Wiley Basic Actg

A. Answer A is correct.
SFAC 1 states that information provided by financial

reporting pertains to individual business enterprises rather than to industries or an
Question: TREPA-0001 economy as a whole or to members of society as consumers.
Which of the following accounting pronouncements is the most authoritative? B. Answer B is incorrect. Refer to the correct answer explanation.
C. Answer C is incorrect. Refer to the correct answer explanation.
D. Answer D is incorrect. Refer to the correct answer explanation.
Answers
A: FASB Statement of Financial Accounting Concepts.
B: FASB Technical Bulletin.
C: AICPA Accounting Principles Board Opinion.
Question: TREPA-0003
According to the FASB conceptual framework, the objectives of financial
D: AICPA Statement of Position. reporting for business enterprises are based on
Answer Explanations
A. This answer is incorrect. Refer to the correct answer explanation. Answers
B. This answer is incorrect. Refer to the correct answer explanation.
A: The need for conservatism.
C. Answer C is correct. The sources of established accounting principles that
are generally accepted in the US are accounting principles promulgated by a body B: Reporting on management’s stewardship.
designated by the AICPA Council to establish such principles, pursuant to rule 203 C: Generally accepted accounting principles.
of the AICPA Code of Professional Conduct. The most authoritative accounting D: The needs of the users of the information.
pronouncements come from FASB Statements of Financial Accounting Standards Answer Explanations
and Interpretations, Accounting Principles Board Opinions, and AICPA A. Answer A is incorrect. Refer to the correct answer explanation.
Accounting Research Bulletins. Only answer C falls into this category. B. Answer B is incorrect. Refer to the correct answer explanation.
D. This answer is incorrect. Refer to the correct answer explanation. C. Answer C is incorrect. Refer to the correct answer explanation.
D. Answer D is correct. Per SFAC 1, the objectives of financial reporting
focus on providing present and potential investors with information useful in
Question: TREPA-0002 making investment decisions. Financial statement users do not have the authority
The information provided by financial reporting pertains to to prescribe the data they desire; therefore, they must rely on external financial
reporting to satisfy their information needs.
Answers
A: Individual business enterprises, rather than to industries or an economy
as a whole or to members of society as consumers.
Under Statement of Financial Accounting Concepts 2, timeliness is an ingredient
B: Individual business enterprises and industries, rather than to an economy
of the primary quality of
as a whole or to members of society as consumers.
C: Individual business enterprises and an economy as a whole, rather than
Answers
to industries or to members of society as consumers.
A: Reliability.
D: Individual business enterprises, industries, and an economy as a whole,
B: Relevance.
rather than to members of society as consumers.
C: Verifiability.
Answer Explanations D: Representational faithfulness.
Answer Explanations
A. Answer A is incorrect because reliability and relevance are the two D. Answer D is incorrect because reliability is not violated.
primary qualities of accounting information.
B. Answer B is correct because per SFAC 2, timeliness is a component of the
primary quality of relevance. Question: TREPA-0006
C. Answer C is incorrect because verifiability is not a primary quality; it is a Under Statement of Financial Accounting Concepts 2, which of the following
component of the primary quality of reliability. relates to both relevance and reliability?
D. Answer D is incorrect because representational faithfulness is not a
primary quality; it is a component of the primary quality of reliability. Answers
A: Timeliness.
Question: TREPA-0005 B: Materiality.
C: Verifiability.
According to the FASB conceptual framework, which of the following situations
violates the concept of reliability? D: Neutrality.
Answer Explanations
Answers A. Answer A is incorrect because reliability and relevance are the two
primary qualities of accounting information. Timeliness is a component of
A: Financial statements were issued 9 months late.
relevance, but not reliability.
B: Report data on segments having the same expected risks and growth B. Answer B is correct because per SFAC 2, materiality relates to both
rates to analysts estimating future profits. relevance and reliability due to its pervasive nature; it acts as a threshold for
C: Financial statements included property with a carrying amount increased accounting recognition.
to management’s estimate of market value. C. Answer C is incorrect because verifiability is an ingredient of the primary
D: Management reports to stockholders regularly refer to new projects quality of reliability, but does not relate to relevance.
undertaken, but the financial statements never report project results. D. Answer D is incorrect because neutrality is an ingredient of the primary
Answer Explanations quality of reliability, but does not relate to relevance.
A. Answer A is incorrect because if financial statements are issued late, this
violates the characteristic of timeliness, which is a component of relevance, not
reliability. Question: TREPA-0007
B. Answer B is not a violation of reliability because the same information is According to the FASB Conceptual Framework, which of the following relates to
simply being reported to two different groups (i.e. shareholders and financial both relevance and reliability?
analysts), which is acceptable.
C. Answer C is correct. Reliability has three subcomponents, as defined in Consistency Verifiability
SFAC 2: neutrality, representational faithfulness, and verifiability. Neutrality A. Yes Yes
means that information should not be prepared or reported in such a way as to B. Yes No
obtain a predetermined result. Also, the information should be free from bias. C. No No
Representational faithfulness is defined as the correspondence or agreement D No Yes
between a measure and what it purports to represent. Verifiability means that two
or more individuals who are independent of each other, would arrive at a similar
conclusion, based on an examination of the same evidence. Answer C is the Answers
answer because management's estimate violates the characteristic of verifiability. A: A.
Property should be valued at its carrying amount on the financial statements, not B: B.
management's estimates of market value.
C: C. Under Statement of Financial Accounting Concepts 2, which of the following
D: D. interacts with both relevance and reliability to contribute to the usefulness of
Answer Explanations information?
A. Answer A is incorrect because verifiability is a component of reliability,
but has no relationship to relevance. Answers
B. Answer B is correct because per SFAC 2, consistency is a secondary A: Comparability.
quality that relates to both of the primary qualities of relevance and reliability. B: Timeliness.
Verifiability is a component of reliability. It is not considered a component of C: Neutrality.
relevance. D: Predictive value.
C. Answer C is incorrect because consistency is a secondary quality that Answer Explanations
relates to both of the primary qualities of relevance and reliability, while A. Answer A is correct because comparability interacts with both relevance
verifiability is a component only of reliability. and reliability. “Comparability is not a quality of information in the same sense as
D. Answer D is incorrect because consistency is a secondary quality that relevance and reliability are, but is rather a quality of the relationship between two
relates to both of the primary qualities of relevance and reliability. or more pieces of information. Improving comparability may destroy or weaken
relevance or reliability if, to secure comparability between two measures, one of
Question: TREPA-0008 them has to be obtained by a method yielding less relevant or less reliable
information” (SFAC 2).
According to the FASB Conceptual Framework, what does the concept of B. Answer B is incorrect because timeliness is a component of relevance, but
reliability in financial reporting include? does not interact with reliability.
Answers C. Answer C is incorrect because neutrality is a component of reliability, but
A: Effectiveness. does not interact with relevance.
B: Certainty. D. Answer D is incorrect because predictive value is a component of
relevance, but does not interact with reliability.
C: Precision.
D: Neutrality.
Answer Explanations
A. Answer A is incorrect. Effectiveness is not a factor in the Conceptual
According to the FASB conceptual framework, predictive value is an ingredient of
Framework.
B. Answer B is incorrect. Certainty is not a factor in the Conceptual Relevance Reliability
Framework. A. No No
C. Answer C is incorrect. Precision is not a factor in the Conceptual B. Yes Yes
Framework. C. No Yes
D. Answer D is correct. Information is reliable if it is verifiable and D. Yes No
neutral.
Answers
A: A.
Question: TREPA-0009 B: B.
C: C.
D: D.
Answer Explanations
A. Answer A is incorrect because predictive value is an ingredient of Question: TREPA-0012
relevance. Deb Co. records all sales using the installment method of accounting. Installment
B. Answer B is incorrect because predictive value is not an ingredient of sales contracts call for 36 equal monthly cash payments. According to the FASB’s
reliability. conceptual framework, the amount of deferred gross profit relating to collections
C. Answer C is incorrect because predictive value is an ingredient of 12 months beyond the balance sheet date should be reported in the
relevance and is not an ingredient of reliability.
D. Answer D is correct. SFAC 2 defines predictive value as the quality of Answers
information that is useful in correctly forecasting the outcome of past or present A: Current liability section as a deferred revenue.
events. This quality contributes to the relevance of information, but not its B: Noncurrent liability section as a deferred revenue.
reliability. C: Current asset section as a contra account.
D: Noncurrent asset section as a contra account.
Question: TREPA-0011 Answer Explanations
A. Answer A is incorrect. Refer to the correct answer explanation.
Under Statement of Financial Accounting Concepts 2, representational faithfulness
B. Answer B is incorrect. Refer to the correct answer explanation.
is an ingredient of
C. Answer C is correct. Per SFAC 6, deferred gross profit on installment
sales is conceptually an asset valuation (i.e., a reduction of an asset). Thus, it must
Relevance Reliability
appear in the asset section. Per ARB 43, the term “current assets” is used to
A. Yes Yes
designate cash and other assets or resources commonly identified as those which
B. Yes No
are reasonably expected to be realized in cash or sold or consumed during the
C. No No
normal operating cycle of the business. In this case, the question states that “all”
D. No Yes
sales are collected over 36 months and hence the operating cycle is 36 months.
Therefore, the deferred gross profit should be reported in the current asset section
Answers of the balance sheet.
A: A. D. Answer D is incorrect. Refer to the correct answer explanation.
B: B.
C: C.
D: D. Question: TREPA-0013
Answer Explanations Historical cost is a measurement base currently used in financial accounting.
A. Answer A is incorrect because representational faithfulness is not an Which of the following measurement bases is(are) also currently used in financial
ingredient of relevance. accounting?
B. Answer B is incorrect because representational faithfulness is not an
ingredient of relevance but it is an ingredient of reliability. Current Discounted Replacement
C. Answer C is incorrect because representational faithfulness is an market value cash flow cost
ingredient of reliability. A. Yes No Yes
D. Answer D is correct. SFAC 2 includes representational faithfulness as an B. Yes Yes Yes
ingredient of reliability, but not as an ingredient of relevance. C. Yes No No
D No Yes Yes
Answers
A: A. Question: TREPA-0015
B: B. Which of the following is an example of the expense recognition principle of
C: C. associating cause and effect?
D: D.
Answer Explanations Answers
A. This answer is incorrect. Refer to the correct answer explanation. A: Allocation of insurance cost.
B. Answer B is correct. Current market value or “quoted market price” is B: Sales commissions.
used as a measurement base, for example, in the case of precious metals having a C: Depreciation of fixed assets.
fixed selling price with no substantial cost of marketing (ARB 43, chap 4). D: Officers’ salaries.
Discounted cash flow is used as a measurement base for assets capitalized under Answer Explanations
long-term leases (SFAS 13). Replacement cost is used as a measurement base for A. Answer A is incorrect because allocation of insurance cost is an example
inventories when the replacement cost has fallen below historical cost (ARB 43, of the systematic and rational allocation expense recognition principle.
chap 4). B. Answer B is correct because sales commissions are recognized as an
C. This answer is incorrect. Refer to the correct answer explanation. expense on the basis of a presumed direct association with the related sales
D. This answer is incorrect. Refer to the correct answer explanation. revenue (SFAC 5).
C. Answer C is incorrect because depreciation of fixed assets is an example
Question: TREPA-0014 of the systematic and rational allocation expense recognition principle.
D. Answer D is incorrect because officers' salaries is an example of the
Under Statement of Financial Accounting Concepts 6, the term “recognized” is immediate recognition expense recognition principle.
synonymous with the term
Answers Question: TREPA-0016

