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Self Study Quiz 18 With Answers

Self Study Quiz 18 With Answers

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Published by: Emily Jones on Dec 09, 2009
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Chapter 18 Self-Study Quiz with Answers
ANALYSIS OF MULTIPLE-CHOICE TYPE QUESTIONS
1.(L.O. 1) The process of formally recording or incorporating an item in the financialstatements of an entity is:a.allocation.b.articulation.c.realization.d.recognition.
Approach
and Explanation: Write down a brief definition of each term listed. Select theone that matches the description in the stem of the question. Allocation is the accountingprocess of assigning or distributing an amount according to a plan or formula. Allocationis a broad term and includes amortization, which is the accounting process of reducingan amount by periodic payments or writedowns. Articulation refers to the interrelation of elements of the financial statements. Realization means the process of convertingnoncash resources and rights into money (such as the sale of assets for cash or claimsto cash). Recognition is defined in
SFAC No.
6 as the process of formally recording or incorporating an item in the financial statements of an entity. (Solution
=
d.)2.(L.O. 1) Dot Point, Inc. is a retailer of washers and dryers and offers a three-yea
service
contract on each appliance sold. Although Dot Point sells the appliances onan installment basis, all service contracts are cash sales at the time of purchase bythe 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 additionto retained earnings.Approach and
Explanation:
Recall the revenue recognition principleand think
about how it
would apply to
this situation. Revenue is to be recognizedwhen
it is realized (or
realizable) and
earned. The
service contract revenue isrealized at the date the cash is received; however, it
is
earned over the three-year periodto which the contract pertains. Therefore, at the point of collection, the cash should berecorded by a credit to a Deferred (Unearned) Service Revenue account. The revenue willbe earned over the three-year period as the company performs the services it promises bythe contract. (Solution
=
b.)3.(L.O. 3) L. Mahoney Corporation sells equipment. On December 31, 2006,Mahoney sold a piece of equipment to C. Bailey for $30,000 with the followingterms: 2% cash discount if paid within 30 days, I % discount if paid between 31 and60 days of purchase, or payable in full within 90 days if not paid within a discountperiod. Bailey had the right to return this equipment to Mahoney if Bailey could notresell it before the end of the 90-day payment period, in which case Bailey would nolonger be obligated to Mahoney. How much should be included in Mahoney’s netsales for 2006 because of the sale of this machine?a.$30,000
b. $29,700 c. $29,400 d. $0
Explanation:Per the terms of the sale/purchase, Bailey has the right to return theequipment to the seller if Bailey is not able to resell the equipment before expiration of 
 
the90-day payment period. According to
SFAS No. 48,
if an enterprise sells its product butgives the buyer the right to return the product, revenue from the sales transaction is notrecognized at the time of the sale if the buyer’s obligation to pay the seller is contingentupon resale of the product. (Solution
=
d.)4.(L.O. 3) Bella Construction Co. uses the percentage-of-completion method. In 2006,Bella began work on a contract for $2,200,000; it
was completed
in 2007. Thefollowing cost data pertain to this contract:Year Ended December 312006 2007Costs incurred during the year$780,000 $560,000 Estimatedcosts to complete at end of year 520,000The amount of gross profit to be recognized on the income statement for the year ended December 31, 2006 is:
a.$0.b.$516,000. c. $540,000. d. $900,000.
Approach and Explanation:
Write down the formula used to compute the gross profitrecognized to date at the end of 2006. Use the data given to compute the gross profit.Costs incurredto dateEstimated totalTotalgrossCurrent periodEstimate of 
X
gross profit
-
~npnorperiodsgross profittotal costs
$780,000
 
L~
 
780~000
+
$520,000
 
X [$2,200,000
-
($780,000
+
 
$520~000)]]- ~
=
 
$780,000
—‘
 
,300,000
 
X ($2,200,000
-
$1 ~300~000)J
-
$0
=
 
 
[.60 x $900,000]
-
$0
=
$540,000(Solution
=
 
c.)
5. 
(L.O.
3)
Refer to the facts for
Question
4
above. The amount of
 
gross profit to be
recognized on the income statement for the year ended December 31, 2007 is:a.$860,000.
b.$360,000. c. 
$344,000.
 d.$320,000. 
Explanation: Use the formula shown for Question 4 and plug in the data for 2007.
E
$780,000
+
$560,000$780,000 +$560,000 +$0
X
 
[$2,200,000
 
($780,000
+
$560~000)]] $540,000
=
 
2006
a.$0
b.$0c. $900,000
d. $860,000$0
The
a.
b.c.d.
 
rsi
,
 
340,000
Ls1
,340,000
 
X ($2,200,000
$1 ~340,000)J
-
$540,000
= 
$860,000
-
$540,000
=
$320.000(Solution
=
d.)
 
6.(L.O. 3) Refer to the data for Question 4 above. If the completed-contract method of  accounting was used, the amount of gross profit to be reported for years 2006 and2007 would be: 
 ____ 
 
2007$860,000$900,000$(40,000)Explanation:The completed-contract method calls for deferral of all revenue and costsrelated to a contract (project) until the period of completion. Thus, the entire gross profit($2,200,000 total revenue
$1,340,000 total costs
=
$860,000 total gross profit) is recognized in the period the contract is completed. (Solution
=
a.) TIP The percentage-of-completion method is the generally accepted preferable methodThe completed-contract method is acceptable under certain circumstances, such asin the case where estimates of costs etc. are not dependable.7.(L.O. 3) Designer Homes Construction Company uses the percentage-of-completion method. The costs incurred to date as a proportion of the estimated totalcosts to be incurred on a project are used as a measure of the extent of progressmade toward completion of the project. During 2006, the company entered into afixed-price contract to construct a mansion for Donald Thrumper for $24,000,000.The following details pertain to that contract:Percentage of completionEstimated total costs of contractGross profit recognized to date
AtDecember 31,
200625%$18,000,0001,500,000
AtDecember 31,
200760%$20,000,0002,400,000The amount of construction costs incurred during 2007 was:

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