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241 terms

Intermediate Acct midterm 1

STUDY
PLAY
Debit is
left
Credit is
right
External decision makers would not look primarily to financial accounting information to assist them in making decisions on
capital budgeting
all of the following are sections of the statement of cash flows except
earning
In a recent annual report, Apple computer reported the following in one of its disclosure notes: "Warranty Expense: The company provides currently for the estimated cost for product warranties at the time the related revenue is recognized." This not exemplifies Apple's use of:
The matching principle
GAAP is an abbreviation for
Generally accepted accounting principles
A firm's comprehensive income always
could be greater than or less than net income
Which of the following has the authority to set accounting standards in the United States
SEC
Accounting standard setting has been characterized as
a politcal process
The international Accounting Standards Board
promotes the use of high-quality, understandable global accounting standards.
When a registrant company submits its annual filing to the SEC, it uses:
form 10-K
The recognition of which of the following expenses exemplifies the application of the matching principle?
cost of goods sold
Equity equals
assets minus liabilities
Net income equals
revenues minus expenses
Gains are
increases in equity from peripheral transactions of an entity
Surefeet corporation changed its inventory valuation method. Which characteristic is jeopardized by this change?
Consistency
Of the following, the most important objective for financial reporting is to provide information useful for
making decisions
Elements of financial statements do not include:
Monetary unit
Land was acquired in 2011 for a future building site at a cost of $40. The assessed valuation for tax purposes is $27, a qualified appraiser placed its value at $48, and a recent firm offer for the land was for a cash payment of $46. The land should be reported in the financial statement at:
$40
Maltec Corporation has started placing its quarterly financial statements on its web page, thereby reducing by ten days the time to get information to investors and creditors. The qualitative concept improved is:
Timeliness
Change in equity from nonowner sources is:
Comprehensive income
The assumption that in the absence of contrary information a business entity will continue indefinitely is the:
Going concern assumption
Mega Loan Company has very stringent credit requirements and, accordingly, has negligible losses from uncollectible accounts. The company's independent accountants did not protest when, contrary to GAAP, the company recorded bad debt expense only when specific accounts were determined to be uncollectible, rather than use an allowance for uncollectible accounts. The concept demonstrated is:
Materiality
If a company has gone bankrupt, its financial statements likely violate:
The going concern assumption
Which of the following is not an identified valuation technique in GAAP regarding fair value measurement?
Cost-benefit approach
Disclosure notes to a company's financial statements:
are an integral part of a company's financial statements
Which of the following best demonstrates the full disclosure principle
Disclosure notes to financial statements
The matching principle is:
An expense recognition accounting principle
To meet the needs of full disclosure, companies use supplemental information including:
ALL
a. Disclosure notes conveying additional insights about company operations, accounting principles, contractual agreements, and pending litigation.
c. Parenthetical comments of modifying comments placed on the face of the financial statements.
d. Supplemental financial statements that report more detailed information than is shown in the primary financial statements.
Financial Accounting Standards Board was established in?
1973
Concepts
are useful in guiding the Board in establishing standards and in providing a frame of reference, or conceptual framework, for resolving accounting issues.
Accounting Standards
are an important element of the financial reporting system because they govern the minimum required content of financial statements of U.S. public companies.
Before the present structure was created, financial accounting and reporting standards were established first by the
Committee on accounting procedure of the American Institute of Certified Public Accountants and then by the Accounting Principles Board.
IASB stands for?
International Accounting Standards Board
IASB was formed in
2001
The body that preceded the IASB was?
The international Accounting Standards Committee
Define IFRS as comprising
International Financial Reporting Standards
Compliance with IFRS states: An entity whose financial statements comply with IFRSs shall make an
explicit and unreserved statement of such compliance in the notes.
How many commissioners does the SEC have?
5
SEC stands for?
Securities and Exchange Commission
The name of the database that has disclosure documents that public companies are required to file with the commission is
EDGAR
If a company has more than:
10 million dollars in assets whose securities are held by more than 500 owners, then it must file annual and other periodic reports.
