have recognized in 2002?
a.
$15,000
b.
$35,000
c.
$50,000
d.
$115,000
 

30. 

Shepard Construction Company has consistently used the percentage-of- completion method. On January 10, 2002, Shepard 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:

Gross profit recognized at December 31, 2002 ..........
$  300,000
Costs incurred Jan. 10, 1999, through Dec. 31, 2003 ...
1,800,000
Estimated cost to complete at December 31, 2003 .......
600,000

How much gross profit should Shepard recognize for the year ended December 31, 2003?
a.
$150,000
b.
$262,500
c.
$300,000
d.
$450,000
 

31. 

For a construction firm using the completed-contract method, if costs exceed billings on some contracts by $1,000,000 and billings exceed costs by $800,000 on others, the contracts should ordinarily be reported as a
a.
current asset of $200,000.
b.
current liability of $200,000.
c.
current asset of $1,000,000 less a contra-current asset of $800,000.
d.
current asset of $1,000,000 and a current liability of $800,000.
 

32. 

Salmon Construction Company uses the percentage-of-completion method of accounting. In 2002, Salmon began work on a project which had a contract price of $1,600,000 and estimated costs of $1,200,000. Additional information is as follows:

 
2002
2003
Costs incurred during the year ............
$240,000
$1,060,000
Estimated costs to complete, as of
  12/31/02 ................................
960,000
 
Billings during the year ..................
290,000
1,310,000
Collections during the year ...............
250,000
1,200,000

The amount of gross profit Salmon should recognize on this contract during 2002 is
a.
$40,000.
b.
$80,000.
c.
$100,000.
d.
$200,000.
 

33. 

Brown Construction Company uses the percentage-of-completion method for long-term construction contracts. A specific job was begun in 2002 and completed in 2004. The contract price was $1,400,000 and cost information as of each year-end is given below:

 
2002
2003
2004
End of year estimated cost to
  complete ......................

$400,000

$200,000

$      0 
Annual cost incurred ............
400,000
400,000
120,000

Assuming Brown correctly recorded gross profit in 2002, how much gross profit should the company record in 2003?
a.
$0
b.
$20,000
c.
$300,000
d.
$320,000
 

34. 

The following data relate to a construction job started by Worthington Co. during 2002:

Total contract price ..................................
$300,000
Actual costs incurred during 2002 .....................
60,000
Estimated remaining costs .............................
120,000
Billed to customer during 2002 ........................
90,000
Received from customer during 2003 ....................
30,000

Under the completed-contract method, how much should Worthington recognize as gross profit for 2002?
a.
$0
b.
$30,000
c.
$40,000
d.
$90,000
 

35. 

The following data relate to a construction job started by Worthington Co. during 2002:

Total contract price ..................................
$300,000
Actual costs incurred during 2002 .....................
60,000
Estimated remaining costs .............................
120,000
Billed to customer during 2002 ........................
90,000
Received from customer during 2002 ....................
30,000

Under the percentage-of-completion method, how much should Worthington recognize as gross profit for 2002?
a.
$0
b.
$40,000
c.
$80,000
d.
$100,000
 

36. 

Rainbow Construction Company uses the percentage-of-completion method for long-term construction contracts. The company started a project with a contract price of $2,750 in 2002. Given the following data, what is the balance in Construction in Progress for this contract at the end of 2002?

 
2002
2003
Costs incurred this year ..................
$  400
$  500
Total estimated costs remaining at end
  of year .................................

1,600

1,000
a.
$150
b.
$400
c.
$550
d.
$1,750
 

37. 

Lake Construction Company uses the percentage-of-completion method for long-term construction contracts. The company has a project with a contract price of $7,000 on which $600 of gross profit has been recognized in prior years. Information for the current year is as follows:

Total cost incurred through current year ...............
$5,000
Estimated costs remaining at end of current year .......
2,800

What is the loss that Lake should recognize in the current year?
a.
$600
b.
$800
c.
$1,400
d.
No loss should be recognized.
 

38. 

Brooke Company began operations on January 1, 2002, and uses the installment sales method of accounting. The company has the following information available for 2002 and 2003:

 
2002
2003
Installment sales .........................
$4,500,000
$5,400,000
Gross profit on sales .....................
       30%
       40%
Cash collections on 2002 sales ............
1,500,000
3,600,000
Cash collections on 2003 sales ............
 
4,200,000

The realized gross profit for 2003 would be
a.
$1,680,000.
b.
$2,760,000.
c.
$3,120,000.
d.
$4,320,000.
 

39. 

Lake Construction Company uses the completed-contract method for long-term construction contracts. The information for a specific contract as of January 1, 2002, is shown below.

Costs incurred to date ................................
$  700,000
Contract price ........................................
2,000,000
Estimated remaining cost to complete ..................
800,000

$600,000 of cost was incurred during 2002 and on December 31, 2002, the estimated remaining cost to complete was still $800,000. The correct balance for the Construction in Progress at December 31, 2002 is
a.
$600,000.
b.
$700,000.
c.
$1,200,000.
d.
$1.300,000.
 

40. 