A: Recorded. When a company estimates its bad debt expense using the percent of net credit
B: Realized. sales method, which of the following statements is true?
C: Matched.
D: Allocated. Answers
Answer Explanations A: Matching is being followed.
A. Answer A is correct because SFAC 6, states that recognition is the process B: Matching is not being followed.
of formally recording or incorporating an item into the financial statements of an C: Substance over form is being followed.
entity. D: Going concern is not being followed.
B. Answer B is incorrect because SFAC 6 indicates that the term “realized” Answer Explanations
identifies revenues or gains (losses) on assets actually disposed of or sold. A. Answer A is correct because when bad debt expense is estimated based on
C. Answer C is incorrect because matching refers to the simultaneous a percentage of credit sales, the matching principle is being followed. The entity is
recognition of revenues and expenses that are directly related to the same attempting to estimate what part of this year's sales will not be collected, thereby
transaction or event. matching this year's expense with this year's sales.
D. Answer D is incorrect because allocation is the systematic assigning of a B. Answer B is incorrect. Refer to the correct answer explanation.
portion of a revenue or expense item to different accounting periods. C. Answer C is incorrect. Refer to the correct answer explanation.
B. Answer B is incorrect because the salespersons' monthly salaries are
recognized based upon immediate recognition. It is not directly caused by a
Question: TREPA-0017 revenue transaction.
A patent, purchased in 2004 and being amortized over a 10-year life, was C. Answer C is correct because the revenue transaction (sales of goods to
determined to be worthless in 2008. The write-off of the asset in 2008 is an customers) directly causes the incurrence of the expense (transportation to
example of which of the following principles? customers).
D. Answer D is incorrect because the electricity used to light offices is
Answers
recognized based upon immediate recognition. It is not directly caused by a
A: Associating cause and effect. revenue transaction.
B: Immediate recognition.
C: Systematic and rational allocation.
D: Objectivity. Question: TREPA-0019
Answer Explanations Uncertainty and risks inherent in business situations should be adequately
A. Answer A is incorrect, although associating cause and effect is a pervasive considered in financial reporting. This statement is an example of the concept of
expense recognition principle. Refer to the correct answer explanation.
B. Answer B is correct. Per SFAC 5, the principle of immediate recognition Answers
requires that items carried as assets in prior periods that are discovered to be
A: Conservatism.
impaired in value be charged to expense (e.g., a patent that is determined to be
worthless). B: Completeness.
C. Answer C is incorrect, although systematic and rational allocation is a C: Neutrality.
pervasive expense recognition principle. Refer to the correct answer explanation. D: Representational faithfulness.
D. Answer D is incorrect because although objectivity is an underlying Answer Explanations
accounting principle, it is not a logical answer for this question. A. Answer A is correct because SFAC 2 states that conservatism is a prudent
reaction to uncertainty, an attempt to ensure that uncertainties and risks inherent in
business situations are adequately considered.
Question: TREPA-0018 B. Answer B is incorrect because completeness is the inclusion of all material
Simultaneous recognition of both a revenue and an expense may result from items. It is not concerned with uncertainty and risks.
certain transactions or events. An example of an expense so recognized may be C. Answer C is incorrect because neutrality refers to absence of bias.
D. Answer D is incorrect because representational faithfulness is
correspondence or agreement between a measure or description and the
Answers
phenomenon that it purports to represent (also called validity).
A: Expired portion of prepaid insurance.
B: Salespersons’ monthly salaries.
C: Transportation to customers.
D: Electricity used to light offices.
Accruing net losses on firm purchase commitments for inventory is an example of
Answer Explanations the accounting concept of
A. Answer A is incorrect because the expired portion of prepaid insurance is
recognized based upon systematic and rational allocation. It is not directly caused Answers
by a revenue transaction.
A: Conservatism.
B: Realization.
C: Consistency.
D: Materiality. Allocation Amortization
Answer Explanations A. No No
A. Answer A is correct. Conservatism refers to a preference on the part of B. No Yes
accountants for understating rather than overstating when doubt exists (e.g., the C. Yes Yes
salability of inventory). Accruing these losses is preferable to waiting until the D. Yes No
firm purchase commitments are consummated.
B. Answer B is incorrect because “realization” specifies when revenue should
be recognized. Answers
C. Answer C is incorrect because “consistency” refers to achieving A: A.
comparability over time by using the same accounting method, etc. B: B.
D. Answer D is incorrect because “materiality” refers to information that is C: C.
significant enough to affect investor evaluations of investment alternatives. D: D.
Answer Explanations
Question: TREPA-0021 A.
B.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Which of the following is an application of the principle of systematic and rational C. Answer C is correct because SFAC 6 defines allocation as the process of
allocation? assigning or distributing an amount according to a plan or formula and
amortization as an allocation process for accounting for prepayments and deferrals.
Answers Allocation is broader in scope and thus includes amortization. Specific examples
A: Amortization of intangible assets. of amortization include recognizing expenses for depletion, depreciation, and
B: Sales commissions. insurance, and recognizing earned subscription revenues.
C: Research and development costs. D. Answer D is incorrect. Refer to the correct answer explanation.
D: Officers’ salaries.
Answer Explanations
A. Answer A is correct because according to SFAC 5, amortization of
intangible assets is an item that is recognized in a systematic and rational manner. The FASB’s conceptual framework classifies gains and losses based on whether
Systematic and rational allocation is one of the three pervasive expense recognition they are related to an entity’s major ongoing or central operations. These gains or
principles. losses may be classified as
B. Answer B is incorrect because sales commissions are recognized as an
expense based on cause and effect. Nonoperating Operating
C. Answer C is incorrect because research and development costs are A. Yes No
recognized as an expense based on immediate recognition. B. Yes Yes
D. Answer D is incorrect because officers' salaries are recognized as an C. No Yes
expense based on immediate recognition. D. No No
Question: TREPA-0022 Answers

A: A.
Recognizing depletion expense is an example of the accounting process of
B: B.
C: C. Question: TREPA-0025
D: D. According to the FASB’s conceptual framework, comprehensive income includes
Answer Explanations which of the following?
B. Answer B is correct. Per SFAC 6, gains and losses may be described or Operating income Investments by owners
classified as “operating” or “nonoperating,” depending on their relation to an A. Yes No
entity's major ongoing or central operations. B. Yes Yes
C. Answer C is incorrect. Refer to the correct answer explanation. C. No Yes
D. Answer D is incorrect. Refer to the correct answer explanation. D. No No
Question: TREPA-0024 Answers