The accounting equation can be stated as:
A-L-OE=0
Examples of internal transactions include all of the following except:
Paying wages to company employees
Incurring an expense for advertising on account would be recorded by
debiting an expense
Rho Aircraft sold a four-passenger airplane for $380, receiving a $50 down payment and a 12% note for the balance. The journal entry to record this sale would include a:
Debit to note receivable
An example of a contra account is:
Accumulated depreciation
Examples of external transactions include all of the following except
Depreciating equipment
Recording revenue earned from a customer, but not yet collected is an example of:
An accrued receivable transaction
XYZ corporation receives $100 from investors for issuing them shares of its stock. XYZ's journal entry to record this transaction would include a:
Credit to capital stock
Adjusting entries are primarily needed for
Accrual Accounting
A sale of account would be recorded by
Debiting assets.
Prepayments occur when:
Cash flow precedes expense recognition
Mu Co invested $15 in ABC corporation and received capital stock in exchange. Mu Co's journal entry to record this transaction would include a:
Debit to investments
Accruals occur when cash flows
Occur after revenue or expense recognition
Assume supplies expense of $2,000 this year. The supplies account decreased by $200 during the year to an ending balance of $400. What was the cost of supplies purchased during the year?
$1,800
On December 31, 2011, the accounts receivable was $54 and estimate of receivables that will not be collected is $2. Accounts receivable in the 2011 balance sheet will be valued at
$52.
The adjusting entry required when amounts previously recorded as unearned revenues are earned includes:
A debit to a liability
Which of the following accounts has a credit balance
Accrued income taxes payable
When a business makes an end-of-period adjusting entry with a debit to supplies expense, the usual credit entry is made to:
Supplies
The adjusting entry required to record accrued expenses includes:
A credit to liability
Assume supplies purchased of $270 this year. The supplies account increased by $10 during the year to an ending balance of $66. What was supplies expense during the year?
$260
In its first year of operations Alpha Corp. had income before tax of $400. Acme made income tax payments totaling $150 during the year and has an income tax rate of 40%. What would be the balance in income tax payable at the end of the year?
$10 credit
Nu opened business on January 1, 2011 and paid for two insurance policies effective that date. The liability policy was $36 for eighteen months, and the property policy was $12 for a two-year term. What was the balance in the prepaid insurance as of December 31, 2011.
$18
Fink Insurance collected premiums of $18 from its customers during the current year. The adjusted balance in the unearned premiums account increased from $6-$8 during the year. What was Fink's revenue from earned insurance premiums for the current year?
$16
On November 1, 2011, Tau borrows $30,000 at 9%. The note is for a six month term and both principal and interest are payable at maturity. What should be the balance of interest payable for the loan as of December 31, 2011?
$450
A future economic benefit owned or controlled by an entity is:
An asset
Cost of goods sold is
an expense account
The balance in retained earnings at the end of the year is determined by retained earnings at the beginning of the year:
Plus net income minus dividends
Assume a company in its first year of operations had income before tax of $500, made income tax payments of $210 and has an income tax rate of 40%. What was net income for the year?
$300
Assume cost of golds sold of $2,000 this year and that the inventory account increased by $200 during the year to an ending balance of $400. What was the cost of merchandise purchased during the year?
$2,200
Permanent accounts would not include:
Interest Expense
Permanent accounts would not include
Cost of goods sold
The purpose of closing entries is to transfer
Balances in temporary accounts to a permanent account
Temporary accounts would not include
Salaries payable
When converting an income statement from a cash basis to an accrual basis, expenses:
May exceed or be less than cash payments to suppliers.
When converting an income statement from a cash basis to an accrual basis, which of the following is incorrect?
An adjustment for bad debts increases the net income.
When the amount of revenue collected in advance decreases during an accounting period:
Accrual-basis revenues exceed cash collections from customers
When converting an income statement from a cash basis to an accrual basis, cash received for services:
May exceed or be less than service revenue
When the amount of interest receivable decreases during an accounting period:
Accrual-basis interest revenues are less than cash collections from borrowers
When the amount of interest receivable decreases during an accounting period:
Accrual-basis interest revenues are less than cash collections from borrowers
Which of the following accounts has a debit balance
Bad debt expense
On December 31, 2011, Chi, Inc. had balances in its accounts receivable and allowance for uncollectible accounts of $48 and $0, respectively. No receivables were written off during the year. At the end of 2011, Chi estimated that $2 in receivables would not be collected. Bad debt expense for 2011 would be:
$2
Making insurance payments in advance is an example of:
A prepaid expense transaction
When a magazine sells subscriptions to customers, it is an example of:
An unearned revenue transaction
The balance sheet reports:
Assets and equities at a point in time
Current assets include cash and all other assets expected to become cash or be consumedL
Within one year or one operating cycle, whichever is longer.
