You are on page 1of 27

FINANCIAL ACCOUNTING

THEORY & PRACTICE


REVENUE & EXPENSE RECOGNITION
QUIZZER
FINANCIAL ACCOUNTING

Essay Questions: Recognition Principles


Revenue & Expense Recognition

RECOGNITION PRINCIPLES

Essay Questions – Revenue Recognition

Sale of goods

1. What are the conditions for the recognition of revenue from the sale of goods?

PAS 18, paragraph 14, provides the following conditions for the recognition of revenue from
sale of goods:

1. The entity has transferred to the buyer the significant risks and rewards of ownership of
the goods.
2. The entity retains neither continuing managerial involvement nor effective control over
the goods sold.
3. The amount of revenue can be measured reliably.
4. It is probable that economic benefits associated with the transaction will flow to the entity.
5. The costs incurred or to be incurred in respect of the transaction can be measured reliably.

2. What are the situations in which an entity may retain the significant risks and rewards of
ownership?

PAS 18, paragraph 16, provides that an entity may retain the significant risks and rewards of
ownership in the following situations:
1. When the seller retains an obligation for unsatisfactory performance not covered by
normal warranty provision.
2. When the receipt of revenue from a particular sale is contingent on the derivation of
revenue by the buyer from its sale of goods.
3. When the goods are shipped subject to installation and the installation is a significant
part of the contract which has not yet been completed by the seller.
4. When the buyer has the right to rescind the purchase for a reason not specified in the
sale contract and the seller is uncertain about the probability of the return.

3. What are the exceptions to the "point of sale" realization principle?

a. Installment method - Revenue is recognized at the point of collection. The amount of


revenue is determined by multiplying the gross profit rate by the amount of collections.
The reason for this approach is the uncertainty of collection or the possibility of
cancelation of the installment sales contract.

Essay: Revenue & Expense Recognition Page 1


FINANCIAL ACCOUNTING

b. Cost recovery or sunk cost method - Revenue is recognized also at the point of
collection. However, unlike the installment method, all collections are first applied to the
cost of the merchandise sold. When the cost of the merchandise sold is fully recovered
through collections, then all subsequent collections are considered revenue.

c. Cash method - Revenue is recognized when received regardless of when earned. In


other words, all collections are treated as revenue. There are no accruals and deferrals.

d. Percentage of completion method - When the outcome of a construction contract can be


estimated reliably, contract revenue and contract costs associated with the construction
contract shall be recognized as revenue and expenses, respectively, by reference to the
stage of completion of the contract activity.

e. Production method - Revenue is recognized at the point of production. This method is


applicable to agricultural, forest and mineral products. The production method is allowed
when a sale is assured under a forward contract or a government guarantee, or when a
homogeneous market exists and there is a negligible risk of failure to sell.

Revenue from rendering of services


4. What are the conditions for the recognition of revenue from rendering of services?

PAS 18, paragraph 19, provides the following conditions for the recognition of revenue from
rendering of services:

1. The amount of revenue can be measured reliably.


2. It is probable that the economic benefits associated with the transaction will flow to the
entity.
3. The stage of completion of the transaction at the end of reporting period can be
measured reliably.
4. The costs incurred for the transaction and the costs to complete can be measured
reliably.

Revenue from interest, royalties & dividends


5. Explain briefly the recognition of revenue from interest, royalties and dividends.

PAS 18, paragraph 30, provides the following guidelines:

1. Interest revenue shall be recognized on a time proportion basis that takes into account
the effective yield on the asset.

Essay: Revenue & Expense Recognition Page 2


Revenue & Expense Recognition

2. Royalties shall be recognized on an accrual basis in accordance with the substance of


the relevant agreement.

3. Dividends shall be recognized as revenue when the shareholder's right to receive


payment is established, meaning, when the dividends are declared.

Installation fees, subscription fees, admission fees, tuition fees


6. Explain briefly the income recognition from installation fees, subscription fees, admission fees
and tuition fees.

1. Installation fees are recognized as revenue over the period of installation by reference
to the stage of completion.

2. Subscription fees should be recognized as revenue on a straight line basis over the
subscription period.

3. Admission fees are recognized as revenue when the event takes place.

4. Tuition fees are recognized as revenue over the period in which tuition is provided.

Essay Questions – Expense Recognition

7. What do you understand by the "matching principle"?

The expense recognition principle is the application of the matching principle. The generation
of revenue is not without any cost. There has got to be some cost in earning a revenue.
"There is no gain if there is no pain".
Accordingly, the matching principle requires that "those costs and expenses incurred in
earning a revenue should be reported in the same period". In other words, there should be
simultaneous or combined recognition of revenue and expenses that result directly from the
same transactions and events. The basic expense recognition principle means that
"expenses are recognized when incurred". But the question is when are expenses incurred?

Expenses are incurred in conformity with the three applications of the matching principle,
namely:
a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition

Essay: Revenue & Expense Recognition Page 3


FINANCIAL ACCOUNTING

8. Explain briefly the "cause and effect association principle".

The cause and effect association principle means that "the expense is recognized when the
revenue is already recognized" on the basis of a presumed direct association of the expense
with specific revenue. This is actually the "strict matching concept".