Under Statements of Financial Accounting Concepts, comprehensive income A: A.
includes which of the following? B: B.
C: C.
Gains Gross margin D: D.
A. No No Answer Explanations
B. No Yes A. Answer A is correct. Per SFAC 6, comprehensive income consists not only
C. Yes No of its basic components (revenues, expenses, gains, and losses) but also the various
D. Yes Yes intermediate components or measures that result from combining the basic
components (e.g., income from continuing operations). SFAC 6 further states that
over the life of an entity comprehensive income equals the net of its cash receipts
Answers and cash outlays, excluding cash invested by owners or distributed to owners. Note
A: A. that under SFAS 130 this statement would not hold because corrections of errors
B: B. and certain changes in accounting principles are still reported in retained earnings.
C: C. Thus, SFAS 130 does not fully implement comprehensive income as defined in
D: D. SFAC 6. Therefore, answer A is correct.
Answer Explanations C. Answer C is incorrect. Refer to the correct answer explanation.
A. Answer A is incorrect. Refer to the correct answer explanation. D. Answer D is incorrect. Refer to the correct answer explanation.
D. Answer D is correct. Under both SFAS 130 and SFAC 6, comprehensive
income consists not only of revenues, expenses, gains, and losses, but also various
intermediate components or measures that result from combining the basic According to the FASB conceptual framework, earnings
components. Examples of intermediate components or measures are gross margin,
contribution margin, income from continuing operations, and operating income. Answers
A: Are the same as comprehensive income.
B: Exclude certain gains and losses that are included in comprehensive D. Answer D is correct. Per SFAC 5, revenues are considered to be “earned”
income. when the entity has substantially completed the duties entitling it to the benefits
C: Include certain gains and losses that are excluded from comprehensive represented by the revenues. When a company assigns patents to other enterprises,
income. it earns royalties as the sales of patented products are made. Therefore, these
royalties should be reported as revenue in the period in which they are earned.
D: Include certain losses that are excluded from comprehensive income.
Answer Explanations
A. Answer A is incorrect. Comprehensive income is not the same as earnings
because comprehensive income is a much broader, “all-inclusive” concept of
Under what condition is it proper to recognize revenues prior to the sale of the
income.
merchandise?
B. Answer B is correct. Per SFAC 5, earnings and comprehensive income
have the same broad components--revenues, expenses, gains, and losses, but are
not the same because certain classes of gains and losses are included in Answers
comprehensive income but are excluded from earnings. A: When the ultimate sale of the goods is at an assured sales price.
C. Answer C is incorrect because per SFAC 5, comprehensive income B: When the revenue is to be reported as an installment sale.
consists of earnings minus cumulative accounting adjustments plus other C: When the concept of internal consistency (of amounts of revenue) must
nonowner changes in equity; therefore, comprehensive income includes all gains be complied with.
and losses that are included in earnings. D: When management has a long-established policy to do so.
D. Answer D is incorrect. Per SFAC 5, comprehensive income consists of Answer Explanations
earnings minus cumulative accounting adjustments plus other nonowner changes
A. Answer A is correct because per ch 1A of ARB 43, profit is to be
in equity; therefore, comprehensive income includes all gains and losses that are
considered realized when a sale in the ordinary course of business is effected.
included in earnings.
Statement 9 of ch 4 of ARB 43 indicates that inventory valuation above cost can
only be justified by the following: an inability to determine approximate costs,
Question: TREPA-0027 immediate marketability at a quoted price, and the characteristic of unit
interchangeability. Thus, a condition permitting recognition of revenue prior to
A company received royalties from the assignment of patents to other enterprises. sale would be an assured sales price.
In the period in which the royalties are earned, the royalties should be B. Answer B is incorrect because, with the installment sales method, revenue
recognition is deferred until cash is collected (as a result of the questionability of
Answers collection of the sales price).
A: Subtracted from the capitalizable cost of the patent. C. Answer C is incorrect because the concept of internal consistency of
B: Amortized to income over the remaining useful life of the patent. amounts of revenue is a nonsense term.
C: Netted against patent amortization expense. D. Answer D is incorrect because a long established management policy of
D: Reported as revenue. noncompliance with GAAP does not justify noncompliance.
Answer Explanations
A. Answer A is incorrect. The assignment of the patent has no effect on the
carrying value of the patent. Refer to the correct answer explanation.
B. Answer B is incorrect. The company that holds the patent has earned the The accrued balance in a revenue account represents an amount that is
royalties from its patent assignment. Refer to the correct answer explanation.
C. Answer C is incorrect. The assignment of the patent has no effect on the Earned Collected
related amortization expense. Refer to the correct answer explanation. A. Yes Yes
B. Yes No
C. No Yes
D. No No Question: TREPA-0031
Seldin Co. owns a royalty interest in an oil well. The contract stipulates that Seldin
will receive royalty payments semiannually on January 31 and July 31. The
Answers January 31 payment will be for 20% of the oil sold to jobbers between the previous
A: A. June 1 and November 30, and the July 31 payment will be for oil sold between the
B: B. previous December 1 and May 31. Royalty receipts for 2008 amounted to $80,000
C: C. and $100,000 on January 31 and July 31, respectively. On December 31, 2007,
D: D. accrued royalty revenue receivable amounted to $15,000. Production reports show
the following oil sales:
Answer Explanations
A. Answer A is incorrect. Refer to the correct answer explanation. June 1, 2007--November 30, 2007 $400,000
B. Answer B is correct because items of income that have been earned during December 1, 2007--May 31, 2008 500,000
a fiscal period but have not yet been collected are called accrued revenue. June 1, 2008--November 30, 2008 425,000
Adjusting entries are made to record these revenues and the corresponding December 1, 2008--December 31, 2008 70,000
receivables.
C. Answer C is incorrect. Refer to the correct answer explanation. What amount should Seldin report as royalty revenue for 2008?
Answers
A: $179,000
Question: TREPA-0030 B: $180,000
C: $184,000
UVW Broadcast Co. entered into a contract to exchange unsold advertising time
for travel and lodging services with Hotel Co. As of June 30, advertising D: $194,000
commercials of $10,000 were used. However, travel and lodging services were not Answer Explanations
provided. How should UVW account for advertising in its June 30 financial A. Answer A is incorrect. Refer to the correct answer explanation.
statements? B. Answer B is incorrect. Refer to the correct answer explanation.
Answers C. Answer C is correct. Royalty revenue should be recognized when earned,
A: Revenue and expense is recognized when the agreement is complete. regardless of when the cash is collected. Royalty revenue earned from 12/1/07
B: An asset and revenue for $10,000 is recognized. to 5/31/08 is $100,000 (20% x $500,000). Since 12/31/07 royalties receivable
was $15,000, that portion of the $100,000 was earned in 2007. Therefore,
C: Both the revenue and expense of $10,000 are recognized.
royalty revenue earned from 1/1/08 to 5/31/08 is $85,000 ($100,000 –
D: Not reported. $15,000). Royalty revenues earned from 6/1/08 to 11/30/08 were also $85,000
Answer Explanations (20% x $425,000), and the amount earned from 12/1/08 to 12/31/08 was
A. Answer A is incorrect because revenue should be recognized when the $14,000 (20% x $70,000). The total 2008 revenue is $184,000 as shown
services are provided. below.
B. Answer B is correct because UVW has provided $10,000 in advertising
services and has a receivable for the travel and lodging services. Earned 12/1/07 to 5/31/08 (20% x $500,000) $100,000
C. Answer C is incorrect because the travel and lodging expense has not yet been Less amt. earned 12/1/07 to 12/31/07 15,000
incurred. Earned 1/1/08 to 5/31/08 85,000
D. Answer D is incorrect because exchange transactions are reported. Earned 6/1/08 to 11/30/08 (20% x $425,000) 85,000
Earned 12/1/08 to 12/31/08 (20% x $70,000) 14,000 Answer Explanations
Amount earned in 2008 $184,000 A. Answer A is incorrect because although cash dividends payable is a
liability, it is not an accrued liability. An accrued liability is an expense that has
D. Answer D is incorrect. Refer to the correct answer explanation. been incurred but not paid. Dividends do not result from an expense.
B. Answer B is correct because an accrued liability results from recording an
Question: TREPA-0032 expense that has been incurred but not paid. Wages payable is an example of an
expense incurred but not paid.
An accrued expense is an expense C. Answer C is incorrect because rent revenue collected in advance, while it
is a liability, is an example of an unearned revenue, not an accrued liability.
Answers D. Answer D is incorrect because although the portion of long-term debt
A: Incurred but not paid. payable in the current year is a liability, it is not an accrued liability. An accrued
B: Incurred and paid. liability is an expense that has been incurred but not paid. This liability does not
result from an expense.
C: Paid but not incurred.
D: Not reasonably estimable.
Answer Explanations
A. Answer A is correct because an accrued expense is an expense incurred
At December 31, 2007, Cobb Company had a $695,000 balance in its advertising
but not paid. An example would be accrued payroll expense, which is incurred expense account before any year-end adjustments relating to the following:
prior to year-end but not paid until the next period. Accruals (expenses and
revenues) are transactions wherein expenses are incurred or the revenue earned Included in the $695,000 is $80,000 for printing sales
prior to the period in which the expense is paid or the revenue received. In contrast catalogs for a January 2008 sales promotional campaign.
to accruals are deferrals. Deferrals are transactions in which cash is received or Television advertising spots telecast during December
cash is paid in a period prior to the earning of the revenue or the incurring of the 2007
expense (e.g., income received in advance and prepaid expenses). were billed to Cobb on January 2, 2008. The invoice
B. Answer B is incorrect because when an expense is both incurred and paid, cost of $45,000 was paid on January 11, 2008.
it is neither an accrual nor a deferral, and requires no adjustment.
C. Answer C is incorrect because an expense paid but not incurred is a Cobb’s advertising expense for the year ended December 31, 2007, should be
prepaid expense, not an accrued expense.
D. Answer D is incorrect because expenses that are not subject to reasonable Answers
estimates are not recorded or disclosed. A: $740,000
B: $660,000
C: $615,000
Question: TREPA-0033 D: $570,000
Which of the following is an accrued liability? Answer Explanations
Answers B. Answer B is correct. The balance in the advertising expense account
A: Cash dividends payable. before adjustment is $695,000. This amount should be reduced by the $80,000 cost
B: Wages payable. of printing sales catalogs for the 2008 sales campaign. The $80,000 is a prepaid
expense at 12/31/07, and is properly matched against 2008 revenues. Advertising
C: Rent revenue collected 1 month in advance.
expense should be increased for December's television advertising of $45,000
D: Portion of long-term debt payable in current year. which was not billed until 1/2/08. This $45,000 must be accrued as an expense and
a liability at 12/31/07. Therefore, the 2007 advertising expense should be $660,000 was included in 2008 expense as the prepayments expired, but it was not paid in
($695,000 – $80,000 + $45,000). 2008 (it was paid in 2007). Finally, the ending balance of prepaid royalties
C. Answer C is incorrect. Refer to the correct answer explanation. ($50,000) is added because this amount was paid in 2008, but not included in 2008
D. Answer D is incorrect. Refer to the correct answer explanation. expense.
Question: TREPA-0035 D. Answer D is incorrect. Refer to the correct answer explanation.
Lane Company acquires copyrights from authors, paying advance royalties in
some cases, and in others, paying royalties within 30 days of year-end. Lane
reported royalty expense of $375,000 for the year ended December 31, 2008. The Question: TREPA-0036
following data are included in Lane’s December 31 balance sheets: Rent revenue collected 1 month in advance should be accounted for as
2007 2008 Answers