Red Onion restaurant classifies a six-month prepaid insurance policy as a current asset. its rationale is based on:
Current asset definition
An asset that is not expected to be converted to cash or consumed within one year or the operating cycle is:
Goodwill
Which of the following accounts are closed at the end of the accounting period
Income tax expense
Which is a shareholders' equity account in the balance sheet?
Paid-in capital
Rent collected in advance is
A liability account in the balance sheet
Notes payable:
Cannot determine its classification without additional information
Which of the following is never a current liability account?
Prepaid rent
New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is:
Thirty months
Noncurrent assets include:
Land held for a possible future plant sale
Assets do not include:
Paid-in capital
Cash equivalents would not include
Cash not available for current operations
Cash equivalents would include:
Treasury Bills with maturity dates of less than three months from the date of the purchase
Accrued expenses:
Result from services received before payment.
The usual difference between accounts payable and notes payable is:
Explicitly stated interest.
Which of the following is not a required disclosure for related party transactions?
THe impact of the transactions on current year's income.
Disclosure notes would not include:
Data to adjust the financial statements so that they are not misleading.
A subsequent event for an entity with a December 31, 2011 year end would not include:
A change in the estimated useful lives of equipment in January 2012.
The final paragraph of the audit report:
Provides the auditor's opinion on the effectiveness of internal control.
The management discussion and analysis section of the annual report can best be described as:
Biased but informative
An example of fraud would be:
Knowingly classifying a material non-current receivable as a current receivable.
An example of an error would be
Counting an inventory item twice when taking a physical inventory.
An exception that is so serious that even a qualified opinion is not justified would result in:
An adverse opinion.
Liquidity refers to:
The readiness of an asset to be converted to cash.
Lack of long-term solvency refers to:
Risk of non-payment relative to liabilities in the capital structure.
The current ratio is given by
Current assets divided by current liabilities
The acid-test ratio is also known as the:
Quick ratio.
The quick ratio is:
Current assets minus inventory and prepaid items divided by current liabilities.
Working capital is equal to:
Current assets minus current liabilities
Which of the following is not a financing ratio?
The current ratio.
When a company pays its bill from a plumber for previous services on account:
Its debt to equity ratio always decreases.
When a company accrues federal income taxes at the end of the accounting period:
Its debt to equity ratio inceases
Assume a company's liquidity and financing ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase:
Its quick ratio decreases
When a company sells land for cash and recognizes a $25,000 gain:
Its debt to equity ratio decreases.
Other comprehensive income
Changes in accumulated other comprehensive income
Net of tax
Before tax amount* (1-tax rate)
Comprehensive income
Net income+ other comprehensive income
Net income
Revenues+gains-expenses-losses
Income from continuing operations
Income before discontinued operations
Gross profit
Net sales- cost of goods sold
Changes in retained earnings
Net income-Dividends
An exit activity includes but is not limited to a
restructuring
Restructuring
a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity, or the manner in which that business is conducted.
Variable interest entity
A legal entity subject to consolidation
One time employee termination benefits
benefits provided to current employees that are involuntarily terminated under the terms of a one-time benefit arrangement.
Legal notification period
The period that an entity is required to provide to employees in advance of a specified termination event as a result of an existing law, statute, or contract
Legal entity
Any legal structure used to conduct activities or to hold assets. Some examples of such structures are corporations, partnerships, limited liability companies, grantor trusts, and other trusts.
Business combination
A transaction or other event in which an acquirer obtains control of one or more businesses
Acquiree
The business or businesses that the acquirer obtains control of in a business combination. This term also includes a nonprofit activity or business that a not-for-profit acquirer obtains control of in an acquisition by a not-for-profit entity.
Acquirer
The entity that obtains control of the acquiree. however, in a business combination in which a variable interest entity (VIE) is acquired, the primary beneficiary of that entity always is the acquirer.
Business
An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.
CHanges in accounting estimates are reported:
Currently and prospectively.
