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Companies should recognize revenue when it is realized and when cash is received.
False. When it is earned
Delayed recognition of revenue is appropriate if the sale does not represent substantial
completion of the earnings process.
If a company sells its product but gives the buyer the right to return it, the company should
not recognize revenue until the sale is collected.
Companies can recognize revenue prior to completion and delivery of the product under
Companies must use the percentage-of-completion method when estimates of progress
toward completion are reasonably dependable.
The most popular input measure used to determine the progress toward completion is the
If the difference between the Construction in Process and the Billings on Construction in
Process account balances is a debit, the difference is reported as a current asset.
The Construction in Process account includes only construction costs under the
Under the completed-contract method, companies recognize revenue and costs only when
the contract is completed.
The principal advantage of the completed-contract method is that reported revenue reflects
final results rather than estimates.
Companies must recognize a loss on an unprofitable contract under the percentage-ofcompletion
method but not the completed-contract method.
A loss in the current period on a profitable contract must be recognized under both the
percentage-of-completion and completed-contract method.
Under the completion-of-production basis, companies recognize revenue when agricultural
crops are harvested since the sales price is reasonably assured and no significant
costs are involved in product distribution.
The provision for a loss on an unprofitable contract may be combined with the Construction
in Process account balance under percentage-of-completion but not completed-contract.
Under the installment-sales method, companies defer revenue and income recognition until
the period of cash collection.
The installment-sales method defers only the gross profit instead of both the sales price
and cost of goods sold.
Deferred gross profit is generally treated as an unearned revenue and classified as a
Under the cost-recovery method, a company recognizes no revenue or profit until cash
payments by the buyer exceed the cost of the merchandise sold.
Companies recognize profit under the cost-recovery method only when cash collections
exceed the total cost of the goods sold.
The revenue recognition principle provides that revenue is recognized when
a. it is realized.
b. it is realizable.
c. it is realized or realizable and it is earned.
d. none of these.
When goods or services are exchanged for cash or claims to cash (receivables), revenues
d. all of these.
When the entity has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues, revenues are
d. all of these.
Which of the following is not an accurate representation concerning revenue recognition?
a. Revenue from selling products is recognized at the date of sale, usually interpreted to
mean the date of delivery to customers.
b. Revenue from services rendered is recognized when cash is received or when services
have been performed.
c. Revenue from permitting others to use enterprise assets is recognized as time passes
or as the assets are used.
d. Revenue from disposing of assets other than products is recognized at the date of sale.
The process of formally recording or incorporating an item in the financial statements of an
Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract
on each appliance sold. Although Dot Point sells the appliances on an installment basis, all
service contracts are cash sales at the time of purchase by the buyer. Collections received
for service contracts should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.
Which of the following is not a reason why revenue is recognized at time of sale?
a. Realization has occurred.
b. The sale is the critical event.
c. Title legally passes from seller to buyer.
d. All of these are reasons to recognize revenue at time of sale.
An alternative available when the seller is exposed to continued risks of ownership through
return of the product is
a. recording the sale, and accounting for returns as they occur in future periods.
b. not recording a sale until all return privileges have expired.
c. recording the sale, but reducing sales by an estimate of future returns.
d. all of these.
A sale should not be recognized as revenue by the seller at the time of sale if
a. payment was made by check.
b. the selling price is less than the normal selling price.
c. the buyer has a right to return the product and the amount of future returns cannot be
d. none of these.
The FASB concluded that if a company sells its product but gives the buyer the right to
return the product, revenue from the sales transaction shall be recognized at the time of
sale only if all of six conditions have been met. Which of the following is not one of these
a. The amount of future returns can be reasonably estimated.
b. The seller's price is substantially fixed or determinable at time of sale.
c. The buyer's obligation to the seller would not be changed in the event of theft or
damage of the product.
d. The buyer is obligated to pay the seller upon resale of the product.
