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Income Recognition - Chapter 4 "The Book" Study Questions
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ASC 605-35
In 1981 the AICPA issued a new Audit and Accounting Guide, "Construction Contractors". Simultaneously, the AICPA issued a statement of Position 81-1 now known as:
Percentage of completion method
Of the two GAAP acceptable methods for income recognition, which one is more preferred?
Completed Contract Method
Which one of the following is an Acceptable income recognition methods in accordance with GAAP
Revenue, costs and gross profit are recognized in all accounting periods throughout the duration of the contract
Which income recognition method is considered the Percentage of Completion method?
Cash basis, Accrual (billing), Hybrid Basis
These methods are only acceptable for financial reporting in conformity with GAAP and not for revenue recognition
Completed contract method when contract is substantially completed and accepted
Revenue, costs and gross profits, when not recognized until the contract has been substantially completed and accepted is considered which income recognition method?
reasonably dependable estimates of revenue, costs and progress toward completion
To use the percentage of completion method, a contractor must be able to provide:
Cost to Cost method, Efforts expended method, Units of work performed method
Accepted Methods of measuring the extent of progress toward completion for percentage of completion
Completed contract Method
Accepted method of income recognition GAAP
inherent risks
Normally, the completed contract method is only used when_______________ associated with the contract preclude the contractor's ability to reasonably estimate contract revenues, costs or gross profit.
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Verified questions
ACCOUNTING
Use the Buffalo Bell Corporation financial statements that follow to answer questions. Buffalo Bell Corporation Consolidated Statements of Financial Position (In millions) $$ \begin{matrix} \quad & \text{December 31,2012} & \text{December 31,2011}\\ \text{Assets:} & \quad & \quad\\ \text{Current Assets } & \quad & \quad\\ \text{Cash and cash equivalents} & \text{\$ 4,333 } & \text{\$ 4,226 }\\ \text{Accounts and notes receivable } & \text{3,400 } & \text{2,403 }\\ \text{Short-term investments } & \text{845} & \text{520}\\ \text{Inventories, at cost} & \text{433} & \text{411}\\ \text{Prepaid expense and other current assets } & \text{1,638 } & \text{1,226 }\\ \text{Total current assets } & \text{10,649 } & \text{8,786 }\\ \text{Property and equipment, net} & \text{1,555 } & \text{907}\\ \text{Investments} & \text{6,804 } & \text{5,199 }\\ \text{Other non-current assets} & \text{303} & \text{155}\\ \text{Total assets} & \text{\$19,311} & \text{\$15,047}\\ \text{Liabilities and stockholders’ equity: } & \quad & \quad\\ \text{Current liabilities } & \quad & \quad\\ \text{Accounts payable} & \text{\$ 7,708 } & \text{\$ 6,009 }\\ \text{Accrued and other liabilities } & \text{3,676 } & \text{3,033 }\\ \text{Total current liabilities } & \text{11,384 } & \text{9,042 }\\ \text{Long-term debt } & \text{304} & \text{305}\\ \text{Other non-current liabilities } & \text{1,701 } & \text{1,179 }\\ \text{Total liabilities } & \text{13,389} & \text{10,526}\\ \text{Stockholders’ equity} & \quad & \quad\\ \text{Preferred stock and capital in excess of \$0.02 par value; shares issued and outstanding: none} & \text{ -} & \text{ -}\\ \text{Common stock and capital in excess of \$0.05 par value; shares authorized: 6,000; shares issued: 2,163 and 1,903, respectively } & \text{7,803 } & \text{7,001 }\\ \text{Treasury stock, at cost: 183 and 123 shares, respectively } & \text{(6,444) } & \text{(4,401) }\\ \text{Retained earnings } & \text{4,676 } & \text{1,990 }\\ \text{Other comprehensive loss } & \text{(79) } & \text{(25}\\ \text{Other} & \text{(34) } & \text{(44) }\\ \text{Total stockholders’ equity } & \text{5,922 } & \text{4,521 }\\ \text{Total liabilities and stockholders’ equity} & \text{\$19,311} & \text{\$15,047}\\ \end{matrix} $$ Buffalo Bell Corporation Consolidated Statements of Income (In millions, except per share amounts) $$ \begin{matrix} \quad & \text{Year ended December 31, 2012} & \text{Year ended December 31, 2011} & \text{Year ended December 31, 2010}\\ \text{Net Revenue} & \text{\$42,666 } & \text{\$35,220 } & \text{\$31,111 }\\ \text{Cost of goods sold } & \text{35,147 } & \text{29,255 } & \text{25,492 }\\ \text{Gross profit } & \text{7,519} & \text{5,965} & \text{5,619}\\ \text{Operating expenses:} & \quad & \quad & \quad\\ \text{Selling, general, and