The best example is the cost of merchandise inventory. Such cost is considered as an asset
in the meantime that the merchandise is on hand. When the merchandise is sold, the cost
thereof is expensed in the form of "cost of sales" because at such time revenue may be
recognized. Other examples include doubtful accounts, warranty expense and sales
commissions.

9. Explain briefly the "systematic and rational allocation principle".

Under the systematic and rational allocation principle, some costs are expensed by simply
allocating them over the periods benefited. The reason for this principle is that the cost
incurred will benefit future periods and that there is an absence of a direct or clear association
of the expense with specific revenue.

When economic benefits are expected to arise over several accounting periods and the
association with income can only be broadly or indirectly determined, expenses are
recognized on the basis of systematic and allocation procedures. Concrete examples include
depreciation, amortization and allocation of prepayments.

10. Explain briefly the "immediate recognition principle".

Under immediate recognition principle, the cost incurred is expensed outright because of
uncertainty of future economic benefits or difficulty of reliably associating certain costs with
future revenue. Actually, this principle reflects a conservative or prudent approach which is
the accountant's general guide for dealing with uncertain situations.

An expense is recognized immediately when an expenditure produces no future economic


benefits or when future economic benefits do not qualify, or cease to qualify for recognition
in the statement of financial position as an asset.

Essay: Revenue & Expense Recognition Page 4


Revenue & Expense Recognition

11. Give examples of expenses that are recognized immediately.

Examples include officers' salaries and most administrative expenses, advertising and most
distribution costs, amount to settle lawsuit and worthless intangible assets.

Many losses, such as loss from disposal of building, loss from sale of investments, and
casualty loss, are immediately recognized because these are not directly related to specific
revenue.

MCQ – Theory: Revenue & Expense Recognition


Revenue recognition principle
1. The term "revenue recognition" conventionally refers to
A. The earning process which gives rise to revenue realization. FA © 2014
B. The process of measuring and relating revenue and expenses during a period.
C. The process of identifying those transactions that result in an inflow of assets to the
entity.
D. The process of identifying transactions to be recorded as revenue in an accounting
period.
2. Which of the following statements describes the revenue recognition principle?
A. Cash is received and the amount is material.
B. Cash is realized or realizable and production is complete.
C. Production is complete and there is an active market for the product.
D. It is probable that future economic benefit will flow to the entity and the amount can be
measured reliably. FA © 2014
3. The revenue principle states that revenue shall be recognized at a point when
A. A contract between buyer and seller has been signed by both parties.
B. An order for shipment of a definite amount of merchandise has been received.
C. An exchange transaction involving goods and services has occurred and the earning
process is essentially complete.
D. The seller has shipped merchandise to a customer under the terms that the customer
need not pay for the merchandise until it is sold. FA © 2014
4. Which of the following best describes the conditions that must be present for the recognition
of revenue?
A. The revenue must be earned and collectible.
B. The revenue must be measurable and collectible.
C. The revenue must be earned, measurable and collected.
D. The revenue must be earned, measurable and collectible. FA © 2014

MCQ – Theory: Revenue & Expense Recognition Page 5


FINANCIAL ACCOUNTING

5. Which of the following bases of revenue recognition reflects the greatest degree of
uncertainty about future events?
A. Production method for a gold mining operation
B. Sales method applied to sales of a department store
C. Percentage of completion on a construction contract
D. Cost recovery method applied to an installment sales contract FA © 2014

Revenue from sale of goods


6. Generally, revenue from sale of goods shall be recognized at a point when
A. Management decides it is appropriate to do so.
B. The product is available for sale to the ultimate consumer.
C. The entity has transferred to the buyer the significant risks and rewards of ownership of
the goods.
D. The entire amount receivable has been collected from the customer and there remains
no further warranty liability. FA © 2014

7. Which would indicate that "risks and rewards" of ownership have been transferred to the
buyer?
A. When revenue from sale is contingent on the sale of the 
goods by the buyer.
B. When the seller retains an obligation for unsatisfactory 
performance not covered by
warranty.
C. When the buyer has a right to return and the seller 
can reliably estimate future returns
based on past 
experience.
D. When the goods are subject to installation which is a 
significant part of the contract and
the installation is not yet completed. TOA © 2013

8. Normally, revenue is recognized


A. When the order is received.
B. When the title to the goods changes.
C. When the order is accompanied by a check.
D. Only if the transaction will create an account receivable. FA © 2014

9. Which of the following criteria must not be satisfied before revenue from the sale of goods
shall be recognized?
A. Revenue can be reliably measured.
B. Ownership has been transferred to the buyer.
C. Managerial control over the goods sold has been relinquished. FA © 2014
D. Significant risks and rewards of ownership have been transferred from the seller to the
buyer.