In selecting an accounting method for a newly contracted long-term construction project,
the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of progress
toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term construction
d. the inherent nature of the contractor's technical facilities used in construction.
The percentage-of-completion method must be used when certain conditions exist. Which
of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration to
be exchanged, and the manner and terms of settlement.
When work to be done and costs to be incurred on a long-term contract can be estimated
dependably, which of the following methods of revenue recognition is preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these
How should the balances of progress billings and construction in process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit
In accounting for a long-term construction-type contract using the percentage-ofcompletion
method, the gross profit recognized during the first year would be the estimated
total gross profit from the contract, multiplied by the percentage of the costs incurred during
the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.
How should earned but unbilled revenues at the balance sheet date on a long-term
construction contract be disclosed if the percentage-of-completion method of revenue
recognition is used?
a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for the portion
of work completed.
The principal disadvantage of using the percentage-of-completion method of recognizing
revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable uncertainty.
c. is likely to assign a small amount of revenue to a period during which much revenue
was actually earned.
d. none of these.
One of the more popular input measures used to determine the progress toward
completion in the percentage-of-completion method is
a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.
The principal advantage of the completed-contract method is that
a. reported revenue is based on final results rather than estimates of unperformed work.
b. it reflects current performance when the period of a contract extends into more than
one accounting period.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case when the
percentage-of-completion method is used.
Under the completed-contract method
a. revenue, cost, and gross profit are recognized during the production cycle.
b. revenue and cost are recognized during the production cycle, but gross profit
recognition is deferred until the contract is completed.
c. revenue, cost, and gross profit are recognized at the time the contract is completed.
d. none of these.
Cost estimates on a long-term contract may indicate that a loss will result on completion of
the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion or
completed-contract method is employed.
b. recognized in the current period under the percentage-of-completion method, but the
completed-contract method should defer recognition of the loss to the time when the
contract is completed.
c. recognized in the current period under the completed-contract method, but the
percentage-of-completion method should defer the loss until the contract is completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or completed-contract method is employed.
Cost estimates at the end of the second year indicate a loss will result on completion of the
entire contract. Which of the following statements is correct?
a. Under the completed-contract method, the loss is not recognized until the year the
construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first
year must not be changed.
c. Under the completed-contract method, when the billings exceed the accumulated
costs, the amount of the estimated loss is reported as a current liability.
d. Under the completed-contract method, when the Construction in Process balance
exceeds the billings, the estimated loss is added to the accumulated costs.
The criteria for recognition of revenue at the completion of production of precious metals
and farm products include
a. an established market with quoted prices.
b. low additional costs of completion and selling.
c. units are interchangeable.
d. all of these.
In certain cases, revenue is recognized at the completion of production even though no
sale has been made. Which of the following statements is not true?
a. Examples involve precious metals or farm equipment.
b. The products possess immediate marketability at quoted prices.
c. No significant costs are involved in selling the product.
d. All of these statements are true.
For which of the following products is it appropriate to recognize revenue at the completion
of production even though no sale has been made?
b. Large appliances
c. Single family residential units
d. Precious metals
When there is a significant increase in the estimated total contract costs but the increase
does not eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the completed-contract methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase requires
a current period adjustment of excess gross profit recognized on the project in prior
c. Under the completed-contract method only, the estimated cost increase requires a
current period adjustment of excess gross profit recognized on the project in prior
d. No current period adjustment is required.
Deferred gross profit on installment sales is generally treated as a(n)
a. deduction from installment accounts receivable.
b. deduction from installment sales.
c. unearned revenue and classified as a current liability.
d. deduction from gross profit on sales.
The installment-sales method of recognizing profit for accounting purposes is acceptable if
a. collections in the year of sale do not exceed 30% of the total sales price.
b. an unrealized profit account is credited.
c. collection of the sales price is not reasonably assured.
d. the method is consistently used for all sales of similar merchandise.
The method most commonly used to report defaults and repossessions is
a. provide no basis for the repossessed asset thereby recognizing a loss.
b. record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
c. record the repossessed merchandise at book value, recording no gain or loss.
d. none of these.