Prepaid royalties $60,000 $50,000 A: Revenue in the month collected.
Royalties payable 75,000 90,000 B: A current liability.
C: A separate item in stockholders’ equity.
During 2008 Lane made royalty payments totaling
D: An accrued liability.
Answers
A: $350,000
Answer Explanations
A. Answer A is incorrect because rent collected 1 month in advance would be
B: $370,000 unearned. Under GAAP, revenue is not recognized until it is earned, regardless of
C: $380,000 when it is collected.
D: $400,000 B. Answer B is correct because revenue collected 1 month in advance is
Answer Explanations unearned and, therefore, should be accounted for as a current liability. Current
A. Answer A is correct. The requirement is to determine the amount of 2008 liabilities are obligations whose liquidation is reasonably expected to require the
royalty payments. Royalty expense in 2008 totaled $375,000. However, this use of existing resources properly classifiable as current assets or the creation of
amount must be adjusted for changes in the related accounts to determine how other current liabilities. This includes collections received in advance of delivery
much cash was paid for royalties. of goods or services per ch 3A of ARB 43.
C. Answer C is incorrect because unearned revenue is not included in
2008 royalty expense $375,000 stockholders' equity.
Royalties payable, 12/31/07 75,000 D. Answer D is incorrect because an accrued liability relates to an expense
Royalties payable, 12/31/08 (90,000) rather than to unearned revenue.
Prepaid royalties, 12/31/07 (60,000)
Prepaid royalties, 12/31/08 50,000
2008 royalty payments $350,000 Question: TREPA-0037
Wright Company sells for cash major household appliance service contracts
The beginning payable balance ($75,000) is added because this amount was paid in agreeing to service customers’ appliances for a 1-year, 2-year, or 3-year period.
2008, but not included in 2008 expense (it was accrued as an expense in 2007). Cash receipts from contracts are credited to unearned service contract revenues and
The ending payable balance ($90,000) is subtracted because this amount was this account had a balance of $1,440,000 at December 31, 2008, before year-end
included in 2008 expense, but was not paid in 2008 (it will be paid in 2009). The adjustment. Service contract costs are charged to service contract expense as
beginning balance of prepaid royalties ($60,000) is subtracted because this amount
incurred and this account had a balance of $360,000 at December 31, 2008. Answers
Outstanding service contracts at December 31, 2008, expire as follows: A: A.
B: B.
During 2009 $300,000
C: C.
During 2010 450,000
During 2011 200,000 D: D.
Answer Explanations
What amount should Wright report as unearned service contract revenues at A. Answer A is incorrect. Refer to the correct answer explanation.
December 31, 2008? B. Answer B is correct. At the time the gift certificates were issued, the following
Answers entry was made:
A: $ 490,000
Cash xx
B: $ 712,500 Deferred revenue xx
C: $ 950,000
D: $1,080,000 Upon redemption of the certificates, the obligation becomes satisfied and the
Answer Explanations revenue is earned. Similarly, as the certificates expire, the store is no longer under
A. Answer A is incorrect. Refer to the correct answer explanation. any obligation to honor the certificates and the deferred revenue should be taken
B. Answer B is incorrect. Refer to the correct answer explanation. into income. In both instances, the deferred revenue account must be reduced
C. Answer C is correct. The amount reported in this liability account should be (debited) to reflect the earning of revenue. This is done through the following
the total amount of outstanding service contracts at 12/31/08, or $950,000 entry:
($300,000 + $450,000 + $200,000). Wright's 12/31/08 adjusting entry would
reduce the liability account from $1,440,000 to $950,000. Deferred revenue xx
Revenue xx
Unearned service contracts revenue 490,000
Service contracts revenue 490,000 C. Answer C is incorrect. Refer to the correct answer explanation.
Question: TREPA-0038 Decker Company assigns some of its patents to other enterprises under a variety of
A retail store received cash and issued gift certificates that are redeemable in licensing agreements. In some instances advance royalties are received when the
merchandise. The gift certificates lapse 1 year after they are issued. How would the agreements are signed, and in others, royalties are remitted within 60 days after
deferred revenue account be affected by each of the following transactions? each license year-end. The following data are included in Decker’s December 31
balance sheet:
Redemption of certificates Lapse of certificates
A. No effect Decrease 2007 2008
B. Decrease Decrease Royalties receivable $90,000 $85,000
C. Decrease No effect Unearned royalties 60,000 40,000
D. No effect No effect
During 2008 Decker received royalty remittances of $200,000. In its income C: Unearned revenue to the extent of related costs expended.
statement for the year ended December 31, 2008, Decker should report royalty D: Unearned revenue for the entire proceeds.
revenue of Answer Explanations
Answers A. Answer A is incorrect. Refer to the correct answer explanation.
A: $195,000 B. Answer B is incorrect. Refer to the correct answer explanation.
B: $215,000 C. Answer C is incorrect. Refer to the correct answer explanation.
C: $220,000 D. Answer D is correct because per SFAC 5, revenue should not be
D: $225,000 recognized until earned. Revenues are generally earned when the product is
Answer Explanations delivered or services are rendered to customers. When a sale or cash receipt (or
This answer is incorrect. Refer to the correct answer explanation. both) takes place prior to the delivery of the product or performance of the service,
B. Answer B is correct. Since the $200,000 cash receipts is not separated into as in this case, the revenues should be earned as delivery/performance takes place.
earned and unearned revenue, set up T-accounts for royalties receivable and Since the entire proceeds in this problem are for the advance sale of tickets, they
unearned royalties. should be reported as unearned revenue in the seller's financial statements before
the performance.
Royalties receivable Unearned royalties
Beg. bal. 90,000 Earned
royal.
20,00 60,00
0 0
beg.
bal Question: TREPA-0041
200,000 Magazine subscriptions collected in advance are reported as
Cash rec.
Earned 195,000 40,00 End Answers
royal. 0 bal. A: A contra account to magazine subscriptions receivable in the asset
End bal. 85,000 section of the balance sheet.
B: Deferred revenue in the liability section of the balance sheet.
By analyzing the T-accounts, the $195,000 debit to royalties receivable C: Deferred revenue in the stockholders’ equity section of the balance
represents revenue earned. In addition, the $20,000 decrease in unearned sheet.
royalties represents 2008 royalty revenue. Therefore, Decker should report
D: Magazine subscription revenue in the income statement in the period
$215,000 ($195,000 + $20,000) of earned royalty revenue.
This answer is incorrect. Refer to the correct answer explanation. collected.
This answer is incorrect. Refer to the correct answer explanation. Answer Explanations
B. Answer B is correct because deposits and prepayments received for goods
Question: TREPA-0040 or services to be provided in the future are deferred revenues. These would be
reported as liabilities because an enterprise has an obligation to provide goods or
How would the proceeds received from the advance sale of nonrefundable tickets
services to those who have paid in advance.
for a theatrical performance be reported in the seller’s financial statements before
C. Answer C is incorrect because deferred revenue is a liability to outside
the performance?
parties rather than a component of stockholders' equity.
D. Answer D is incorrect because the revenue is not considered earned until
Answers the goods or services are provided (i.e., the magazines are delivered).
A: Revenue for the entire proceeds.
B: Revenue to the extent of related costs expended.
Answers
Question: TREPA-0042 A: $0
Winn Co. sells subscriptions to a specialized directory that is published B: $ 4,000
semiannually and shipped to subscribers on April 15 and October 15. C: $24,000
Subscriptions received after the March 31 and September 30 cutoff dates are held D: $72,000
for the next publication. Cash from subscribers is received evenly during the year
and is credited to deferred subscription revenue. Data relating to 2008 are as Answer Explanations
follows: A. Answer A is correct. SFAC 5 states that revenues are to be recognized
when realized or realizable, and earned. At 12/31/07, none of the subscription
Deferred subscription revenue, 1/1/08 $ 750,000 revenue has been earned, since magazine delivery will not begin until 2008.
Cash receipts from subscribers 3,600,000 Therefore, unearned subscriptions revenue in the 12/31/07 balance sheet is
$72,000 and subscriptions revenue in the 2007 income statement is $0. Note that
In its December 31, 2008, balance sheet, Winn should report deferred subscription the treatment of the $72,000 collection for tax purposes does not determine its
revenue of treatment for financial accounting purposes.
Answers C. Answer C is incorrect. Refer to the correct answer explanation.
A: $2,700,000 D. Answer D is incorrect. Refer to the correct answer explanation.
B: $1,800,000
C: $1,650,000
D: $ 900,000 Question: TREPA-0044
Answer Explanations Weaver Company sells magazine subscriptions for a 1-year, 2-year, or 3-year
A. Answer A is incorrect. Refer to the correct answer explanation. period. Cash receipts from subscribers are credited to magazine subscriptions
B. Answer B is incorrect. Refer to the correct answer explanation. collected in advance, and this account had a balance of $1,700,000 at December
C. Answer C is incorrect. Refer to the correct answer explanation. 31, 2007. Information for the year ended December 31, 2008, is as follows:
D. Answer D is correct. The 12/31/08 balance of deferred subscription
revenue should reflect the liability for subscriptions still outstanding at that time. Cash receipts from subscribers $2,100,000
The 12/31/07 deferred revenue ($750,000) would have been earned when the April Magazine subscriptions revenue (credited at 12/31/08) 1,500,000
15 directory was mailed, and therefore is no longer a liability. The cash collected
through the September 30 cutoff date (9/12 x $3,600,000 = $2,700,000) would also In its December 31, 2008 balance sheet, what amount should Weaver report as the
have been earned when the April 15 and October 15 directories were mailed (note balance for magazine subscriptions collected in advance?
that the cash was received evenly throughout the year). However, the cash Answers
collected after September 30 (3/12 x $3,600,000 = $900,000) will not be earned A: $1,400,000
until the 4/15/09 directory is mailed, and therefore is deferred revenue at 12/31/08.
B: $1,900,000
C: $2,100,000
Question: TREPA-0043 D: $2,300,000
Answer Explanations
In November and December 2007, Dorr Co., a newly organized magazine
publisher, received $72,000 for 1,000 3-year subscriptions at $24 per year, starting This answer is incorrect. Refer to the correct answer explanation.
with the January 2008 issue. Dorr elected to include the entire $72,000 in its 2007 This answer is incorrect. Refer to the correct answer explanation.
income tax return. What amount should Dorr report in its 2007 income statement This answer is incorrect. Refer to the correct answer explanation.
for subscriptions revenue?
D. Answer D is correct. The solutions approach is to set up a T- account for Answers
the liability. A: One-fifth of the cabinet costs in cost of goods sold.
B: One-fifth of the cabinet costs in selling, general, and administrative
Subscriptions collected in advance
expenses.
1,700,000 12/31/07 bal.
Revenue earned 1,500,000 2,100,000 Cash receipts
C: All of the cabinet costs in cost of goods sold.
2,300,000 12/31/08 bal. D: All of the cabinet costs in selling, general, and administrative expenses.
Answer Explanations
As receipts are collected, the liability is credited to record the additional A. Answer A is incorrect. The cabinets are considered fixed assets and not a
subscriptions owed to customers. In addition, the liability is decreased as revenue part of cost of goods sold.
from the subscriptions is earned. Based upon the information given, Weaver B. Answer B is correct. One-fifth of the cabinet costs would be reported as
should report $2,300,000 of subscriptions collected in advance at December 31, depreciation expense in selling, general, and administrative expenses. Four-fifths
2008. of the cabinet cost would remain capitalized as fixed assets at the end of 2008.
C. Answer C is incorrect. The cabinets are considered fixed assets and not a
part of cost of goods sold.
Question: TREPA-0045 D. Answer D is incorrect. Refer to the correct answer explanation.
Which of the following is a deferred cost that should be amortized over the periods
estimated to be benefited?
Answers The premium on a 3-year insurance policy expiring on December 31, 2008, was
paid in total on January 1, 2006. Assuming that the original payment was initially
A: Prepayment of 3-year insurance premiums on machinery.
debited to an expense account, and that appropriate adjusting entries have been
B: Security deposit representing 2-months’ rent on leased office space. recorded on December 31, 2006 and 2007, the balance in the prepaid asset account
C: Advance from customer to be returned when sale completed. on December 31, 2007, would be
D: Property tax for this year payable next year. Answers
Answer Explanations A: Zero.
A. Answer A is correct because a deferred cost is a cost which has been paid B: Lower than the balance on December 31, 2008.
in advance of its use in the business and is, therefore, an asset which will provide
C: The same as the original payment.
future benefits such as the prepayment of insurance premiums.
B. Answer B is incorrect because a deposit to cover potential damages will D: The same as it would have been if the original payment had been
not necessarily provide benefits in the future; it would be more properly labeled a initially debited to a prepaid asset account.
receivable. Answer Explanations
C. Answer C is incorrect because this advance is a liability, not an asset. A. Answer A is incorrect. Refer to the correct answer explanation.
D. Answer D is incorrect because this property tax is a liability, not an asset. B. Answer B is incorrect. Refer to the correct answer explanation.
D. Answer D is correct because under either method the balance in the
Question: TREPA-0046 prepaid asset account on December 31, 2007, should be the unexpired portion of
the policy. On 12/31/06, an adjusting entry would be made by debiting “Prepaid
On January 1, 2008, Brecon Co. installed cabinets to display its merchandise in
customers’ stores. Brecon expects to use these cabinets for 5 years. Brecon’s 2008 insurance” and crediting “Insurance expense” for two-thirds of the original
multi-step income statement should include payment (the unexpired portion of the policy). This would result in one-third of the
payment being expensed. This entry would then be reversed on 1/1/07. At the end
of 2007, an adjusting entry would again be made by debiting “Prepaid insurance” insurance. Additional information for the year ended December 31, 2008, is as
and crediting “Insurance expense” for one-third of the original payment (the follows:
unexpired portion of the policy). Since the reversing entry will not be made until
1/1/08, the prepaid asset account balance would be the same on 12/31/07 for this Prepaid insurance at December 31, 2007 $150,000
method as would have been had the payment originally been debited to “Prepaid Charges to insurance expense during 2008
insurance” on 1/1/06. (including a year-end adjustment of $25,000) 625,000
Unexpired insurance premiums at December 31, 2008 175,000
Question: TREPA-0048 What was the total amount of insurance premiums paid by Gerber during 2008?
The premium on a 3-year insurance policy expiring on December 31, 2008, was Answers
paid in total on January 1, 2006. Assuming that the original payment was recorded A: $475,000
as a prepaid asset, how would total assets and stockholders’ equity be affected B: $600,000
during 2008? C: $625,000
Answers D: $650,000
A: Total assets would decrease and stockholders’ equity would increase. Answer Explanations
B: Both total assets and stockholders’ equity would decrease. This answer is incorrect. Refer to the correct answer explanation.
C: Both total assets and stockholders’ equity would increase. This answer is incorrect. Refer to the correct answer explanation.
D: Neither total assets nor stockholders’ equity would change. This answer is incorrect. Refer to the correct answer explanation.
Answer Explanations D. Answer D is correct. The total amount of insurance premiums paid can be
A. Answer A is incorrect. Refer to the correct answer explanation. found by setting up a T-account.
B. Answer B is correct because when the premium on the 3-year insurance policy
was paid in total on January 1, 2006, a prepaid asset was recorded. At the end Prepaid insurance
of each of the next 3 years, one-third of the premium must be amortized to 12/31/07 150,000
expense using the following journal entry: Premiums paid ? 625,000 To insurance expense
12/31/08 175,000
Insurance expense xxx
Prepaid insurance xxx The amount of premiums paid and debited to prepaid insurance, therefore,
(asset) must be $650,000.
The effect of this amortization is to increase expenses (a decrease in stockholders'

