Intermediate Acct CH5

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Flapper Jack's pancake restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and trouble shooting as needed over the first five years. On March 15, 2012, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest. Assuming that the initial services to be performed by flapper jack's subsequent to the signing are substantial and that collection of the receivable is reasonable assured, the journal entry required at signing would include a credit to:

Unearned franchise fee revenue for $36,000

Flapper Jack's pancake restaurants sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2012 tim cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest. Assume that at the time of signing the contract, collection of the receivable was assured and that service obligations were substantial. However by October 20, 2012 substantially all continuing obligations had been met. The journal entry required at October 20, 2012 would include a:

Debit to unearned franchise fee revenue for $36,000

Flapper jacks pancake restaurant inc sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2012, Tim cruise signed a franchise contract paying the standard $6,000 down with the balance due over five years with interest. Assume at March 15, 2012 the time of signing the contract, collection of the receivable was reasonably assured and there were no significant continuing obligations. The journal entry at signing would include a:

Credit to franchise fee revenue for $36,000

The racquet store sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS. Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS can recognize revenue associated with the $50,000:

As soon as RS has assisted Steffi in setting up the store.

The racquet store sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS. Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS can recognize revenue associated with the $50,000:

As soon as RS has assisted Steffi in setting up the store, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.

The racquet store sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS. Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. Rs has no experience estimating uncollectible accounts associated with these sorts of notes. It can recognize:

Revenue under the installment method, as soon as it has assisted Steffi in setting up the store.

Sullivan software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75. Sullivan should recognize revenue for the two parts of the arrangement as follows:

Recognize the portion of the $500 attributable to the software program when the customer pays cash to buy the package, defer the portion attributable to technical support and recognize over the support period.

Sullivan software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75. The amount of revenue that GAAP, regarding software revenue recognition, would require Sullivan to attribute to the software program (as opposed to the technical support) is (rounded):

$432

GAAP that covers revenue recognition for multiple part arrangements requires that a seller recognize revenue for a particular part if:

Both the part has value on stand-alone basis and customer acceptance of the part is not contingent on successful delivery of a later part are required.

Under GAAP, with respect to multiple-element arrangements, if the revenue for a particular part of a multiple-part arrangement does not qualify for separate recognition, it is:

Recognized when revenue for the other parts is recognized.

"VSOE" stands for:

Vendor-Specific objective evidence

"VSOE" is necessary to separately recognize revenue in multiple-element contracts for:

Software contracts

Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and

Collection is reasonably certain

Merchandise sold FOB shipping point indicates that:

The buyer holds title after the merchandise leaves the seller's location.

Merchandise sold FOB destination indicates that:

The seller holds the title until the merchandise is received at the buyer's location.

Which of the following was not a criterion for revenue recognition in SAB 101?

Cash has been collected.

For a typical manufacturing company, the most common critical point for recognizing revenue is the date:

The product is delivered

Under IFRS, which of the following is not a condition for recognizing revenue?

It is reasonably possible that the economic benefits associated with the transaction will flow to the seller.

Under IFRS, revenue for a product sale should occur when:

The seller has transferred to the buyer the risks and rewards of ownership and doesn't effectively manage or control the goods.

Which of the following is not an indicator that the seller is a principal with respect to a transaction?

The seller's primary role is facilitating the sale of the product or service.

Explodia.com sells fireworks over the internet. Customers access Explodia's website and select particular products and Explodia refers the customer order to a fireworks manufacturer who fulfills the order, ships to the customer, and pays Explodia a 20% commission. Which of the following is true about explodia?

Explodia is an agent in this transaction.

Jing statistical services operates a website that links experienced statisticians with businesses that need data analyzed. Statisticians post their rates, qualifications, and references on the website, and Jing receives 25% of the fee paid to the statisticians in exchange for identifying potential customer. VetMed Associates contact Jing and arranges to pay a consultant $1,500 in exchange for analyzing some data. Jing's income statement would include the following with respect to this transaction:

Revenue of $375 (=25% x $1,500)

Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the

Installment sales method or cost recovery method.

Bert's Meat market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:

Installment sales or cost recovery.

