Professional Documents
Culture Documents
Installment Method
Criteria
11. The installment method of recognizing revenue
a. should be used only in cases in which no reasonable basis exists for estimating the
collectibility of receivables.
b. is not a generally accepted accounting principle under any circumstances.
c. should be used for book purposes only if it is used for tax purposes.
S, S & S
d. is an acceptable alternative accounting principle for a firm that makes installment sales.
46. 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:
A. Installment sales method.
C. Cost recovery method.
B. Point of sales method.
D. Completed contract method.
S, S & T
21. The installment 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.
K, W & W
1.
c.
No
Yes
d.
Yes
No
2.
An acceptable method for recognizing profit when the collection of cash is in doubt is the
a. Percentage-of-completion method.
c. Completed-contract method.
b. Installment method.
d. Consignment method.
CMA 0685 4-35
3.
For financial statement purposes, the installment method of accounting may be used if the
a. Collection period extends over more than 12 months.
b. Installments are due in different years.
c. Ultimate amount collectible is indeterminate.
d. Percentage-of-completion method is inappropriate.
AICPA 1191 T-6
4.
To properly account for an installment sale, all of the following must be readily determinable
except
A. The amount of gross profit to be deferred.
B. The total cash collected on each year's sales.
C. The operating costs to be deferred.
D. Costs associated with default and repossession.
CMA 1292 2-20
5.
If sales are accounted for using the installment method, which of the following is (are) only
recognized in proportion to the cash collected on the sales during the period?
A. Sales.
B. Sales and cost of sales.
C. Sales and cost of sales and selling expenses.
D. Sales and cost of sales and administrative expenses.
CIA 0595 IV-11
Characteristics
13. When using the installment sales method,
a. gross profit is deferred until all cash is received, but revenues and costs are recognized in
proportion to the cash collected from the sale.
b. gross profit is recognized only after the amount of cash collected exceeds the cost of the
item sold.
c. revenue, costs, and gross profit are recognized proportionally as the cash is received from
the sale of product.
d. total revenues and costs are recognized at the point of sale, but gross profit is deferred in
proportion to the cash that is uncollected from the sale.
S, S & S
Installment Receivable Balance
6.
Pie Co. uses the installment sales method to recognize revenue. Customers pay the
installment notes in 24 equal monthly amounts, which include 12% interest. What is an
installment notes receivable balance six months after the sale?
a. 75% of the original sales price.
b. Less than 75% of the original sales price.
AICPA 1192T-9
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than the present value of the remaining monthly payments discounted at 12%.
Deferred Revenue
65. Alton, Inc. is a retailer of home appliances and offers a service contract on each appliance
sold. Alton sells appliances on installment contracts, but all service contracts must be paid in
full at the time of sale. Collections received for service contracts should be recorded as an
increase in a
a.
b.
c.
d.
K, W & W
Repossessions
8.
When assets that have been sold and accounted for by the installment method are
subsequently repossessed and returned to inventory, they should be recorded on the books at
a. Selling price.
b. The amount of the installment receivable less associated deferred gross profit.
c. Net realizable value.
d. Net realizable value minus normal profit.
Gleim
22. 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.
K, W & W
Cost Recovery Method
Criteria
8. Drew Co. produces expensive equipment for sale on installment contracts. When there is
doubt about eventual collectibility, the income recognition method least likely to overstate
income is
a. at the time the equipment is completed. c. the cost recovery method.
b. the installment method.
d. at the time of delivery.
AICPA 0591T-8
33. According to the cost recovery method of accounting, the gross profit on an installment sale is
recognized in income:
a. after cash collections equal to the cost of sales are received.
b. in proportion to cash collections.
c. on the date the final cash collection is received.
d. on the date of sale.
RPCPA 0593
*.
9.
*.
Wren Co. sells equipment on installment contracts. Which of the following statements best
justifies Wrens use of the cost recovery method of revenue recognition to account for these
installment sales?
a. The sales contract provides that title to the equipment only passes to the purchaser when
all payments have been made.
b. No cash payments are due until one year from the date of sale.
c. Sales are subject to a high rate of return.
d. There is no reasonable basis for estimating collectibility.
