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Accounting 381

Quiz 2, Section 12:00 – 1:50 A
Score _____/ 15

Name:_______________________

Use the following information for questions 1 and 2.
Ramos, Inc. began work in 2007 on contract #3814, which provided for a contract price of
$7,200,000. Other details follow:
2007
2008
Costs incurred during the year
$1,200,000
$3,675,000
Estimated costs to complete, as of December 31
3,600,000
0
Billings during the year
1,350,000
5,400,000
Collections during the year
900,000
5,850,000
1. Assume that Ramos uses the percentage-of-completion method of accounting. The portion of the total
gross profit to be recognized as income in 2007 is
a. $450,000.
b. $600,000.
c. $1,800,000.
d. $2,400,000.
Construction Expense
CIP (DR or CR)
Revenue (D/E * Tot Rev)

1,200,000
600,000

Cost to Date (D)
Total Estimated costs (E)
Contract Revenue
Total
Previous Revenue Recognized
Current Revenue Recognized

1,200,000
4,800,000

1,800,000

-

25%
7,200,000
1,800,000
0
1,800,000

2. Assume that Ramos uses the completed-contract method of accounting. The portion of the total gross
profit to be recognized as income in 2008 is
a. $900,000.
b. $1,350,000.
c. $2,325,000.
d. $7,200,000.
Construction expense
CIP
Billings
Contract revenue

Contract revenue
less: construction expense
Gross profit

4,875,000
4,875,000
7,200,000
7,200,000

7,200,000
4,875,000
2,325,000

Progress billings as income. 4.000.000 .500 Total Estimated costs (E) 625.500 75.500 $302. 302. as a current asset if debit balance.500 47.500 Previous Rev Recog Current Revenue Recog 0 - 262. $ 27.000 30% 490. and current liability if credit balance.000 425.500 Cost to Date (D) 187.000 325. 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. Data for each year of the contract are as follows: 2003 2004 2005 $187.000 70% 700.000 Costs incurred during the year 437.000 302.500 2003 2004 DR CIP CR DR 187. c. $490.000 Total 262.500 CIP 187. $150.500 612.000 d.500 302. etc.000 CR 350.3.500 302.500 612. construction in progress as a deferred expense.500 350.500 CIP (DR or CR) 75. Net.500 Revenue (D/E * Tot Rev) 262.000 312.500 Billings 125.000 Contract Revenue 875.000 c. Progress billings as deferred income.500 187.500 210. In 2003 a construction company began work on a contract with a price of $875. the balance of the Construction in Progress account at the end of 2004 would be a. b.500 262. $612.500 $210.000 Collections Under the percentage-of-completion method of revenue recognition. construction in process as inventory. Net.000 -0Estimated costs to complete 150.500 412. d.000 and estimated costs of $625.500 Cash/AP.000 47.000 875.500 b. and loss from construction if debit balance.500 Construction Expense 187. as income from construction if credit balance.

if Nemo. 0 250. appropriately used the installment method of accounting to recognize income in its financial statement. 250. $220.000 Collections during year: On 2007 sales On 2008 sales 250.5.000 d. Some pertinent data relating to this method of accounting include: 2007 2008 Installment sales $750.000 $900. 300.000 630.000 250.000 d. Inc.000 c.000 c. $ 0 $100. none of the listed answers 2007 $0 2008 $50.000 b.000 300. $165.000 What amount to be realized gross profit should be reported on Nemo’s income statement for 2008? a.000 6.000 b.000 270.000 Cost of sales 450.000 = 190. $270.000 e. none of the listed answers 40% X 250. $190. In the problem above. Inc.000 . instead used the cost recovery method of accounting to recognize income in its financial statement. how much total realized gross profit would be reported on Nemo’s income statement for 2007 and 2008? 2007 2008 a. Nemo.000 e.000 $270.000 Gross profit $300.000 550.000 + 30% X 300.

000 Cost of installment sales 980. Lamberson Company has used the installment method of accounting since it began operations at the beginning of 2008.000.000 The amount to be reported on the December 31.000 e.7. $252. $168.000 Collections of installment sales 560. The cost–recovery method 9.400.000 168.000 560.000 Deferred gross profit 420.400.000. b.000 980. The following information pertains to its operations for 2008: Installment sales $ 1.000 1. d. At the date of delivery (sales method) c.400. c. A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Anticipated losses are recognized immediately under which of the following methods of recognizing revenue? Percentage of Completion a.000 Cash Installment AR 560. At the time of completion of the equipment (completion of production method) b.000 168. 2008 balance sheet as Deferred Gross Profit should be a. c. $840.000 8. b. none of the listed answers 2008 J/E Installment AR Installment Sales 1.000 Installment Sales Cost of goods sold Deferred GP 1. $336.000 168.400.000. The installment-sales method d. Yes No Yes No Completed Contract No No Yes Yes .000 980.000 General and administrative expenses 140.000 Deferred GP Realized GP (I/S) 168.000 Cost of goods sold Inventory 980. d.000 252.000 420. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported? a.

. The seller's price is substantially fixed or determinable at time of sale. The FASB concluded that if a company sells its product but gives the buyer the right to return the product. b. but the percentage-ofcompletion method should defer the loss until the contract is completed. 13. c. regardless of whether the percentage-of-completion or completed-contract method is employed. b. but the completed-contract method should defer recognition of the loss to the time when the contract is completed. Accounts Receivable XX Partial Billings XX d. percentage of completion 11. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product. Revenues are realized when a company exchanges goods and services for cash or claims to cash. installment method c. c. d. regardless of whether the percentage-of-completion or completed-contract method is employed. d. the entire expected loss should be a. The buyer is obligated to pay the seller upon resale of the product. In this case. recognized in the current period under the completed-contract method. Partial Billings XX Construction Revenue XX b. revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. Which one of the following entries would you probably not see if an entity used the percentage-ofcompletion method? a. 14. Inventory is reported at cost plus gross profit recognized to date under which of the following revenue recognition methods? a. recognized in the current period. completed contract b. cost recovery d. The amount of future returns can be reasonably estimated. Which of the following is not one of these six conditions? a.10. Partial Billings XX Construction in Progress XX 12. Construction Expense XX Construction in Progress XX Construction Revenue XX c. deferred and recognized when the contract is completed. (Circle one) True False 15. recognized in the current period under the percentage-of-completion method. True or False: Delayed recognition of revenue is appropriate if the sale does not represent substantial completion of the earnings process.

True False .