Pi Inc. incurred a material loss which was not unusual in character, but was clearly an infrequent occurrence. This lost should be reported as:
A separate line item within income from continuing operations.
Each of the following would be reported as items of other comprehensive income except:
Gains from the sale of equipment.
Beta reported net income of $45 for the year ended December 31, 2011. January 1 balances in accounts receivable and accounts payable were $23 and $26 respectively. Year-end balances in these accounts were $22 and $28, respectively. Assuming that all relevant information has been presented, Beta's cash flows from operating activities would be:
$48
A voluntary change in accounting principle is accounted for by:
A retrospective reporting of all comparative financial statements shown.
If company A acquires company B, required financial statement disclosures include all of the following except:
The effect of the change on market share.
The principal benefit of separately reporting discontinued operations and extraordinary items is to enhance:
Predictive ability
Reconciliation between net income and comprehensive income would include
Unrealized losses and unrealized gains on available for sale securities.
Nu reported net income of $216 for its year ended December 31, 2011. Purchases totaled $152. Accounts payable balances at the beginning and end of the year were $36 and $33, respectively. Beginning and ending inventory balances were $44 and $46, respectively. Assuming that all relevant information has been presented, Nu would report operating cash flows of:
$211
On May 1, Alpha Co. Agreed to sell for $80 the assets a division that qualifies as a component of the entity according to GAAP regarding discontinued operations. The sale was completed on Dec 31, 2011. The book value of the divisions assets totaled $84 on the date of the sale. The division's operating income was a pre-tax loss of $10 in 2011. Alpha's income tax rate is 40%. In its 2011 income statement Alpha Co. would report:
Income (loss) from its continuing and discontinued operations separately.
Reporting comprehensive income according to internal financial reporting standards can be accomplished by each of the following methods except:
In the statement of shareholders' equity.
Cash flows from financing activities include:
Dividends paid
The difference between single-step and multiple-step income statements is primarily an issue ofL
Presentation
On October 28, 2011, Mu Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations adn was properly classified as held for sale on December 31, 2011, the end of the company's fiscal year. The division's loss from operations for 2011 was $2,000. The divisions book value and fair value less cost to sell on December 31 were $3,000 and $2,500, respectively. What before-tax amount should Mu report as loss on discontinued operations in its 2011 income statement?
$2,500 loss.
Operating cash outflows would include:
Purchases of inventory.
Tau Co. purchased an offset press on January 1, 2008, at a cost of $120. The press had an estimated eight-year life with no residual value. Tau uses straight-line depreciation. At January 1, 2011, Tau estimated that the press would have only three more years of remaining life with no residual value. For 2011, Tau would report depreciation of:
$25
Kappa Ltd. reported net income of $135 for the year ended December 31, 2011. January 1 balances in accounts receivable and accounts payable were $29 and $26 respectively. Assuming that all relevant information has been presented, Kappa's cash flows from operating activities would be:
$132
On May 1, Alpha Co put assets of a Division that qualifies as a component of the entity according to GAAP regarding discontinued operations for sale. The division's operating income was a pre-tax loss of $10 in 2011. Alpha's income tax rate is 40%. Assume that the fair value of the Division's assets at December 31 was $40 with a book value of $48. Alpha's income tax rate is 40%. In the 2011 income statement for Alpha Co., it would report a loss from discontinued operations of:
$10.8 loss
Comprehensive income is the change in equity from:
Nonowner transactions
On May 1, Alpha Co. agreed to sell for $80 the assets a Division that qualifies as a component of the entity according to GAAP regarding discontinued operations. The sale was completed on December 31, 2011. The book value of the divisions asset's totaled $48 on the date of the sale. The Division's operating income was a pre-tax loss on $10 in 2011. Alpha's income tax rate is 40%. In the 2011 income statement for ALpha Co., it would report income from discontinued operations of:
$13.2.
Cash flows from investing do not include cash flows from:
Borrowing
In a statement of cash flows prepared under International Financial Reporting Standards, each of the following items is typically classified as a financing cash flow except:
Dividends received.
The distinction between operating and nonoperating income relates to:
Principal activities of the reporting entity.
In comparing the direct method with the indirect method of preparing the statement of cash flows:
Only operating activities are presented differently.