administrative } & \text{3,341 } & \text{3,250 } & \text{2,985 }\\ \text{Research, development, and engineering } & \text{544} & \text{553} & \text{536}\\ \text{Special charges } & \text{ -} & \text{ -} & \text{512}\\ \text{Total operating expenses } & \text{3,885} & \text{3,803 } & \text{4,033 }\\ \text{Operating income } & \text{3,634 } & \text{2,162 } & \text{1,586 }\\ \text{Investment and other income (loss), net } & \text{153} & \text{196} & \text{(30) }\\ \text{Income before income taxes } & \text{3,787 } & \text{2,358 } & \text{1,556 }\\ \text{Income tax expense } & \text{1,136 } & \text{940} & \text{472}\\ \text{Net income } & \text{\$ 2,651} & \text{\$ 1,418} & \text{\$ 1,084 }\\ \text{Earnings per common share: } & \quad & \quad & \quad\\ \text{Basic} & \text{\$ 1.41} & \text{\$ 0.95} & \text{\$ 0.37 }\\ \end{matrix} $$ How many shares of common stock did Buffalo Bell have outstanding, on average, during 2012? a. 1,880 million b. 137.9 million c. 20.1 million d. 35,147 million
ACCOUNTING
Benning Manufacturing Company is negotiating with a customer for the lease of a large machine manufactured by Benning. The machine has a cash price of $800,000. Benning wants to be reimbursed for financing the machine at an 8% annual interest rate. Required: 1. Determine the required lease payment if the lease agreement calls for 10 equal annual payments beginning immediately. 2. Determine the required lease payment if the first of 10 annual payments will be made one year from the date of the agreement. 3. Determine the required lease payment if the first of 10 annual payments will be made immediately and Benning will be able to sell the machine to another customer for$50,000 at the end of the 10-year lease.
ACCOUNTING
The trial balance of Dorman Specialties, Inc., follows. Dorman Specialties, Inc. Trial Balance December 31, 2012 $$ \begin{matrix} \text{Cash} & \text{\$ 20,000 } & \quad\\ \text{Accounts receivable } & \text{45,000 } & \quad\\ \text{Prepaid expenses } & \text{3,000 } & \quad\\ \text{Equipment} & \text{235,000 } & \quad\\ \text{Building} & \text{104,000} & \quad\\ \text{Accounts payable } & \quad & \text{\$102,000 }\\ \text{Note payable } & \quad & \text{82,000 }\\ \text{Common stock } & \quad & \text{55,000 }\\ \text{Retained earnings } & \quad & \text{162,000}\\ \text{Dividends} & \text{18,000} & \quad\\ \text{Service revenue } & \quad & \text{180,000}\\ \text{Rent expense } & \text{59,000 } & \quad\\ \text{Advertising expense } & \text{12,000 } & \quad\\ \text{Wage expense } & \text{76,000 } & \quad\\ \text{Supplies expense } & \text{9,000 } & \quad\\ \text{Total} & \text{\$581,000} & \text{\$581,000}\\ \end{matrix} $$ Abby Ricardo, your best friend, is considering investing in Dorman Specialties, Inc. Abby seeks your advice in interpreting this information. Specifically, she asks how to use this trial balance to compute the company’s total assets, total liabilities, and net income or net loss for the year. Write a short note to answer Abby’s questions. In your note, state the amounts of Dorman Specialties’ total assets, total liabilities, and net income or net loss for the year. Also show how you computed each amount.
ACCOUNTING
Miller, Inc., has the following plant asset accounts: Land, Buildings, and Equipment, with a separate accumulated depreciation account for each of these except Land. Miller completed the following transactions: $$ \begin{matrix} \text{Jan 4 } & \text{Traded in equipment with accumulated depreciation of \$61,000 (cost of \$134,000) for similar new equipment with a cash cost of \$178,000. Received a trade-in allowance of \$77,000 on the old equipment and paid \$101,000 in cash. }\\ \text{Jun 29 } & \text{Sold a building that had a cost of \$650,000 and had accumulated depreciation of \$140,000 through December 31 of the preceding year. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \$220,000. Miller received \$110,000 cash and a \$394,625 note receivable. }\\ \text{Oct 30 } & \text{Purchased land and a building for a single price of \$360,000. An independent appraisal valued the land at \$160,800 and the building at \$241,200. }\\ \text{Dec 31 } & \text{Recorded depreciation as follows:}\\ \quad & \text{Equipment has an expected useful life of 8 years and an estimated residual value of 3\\% of cost. Depreciation is computed on the double-declining-balance method. Depreciation }\\ \quad & \text{Depreciation on buildings is computed by the straight-line method. The new building carries a 40-year useful life and a residual value equal to 30\\% of its cost.}\\ \end{matrix} $$ Record the transactions in Miller, Inc.’s journal.
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