equity) and decrease prepaid assets. Question: TREPA-0050
C. Answer C is incorrect. Refer to the correct answer explanation. On November 1, 2008, Key Co. paid $3,600 to renew its insurance policy for 3
D. Answer D is incorrect. Refer to the correct answer explanation. years and used an income statement account to record this transaction. At
December 31, 2008, Key’s unadjusted trial balance showed a balance of $90 for
prepaid insurance and $4,410 for insurance expense. What amounts should be
Question: TREPA-0049 reported for prepaid insurance and insurance expense in Key’s December 31, 2008
Under Gerber Company’s accounting system, all insurance premiums paid are financial statements?
debited to prepaid insurance. For interim financial statements, Gerber makes
monthly estimated charges to insurance expense with an offset to prepaid Prepaid insurance Insurance expense
A. $3,300 $1,200
B. $3,400 $1,200 A: $25,000
C. $3,400 $1,100 B: $40,000
D. $3,490 $1,010 C: $85,000
D: $90,000
Answer Explanations
Answers A. Answer A is incorrect. Refer to the correct answer explanation.
A: A. B. Answer B is incorrect. Refer to the correct answer explanation.
B: B. C. Answer C is incorrect. Refer to the correct answer explanation.
C: C. D. Answer D is correct. On 1/1/08, the balance of prepaid royalties was $65,000.
D: D. Ott makes no entries to this account until year-end, so the 12/31/08 balance
Answer Explanations before adjustment was still $65,000. On 10/31/08, Ott made a $110,000
A. Answer A is incorrect. Refer to the correct answer explanation. royalty payment which included payment in advance for 2009 royalties.
B. Answer B is incorrect. Refer to the correct answer explanation. However, under Ott's system, all such payments are debited to royalty expense
C. Answer C is correct. Based on the information given, Key has only one when paid, and any necessary adjustments to prepaid royalties are made at
prepaid insurance policy at 12/31/08. The 3-year policy acquired on 11/1/08 has year-end. At 12/31/08, Ott made a credit adjustment to royalty expense:
been in force for 2 months, so 34 months remain unexpired. Therefore, 12/31/08
prepaid insurance is $3,400 ($3,600 x 34/36). Key must make an adjusting entry to Prepaid royalties 25,000
transfer $3,310 ($3,400 – $90) from insurance expense to prepaid insurance. This Royalty expense 25,000
will leave the account balances at $3,400 for prepaid insurance ($90 + $3,310) and
$1,100 for insurance expense ($4,410 – $3,310). (Apparently, Key Co. records Therefore, the 12/31/08 balance of prepaid royalties is $90,000 ($65,000 +
policy payments as charges to insurance expense during the year and adjusts the $25,000).
prepaid insurance account at the end of the year.)
The following information is available for Bart Company for 2008:
Ott Company acquired rights to a patent from Grey under a licensing agreement Disbursements for purchases $580,000
that required an advance royalty payment when the agreement was signed. Ott Increase in trade accounts payable 50,000
remits royalties earned and due under the agreement on October 31 each year. Decrease in merchandise inventory 20,000
Additionally, on the same date, Ott pays, in advance, estimated royalties for the
next year. Ott adjusts prepaid royalties at year-end. Information for the year ended Cost of goods sold for 2008 was
December 31, 2008, is as follows: Answers
A: $650,000
Date Amount B: $610,000
1/1/08 Prepaid royalties $ 65,000 C: $550,000
10/31/08 Royalty payment (charged to royalty expense) 110,000 D: $510,000
12/31/08 Year-end credit adjustment to royalty expense 25,000
Answer Explanations
In its December 31, 2008 balance sheet, Ott should report prepaid royalties of A. Answer A is correct. The basic cost of goods sold formula is
Answers
Beg. inv. + Net Purchases – End. inv. = CGS This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
To compute cost of goods sold from the information given, cash paid for purchases D. Answer D is correct. Cash payments to suppliers are converted to CGS as
must be adjusted for increases (decreases) in both accounts payable and follows:
merchandise inventory. Cash payments for purchases during 2008 were $580,000.
In addition, accounts payable increased by $50,000, indicating that total purchases Cash payments to suppliers
exceeded cash payments for purchases by $50,000. Merchandise inventory + Increase in AP
decreased by $20,000, which means beginning inventory exceeded ending – Increase in inventory
inventory by $20,000. This decrease in inventory must be added to cash payments Cost of Goods Sold
for purchases to compute the cost of goods sold of $650,000.
An increase in ending inventory represents the cost of items purchased during
Cash paid for purchases $580,000 the period which remain unsold. Thus, the increase should be deducted from
+ Increase in AP 50,000 cash payments to suppliers. An increase in AP indicates that certain items
+ Decrease in inv 20,000 purchased during the period have not yet been paid for and are not included in
Cost of goods sold $650,000 cash payments. Since these represent unrecorded purchases, the increase must
be added to cash payments to suppliers to arrive at CGS.
Question: TREPA-0053 Before 2008, Droit Co. used the cash basis of accounting. As of December 31,
2008, Droit changed to the accrual basis. Droit cannot determine the beginning
Dee’s inventory and accounts payable balances at December 31, 2008, increased balance of supplies inventory. What is the effect of Droit’s inability to determine
over their December 31, 2007, balances. Should these increases be added to or beginning supplies inventory on its 2008 accrual basis net income and December
deducted from cash payments to suppliers to arrive at 2008 cost of goods sold? 31, 2008, accrual basis owners’ equity?
Increase in inventory Increase in accounts payable 2008 Net income 12/31/08 Owners’ equity
A. Added to Deducted from A. No effect No effect
B. Added to Added to B. No effect Overstated
C. Deducted from Deducted from C. Overstated No effect
D. Deducted from Added to D. Overstated Overstated
Answers Answers
A: A. A: A.
B: B. B: B.
C: C. C: C.
D: D. D: D.
Answer Explanations Answer Explanations
This answer is incorrect. Refer to the correct answer explanation. A. Answer A is incorrect. Refer to the correct answer explanation.
C. Answer C is correct. Inability to determine beginning supplies inventory
would cause supplies expense to be understated and 2008 net income to be Question: TREPA-0056
overstated. Cumulative supplies expense would be properly stated so there would Adam Co. reported sales revenue of $2,300,000 in its income statement for the
be no effect on December 31, 2008 retained earnings. year ended December 31, 2008. Additional information was as follows:
12/31/07 12/31/08
Question: TREPA-0055 Accounts receivable