MCQ – Theory: Revenue & Expense Recognition Page 6


Revenue & Expense Recognition

10. If the seller retains significant risks and rewards of ownership, the transaction is not regarded
as sale for purposes of recognizing revenue. Which of the following situations would signify
that "risks and rewards" have been transferred to the buyer and therefore revenue should be
recognized?
A. When the seller retains an obligation for unsatisfactory performance not covered by
normal warranty provision.
B. When the receipt of revenue from a particular sale is contingent on the derivation of
revenue by the buyer from its sale of the goods.
C. When the goods are shipped subject to installation and the installation is a significant
part of the contract which has not yet been completed by the seller. TOA © 2013
D. When the buyer has a right to return the goods or right to seek a refund and the seller
can reliably estimate the future returns based on past experience and other relevant
factors.

11. Revenue from sale of goods shall be recognized when all of the following conditions have
been satisfied, except
A. The amount of revenue can be measured reliably.
B. It is probable that economic benefits will flow to the entity.
C. The entity retains either continuing managerial involvement or effective control over the
goods sold.
D. The entity has transferred to the buyer the significant risks and rewards of ownership of
the goods. FA © 2014

12. Generally, recognition criteria are met and revenue is recognized


A. At the point of sale.
B. At the point of cash collection.
C. When cause and effect are associated.
D. At appropriate points throughout the operating cycle. FA © 2014

13. An entity is a large manufacturer of machines. A major customer has placed an order for a
special machine for which it has given a deposit to the entity. The parties have agreed on a
price for the machine. As per the terms of the sale agreement, it is free on board contract and
the title passes to the buyer when goods are loaded into the ship at the port. When should
the revenue be recognized by the entity?
A. When the deposit is received.
B. When the machine is loaded at the port.
C. When the customer orders the machine.
D. When the machine has been received by the customer. TOA © 2013

MCQ – Theory: Revenue & Expense Recognition Page 7


FINANCIAL ACCOUNTING

14. A wholesale bakery would normally recognize revenue when


A. Management chooses to do so
B. Cash is received from the customer
C. Goods are delivered to the customer
D. The product is available for sale to a customer FA © 2014

15. An entity placed an order with a manufacturer for new specialized machinery. The order was
noncancelable and the entity agreed to pay for the machinery at the time the order was
signed. The manufacturer held the machinery until the date on which it was completed. The
entity commenced using the machinery when the manufacturer completed the installation
process. The manufacturer had staff on standby to deal with any operating problems until the
warranty period has ended. When shall the manufacturer recognize the revenue from the
sale of this specialized machinery?
A. The date of completion
B. The date the order was signed
C. The date when the warranty period has ended
D. The date when the installation process was completed TOA © 2013

16. Under what condition is it proper to recognize revenue prior to the sale of the merchandise?
A. When the concept of consistency is complied with.
B. When the revenue is to be reported as an installment sale.
C. When management has a long-established policy to do so.
D. When the ultimate sale of the goods is at an assured sales price. TOA © 2013

17. It is proper to recognize revenue prior to the sale of merchandise when


I. The revenue will be reported as an installment sale.
II. The revenue will be reported under the cost recovery method.
A. I only C. Both I and II
B. II only D. Neither I nor II TOA © 2013

18. Sales where the goods are delivered only when the buyer makes final payment are called
A. Layaway sales C. Consignment sales TOA © 2013
B. Bill and hold sales D. Sales subject to installation or inspection

19. Sales in which the buyer is not yet ready to take delivery but does take title are known as
A. Barter sales C. Layaway sales
B. Bill and hold sales D. Sales with buyback TOA © 2013

MCQ – Theory: Revenue & Expense Recognition Page 8


Revenue & Expense Recognition

20. "Bill and hold" sales, in which delivery is delayed at the buyer's request but the buyer assumes
title and accepts invoicing, shall be recognized when
A. The buyer makes an order.
B. The seller starts manufacturing the goods.
C. The title has been transferred but the goods are kept on 
the seller's premises.
D. It is probable that the delivery will be made, payment 
terms have been established and
the buyer has 
acknowledged the delivery instructions. TOA © 2013

21. A sale should not be recognized as revenue at the time of sale if


A. Payment was made by check.
B. The sale price is less than the normal sale price.
C. The buyer has a right to return and the amount of future returns cannot be reliably
estimated.
D. None of these TOA © 2013

22. An entity has come out with an offer to refund the cost of purchase within one month after
the sale if the customer is not satisfied with the product. When should the entity recognize
the revenue?
A. After one month of sale.
B. When goods are sold to the customers.
C. Only if goods are not returned by the customers after 
the period of one month.
D. At the time of sale with an offset to revenue of the 
liability of same amount for the
possibility of the return. TOA © 2013

23. Which of the following may not be an acceptable deviation from recognizing revenue at the
point of sale?
A. During production C. Upon receipt of cash
B. End of production D. Upon receipt of order FA © 2014

24. Depending on the nature of the entity, revenue may be recognized based on different
acceptable criteria. Which of the following is not an accepted basis for recognition of
revenue?
A. Completion of percentage of a project C. Performance of service
B. Passage of time D. Upon signing of contract FA © 2014

25. Which of the following represents the least desirable choice in terms of realization and
recognition of revenue?
A. During production C. When cash is collected FA © 2014
B. When a sale occurs D. When production is completed