AICPA 0594 F-41
FGH Machinery, Inc. is engaged in the business of selling tractors on installment basis. Under
which of the following circumstances should you recommend to FGH the use of the cost
recovery method of revenue recognition to account for the installment sales?
a. Where there is no reasonable basis for estimating collectibility.
b. Where the sales are subject to a high rate of return.
c. Where no cash payments are due until one year from date of sale.
d. Where the sale contract provides that title to the equipment only passes to the buyer
when all payments have been made.
RPCPA 1096
47. 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:
A. Point of sale.
C. Cost recovery.
B. Installment sales.
D. Completed contract.
S, S & T
10 .
ABC Oil Co. is engaged in extensive exploration for oil in the Cagayan Valley. If upon
discovery of oil the company does not recognize any revenue from oil sales until the sales
exceed the costs of exploration, the basis of revenue recognition being employed is the
a. production basis.
c. sales (or accrual) basis.
RPCPA 1082
b. cash (or collection) basis.
d. sunk cost (or cost recovery) basis.
31. A sells on the installment basis, with service contracts paid in full at the date of sale. The
collections from service contracts should be recorded as an increase in
a. Deferred revenue account.
c. Valuation account of stockholders equity.
b. Sales receivable valuation account.
d. Service revenue account. RPCPA 0593
Application
26. 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.
c. sales (or accrual) basis.
b. cash (or collection) basis.
d. cost recovery basis.
K, W & W
Gross Profit
75. According to the cost recovery method of accounting, gross profit on an installment sale is
recognized in income (E)
A. After cash collections equal to the cost of sales have been received
B. In proportion to the cash collections
C. On the date the final cash collection is received
D. On the date of sale
CPAR
Income recognition
25. 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 the
product.
b. income is recognized when the cash received from the sale of the product is greater than
the cost of the product.
24. 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
income.
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.
K, W & W
CONSIGNMENT ACCOUNTING
Ownership of Consigned Inventories
23. Goods on consignment should be included in the inventory of
S, S & S
a. the consignor but not the consignee.
c. the consignee but not the consignor.
b. both the consignor and the consignee.
d. neither the consignor nor the consignee.
Inventoriable Costs
11 . Consignor Co. paid the in-transit insurance premium for consignment goods shipped to
Consignee Co. In addition, Consignor advanced part of the commissions that will be due
when Consignee sells the goods. Should Consignor include the in-transit insurance premium,
and the advanced commissions in inventory costs?
AICPA 0592 T-23
a.
b.
c.
d.
Insurance Premium
Yes
No
Yes
No
Advanced Commissions
Yes
No
No
Yes
Revenue/Cost Recognition
31. Revenue is recognized by the consignor when the
a. goods are shipped to the consignee.
b. consignee receives the goods.
c. consignor receives an advance from the consignee.
d. consignor receives an account sales from the consignee.
12 .
K, W & W
K, W & W
In accounting for sales on consignment, sales revenue and the related cost of goods sold
should be recognized by the
a. Consignor when the goods are shipped to the consignee.
b. Consignee when the goods are shipped to the third party.
c. Consignor when notification is received that the consignee has sold the goods.
DEF is the consignee for 1,000 units of product X for ABC Company. ABC should recognize
the revenue from these 1,000 units when
A. The agreement between DEF and ABC is signed.
B. ABC ships the goods to DEF.
C. DEF receives the goods from ABC.
D. DEF sells the goods and informs ABC of the sale.
CIA 0590 IV-31
*. When goods are consigned out, profits should be recognized by the consignor when the
a. Goods are sold by the consignee.
b. Goods are received by the consignee.
c. Consignee agrees to the terms of the consignment.
d. Goods are shipped by the consignor.
RPCPA 0577
Prepaid Freight
14 . Jel Co., a consignee, paid the freight costs for goods shipped from Dale Co., a consignor.
These freight costs are to be deducted from Jels payment to Dale when the consignment
goods are sold. Until Jel sells the goods, the freight costs should be included in Jels
a. Cost of goods sold.
c. Selling expenses.
b. Freight-out costs.
d. Accounts receivable.