An extraordinary event for financial reporting purposes is both:
Unusual and infrequent.
The FASB's stated preference for reporting operating cash flows is the:
Direct method.
The financial statement presentation of a change in depreciation method is most similar to that of reporting:
Changes in accounting estimates.
Change statements include a:
Cash flow statement, an income statement, and a retained earnings statement.
In the operating activities section of the statement of cash flows, we start with net income:
In the indirect method.
A change in depreciation method is accounted for:
Prospectively, like changes in accounting estimates.
Zeta Mfg. Co. sold for $18 equipment that cost $40 and had a book value $30. Zeta would report:
Investing cash inflows of $18.
The statement of cash flows reports cash flows from the activities of
Financing, investing, and operating.
On May 1, Alpha Co. agreed to sell for $80 the assets a Division that qualifies as a component of the entity according to GAAP regarding discontinued operations. The sale was completed on December 31, 2011. The book value of the Division's assets totaled $48 on the date of the sale. During 2011 the Division's operating income was a pre-tax loss of $10. Alpha's income tax rate is 40%. In its 2011 Income statement Alpha Co:
Income taxes would be separated for continuing and discontinued operations.
Expenses in an income statement prepared under International Financial Reporting Standards:
Can be classified either by function or by natural description.
Cash flows from investing activities do not include:
Proceeds from issuing bonds.
A change in estimated useful life of a depreciable asset is accounted for:
Prospectively.
Zeta paid $2 interest on short-term notes payable, $10 interest on long-term bonds, and $6 in dividends on its common stock. Zeta would report cash outflows from activities, as follows:
Operating, $12; financing $6.
Chi company sells a division that qualifies as a component of the entity according to GAAP regarding disposal of long-lived assets. How should Chi report the sale in its 2011 income statement?
As a discontinued operation, reported below income from continuing operations.
On May 1, Alpha Co. put assets of a Division that qualifies as a component of the entity according to GAAP regarding discontinued operations for sale. The division's operating income was a pre-tax loss of $10 in 2011. Alpha's income tax rate is 40%. Assume that the fair value of the Division's assets at December 31 was $80 with a book value of $48. In the 2011 income statement for Alpha Co under discontinued operations it would report a:
$6 loss
Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?
Loss on the sale of equipment
In its December 31, 2011 financial statements, E-Z prices estimated that losses on its current receivables would be $10.2. During 2012, E-Z Prices determined that the losses on December 31, 2011, receivables were actually $12.4. Ignoring taxes, E-Z prices would report, in its 2012 financial statements, the additional $2.2 loss on receivables as:
A current year's expense
Theta reported revenue of $5,000 for its year ended December 31, 2011. Accounts receivable at December 31, 2010 and 2011, were $320 and $355, respectively. Using the direct method for reporting cash flows from operating activities, Theta would report cash collected from customers of:
$4,965
Pi purchased a lathe on January 1, 2009 at a cost of $45,000. At the time of purchase, the lathe was expected to have a five-year economic life and a residual value of $3,000. Pi uses straight-line depreciation. At the beginning of 2011, Pi estimated the lathe to have a remaining life of four years with no residual value. For the year ended December 31, 2011, Pi would report depreciation of:
$7,050
Operating cash flows would exclude
dividends paid
Theta reported revenue of $400 for its year ended December 31, 2011. Accounts receivable at December 31, 2010 and 2011, were $35 and $32, respectively. Using the direct method for reporting cash flows from operating activities, Theta would report cash collected from customers of:
$403.
The Mu Corporation's income statement includes income from continuing operations, a loss from discontinued operations and extraordinary items. Earnings per share information would be provided for:
Income from continuing operations, loss from discontinued operations, extraordinary items and net income.
On October 28, 2011, Mu Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2011, the end of the company's fiscal year. The division's loss from operations for 2011 was $2,000. The division's book value and fair value less cost to sell on December 31 were $3,000 and $3,500, respectively. What before-tax amount should Mu report as loss on discontinued operations in its 2011 income statement?
$2,000 loss
Rho inc. had salaries payable of $60 and $90 at the end of 2010 and 2011, respectively. During 2011, Rho recorded $620 in salaries expense in its income statement. Cash outflows for salaries in 2011 were:
$590
Pro forma earnings:
Are management's view of permanent earnings.
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