MCQ – Theory: Revenue & Expense Recognition Page 9


FINANCIAL ACCOUNTING

Revenue for transactions involving the rendering of services


26. Which of the following conditions does not apply to the recognition of revenue for transactions
involving the rendering of services?
A. It is probable that payment for the services shall be received by the entity.
B. The significant risks and rewards of ownership have been transferred to the buyer.
C. The amount of revenue and the costs incurred and costs to complete can be measured
reliably.
D. The stage of completion of the transaction at the end of reporting period can be
measured reliably. TOA © 2013
27. Which of the following conditions does not apply to the recognition of revenue for transactions
involving the rendering of services?
A. The amount of revenue can be measured reliably.
B. It is probable that payment for the services shall be received by the entity.
C. The significant risks and rewards of ownership have been transferred to the buyer.
D. The costs incurred for the transaction and the costs to complete the transaction can be
measured reliably. FA © 2014

28. One of the conditions that must be satisfied in order to recognize revenue in a transaction
involving the rendering of services is that the stage of completion of the transaction at the
end of reporting period can be measured reliably.
Which of the following is not a method for determining the stage of completion of a contract
involving the rendering of services?
A. Survey of work performed.
B. Advances received to date as a percentage of the total amount receivable.
C. Costs incurred to date as a percentage of the estimated total costs of the transaction.
D. Services performed to date as a percentage of the total services to be performed under
the contract. TOA © 2013

29. Which is incorrect concerning recognition of revenue from rendering of services?


A. Tuition fees are recognized as revenue over the period in which tuition is provided.
B. Magazine subscriptions usually are recognized on a straight line basis over the
subscription period.
C. Installation fees are recognized over the period of installation by reference to the stage
of completion.
D. Admission fees for a musical concert are recognized when received regardless of when
the event takes place. FA © 2014

MCQ – Theory: Revenue & Expense Recognition Page 10


Revenue & Expense Recognition

Real estate transactions


30. In which of the following examples of real estate transactions would the seller not transfer the
usual risks and rewards of ownership?
I. The buyer can compel the seller to repurchase the property.
II. The seller guarantees the return of the buyer's investment.
III. The seller is required to support operations of the buyer and will be reimbursed on a cost
plus 5% basis.
A. I only C. I, II and III
B. II only D. I and II only TOA © 2013

Revenue from interest, royalties & dividends


31. Revenue from an artistic performance is recognized once
A. The event takes place.
B. The tickets for the concert are sold.
C. The audience register for the event online.
D. Cash has been received from the ticket sales. FA © 2014

Installment method
32. The installment method of recognizing revenue
A. Should be used for book purposes only if it is used for tax purposes.
B. Is not a generally accepted accounting principle under any circumstances.
C. Is an acceptable alternative accounting principle for an entity that makes installment
sales.
D. Should be used only in cases in which no reasonable basis exists for estimating the
collectibility of receivables. TOA © 2013

33. Under which of the following circumstances is the installment sales method appropriate for
the recognition of revenue?
A. For any sales where collection is spread over a reasonable long period of time.
B. In any situation where management wishes to delay the recognition of revenue in order
to smooth its income.
C. For sales where collection is spread over a reasonable long period of time and significant
doubt exists about the ultimate collection of the receivables.
D. For sales where collection is spread over a reasonable long period of time and no
significant doubt exists concerning ultimate collection of the receivables. TOA © 2013

MCQ – Theory: Revenue & Expense Recognition Page 11


FINANCIAL ACCOUNTING

34. When should an entity use the installment method of revenue recognition?
A. When collectibility of installment accounts receivable is reasonably predictable.
B. When repossessions of merchandise on the installment plan may. result in a future gain
or loss.
C. When installment sales are material, and there is no reasonable basis for estimating
collectibility.
D. When collection expenses and bad debts on installment accounts receivable are
deemed to be immaterial. TOA © 2013

35. For financial statement purposes, the installment method of accounting may be used if the
A. Installments are due in different years
B. Ultimate amount collectible is indeterminate
C. Percentage of completion method is inappropriate
D. Collection period extends over more than 12 months TOA © 2013

36. When using the installment sales method


A. Gross profit is recognized only after the amount of cash collected exceeds the cost of
the item sold.
B. Revenue, costs and gross profit are recognized proportionally as the cash is received
from the sale of product.
C. Gross profit is deferred until all cash is received, but revenue and costs are recognized
in proportion to the cash collected from the sale.
D. Total revenue 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. TOA © 2013

37. Income recognized using the installment method of accounting generally equals cash
collected multiplied by
A. Net profit percentage
B. Gross profit percentage
C. Net profit percentage adjusted for expected uncollectible accounts
D. Gross profit percentage adjusted for expected uncollectible accounts TOA © 2013

38. According to the installment method of accounting, gross profit on an installment sale is
recognized in income
A. On the date of sale.
B. In proportion to the cash collection.
C. On the date the final cash collection is received.
D. After cash collections equal to the cost of sales have been received. TOA © 2013

MCQ – Theory: Revenue & Expense Recognition Page 12


Revenue & Expense Recognition

Cost recovery method


39. The cost recovery method
A. Is similar to percentage of completion accounting.
B. Is the most common method of accounting for real estate sales.
C. Is never acceptable under generally accepted accounting principles.
D. Is used only when circumstances surrounding a sale are so uncertain that earlier
recognition is impossible. TOA © 2013