AICPA 1192 T-12
Journal Entries
15 . ABC Manufacturing Company ships merchandise costing $40,000 on consignment to XYZ
Stores. ABC pays $3,000 of freight costs to a transport company, and XYZ pays $2,000 for
local advertising costs that are reimbursable from ABC. By the end of the period, three fourths
of the consigned merchandise has been sold for $50,000 cash. XYZ notifies ABC of the sales,
retains a 10% commission and the paid advertising costs, and remits the cash due ABC.
Select the journal entry that appropriately records the notification of sale and the receipt of
cash by ABC.
CIA 1193 IV-37
$40,000
A. Cash
2,000
Advertising expense
5,000
Commission expense
3,000
Freight expense
$50,000
Revenue from consignment sales
$43,000
B. Cash
2,000
Advertising expense
5,000
Commission expense
$50,000
Revenue from consignment sales
C.
D.
Cash
Revenue from consignment sales
Cash
Commission expense
Revenue from consignment sales
$50,000
$45,000
5,000
$50,000
1.
Answers (A), (C), and (D) are incorrect because cash collections are critical to both the costrecovery and the installment method.
$50,000
2.
3.
4.
Answer (C) is correct. The accounting treatment of installment sales recognizes gross profit as
cash is received. Gross profit is deferred at the time of sale and recognized as income in the
accounting periods in which cash is received. Thus, the accountant must know the amount of
gross profit to be deferred, the cash collected each year, and perhaps the costs associated
with default and repossession. When goods are repossessed, they are returned to inventory at
net realizable value (selling price - costs of completion, reconditioning, and selling) minus
normal profit. The interest costs on the funds tied up in receivables are also a consideration.
However, no operating costs are deferred as a result of installment sales.
Answer (A) is incorrect because the amount of gross profit to be deferred must be known to
allocate it over future periods. Answer (B) is incorrect because the amount of cash collected
each year is used to allocate gross profit to the proper periods. Answer (D) is incorrect
because default and repossession often occur as a result of installment sales.
5.
Answer (B) is correct. Under the installment method, the gross profit on sales (sales - cost of
sales) is not recognized until cash is collected. The proportion of cash collected on the sales
RPCPA 0592
K, W & W
REQUIRED: The method(s), if any, under which cash collection is important for recognizing
income.
DISCUSSION: (B) When receivables are collected over an extended period and no
reasonable basis exists for estimating the degree of collectibility, the installment method or the
cost-recovery method of accounting may be used. Under the installment method, gross profit
recognized during each period of the term of an installment receivable is equal to the gross
profit ratio on the installment sales for the period in which the receivable is recognized
multiplied by the amount of cash collected on that receivable during the period. The costrecovery method recognizes profit only after collections exceed the cost of the item sold, that
is, when the full cost has been recovered. Subsequent amounts collected are treated entirely
as realized gross profit.
during the accounting period determines the proportion of the gross profit on those sales that
is recognized during the period. Hence, both sales and cost of sales are deferred.
Answer (A) is incorrect because sales and cost of sales are recognized in proportion to cash
collections. Answer (C) is incorrect because only the gross profit (sales - cost of sales) is
deferred on sales for which cash has not yet been collected. Answer (D) is incorrect because
only the gross profit (sales - cost of sales) is deferred on sales for which cash has not yet been
collected.
6.
7.
8.
Answer (A) is incorrect because, if repossessed goods are recorded at selling price, a loss
would occur upon resale if reconditioning or selling costs were incurred. Answer (B) is
incorrect because the installment receivable minus the associated deferred gross profit is
usually not equal to the net realizable value of the asset. Answer (C) is incorrect because
recording at net realizable value precludes recognition of profit upon resale.
9.
10.
Answer (C) is correct. Under the cost-recovery method, no revenue is recognized until cash
payments by the buyer exceed the seller's cost of the merchandise sold. This method is
appropriate when collection of the revenue is very uncertain.