Allowance for uncollectible
$500,000
(30,000)
$650,000
(55,000)
Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income accounts
tax return for the year ended November 30, 2008. Additional information is as
follows: Uncollectible accounts totaling $10,000 were written off during 2008. Under the
cash basis of accounting, Adam would have reported 2008 sales of
Rents receivable - November 30, 2008 $1,060,000 Answers
Rents receivable - November 30, 2007 800,000 A: $2,140,000
Uncollectible rents written off B: $2,150,000
during the fiscal year 30,000
C: $2,175,000
Under the accrual basis, Marr should report rental revenue of D: $2,450,000
Answers Answer Explanations
A. Answer A is correct. To determine cash basis revenue, the solutions approach
A: $1,920,000
is to prepare a T-account for accounts receivable.
B: $1,980,000
C: $2,440,000 Accounts receivable
D: $2,500,000 12/31/07 500,000
Answer Explanations Sales 2,300,000 10,000 Write-offs
This answer is incorrect. Refer to the correct answer explanation. ? Collections
This answer is incorrect. Refer to the correct answer explanation. 12/31/08 650,000
D. Answer D is correct. To determine rental revenue, prepare a T-account for An increase in receivables ($150,000) means that the amount of cash collected
rents receivable was less than sales, and this amount should be subtracted from accrual basis
sales revenue to arrive at the cash basis sales revenue. Also, the $10,000
Rents receivable written off during 2008 means that the 12/31/08 receivable balance is $10,000
11/30/07 800,000 2,210,000 Cash collections less than it would have been had no write-offs been made. In other words, this
Revenue XXX 30,000 Write-offs $10,000 represents recognized sales that will not result in the collection of
11/30/08 1,060,000 cash and should be subtracted from accrual basis sales to determine cash basis
sales revenue. Therefore, Adam should report $2,140,000 ($2,300,000 –
Revenue can be calculated by solving for the unknown amount in the T- $150,000 – $10,000) for 2008 cash basis sales.
account, ($800,000 + XXX - $2,210,000 - $30,000 = $1,060,000). Revenues This answer is incorrect. Refer to the correct answer explanation.
would be equal to $2,500,000. The above analysis assumes all revenues were This answer is incorrect. Refer to the correct answer explanation.
initially recorded as receivables. This answer is incorrect. Refer to the correct answer explanation.
Question: TREPA-0057 On January 2, 2008, Smith purchased the net assets of Jones’ Cleaning, a sole
James Lee, M.D., keeps his accounting records on a cash basis. During 2008, Dr. proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole
Lee collected $100,000 in fees from his patients. At December 31, 2007, Dr. Lee proprietorship. The assets had a carrying amount of $375,000 and a market value
had accounts receivable of $20,000. At December 31, 2008, Dr. Lee had accounts of $360,000. In Spiffy’s cash-basis financial statements for the year ended
receivable of $30,000, and unearned fees of $1,000. On an accrual basis, how December 31, 2008, Spiffy reported revenues in excess of expenses of $60,000.
much was Dr. Lee’s patient service revenue for 2008? Smith’s drawings during 2008 were $20,000. In Spiffy’s financial statements, what
Answers amount should be reported as Capital-Smith?
A: $111,000 Answers
B: $109,000 A: $390,000
C: $ 90,000 B: $400,000
D: $ 89,000 C: $410,000
Answer Explanations D: $415,000
This answer is incorrect. Refer to the correct answer explanation. Answer Explanations
B. Answer B is correct. The following formula is used to adjust service revenue A. Answer A is correct. The ending balance in Smith's capital account on either
from the cash basis to the accrual basis: the accrual or cash basis is computed as follows:
Beginnin + Investment + Incom – Drawing = Ending
Accrual basis Beg. g capital s e s capital
service = Cash fees + End. – Beg. + unearned Smith's beginning capital balance is measured as the cost of the assets purchased to
revenue collected AR AR fees establish the business ($350,000). The previously recorded value ($375,000) and
estimated market value ($360,000) are irrelevant and do not affect beginning
Therefore, Dr. Lee's patient service revenue for 2008 is $109,000 ($100,000 + capital. No additional investments were made; cash basis income was $60,000 and
$30,000 – $20,000 + $0 - $1,000). As an alternative, T-accounts can be used. drawings were $20,000. Therefore, the ending capital balance is $390,000
($350,000 + $60,000 - $20,000).
Service revenue Acct. receivable B. Answer B is incorrect. Refer to the correct answer explanation.
110,000 1/1/08 20,000 C. Answer C is incorrect. Refer to the correct answer explanation.
1,00 100,000 Cash received D. Answer D is incorrect. Refer to the correct answer explanation.
0
109,000 12/31/08 110,000
30,000 Question: TREPA-0059
Unearned revenue Cash collection is a critical event for income recognition in the
0 1/1/08
1,000 Cost-recovery method Installment method
1,000 12/31/08 A. No No
B. Yes Yes
This answer is incorrect. Refer to the correct answer explanation. C. No Yes
This answer is incorrect. Refer to the correct answer explanation. D. Yes No
Answers
A: A. Answers
B: B. A: On the date of sale.
C: C. B: On the date the final cash collection is received.
D: D. C: After cash collections equal to the cost of sales have been received.
Answer Explanations D: In proportion to the cash collections received.
A. Answer A is incorrect. Refer to the correct answer explanation. Answer Explanations
B. Answer B is correct. Under the cost recovery method no profit of any type A. Answer A is incorrect. Refer to the correct answer explanation.
is recognized until cumulative cash receipts exceed the cost of the asset sold. B. Answer B is incorrect. Refer to the correct answer explanation.
Under the installment method, gross profit is deferred at the time of sale and is C. Answer C is incorrect. Refer to the correct answer explanation.
recognized by applying the gross profit rate to subsequent cash collections. Both D. Answer D is correct. Per APB 10, the installment method of recognizing
methods require the collection of cash before income is recognized. revenue is appropriate only when “collection of the sale price is not reasonably
C. Answer C is incorrect. Refer to the correct answer explanation. assured.” Under the installment method, gross profit is deferred to future periods
D. Answer D is incorrect. Refer to the correct answer explanation. and recognized proportionately to collection of the receivables.
Question: TREPA-0060 Question: TREPA-0062

