Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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1.
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An
adjusting entry in which revenue is recognized and a receivable is established indicates that revenue
has been
a. | Yes
No | b. | Yes
Yes | c. | No
Yes | d. | No
No | | |
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2.
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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. | | |
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3.
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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. | | |
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4.
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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. | | |
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5.
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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). | | |
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6.
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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. | | |
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7.
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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. | | |
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8.
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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. | | |
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9.
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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. | | |
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10.
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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 | | |
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11.
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The
installment method of recognizing revenue a. | should be used only in cases in which no reasonable basis
exists for estimating the collectibility of receivables. | b. | is not a
generally accepted accounting principle under any circumstances. | c. | should be used
for book purposes only if it is used for tax purposes. | d. | is an acceptable
alternative accounting principle for a firm that makes installment sales. | | |
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12.
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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. | | |
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13.
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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. | | |
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14.
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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. | | |
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15.
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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. | | |
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16.
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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. | | |
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17.
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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. | | |
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18.
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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. | | |
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19.
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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. | | |
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20.
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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. | | |
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21.
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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. | | |
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22.
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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. | | |
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23.
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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. | | |
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24.
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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. | | |
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25.
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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. | | |
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26.
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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. | | |
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27.
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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 | | |
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28.
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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 | | |
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29.
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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 | | |
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30.
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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 | | |
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31.
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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. | | |
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32.
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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. | | |
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33.
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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 | | |
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34.
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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 | | |
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35.
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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 | | |
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36.
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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 | | |
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37.
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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. | | |
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38.
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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. | | |
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39.
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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. | | |
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40.
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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 | | |
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41.
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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. | | |
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42.
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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 | | |
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43.
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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. | | |
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44.
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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 | | |
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45.
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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 | | |
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46.
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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?
a. | $0
$32,000 | b. | $0
$27,200 | c. | $144,000
$0 | d. | $142,800 $0 | | |
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47.
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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. | | |
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48.
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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. | | |
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49.
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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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