On December 15, 2013, Rigsby Sales co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2014, and December 15, 2015. Ignore interest charges. Rigsby has a December 13 year-end. In 2013, Rignsby would recognize realized gross profit of:

$100,000

On December 15, 2013, Rigsby Sales co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2014, and December 15, 2015. Ignore interest charges. Rigsby has a December 13 year-end. In 2014, Rigsby would recognize realized gross profit of:

$400,000

On December 15, 2013, Rigsby Sales co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2014, and December 15, 2015. Ignore interest charges. Rigsby has a December 13 year-end. In its December 31, 2013, balance sheet, Rigsby would report:

Installment receivables (net) of $3,200,000

On December 15, 2013, Rigsby Sales co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2014, and December 15, 2015. Ignore interest charges. Rigsby has a December 13 year-end. At December 31, 2014, Rigsby would report in its balance sheet:

Deferred gross profit of $400,000

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recover method. Merchandise costing $30,000 was sold for $55,000 in 2012. Collections on this sale were $20,000 in 2012, $15,000 in 2013, and $20,000 in 2014. In 2012, Reliable would recognize gross profit of:

$0

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recover method. Merchandise costing $30,000 was sold for $55,000 in 2012. Collections on this sale were $20,000 in 2012, $15,000 in 2013, and $20,000 in 2014. In 2013, Reliable would recognize gross profit of:

$5,000

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recover method. Merchandise costing $30,000 was sold for $55,000 in 2012. Collections on this sale were $20,000 in 2012, $15,000 in 2013, and $20,000 in 2014. In 2014, Reliable would recognize gross profit of:

$20,000

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recover method. Merchandise costing $30,000 was sold for $55,000 in 2012. Collections on this sale were $20,000 in 2012, $15,000 in 2013, and $20,000 in 2014. In its 2012 year-end balance sheet, Reliable would report installment receivables (net) of:

$10,000

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recover method. Merchandise costing $30,000 was sold for $55,000 in 2012. Collections on this sale were $20,000 in 2012, $15,000 in 2013, and $20,000 in 2014. In its 2013 year-end balance sheet, Reliable would report installment receivables (net) of:

$0

Lake Power sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment method for revenue recognition. In 2012, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2012, $300,000 in 2013 and $300,000 in 2014 associated with those sales. In 2013 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2013, $400,000 in 2014 and $400,000 in 2015 associated with those sales. In 2015, Lake also repossessed $200,000 of jet skis that were sold in 2013. Those jet skis had a fair value of $75,000 at the time they were repossessed. Total cash collections on installment sales during 2013 would be:

$800,000

Lake Power sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment method for revenue recognition. In 2012, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2012, $300,000 in 2013 and $300,000 in 2014 associated with those sales. In 2013 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2013, $400,000 in 2014 and $400,000 in 2015 associated with those sales. In 2015, Lake also repossessed $200,000 of jet skis that were sold in 2013. Those jet skis had a fair value of $75,000 at the time they were repossessed.In 2012, Lake would recognize realized gross profit of:

$150,000

Lake Power sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment method for revenue recognition. In 2012, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2012, $300,000 in 2013 and $300,000 in 2014 associated with those sales. In 2013 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2013, $400,000 in 2014 and $400,000 in 2015 associated with those sales. In 2015, Lake also repossessed $200,000 of jet skis that were sold in 2013. Those jet skis had a fair value of $75,000 at the time they were repossessed.In 2014, Lake would recognize realized gross profit of:

$310,000

Lake Power sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment method for revenue recognition. In 2012, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2012, $300,000 in 2013 and $300,000 in 2014 associated with those sales. In 2013 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2013, $400,000 in 2014 and $400,000 in 2015 associated with those sales. In 2015, Lake also repossessed $200,000 of jet skis that were sold in 2013. Those jet skis had a fair value of $75,000 at the time they were repossessed.In its December 31, 2013, balance sheet, Lake would report:

Installment receivables (net) of $750,000

Lake Power sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment method for revenue recognition. In 2012, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2012, $300,000 in 2013 and $300,000 in 2014 associated with those sales. In 2013 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2013, $400,000 in 2014 and $400,000 in 2015 associated with those sales. In 2015, Lake also repossessed $200,000 of jet skis that were sold in 2013. Those jet skis had a fair value of $75,000 at the time they were repossessed. In 2015, Lake would record a loss on repossession of:

$45,000

Lake Power sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment method for revenue recognition. In 2012, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2012, $300,000 in 2013 and $300,000 in 2014 associated with those sales. In 2013 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2013, $400,000 in 2014 and $400,000 in 2015 associated with those sales. In 2015, Lake also repossessed $200,000 of jet skis that were sold in 2013. Those jet skis had a fair value of $75,000 at the time they were repossessed. In 2012, Lake would recognize realized gross profit of:

$0

Lake Power sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment method for revenue recognition. In 2012, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2012, $300,000 in 2013 and $300,000 in 2014 associated with those sales. In 2013 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2013, $400,000 in 2014 and $400,000 in 2015 associated with those sales. In 2015, Lake also repossessed $200,000 of jet skis that were sold in 2013. Those jet skis had a fair value of $75,000 at the time they were repossessed. In 2014, Lake would recognize realized gross profit of:

$300,000

Lake Power sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment method for revenue recognition. In 2012, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2012, $300,000 in 2013 and $300,000 in 2014 associated with those sales. In 2013 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2013, $400,000 in 2014 and $400,000 in 2015 associated with those sales. In 2015, Lake also repossessed $200,000 of jet skis that were sold in 2013. Those jet skis had a fair value of $75,000 at the time they were repossessed. In its December 31, 2013 balance sheet, Lake would report:

Installment receivables (net) of $400,000

Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this return policy and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:

When boomerang delivers a computer to a customer.

Gunk goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing gross profit associated with one of these sales?

Three years, after the right of return has expired

Todd Sweeney is an artist who sells his work under consignment(he displays his work in local barbershops and customers purchase his work there). Sweeney recently transferred a painting to a local barbershop. Sweeney most likely should recognize revenue when:

When the barbershop sells the painting

Todd Sweeney is an artist who sells his work under consignment(he displays his work in local barbershops and customers purchase his work there). Sweeney recently transferred a painting to a local barbershop. After Sweeney has transferred a painting to a barbershop, the painting:

Should be counted in Sweeney's inventory until the barbershop sells it

Todd Sweeney is an artist who sells his work under consignment(he displays his work in local barbershops and customers purchase his work there). Sweeney recently transferred a painting to a local barbershop. The rationale for adoption of the percentage-of-completion method is that:

It provides a measure of periodic accomplishment

The percentage-of-completion method is preferable to the completed contract method and should only be avoided if:

There is a lack of dependable estimates or inherent hazards cause forecasts to be doubtful

When using the completed contract method of accounting for long-term contracts:

Estimated losses on the overall contract are recognized before the contract is completed.

When using the cost recovery method of accounting for long-term contracts under IFRS:

Estimated losses on the overall contract are recognized before the contract is completed

When using the cost recovery method of accounting for long-term contracts under IFRS, early in the life of the contract it is typically the case that:

An equal amount of revenue and expense is recognized

The cost recovery method of accounting for long-term contracts under IFRS is sometimes referred to as the:

"Zero profit method"

When using the percentage-of-completion method of accounting for long-term contracts, the percentage of completion used to recognize gross profit in the first year usually is determined by measuring:

Costs incurred in first year, divided by estimated total costs of the completed project.

The percentage-of-completion method violates the general rule for revenue recognition that:

The earnings process is complete

Indiana Co. began a construction project in 2013 that will prove it $150 million when it is completed in 2015. During 2013, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Using the percentage-of-completion method, Indiana:

Recognized $9 million gross profit on the project in 2013.

Indiana Co. began a construction project in 2013 that will prove it $150 million when it is completed in 2015. During 2013, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. In 2014, Indiana incurred costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Using the percentage-of-completion method, Indiana:

Recognized $1.5 million gross profit on the project in 2014

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