In 2002, Aldaus Corp. began construction work under a three-year contract. The contract price is $800,000. Aldaus used the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial presentations relating to this contract at December 31, 2002, appear below.

Balance Sheet
Accounts receivable--construction contract
  billings ..................................
 

$15,000
Construction in progress ....................
$50,000 
 
Less contract billings ......................
(47,000)
 
Cost of uncompleted contract in excess of
  billings ..................................
 

3,000
   
Income Statement
Income (before tax) on the contract
  recognized in year 1 ......................
 

$10,000

How much cash was collected in 2002 on this contract?
a.
$32,000
b.
$35,000
c.
$47,000
d.
$50,000
 

41. 

Paral Company began operations on January 2, 1999, and appropriately used the installment sales method of accounting. The following data are available for 2002 and 2003:

 
2002
2003
Installment sales ..........................
$3,000,000
$3,600,000
Gross profit on sales ......................
       30%
       40%
Cash collections from:
  
  2002 sales ...............................
$1,000,000
$1,200,000
  2003 sales ...............................
--
$1,400,000

The realized gross profit for 2003 is
a.
$1,440,000.
b.
$1,040,000.
c.
$920,000.
d.
$780,000.
 

42. 

Wedtec Enterprises, which began operations on January 1, appropriately uses the installment method of accounting. The following information is available for its first year:

Gross profit on sales .................................
40%
Deferred gross profit at December 31 ..................
$120,000
Cash collected, including down payments ...............
$225,000

What is the total amount of Wedtec's installment sales for the first year?
a.
$300,000
b.
$345,000
c.
$425,000
d.
$525,000
 

43. 

Leno Distributing, which began operating on January 1, appropriately uses the installment method of accounting. The following information pertains to Leno's operations for the first year:

Installment sales ......................................
$1,000,000
Cost of installment sales ..............................
600,000
General and administrative expenses ....................
100,000
Collections on installment sales .......................
200,000

The balance in the deferred gross profit account at December 31 should be
a.
$400,000.
b.
$320,000.
c.
$240,000.
d.
$200,000.
 

44. 

On January 3, 2002, Lincoln Services, Inc., signed an agreement authorizing Lisa Company to operate as a franchisee over a 20-year period for an initial franchise fee of $100,000 received when the agreement was signed. Lisa commenced operations on July 1, 2002, at which date all of the initial services required of Lincoln had been performed. The agreement also provides that Lisa must pay a continuing franchise fee equal to 5% of the revenue from the franchise annually to Lincoln. Lisa's franchise revenue for 2002 was $800,000. For the year ended December 31, 2002, how much should Lincoln record as revenue from franchise fees in respect of the Lisa franchise?
a.
$140,000
b.
$90,000
c.
$45,000
d.
$42,500
 

45. 

Assume the Randall Corporation sold $30,000 worth of merchandise on the installment basis. The cost of the merchandise was $24,000, and collectibility of the receivable is uncertain. Collection in the current year on the account is $8,000. How much gross profit should be reported as realized?
a.
$1,600
b.
$2,000
c.
$6,000
d.
$8,000
 

46. 

On November 30, Northrup Company consigned 90 freezers to Watson Company for sale at $1,600 each and paid $1,200 in transportation costs. A report of sales was received on December 30 from Watson reporting the sale of 20 freezers, together with a remittance of the $27,200 balance due. The remittance was net of the agreed 15% commission. How much, and in what month, should Northrup recognize as consignment sales revenue?

November
December
a.
  $0            $32,000
b.
  $0            $27,200
c.
  $144,000      $0
d.
  $142,800      $0
 

47. 

Layton Construction Company has consistently used the percentage-of completion method of recognizing income. During 2003, Layton entered into a fixed-price contract to construct an office building for $10,000,000. Information relating to the contract is as follows:

 
December 31
 
2002
2003
Percentage of completion ..............
       20%
       60%
Estimated total cost at completion ....
$7,500,000
$8,000,000
Income recognized (cumulative) ........
   500,000
1,200,000

Contract costs incurred during 2003 were
a.
$3,200,000.
b.
$3,300,000.
c.
$3,500,000.
d.
$4,800,000.
 

48. 

Hillson Company began operations on January 1, 2002, and appropriately uses the installment method of accounting. The following data are available for 2002 and 2003:

 
2002
2003
Installment sales .....................
$1,200,000
$1,500,000
Cash collections from:
  
  2002 sales ..........................
   400,000
   500,000
  2003 sales ..........................
        --
   600,000
Gross profit on sales .................
       30%
       40%

The realized gross profit for 2003 is
a.
$240,000.
b.
$390,000.
c.
$440,000.
d.
$600,000.
 

49. 

Seahawks, Inc. had the following consignment transactions during December:

Inventory shipped on consignment to Ashe Company ........
$18,000
Freight paid by Seahawks ................................
900
Inventory received on consignment from Fenn Company .....
12,000
Freight paid by Fenn ....................................
500

No sales of consigned goods were made through December 31. Seahawks' December 31 balance sheet should include consigned inventory at
a.
$18,900.
b.
$18,000.
c.
$12,500.
d.
$12,000.
 



 
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