40. An entity sells equipment on installment contracts. Which of the following statements best
justifies the use of the cost recovery method of revenue recognition to account for these
installment sales?
A. Sales are subject to a high rate of return.
B. There is no reasonable basis for estimating collectibility.
C. No cash payments are due until one year from the date of sale.
D. The sales contract provides that title to the equipment only passes to the purchaser when
all payments have been made. TOA © 2013

41. An entity is engaged in extensive exploration for water. If upon discovery of water, the entity
need not recognize any revenue from water sales until the sales exceed the costs of
exploration, the basis of revenue recognition being employed is
A. Accrual basis C. Production basis
B. Cash basis D. Sunk cost or cost recovery basis

42. According to the cost recovery method of accounting, gross profit on an installment sale is
recognized
A. On the date of sale
B. In proportion to the cash collections
C. On the date the final cash collection is received
D. After cash collections equal to the cost of sales have been received TOA © 2013

Realization
43. Which of the following in the most precise sense means the process of converting noncash
resources and rights into cash or claims to cash?
A. Allocation C. Realization
B. Collection D. Recognition FA © 2014

44. Gains on assets unsold are identified in a precise sense by the term
A. Unallocated C. Unrecognized
B. Unrealized D. Unrecorded FA © 2014

MCQ – Theory: Revenue & Expense Recognition Page 13


FINANCIAL ACCOUNTING

45. Which of the following statements conforms to the realization concept?


A. Cash was collected on accounts receivable
B. Depreciated equipment was sold in exchange for a note receivable
C. Product unit costs were assigned to cost of goods sold when the units were sold.
D. Equipment depreciation was assigned to a production department and then to product
unit cost TOA © 2013

Comprehensive
46. Which of the following statements in relation to the concept of "revenue" is true?
I. Transactions like issuance of share capital and payment of dividends between the entity
and the owners cannot give rise to revenue.
II. Deferred revenue is synonymous with unrealized revenue.
A. I only C. Both I and II
B. II only D. Neither I nor II TOA © 2013

47. Which is incorrect concerning recognition of revenue?


A. Dividend revenue shall be recognized when the shareholder's right to receive payment
is established.
B. Royalty revenue shall be recognized on an accrual basis in accordance with the
substance of the relevant agreement.
C. Interest revenue shall be recognized on a time proportion basis that does not take into
account the effective yield on the asset.
D. Revenue from rendering of services shall be recognized by reference to the stage of
completion of the transaction at the end of reporting period. FA © 2014

MCQ – Problems: Sales Revenue


Net sales
1. Lewis Company's usual sales terms are net 60 days, F.O.B. shipping point. Sales, net of
returns and allowances, totaled P9,200,000 for the year ended December 31,2014, before
year-end adjustments.

• On December 27,2014, Lewis authorized a customer to return, for full credit, goods
shipped and billed at P200,000 on December 15,2014. The returned goods were
received by Lewis on January 4,2015, and a P200,000 credit memo was issued and
recorded on the same date.
• Goods with an invoice amount of P300,000 were billed and recorded on January 3, 2015.
The goods were shipped on December 30,2014.
• Goods with an invoice amount of P400,000 were billed and recorded on December 30,
2014. The goods were shipped on January 3,2015.

MCQ – Problems: Revenue & Expense Recognition Page 14


Revenue & Expense Recognition

What is the correct amount of net sales for 2014?


A. 8,900,000 C. 9,100,000
B. 9,000,000 D. 9,300,000 P1 © 2014

2. White Company's usual sales terms are net 60 days, FOB shipping point. Sales, net of returns
and allowances, totaled P5,000,000 for the year ended December 31, 2014, before year-end
adjustment.

 On December 27, 2014, White Company authorized a customer to return, for full credit,
goods shipped and billed at P50,000 on December 15, 2014. The returned goods were
received by White Company on January 4,2015, and a P50.000 credit memo was issued
on the same date.
 Goods with an invoice amount of P300,000 were billed to a customer on January 3,
2015. The goods were shipped on December 31, 2014.
 Goods with an invoice amount of P200,000 were billed and recorded on December 30,
2014. The goods were shipped on January 3, 2015.

What amount of net sales should be reported for the current year?
A. 4,750,000 C. 5,050,000
B. 4,950,000 D. 5,250,000 FA © 2014

3. Emco Company had the following transactions in 2014:


• Emco sold goods to a customer for P50,000, FOB shipping point on December 30,2014.
• Emco sold three pieces of equipment on a contract over a three-year period. The sale
price of each piece of equipment is P100,000. Delivery of each piece of equipment is on
February 10 of each year. In 2014, the customer paid a P200,000 down payment, and
will pay P50,000 per year in 2015 and 2016. Collectibility is reasonably assured.
• On June 1,2014, Emco signed a contract for P200,000 for goods to be sold on account.
Payment is to be made in two installments of P100,000 each on December 1,2014 and
December 1,2015. The goods are delivered on October 1, 2014. Collection is
reasonably assured and the goods may not be returned.
• Emco sold goods to a customer on July 1,2014 for P500,000. If the customer does not
sell the goods to retail customers by December 31, 2015, the goods can be returned to
Emco. The customer sold the goods to retail customers on October 1,2015.
What amount of sales revenue should be reported in the income statement for 2014?
A. 350,000 C. 550,000
B. 450,000 D. 850,000 FA © 2014