For financial statement purposes, the installment method of accounting may be Taft Corp., which began business on January 1, 2007, appropriately uses the
used if the installment sales method of accounting. The following data are available for
December 31, 2007 and 2008.
Answers
A: Collection period extends over more than 12 months. Balance of
B: Installments are due in different years. deferred
gross profit on
C: Ultimate amount collectible is indeterminate.
sales account 2007 2008
D: Percentage-of-completion method is inappropriate.
Answer Explanations 2007 $300,000 $120,000
A. Answer A is incorrect. Refer to the correct answer explanation. 2008 - 440,000
B. Answer B is incorrect. Refer to the correct answer explanation. Gross profit on sales 30% 40%
C. Answer C is correct because APB 10, states that the profit on a sale in the
ordinary course of business is considered to be realized at the time of the sale The installment accounts receivable balance at December 31, 2008, is
unless it is uncertain whether the sales price will be collected. The Board Answers
concluded that use of the installment method of accounting is not acceptable unless A: $1,000,000
this uncertainty exists. B: $1,100,000
D. Answer D is incorrect. Refer to the correct answer explanation. C: $1,400,000
D: $1,500,000
According to the installment method of accounting, the gross profit on an B. Answer B is incorrect. Refer to the correct answer explanation.
installment sale is recognized in income C. Answer C is incorrect. Refer to the correct answer explanation.
D. Answer D is correct. When using the installment sales method, the balance of
the deferred gross profit account represents the gross profit not yet recognized Sales price – Cost of building = Gain recognized
because the related receivable has not yet been collected. The formula below $1,200,000
– $1,000,000 = $200,000
expresses this relationship.
Deferred GP = GP rate x Accounts Receivable D. Answer D is incorrect. Refer to the correct answer explanation.
This equation can be rearranged as follows:
Deferred GP / GP rate = Accounts Receivable
Therefore, the installment accounts receivable balance at 12/31/08 can be Question: TREPA-0064
computed as follows: Lane Co., which began operations on January 1, 2008, appropriately uses the
From 2007 sales: $120,000 / 30% = $ 400,000 installment method of accounting. The following information pertains to Lane’s
From 2008 sales: $440,000 / 40% = 1,100,000 operations for the year 2008:
Total $1,500,000
Installment sales $1,000,000
Regular sales 600,000
Cost of installment sales 500,000
Question: TREPA-0063 Cost of regular sales
General and administrative expenses
300,000
100,000
Bucca Warehousing Corporation bought a building at auction on June 30, 2008,
Collections on installment sales 200,000
for $1,000,000. On July 2, 2008, before occupying the building, Bucca sold it to a
triple-A rated company for $1,200,000. Bucca received a cash down payment of
The deferred gross profit account in Lane’s December 31, 2008 balance sheet
$300,000 and a first mortgage note at the market rate of interest, for the balance.
should be
No additional payments were required until 2009. On September 1, 2008, an
independent appraiser valued the property at $1,500,000. On its 2008 income tax Answers
return, Bucca reported the sale on the installment basis. How much gain should A: $150,000
Bucca recognize in its income statement for the year ended December 31, 2008? B: $320,000
Answers C: $400,000
A: $0 D: $500,000
B: $ 50,000 Answer Explanations
C: $200,000 A. Answer A is incorrect. Refer to the correct answer explanation.
D: $300,000 B. Answer B is incorrect. Refer to the correct answer explanation.
C. Answer C is correct. Under the installment method, gross profit is deferred
Answer Explanations
at the time of sale and is recognized by applying the gross profit rate to subsequent
cash collections. At the time of sale, gross profit of $500,000 is deferred
($1,000,000 – $500,000). The gross profit rate is 50% ($500,000 ÷ $1,000,000).
C. Answer C is correct. The installment method of recognizing revenue is not
Since 2008 collections on installment sales were $200,000, gross profit of
acceptable for financial reporting purposes unless the circumstances are such
$100,000 (50% x $200,000) is recognized in 2008. This recognition of gross profit
that the collection of the sales price is not reasonably assured. Since the
would decrease the deferred gross profit account to a 12/31/08 balance of $400,000
property was sold to a triple-A rated company and the value of the property is
($500,000 – $100,000). Note that regular sales, cost of regular sales, and general
appreciating, collection can be assumed to be reasonably assured. Therefore,
and administrative expenses do not affect the deferred gross profit account.
the entire gain should be recognized for financial reporting purposes at the date
of sale:
Question: TREPA-0065 The 12/31/08 deferred gross profit is computed by multiplying the gross profit
Lang Co. uses the installment method of revenue recognition. The following data percentages by the year-end receivables resulting from that year's sales.
pertain to Lang’s installment sales for the years ended December 31, 2007 and 2007 2008
2008: 12/31/08 AR from 2007 sales $30,000
12/31/08 AR from 2008 sales $69,000
2007 2008 x 50% x 33 1/3%
Installment receivables at year-end on 2007 $60,000 $30,000 $15,000 $23,000
sales
Installment receivables at year-end on 2008 -- 69,000 Therefore, 12/31/08 deferred GP is $38,000 ($15,000 + $23,000).
sales D. Answer D is incorrect. Refer to the correct answer explanation.
Installment sales 80,000 90,000
Cost of sales 40,000 60,000
What amount should Lang report as deferred gross profit in its December 31, 2008 On January 1, 2007, Bartell Company sold its idle plant facility to Cooper, Inc. for
balance sheet? $1,050,000. On this date the plant had a net book value of $735,000. Cooper paid
Answers $150,000 cash on January 1, 2007, and signed a $900,000 note bearing interest at
A: $23,000 10%. The note was payable in three annual installments of $390,000 beginning
B: $33,000 January 1, 2008. This included interest of $90,000. Bartell appropriately accounted
C: $38,000 for the sale under the installment method. Cooper made a timely payment of the
first installment on January 1, 2008. At December 31, 2008, Bartell has deferred
D: $43,000
gross profit of
A: $153,000
C. Answer C is correct. Under the installment method, gross profit is deferred at B: $180,000
the time of sale and is recognized by applying the gross profit rate to C: $225,000
subsequent cash collections. Therefore, at each year-end, deferred gross profit D: $270,000
can be computed by multiplying the gross profit percentage by the AR Answer Explanations
balance. The gross profit percentage for each year is computed by dividing that This answer is incorrect. Refer to the correct answer explanation.
year's gross profit by installment sales. B. Answer B is correct. The total gross profit (GP) on the sale is $315,000
(selling price of $1,050,000 less depreciated cost of $735,000), and the GP rate
2007 2008 is 30% ($315,000/$1,050,000). GP recognized in 2007 is $45,000 (30% x
$150,000 down payment), and GP recognized in 2008 is $90,000 [30% x
Installment sales (A) $80,000 $90,000 ($390,000 - $90,000)]. This leaves a balance of $180,000 in deferred GP.
Cost of sales (40,000) (60,000) Deferred gross profit
Recognized 2007 45,000 315,000 Total gross profit
Gross profit (B) $40,000 $30,000
Recognized 2008 90,000
Gross profit % (B ÷ A) 50% 33 1/3% 180,000 Balance 12/31/08
GP is recognized only on the portion of the sales price collected, not on the can be calculated as: $350,000 total debits - $200,000 ending balance =
interest collected ($90,000). A short-cut approach is to multiply the remaining $150,000 cash collections. Finally, GP realized in 2008 (3) would be 40%
balance in installment notes receivable by the GP rate ($600,000 x 30% = times cash collections of $150,000 for $60,000 GP realized.
$180,000).
This answer is incorrect. Refer to the correct answer explanation. Installment AR Deferred GP
This answer is incorrect. Refer to the correct answer explanation. Beg. bal. 0 150,000 (2) 0 Beg. bal.
(1) 350,000 (3) 60,000 140,000
End. bal. 200,000
Tillary Company, which began business on January 1, 2008, appropriately uses the
installment sales method of accounting. The following data are available for 2008:
Installment accounts receivable, December 31, 2008 $200,000 Drew Co. produces expensive equipment for sale on installment contracts. When
Deferred gross profit, December 31, 2008 there is doubt about eventual collectibility, the income recognition method least
(before recognition of realized gross profit) $140,000 likely to overstate income is
Gross profit on sales 40%
Answers
The cash collections and the realized gross profit on installment sales for the year A: At the time the equipment is completed.
ended December 31, 2008, should be
B: The installment method.
Cash collections Realized gross profit C: The cost recovery method.
A. $100,000 $80,000 D: At the time of delivery.
B. $100,000 $60,000 Answer Explanations
C. $150,000 $80,000 A. Answer A is incorrect because the earnings process is not culminated upon
D. $150,000 $60,000 the completion of the equipment, and recognition of income at that time is
inappropriate.
Answers B. Answer B is incorrect because the installment method, which recognizes a
A: A. proportionate share of profit upon receipt of each installment, is less conservative
than the cost recovery method.
B: B.
C. Answer C is correct. Per ARB 43, chap 1A, profit is deemed to be realized
C: C. when a sale in the ordinary course of business is effected, unless the circumstances
D: D. are such that the collection of the sale price is not reasonably assured. The most
Answer Explanations conservative accounting treatment in such instances is the cost recovery method,
This answer is incorrect. Refer to the correct answer explanation. which defers the recognition of any profit until the full cost of the item sold has
This answer is incorrect. Refer to the correct answer explanation. been collected. Subsequent collections are then considered to be all profit.
This answer is incorrect. Refer to the correct answer explanation. D. Answer D is incorrect because ARB 43 precludes the recognition of profit
D. Answer D is correct. As this is the first year of operations, all $140,000 is from when there is doubt about the collectibility of the selling price.
2008 sales. In the absence of any defaults and repossessions during the year,
this represents the total gross profit (GP) for 2008. Therefore, the total debits
to installment AR for 2008 sales (1) can be computed by dividing the deferred
GP by the GP ratio, or $350,000 ($140,000/40%). Next, cash collections (2)
According to the cost recovery method of accounting, gross profit on an C. Answer C is incorrect. Refer to the correct answer explanation.
installment sale is recognized in income D. Answer D is incorrect. Refer to the correct answer explanation.
Answers
A: After cash collections equal to the cost of sales have been received. Question: TREPA-0071
B: In proportion to the cash collections. Which of the following should be expensed as incurred by a franchise with an
C: On the date the final cash collection is received. estimated useful life of 10 years?
D: On the date of sale.
A. Answer A is correct. Per APB 10, installment methods of recognizing A: Amount paid to the franchisor for the franchise.
revenue are appropriate only when “collection of the sale price is not reasonably B: Periodic payments to a company, other than the franchisor, for that
assured.” Under the cost recovery method, gross profit is deferred and recognized company’s franchise.
only when the cumulative receipts exceed the cost of the asset sold. C: Legal fees paid to the franchisee’s lawyers to obtain the franchise.
B. Answer B is incorrect. Refer to the correct answer explanation. D: Periodic payments to the franchisor based on the franchisee’s revenues.
C. Answer C is incorrect. Refer to the correct answer explanation. Answer Explanations
D. Answer D is incorrect. Refer to the correct answer explanation. A. Answer A is incorrect. Refer to the correct answer explanation.
Question: TREPA-0070 C.
D.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is correct. The requirement is to determine which of the
On October 1, 2007, Price Corp., a real estate developer, sold land to Greene Co. following outflows should be expensed as incurred by the franchisee. Continuing
for $5,000,000. Greene paid $600,000 cash and signed a 10-year $4,400,000 note franchise fees, based on revenues (Answer D), should be reported as expenses
bearing interest at 12%. The carrying amount of the land was $4,000,000 on date when incurred. Answers A, B, and C are incorrect because they represent direct
of sale. The note was payable in forty quarterly principal installments of $110,000 franchise costs. Since these costs relate to the acquisition of the franchise, they
beginning January 2, 2008. Price appropriately accounts for the sale under the cost should be capitalized and deferred, rather than expensed.
recovery method. On January 2, 2008, Greene paid the first principal installment of
$110,000 and interest of $132,000. For the year ended December 31, 2007, what
total amount of income should Price recognize from the land sale and financing? Question: TREPA-0072
Answers On January 3, 2008, Paterson Services, Inc. signed an agreement authorizing Cobb
A: $0 Company to operate as a franchisee over a 20-year period for an initial franchise
B: $120,000 fee of $50,000 received when the agreement was signed. Cobb commenced
C: $132,000 operations on July 1, 2008, at which date all of the initial services required of
D: $252,000 Paterson had been performed. The agreement also provides that Cobb must pay a
continuing franchise fee equal to 5% of the revenue from the franchise annually to
Answer Explanations
Paterson. Cobb’s franchise revenue for 2008 was $400,000. For the year ended
A. Answer A is correct. Under the cost recovery method no profit of any type
December 31, 2008, how much should Paterson record as revenue from franchise
is recognized until the cumulative receipts exceed the cost of the asset sold. This
fees in respect of the Cobb franchise?
means that the entire gross profit ($5,000,000 – $4,000,000 = $1,000,000) and the
2007 interest revenue ($132,000) will be deferred until cash collections exceed Answers
$4,000,000. Therefore, no income is recognized in 2007. A: $70,000
B. Answer B is incorrect. Refer to the correct answer explanation. B: $50,000
C: $45,000 refundable. Therefore, the $30,000 may be recognized as revenue in 2008. The
D: $22,500 three remaining $15,000 installments relate to substantial future services to be
Answer Explanations performed by Reed. The present value of these payments, $36,000, is recorded
A. Answer A is correct. Initial franchise fees are recognized as revenue when as unearned fees and recognized as revenue once substantial performance has
all of the initial services required of the franchisor have been substantially occurred.
performed. Continuing franchise fees are reported as revenue as the fees are earned
and become receivable. In this case, since all the initial services were performed by Cash 30,000
7/1/08, the initial fee ($50,000) is recognized as revenue in 2008. Also, continuing Notes Receivable 45,000
fees of $20,000 (5% x $400,000) should be recognized. Therefore, the total Discount on NR 9,000
franchise fee revenue to be recognized in 2008 is $70,000 ($50,000 + $20,000). Franchise revenue 30,000
B. Answer B is incorrect. Refer to the correct answer explanation. Unearned franchise fees 36,000
D. Answer D is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.
Question: TREPA-0073 Question: TREPA-0074

