11.

Lake Construction Company uses the completed-contract method for long-term

construction contracts. The information for a specific contract as of January 1, 2007, is
shown below.

Costs incurred to date $ 700,000

Contract price 2,000,000
Estimated remaining cost to complete 800,000

$600,000 of cost was incurred during 2007 and on December 31, 2007, the estimated
remaining cost to complete was still $800,000. The correct balance for the Construction
in Progress at December 31, 2007 is

A. $600,000. C. $1,200,000.
B. $700,000. D. $1,300,000.

12. In preparing the bank reconciliation of Crews Company for the month of July, the
following information is available:

Balance per bank statement, 7/31 $54,075

Deposits in transit, 7/31 9,375
Outstanding checks, 7/31 8,625
Deposit erroneously recorded by bank to Crews account, 7/18 375
Bank service charges for July 75

What is the correct cash balance at July 31?

A. $52,875 C. $54,450
B. $54,375 D. $54,825

13. C & J Construction, Inc. has consistently used the percentage-of-completion method
of recognizing income. Last year, C & J started work on a $4,500,000 construction
contract, which was completed this year. The accounting records disclosed the following
data for last year:

Progress billings $1,650,000

Costs incurred 1,350,000
Collections 1,050,000
Estimated cost to complete 2,700,000

How much income should C & J have recognized on this contract last year?

A. $105,000 C. $300,000
B. $150,000 D. $350,000

14. Under which approach does a company record all earnings from a project to the
current period even though only a percentage of these earnings were actually realized
during this period?
A. Proportional performance method
B. Cost-to-cost method
C. Efforts-expended method
D. Completed-contract method

Under some circumstances, revenue can be meaningfully reported prior to delivery

of the finished product or completion of a service contract. Usually this occurs when
the construction period of the asset being sold or the period of service performance
is relatively long, that is more than one year. In these cases, if a company waits until
the production or service period is complete to recognize revenue, the income
statement may not report meaningfully the periodic achievement of the company.
Under this approach, referred to as the completed-contract method, all income from
the contract is related to the year of completion, even though only a small part of the
earnings may be attributed to effort in that period.
15. On June 30, 2007, Simon Company discounted a customer’s $180,000, 6-month,
10 percent note receivable dated April 30, 2007. A discount rate of 12 percent was
charged by the bank. Simon’s proceeds from this discounted note would be
A. $169,200. C. $181,440.
B. $172,800. D. $185,220.

16. Lake Construction Company uses the percentage-of-completion method for long-term
construction contracts. The company has a project with a contract price of $7,000 on
which $600 of gross profit has been recognized in prior years. Information for the current
year is as follows:

Total cost incurred through current year $5,000

Estimated costs remaining at end of current year 2,800

What is the loss that Lake should recognize in the current year?
A. $600 C. $1,400
B. $800 D. No loss should be recognized.

17. On September 1, Riva Co. assigns specific receivables totaling $750,000 to Pacific
Bank as collateral on a $625,000, 12 percent note. Riva Co. will continue to collect the
assigned accounts receivable. Pacific also assesses a 2 percent service charge on the total
accounts receivable assigned. Riva Co. is to make monthly payments to Pacific with cash
collected on assigned accounts receivable. Collections of assigned accounts during
September totaled $260,000 less cash discounts of $3,500. What amount is owed to
Pacific by Riva Co. for September collections plus accrued interest on the note to
September 30?

A. $260,000 C. $264,000
B. $262,750 D. $266,250
18. Richards Company uses the allowance method of accounting for bad debts. The
following summary schedule was prepared from an aging of accounts receivable
outstanding on December 31 of the current year.

No. of Days Outstanding Amount Probability of Collection

0–30 days $500,000 .98
31–60 days 200,000 .90
Over 60 days 100,000 .80

The following additional information is available for the current year:

Net credit sales for the year $4,000,000
Allowance for Doubtful Accounts:
Balance, January 1 45,000 (cr)
Balance before adjustment, December 31 2,000 (dr)

If Richards determines bad debt expense using 1.5 percent of net credit sales, the net
realizable value of accounts receivable on the December 31 balance sheet will be
A. $738,000. C. $742,000.
B. $740,000. D. $750,000.

19. Assume a retail company makes a $5,000 deposit of credit card receipts for sales
made on Visa and MasterCard and that the bank charges a 4 percent service charge for
sales on these cards. The company would debit cash for
A. $0. C. $5,000.
B. $4,800. D. $5,200.

20. Jane likes to shop at The Gap upon occasion. Last week she bought a sweater because
it was just the right color to match another item in her wardrobe. Once she got the
sweater home, it didn’t match at all. So Jane revisited her local Gap store to return the
sweater. Which of the following indicates the account(s) that would be affected by Jane’s
return?
A. Sales Return and Allowances and Cost of Goods Sold
B. Accounts Receivable
C. Inventory and Sales Return
D. Sales Return and Allowances, Cost of Goods Sold, Inventory, and Accounts
Receivable