Answer (A) is incorrect because the accrual basis recognizes revenue on the date of the
installment sale. Answer (B) is incorrect because the installment basis recognizes revenue in
proportion to the cash collections. Answer (D) is incorrect because, after the cash collections
equal the cost of sales, revenue is to be recognized for any further collections.
11.
12.
REQUIRED: The basis for recognition of sales revenue and related costs of goods sold for
goods on consignment.
DISCUSSION: (C) Under a consignment sales arrangement, the consignor ships
merchandise to the consignee who acts as agent for the consignor in selling the goods. The
goods are in the physical possession of the consignee but remain the property of the
consignor and are included in the consignors inventory count. Sales revenue and the related
cost of goods sold from these consigned goods should be recognized by the consignor only
when the merchandise is sold and delivered to the ultimate borrower. Accordingly, recognition
occurs when notification is received that the consignee has sold the goods.
Answer (A) is incorrect because, at the date of shipment, the goods are still the property of the
consignor. Answers (B) and (D) are incorrect because the consignee does not recognize
sales revenue or cost of goods sold for these goods. The consignee recognizes commission
revenue only when the goods are sold and delivered to the third party.
13.
Answer (D) is correct. Under a consignment sales arrangement, the consignor ships
merchandise to the consignee who acts as agent for the consignor in selling the goods. The
goods are in the physical possession of the consignee but remain the property of the
consignor and are included in the consignor's inventory count. Sales revenue and the related
cost of goods sold from these consigned goods should only be recognized by the consignor
when the merchandise is sold and delivered to the final customer. Accordingly, recognition
occurs when notification is received that the consignee has sold the goods.
Answer (A) is incorrect because the revenue has not been realized or earned at this time and
should not be recognized. Answer (B) is incorrect because the revenue has not been realized
or earned at this time and should not be recognized. Answer (C) is incorrect because the
revenue has not been realized or earned at this time and should not be recognized.
14.
REQUIRED: The consignees classification of freight costs paid by the consignee on behalf of
the consignor.
DISCUSSION:
The consignee should debit consignment-in for the freight costs.
Consignment-in is a receivable-payable account used by consignees. It represents the
amount payable to the consignor if it has a credit balance. If it has a debit balance, it reflects
the amount receivable from the consignor. Before consigned goods are sold, expenditures
chargeable to the consignor are recorded in the consignment-in account as receivable. After
the consigned goods are sold, the consignees net liability to the consignor is reflected in the
account.
Answers (A), (B), and (C) are incorrect because the freight costs constitute a receivable.
15.
Answer (B) is correct. ABC debits the cash received $43,000 [$50,000 sales - $2,000
advertising - (.10 x $50,000) sales commission]. The advertising and commission expenses
are debited for $2,000 and $5,000, respectively. Finally, $50,000 of gross revenue is credited.
Answer (A) is incorrect because the freight was paid earlier in the period and would have been
recorded then by a credit to cash and a debit to inventory. Thus, the freight costs will be
released to income via cost of goods sold. Answer (C) is incorrect because the 10%
commission and the advertising costs are ignored in this answer. Answer (D) is incorrect
because the reimbursable advertising costs are ignored in this answer.
16.
REQUIRED: The reporting of deferred gross profit relating to collections beyond that balance
sheet date.
DISCUSSION: (C) Under the installment method, a credit sale is recorded by debiting a
receivable and crediting inventory and deferred gross profit. Revenue is recognized only when
cash is collected. Because the essence of an installment sale is an equal change in
receivables and inventory, the deferred gross profit account serves to reduce the asset
valuation to the unrecovered cost of goods sold. Accordingly, deferred gross profit account
serves to reduce the asset valuation to the unrecovered cost of goods sold. Accordingly,
deferred gross profit functions as an asset valuation (contra account). The installment
receivables (and related valuation accounts) should be classified in the current asset section
of the balance sheet if they are collectible within the operating cycle. All of Deb Co.s
installment contracts are for 36 months. They are apparently related to normal operations and
should be classified as current.
Answers (A) and (B) are incorrect because deferred gross profit is not a liability. It does not
entail a probable future sacrifice of economic benefits. Answer (D) is incorrect because the
installment receivables are current assets.