MCQ – Problems: Revenue & Expense Recognition Page 15


FINANCIAL ACCOUNTING

4. Purple Company had sales of P4,000,000 during December of the current year. Experience
has shown that merchandise equaling 7% of sales will be returned within 30 days and an
additional 3% will be returned within 90 days. Returned merchandise is readily resalable. In
addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or
greater value. What amount should be reported for net sales for the month of December?
A. 3,000,000 C. 3,400,000
B. 3,120,000 D. 3,600,000 FA © 2014

5. Fenn Company had sales of P5,000,000 during December 2014. Experience had shown that
merchandise equaling 7% of sales will be returned within 30 days and an additional 3% will
be returned within 90 days. Returned merchandise is readily resalable. In addition,
merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater
value. What amount should be reported for net sales in the income statement for the month
of December 2014?
A. 3,750,000 C. 4,250,000
B. 3,900,000 D. 4,500,000 P1 © 2014

6. On October 1,2014, Acme Company sold 100,000 gallons of heating oil to Karn Company at
P30 per gallon. Fifty thousand gallons were delivered on December 15,2014, and the
remaining 50,000 gallons were delivered on January 15,2015. Payment terms were: 50%
due on October 1, 2014, 25% on the first delivery, and the remaining 25% due on the second
delivery. What amount of revenue should be recognized from the sale during 2014?
A. 750,000 C. 2,250,000
B. 1,500,000 D. 3,000,000 FA © 2014

7. On January 1, 2014, Bell Company contracted with the City of Manila to provide custom built
desks for the city schools. The contract made Bell the city's sole supplier and required Bell
to supply no less than 4,000 desks and no more than 5,500 desks per year for two years. In
turn, the City of Manila agreed to pay a fixed price of P550 per desk. During 2014, Bell
produced 5,000 desks for the City of Manila. On December 31,2014, 500 of these desks were
segregated from the regular inventory and were accepted and awaiting pickup by the City of
Manila. The City of Manila paid Bell P2,250,000 during 2014. What amount should be
recognized as contract revenue in 2014?
A. 2,250,000 C. 2,750,000
B. 2,475,000 D. 3,025,000 FA © 2014

MCQ – Problems: Revenue & Expense Recognition Page 16


Revenue & Expense Recognition

8. Abode Company sold merchandise for P800,000 to a customer on December 31, 2014. The
terms of the sale agreement state that payment is due in one year's time. The entity has an
imputed rate of interest of 9%. The PV of 1 at 9% is .917 for one period. What amount of
sales revenue should be recognized from the transaction?
A. 0 C. 800,000
B. 793,600 D. 872,000 FA © 2014
9. On July 1,2014, Loveluck Company, a manufacturer of office furniture, supplied goods to
Kaye Company for P1,200,000 on condition that this amount is paid in full on July 1,2015.
Kaye had earlier rejected an alternative offer from Loveluck whereby it could have bought the
same goods by paying cash of P1,080,000 on July 1,2014. What amount should respectively
be recognized as sales revenue and interest income for the year ended June 30, 2015?
A. 1,080,000 and 0 C. 1,200,000 and 0
B. 1,080,000 and 120,000 D. 1,200,000 and 120,000 FA © 2014
10. On July 1,2014, Kathleen Company handed over to a client a new computer system. The
contract price for the supply of the system and after-sales support for 12 months was
P800,000. The entity estimated the cost of the after-sales support at P120,000 and it marked
up such cost by 50%o when tendering for support contracts. What is the total revenue that
should be recognized for 2014?
A. 0 C. 710,000
B. 620,000 D. 800,000 P1 © 2014

11. Ilocos Company produced 80,000 kilos of tobacco during the 2014 season. Ilocos sells all of
its tobacco to a certain customer which has agreed to purchase the entire production at the
prevailing market price. Recent legislation assures that the market price will not fall below
P100 per kilo during the next two years. The costs of selling and distributing the tobacco are
immaterial and can be reasonably estimated. Ilocos reports its inventory at expected exit
value. During 2014, Ilocos sold and delivered to the customer 60,000 kilos at the market price
of P100. Ilocos sold the remaining 20,000 kilos during 2015 at the market price of P150.
What amount of revenue should be recognized in 2014?
A. 3,000,000 C. 8,000,000
B. 6,000,000 D. 9,000,000 FA © 2014

12. Beverly Company provided service contracts to customers for maintenance of their electrical
system. On October 1,2014, the entity agreed to a four-year contract with a major customer
for P1,540,000. Costs over the period of the contract are reliably estimated at P513,330.
What amount of revenue should be recognized for the year ended December 31,2014?
A. 32,080 C. 128,330
B. 96,250 D. 385,000 P1 © 2014