Under the installment-sales method,
a. revenue, costs, and gross profit are recognized proportionate to the cash that is
received from the sale of the product.
b. gross profit is deferred proportionate to cash uncollected from sale of the product, but
total revenues and costs are recognized at the point of sale.
c. gross profit is not recognized until the amount of cash received exceeds the cost of the
d. revenues and costs are recognized proportionate to the cash received from the sale of
the product, but gross profit is deferred until all cash is received.
The realization of income on installment sales transactions involves
a. recognition of the difference between the cash collected on installment sales and the
cash expenses incurred.
b. deferring the net income related to installment sales and recognizing the income as
cash is collected.
c. deferring gross profit while recognizing operating or financial expenses in the period
d. deferring gross profit and all additional expenses related to installment sales until cash
is ultimately collected.
A manufacturer of large equipment sells on an installment basis to customers with
questionable credit ratings. Which of the following methods of revenue recognition is least
likely to overstate the amount of gross profit reported?
a. At the time of completion of the equipment (completion of production method)
b. At the date of delivery (sales method)
c. The installment-sales method
d. The cost-recovery method
A seller is properly using the cost-recovery method for a sale. Interest will be earned on the
future payments. Which of the following statements is not correct?
a. After all costs have been recovered, any additional cash collections are included in
b. Interest revenue may be recognized before all costs have been recovered.
c. The deferred gross profit is offset against the related receivable on the balance sheet.
d. Subsequent income statements report the gross profit as a separate item of revenue
when it is recognized as earned.
Under the cost-recovery method of revenue recognition,
a. income is recognized on a proportionate basis as the cash is received on the sale of
b. income is recognized when the cash received from the sale of the product is greater
than the cost of the product.
c. income is recognized immediately.
d. none of these.
Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of
water, Winser does not recognize any revenue from water sales until the sales exceed the
costs of exploration, the basis of revenue recognition being employed is the
a. production basis.
b. cash (or collection) basis.
c. sales (or accrual) basis.
d. cost recovery basis.
The deposit method of revenue recognition is used when
a. the product can be marketed at quoted prices and units are interchangeable.
b. cash is received before the sales transaction is complete.
c. the contract is short-term or the percentage-of-completion method can't be used.
d. there are no significant costs of distribution.
The cost-recovery method
a. is prohibited under current GAAP due to its conservative nature.
b. requires a company to defer profit recognition until all cash payments are received from
c. is used by sellers when there is a reasonable basis for estimating collectibility.
d. recognizes total revenue and total cost of goods sold in the period of sale.
Types of franchising arrangements include all of the following except
a. service sponsor-retailer.
b. wholesaler-service sponsor.
In consignment sales, the consignee
a. records the merchandise as an asset on its books.
b. records a liability for the merchandise held on consignment.
c. recognizes revenue when it ships merchandise to the consignor.
d. prepares an "account report" for the consignor which shows sales, expenses, and cash
Some of the initial franchise fee may be allocated to
a. continuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. All of these may reduce the amount of the initial franchise fee that is recognized as
Continuing franchise fees should be recorded by the franchisor
a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.
Occasionally a franchise agreement grants the franchisee the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the franchisor should
a. increase revenue recognized from the initial franchise fee by the amount of the
expected future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase the
selling price when the franchisee subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made.
d. None of these.
A franchise agreement grants the franchisor an option to purchase the franchisee's
business. It is probable that the option will be exercised. When recording the initial
franchise fee, the franchisor should
a. record the entire initial franchise fee as a deferred credit which will reduce the
franchisor's investment in the purchased outlet when the option is exercised.
b. record the entire initial franchise fee as unearned revenue which will reduce the amount
of cash paid when the option is exercised.
c. record the portion of the initial franchise fee which is attributable to the bargain
purchase option as a reduction of the future amounts receivable from the franchisee.
d. None of these.
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