On December 31, 2008, Reed, Inc. authorized Foy to operate as a franchisee for an
initial franchise fee of $75,000. Of this amount, $30,000 was received upon Baker Co. has a franchise restaurant business. On January 15 of the current year,
signing the agreement and the balance, represented by a note, is due in three Baker charged an investor a franchise fee of $65,000 for the right to operate as a
annual payments of $15,000 each beginning December 31, 2009. The present franchisee of one of Baker’s restaurants. A cash payment of $25,000 towards the
value on December 31, 2008, of the three annual payments appropriately fee was required to be paid to Baker during the current year. Four subsequent
discounted is $36,000. According to the agreement, the nonrefundable down annual payments of $10,000 with a present value of $34,000 at the current market
payment represents a fair measure of the services already performed by Reed; interest rate represent the balance of the fee which is expected to be collected in
however, substantial future services are required of Reed. Collectibility of the note full. The initial cash payment is nonrefundable and no future services are required
is reasonably certain. On December 31, 2008, Reed should record unearned by Baker. What amount should Baker report as franchise revenue during the
franchise fees in respect of the Foy franchise of current year?
Answers Answers
A: $0 A: $0
B: $36,000 B: $25,000
C: $45,000 C: $59,000
D: $75,000 D: $65,000
Answer Explanations Answer Explanations
This answer is incorrect. Refer to the correct answer explanation. A. Answer A is incorrect. All revenue should be recognized.
B. Answer B is correct. Per SFAS 45, franchise fee revenue shall be recognized B. Answer B is incorrect. Baker may also recognize the present value of the
when all material services have been substantially performed by the franchisor future payments.
(i.e., the franchisor has no remaining obligation to refund any cash received C. Answer C is correct. Revenue on a franchise agreement should be
and substantially all of the initial services of the franchisor have been recognized when the franchisor has substantially performed all material
performed). Of the initial fee of $75,000, the $30,000 down payment applies to services and conditions, and collectibility is reasonably assured. Baker should
the initial services already performed by Reed. Additionally, this amount is not recognize $59,000 in revenue: the initial cash payment ($25,000) plus the
present value of the future cash payments ($34,000).
D. Answer D is incorrect. The present value of the future payments should be D: Full accrual method.
recognized, not the total payments. Answer Explanations
A. Answer A is incorrect. The deposit method is to be used
Question: TREPA-0075 1. Until the sale is consummated, when all activities necessary for closing
Macklin Co. entered into a franchise agreement with Heath Co. for an initial fee of have been performed.
$50,000. Macklin received $10,000 when the agreement was signed. Heath signed 2. If the buyer's initial and continuing investments are not adequate to
an 8% interest bearing-note for $40,000. The note was to be paid at a rate of demonstrate a commitment to pay for the property and the seller is not
$10,000 per year, starting the next year. All services were performed by Macklin reasonably assured of recovering the cost of the property if the buyer
and the refund period had expired. Operations started in the current year. What defaults.
amount should Macklin recognize as revenue in the current year?
Answers The problem states that the sale has been consummated and that Kame's initial and
A: $0 continuing investments are adequate. Therefore, the deposit method will not be
B: $10,000 used to account for the sale.
B. Answer B is incorrect. The reduced profit method is used only when the
C: $20,000
initial investment is adequate to demonstrate a commitment to pay for the property
D: $50,000 but the continuing investments are not. The continuing investments must also meet
Answer Explanations certain additional requirements for the reduced profit method to be used. Since
A. Answer A is incorrect. $50,000 in revenue should be recognized. Kame's continuing investments are adequate, the reduced profit method will not be
B. Answer B is incorrect. $50,000 in revenue should be recognized. used to account for the sale.
C. Answer C is correct. The problem states that the sale has been
C. Answer C is incorrect. $50,000 in revenue should be recognized. consummated and that Kame's initial and continuing investments are adequate to
D. Answer D is correct. Revenue on a franchise agreement should be recognized demonstrate a commitment to pay for the property. However, the fact that Esker's
when the franchisor has substantially performed all material services and receivable is subject to future subordination precludes recognition of the profit in
conditions, and collectibility is reasonably assured. All services are performed full. Instead, the cost recovery method must be used to account for the sale.
and the refund period has expired. D. Answer D is incorrect. The full accrual method may be used only if profit on
the sale is determinable, the earning process is virtually complete, and all of
the following:
Question: TREPA-0076 1. A sale is consummated.
Esker Inc. specializes in real estate transactions other than retail land sales. On
2. The buyer's initial and continuing investments are adequate to demonstrate
January 1, 2008, Esker consummated a sale of property to Kame Ltd. The amount
a commitment to pay for the property.
of profit on the sale is determinable and Esker is not obligated to perform any
3. The seller's receivable is not subject to future subordination.
additional activities to earn the profit. Kame’s initial and continuing investments
4. The seller has transferred to the buyer the usual risks and rewards of
were adequate to demonstrate a commitment to pay for the property under SFAS
ownership in a transaction that is, in substance, a sale and does not have a
66. However, Esker’s receivable may be subject to future subordination. Esker
substantial continuing involvement in the property.
should account for the sale using the
Answers Since Esker's receivable is subject to future subordination, the full accrual method
A: Deposit method. may not be used to account for the sale.
B: Reduced profit method.
C: Cost recovery method.
D: Expensed immediately
The following information pertains to a sale of real estate by Ryan Co. to Sud Co. A. Answer A is incorrect. It identifies an inappropriate method of accounting.
on December 31, 2007: B. Answer B is incorrect. It identifies an inappropriate method of accounting.
C. Answer C is incorrect. It identifies an inappropriate method of accounting.
Carrying amount $2,000,000
D. Answer D is correct. AICPA Statement of Position 98-5 states that start-up
Sales price:
costs and organization costs should be expensed as incurred.
Cash $ 300,000
Purchase money mortgage 2,700,000 3,000,000
The mortgage is payable in nine annual installments of $300,000 beginning

December 31, 2008, plus interest of 10%. The December 31, 2008 installment was Which of the following statements best describes an operating procedure for
paid as scheduled, together with interest of $270,000. Ryan uses the cost recovery issuing a new Financial Accounting Standards Board (FASB) statement?
method to account for the sale. What amount of income should Ryan recognize in Answers
2008 from the real estate sale and its financing? A: The Emerging Issues Task Force must approve a discussion
Answers memorandum before it is disseminated to the public.
A: $570,000 B: The Exposure Draft is modified per public opinion before issuing the
B: $370,000 discussion memorandum.
C: $270,000 C: A new statement is issued only after a majority vote by the members of
D: $0 the FASB.
Answer Explanations D: A new FASB statement can be rescinded by a majority vote of the
A. Answer A is incorrect. Refer to the correct answer explanation. AICPA membership.
B. Answer B is incorrect. Refer to the correct answer explanation. Answer Explanations
C. Answer C is incorrect. Refer to the correct answer explanation. A. Answer A is incorrect because the EITF does not approve a discussion
D. Answer D is correct. Under the cost recovery method no profit of any type memorandum before it is disseminated to the public.
is recognized until the cumulative receipts (principal and interest) exceed the cost B. Answer B is incorrect because an Exposure Draft is modified by the FASB
of the asset sold. This means that the entire gross profit ($3,000,000 – $2,000,000 members.
= $1,000,000) and the 2008 interest received ($270,000) will be deferred until cash C. Answer C is correct. The requirement is to identify the operating
collections exceed $2,000,000. Therefore, no income is recognized in 2008. procedure for issuing new FASB statements. Answer C is correct because a new
statement is issued after a majority vote of the members of FASB.
Question: TREPA-0078 D. Answer D is incorrect because the AICPA does not have the authority to
rescind a FASB pronouncement.
Wind Co. incurred organization costs of $6,000 at the beginning of its first year of
operations. How should Wind treat the organization costs in its financial
statements in accordance with GAAP? Question: TREPA-0080
Answers According to the FASB conceptual framework, the quality of information that
A: Never amortized. helps users increase the likelihood of correctly forecasting the outcome of past or
B: Amortized over sixty months. present events is called
C: Amortized over forty years. Answers
A: Feedback value. Answers
B: Predictive value. A: $10,000
C: Representational faithfulness. B: $ 6,000
D: Reliability. C: $ 4,000
Answer Explanations D: $0
Null Answer Explanations
B. Answer B is correct. The requirement is to identify the quality of in- Null Null Null
formation that helps users increase the likelihood of correctly forecasting D. Answer D is correct. The requirement is to determine the amount that
outcomes. According to the glossary in SFAC 2, predictive value is defined as the should be included in sales revenue. Per SFAS 48, para 6, when the right of return
quality of information that helps users to increase the likelihood of correctly exists, a seller may only recognize revenue when the buyer is obligated to pay the
forecasting the outcome of past or present events. seller, and the obligation is not contingent on the resale of the product. Because
Null Null Jensen’s obligation to repay is contingent upon Jensen reselling the goods, Jensen
cannot recognize revenue in its December 31 income statement.
Which of the following assumptions means that money is the common Question: TREPA-0083
denominator of economic activity and provides an appropriate basis for accounting North Co. entered into a franchise agreement with South Co. for an initial fee of
measurement and analysis? $50,000. North received $10,000 at the agreement’s signing. The remaining
Answers balance was to be paid at a rate of $10,000 per year, beginning the following year.
A: Going concern. North’s services per the agreement were not complete in the current year.
B: Periodicity. Operating activities will commence next year. What amount should North report as
C: Monetary unit. franchise revenue in the current year?
D: Economic entity. Answers
Answer Explanations A: $0
Null Null B: $10,000
C. Answer C is correct. The requirement is to identify the assumption that C: $20,000
means that money is the common denominator of economic activity. CON 5, para D: $50,000
71, provides that the monetary unit is the common denominator of economic Answer Explanations
activity and provides a basis for accounting measurement. A. Answer A is correct. The requirement is to determine the amount that
Null should be reported as franchise revenue. According to SFAS 45, revenue can be
recognized only when all material services or conditions relating to the sale have
been substantially performed by the franchisor. Since North’s services were not
Question: TREPA-0082 complete in the current year, no revenue can be recognized in the current year.
On December 30, Devlin Co. sold goods to Jensen Co. for $10,000, under an Null Null Null
arrangement in which (1) Jensen has an unlimited right of return and (2) Jensen’s
obligation to pay Devlin is contingent upon Jensen’s reselling the goods. Past
experience has shown that Jensen ordinarily resells 60% of goods and returns the
other 40%. What amount should Devlin include in sales revenue for this
transaction on its December 31 income statement?

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A. Answer A is correct.

SFAC 1 states that information provided by financial

Answers Question: TREPA-0016

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2007 2008 Answers

The effect of this amortization is to increase expenses (a decrease in stockholders'

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Question: TREPA-0073 Question: TREPA-0074

The mortgage is payable in nine annual installments of $300,000 beginning

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