MCQ – Problems: Revenue & Expense Recognition Page 17


FINANCIAL ACCOUNTING

13. Marie Company, a distributor of machinery, bought a machine from the; manufacturer in
November 2014 for P10,000. On December 30,2014, Marie sold this machine to Zoe
Company for PI5,000 under the following terms: 2% discount if paid within thirty days, 1 %
discount if paid after thirty days but within sixty days, or payable in full within ninety days if
not paid within the discount periods. However, Zoe had the right to return this machine to
Marie if it was unable to resell the machine before expiration of the ninety-day payment
period, in which case Zoe's obligation to Marie would be canceled. In the net sales for the
year ended December 31,2014, what amount should be included for the sale of this machine?
A. 0 C. 14,850
B. 14,700 D. 15,000 P1 © 2014

14. Yellow Company, a distributor of machinery, bought a machine from the manufacturer in
November 2014 for P500,000. On December 30, 2014, the entity sold this machine for
P750,000, under the following terms: 2% discount if paid within thirty days, 1% discount if
paid after thirty days but within sixty days, or payable in full within ninety days if not paid
within the discount periods. However, the customer had the right to return this machine to
Yellow Company if it was unable to resell the machine before expiration of the ninety-day
payment period, in which case the customer's obligation to Yellow Company would be
canceled. In the net sales for the year ended December 31, 2014, what amount should be
included for the sale of the machine?
A. 0 C. 742,500
B. 735,000 D. 750,000 FA © 2014

Comprehensive
Questions 1 thru 3 are based on the following information. P1 © 2014
Delicate Company is a wholesale distributor of automotive replacement parts. Initial amounts taken
from accounting records on December 31,2014 are as follows:

Inventory on December 31 based on physical count 1,250,000


Accounts payable 1,000,000
Sales l9,000,000

A. Parts held on consignment from another entity to Delicate, the consignee, amounting to
P165,000, were included in the physical count on December 31, 2014, and in accounts
payable on December 31,2014.
B. P20,000 of parts which were purchased and paid for in December 2014, were sold in the last
week of 2014 and appropriately recorded as sales of P28,000. The parts were included in the
physical count on December 31, 2014 because the parts were on the loading dock waiting to
be picked up by the customer.

MCQ – Problems: Revenue & Expense Recognition Page 18


Revenue & Expense Recognition

C. Parts in transit on December 31, 2014 to customers, shipped FOB shipping point on December
28, 2014, amounted to P34,000. The customers received the parts on January 6,2015. Sales
of P40,000 to the customers for the parts were recorded by Delicate on January 2,2015.
D. Retailers were holding P210,000 at cost and P250,000 at retail, of goods on consignment from
Delicate, at their stores on December 31,2014.
E. Goods were in transit from a vendor to Delicate on December 31, 2014. The cost of goods
was P25,000. The goods were shipped FOB shipping point on December 29,2014.

15. What is the correct amount of inventory?


A. 1,090,000 C. 1,320,000
B. 1,300,000 D. 1,334,000

16. What is the correct amount of accounts payable?


A. 835,000 C. 960,000
B. 860,000 D. 975,000

17. What is the correct amount of sales?


A. 9,000,000 C. 9,250,000
B. 9,040,000 D. 9,290,000

Collection from customers


18. On June 1, 2014 Compassion Company sold merchandise with a list price of P 1,000,000 to
a customer. The entity allowed trade discounts of 20% and 10%. Credit terms were 5/10,
n/30 and the sale was made FOB shipping point. The entity prepaid P50,000 of delivery cost
for the customer as an accommodation On June 11, 2014, what amount is received from the
customer as full remittance?
A. 684,000 C. 770,000
B. 720,000 D. 794,000 FA © 2014

Consignment
19. Dignity Company had the following consignment transactions during 2014:
Inventory shipped on consignment to a consignee 600,000
Freight paid by Dignity Company 50,000
Inventory received on consignment from a consignor 800,000
Freight paid by consignor 50,000
No sales of consigned goods were made through December 31, 2014. On December 31,
2014, what amount should be reported as consigned inventory?
A. 600,000 C. 850,000
B. 650,000 D. 1,500,000 FA © 2014

MCQ – Problems: Revenue & Expense Recognition Page 19


FINANCIAL ACCOUNTING

20. On October 1, 2014, Humility Company consigned 50 freezers to a consignee for sale at
P10,000 each and paid P20.000 in transportation cost. On December 30, 2014, the
consignee reported the sale of 40 freezers and remitted P340,000. The remittance was net
of the agreed 15% commission. What amount should be recognized as consignment sales
revenue for 2014?
A. 340,000 C. 425,000
B. 400,000 D. 500,000 FA © 2014

MCQ – Problems: Revenue & Expense Recognition Page 20


Revenue & Expense Recognition

21. On December 1, 2014, Gratitude Company received 1,000 sweaters on consignment from a
consignor. The cost for the sweaters was P800 each, and they were priced to sell at P1,000.
The commission on consigned goods is 10%. On December 31, 2014, 100 sweaters remained.
On December 31, 2014, what amount should be reported as payable for consigned goods?
A. 720,000 C. 900,000
B. 810,000 D. 1,000,000 FA © 2014

22. Blue Company provided the following for the current year:

Central warehouse Held by consignees


Beginning inventory 1,100,000 120,000
Purchases 4,800,000 600,000
Freight in 100,000
Transportation to consignees 50,000
Freight out 300,000 80,000
Ending inventory 1,450,000 200,000

What is the cost of goods sold for the current year?


A. 4,550,000 C. 5,070,000
B. 4,850,000 D. 5,120,000 FA © 2014

MCQ – Problems: Revenue & Expense Recognition Page 21


FINANCIAL ACCOUNTING

ANSWER KEY

1.D 31.A 1.A


2.D 32.D 2.C
3.C 33.C 3.A
4.D 34.C 4.D
5.D 35.B 5.D
6.C 36.D 6.B
7.C 37.B 7.C
8.B 38.B 8.B
9.B 39.D 9.B
10.D 40.B 10.C
11.C 41.D 11.C
12.A 42.D 12.B
13.B 43.C 13.A
14.C 44.C 14.A
15.D 45.B 15.B
16.D 46.A 16.B
17.D 47.C 17.B
18.A 18.D
19.B 19.B
20.D 20.B
21.C 21.B
22.B 22.D
23.D
24.D
25.C
26.B
27.C
28.B
29.D
30.D

MCQ – Problems: Revenue & Expense Recognition Page 22


Revenue & Expense Recognition

SOLUTIONS

1. Answer is (A).
Net sales per book 9,200,000
Sales returns ( 200,000)
Goods shipped on December 30, 2014 but recorded January 3, 2015 300,000
Goods shipped on January 3, 2015 erroneously
recorded on December 30, 2014 ( 400,000)
Adjusted net sales 8,900,000

2. Answer is (C).
Net sales per book 5,000,000
Sales return (50,000)
Goods shipped on Dec. 31, 2014 300,000
Goods shipped on January 3, 2015 recorded on Dec. 30, 2014 (200,000)
Adjusted net sales 5,050,000

3. Answer is (A).
Goods sold FOB shipping point 50,000
Delivery of one equipment on February 10,2014 100,000
Goods sold on account on October 1, 2014 200,000
Total sales revenue 350,000

4. Answer is (D).
Gross sales 4,000,000
Estimated sales return (10% x 4,000,000) (400,000)
Net sales 3,600,000

5. Answer is (D).
Gross sales 5,000,000
Estimated sales returns (10% x 5,000,000) ( 500,000)
Net sales 4,500,000
As a conservative approach, sales revenue should be reduced by the 10%> estimated probable
sales returns. However, the estimated exchanges of 15% will not result to reduction of sales.

6. Answer is (B). (50,000 x 30) 1,500,000

7. Answer is (C). Contract revenue (5,000x550) 2,750,000

MCQ – Problems: Revenue & Expense Recognition Page 23


FINANCIAL ACCOUNTING

8. Answer is (B).
Sales price 800,000
Multiple by PV of 1 at 9% for one period .917
Present value – actual sales revenue 793,600

9. Answer is (B).
Sales price 1,200,000
Cash price - actual sales revenue 1,080,000
Implied interest income 120,000
10. Answer is (C).
Contract price 800,000
Contract price of after-sales support (120,000 x 150%) (180,000)
Revenue from sale of computer system 620,000
Revenue from after-sales support (180,000 x 6 / 12) 90,000
Total revenue 710,000
11. Answer is (C).
Sales revenue in 2014 (80,000 x P100) 8,000,000
Revenue is recognized at the point of production for agricultural, mineral and forest product
when a sale is assured under a forward contract. The remainder of the sales in 2015 of
P1,000,000 (20,000 x P50) is recognized as revenue in 2015 and not a correction of 2014
revenue.
12. Answer is (B).
Revenue from October 1 to December 31, 2013
(1,540,000 / 4 years = 385,000 x 3 /12) 96,250
13. Answer is (D).
14. Answer is (A). Zero, since the customer has right to return the merchandise.
15. Answer is (B).
Inventory Accounts payable Net sales
Unadjusted 1,250,000 1,000,000 9,000,000
A ( 165,000) ( 165,000)
B (20,000)
C - - 40,000
D 210,000
E 25,000 25,000 -
Adjusted 1,300,000 860,000 9,040,000

MCQ – Problems: Revenue & Expense Recognition Page 24


Revenue & Expense Recognition

16. Answer is (B).

17. Answer is (B).

18. Answer is (C).


Invoice price (1,000,000 x .80 x .90) 720,000
Cash discount (5% x 720,000) (36,000)
Net amount 684,000
Freight charge 50,000
Total remittance 794,000

19. Answer is (B).


Inventory shipped on consignment 500,000
Freight paid 50,000
Consigned inventory 650,000

20. Answer is (B).


Consignment sales revenue (40 x P10,000) 400,000

21. Answer is (B).


Sales (900 x 1,000) 900,000
Commission (10% 900,000) (90,000)
Payable to consignor 810,000

22. Answer is (D).


Beginning inventory 1,220,000
Purchases 5,400,000
Freight-in (100,000+ 50,000) 150,000
Goods available for sale 6,770,000
Ending inventory (1,650,000)
Cost of goods sold 5,120,000

MCQ – Problems: Revenue & Expense Recognition Page 25