Professional Documents
Culture Documents
REVENUE RECOGNITION
TRUE-FALSE—Conceptual
1. The new revenue recognition standard adopts a liability approach as the basis for revenue
recognition.
2. Revenue is recognized in the accounting period when the performance obligation is
satisfied.
3. The first step in the revenue recognition process is to identify the separate performance
obligations in the contract.
4. Revenue from a contract with a customer cannot be recognized until a contract exists.
5. When a contract modification is treated as a separate performance obligation or
prospectively, the same amount of revenue is recognized before and after the modification.
6. If the performance obligation is not highly dependent on, or interrelated with, other
promises in the contract, then each performance obligation should be accounted for
separately.
7. A performance obligation is a written guarantee in a contract to provide a product or
service to a customer.
8. Companies use the expected value, a probability-weighted amount to estimate variable
consideration.
9. When a sales transaction involves a significant financing component, the fair value is
determined either by measuring the consideration received or by discounting the payment
using an imputed interest rate.
10. Companies rarely have to allocate the transaction price to more than one performance
obligation in a contract.
11. When a company sells a bundle of goods at a discount, the discount should be allocated to
the product that caused the discount and not to the entire bundle.
12. A company recognizes revenue from a performance obligation over time by measuring the
progress toward completion.
13. A company can only satisfy its performance obligations at a point in time.
14. When a company sells a product but gives the buyer the right to return it, revenue should
not be recognized until the sale is collected.
15. Warranties that the product meets agreed-upon specifications in the contract at the time
the product is sold are referred to as assurance-type warranties.
16. A contract liability is a company’s obligation to transfer goods or services to a customer for
which the company has received consideration from the customer.
*17. The most popular input measure used to determine the progress toward completion in
long-term contracts is the cost-to-cost basis.
*18. If the difference between the Construction in Process and the Billings on Construction in
Process account balances is a debit, the difference is reported as a current asset.
*19. The Construction in Process account includes only construction costs under the
percentage-of-completion method.
18 - 4 Test Bank for Intermediate Accounting, IFRS Edition, 3e
*20. Under the cost-recovery method, companies recognize costs only when the contract is
completed.
*21. The principal advantage of the cost-recovery method is that reported revenue reflects final
results rather than estimates.
*22. Companies must recognize the entire expected loss on an unprofitable contract in the
current period under the percentage-of-completion method but not the cost-recovery
method.
*23. A loss in the current period on a profitable contract must be recognized under both the
percentage-of-completion and cost-recovery method.
*24. Neither the Billings account balance nor the Construction in Process account balance can
exceed the long-term contract price.
*25. The provision for a loss on an unprofitable contract may be combined with the Construction
in Process account balance under percentage-of-completion but not cost-recovery.
True-False Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. T 11. T 16. T 21. T
2. T 7. F 12. T 17. T 22. F
3. F 8. F 13. F 18. T 23. F
4. T 9. T 14. F 19. F 24. T
5. T 10. F 15. T 20. F 25. F
MULTIPLE CHOICE—Conceptual
26. To address inconsistencies and weaknesses in revenue recognition, a comprehensive
revenue recognition standard was developed entitled the
a. Revenue Recognition Principle.
b. Principle-based Revenue Accounting.
c. Rules-based Revenue Accounting.
d. Revenue from Contracts with Customers.
27. The converged standard on revenue recognition
a. reduces the number of disclosures required for revenue reporting.
b. increases the complexity of financial statement preparation.
c. recognizes and measures revenue based on changes in assets and liabilities.
d. simplify revenue recognition practices across entities and industries.
28. The first step in the process for revenue recognition is to
a. determine the transaction price.
b. identify the contract with customers.
c. allocate transaction price to the separate performance obligations.
d. identify the separate performance obligations in the contract.
Revenue Recognition 18 - 5
18 - 6 Test Bank for Intermediate Accounting, IFRS Edition, 3e
35. A contract between Boeing and Delta in which Boeing supplies planes to Delta
a. is an agreement that creates enforceable rights and obligations for both parties.
b. is an agreement that creates enforceable rights and obligations for Boeing only.
c. cannot create multiple performance obligations.
d. is considered wholly unperformed until Boeing receives payment from Delta.
36. On January 15, 2018, Bella Vista Company enters into a contract to build custom
equipment for ABC Carpet Company. The contract specified a delivery date of March 1.
The equipment was not delivered until March 31. The contract required full payment of
€75,000 30 days after delivery. The revenue for this contract should be
a. recorded on January 15, 2018.
b. recorded on March 1, 2018.
c. recorded on March 31, 2018.
d. recorded on April 30, 2018.
Revenue Recognition 18 - 7
37. A company must account for a contract modification as a new contract if the
a. goods or services are interdependent on each other.
b. promised goods or services are distinct.
c. company has the right to receive consideration equal to standalone price.
d. goods or services are distinct and company has right to receive the standalone price.
38. When a contract modification does not result in a separate performance obligation, the
additional products are priced at the
a. standalone price of the product.
b. blended price of original contract and contract modification.
c. average selling price of original selling price and standalone price.
d. selling price specified in contract modification
39. A performance obligation exists when
a. a company receives the right to receive consideration.
b. a contract is approved and signed.
c. a company provides a distinct product or service.
d. a company provides interdependent product or service.
40. When multiple performance obligations exist in a contract, they should be accounted for as
a single performance obligation when
a. each service is interdependent and interrelated.
b. both performance obligations are distinct but interdependent.
c. the product is distinct within the contract.
d. determination cannot be made.
41. New Age Computers manufactures and sells pagers and radio paging systems which
include a 180 day warranty on product defects. It also sells an extended warranty which
provides an additional two years of protection. On May 10, it sold a paging system for
€4,500 and an extended warranty for another €1,400. The journal entry to record this
transaction would include
a. a credit to Warranty Revenue of €5,900.
b. a credit to Warranty Revenue of €1,400
c. a credit to Sales of €4,500 and a credit to Warranty Revenue of €1,400
d. a credit to Unearned Warranty Revenue of €1,400.
42. Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to
providing the software, the company also provides consulting services and support to
ensure smooth operation of the software. The total transaction price is €420,000. Based on
standalone values, the company estimates the consulting services and support have a
value of €120,000 and the software license has a value of €300,000. Assuming the
performance obligations are not interdependent, the journal entry to record the transaction
includes
a. a credit to Sales Revenue for €300,000 and a credit to Unearned Service Revenue of
$120,000.
b. a credit to Service Revenue of €120,000.
c. a credit to Unearned Service Revenue of €120,000.
d. a credit to Sales Revenue of €420,000.
18 - 8 Test Bank for Intermediate Accounting, IFRS Edition, 3e
66. On July 31, O’Malley Company contracted to have two products built by Taylor
Manufacturing for a total of €370,000. The contract specifies that payment will only occur
after both products have been transferred to O’Malley Company. Taylor determines that
the standalone prices are €200,000 for Product 1 and €170,000 for Product 2. On August
1, when Product 1 has been transferred, Taylor’s journal entry to record this event includes
a
a. debit to Accounts Receivable for €200,000.
b. debit to Accounts Receivable for €170,000.
c. debit to Contract Assets for €170,000.
d. debit to Contract Assets for €200,000.
*69. In selecting an accounting method for a newly contracted long-term construction project,
the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of progress
toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term
construction contracts.
d. the inherent nature of the contractor's technical facilities used in construction.
*70. How should the balances of Progress Billings and Construction in Process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress Billings as deferred income, Construction in Progress as a deferred expense.
b. Progress Billings as income, Construction in Process as inventory.
c. Net balance, as a current asset if debit balance, and current liability if credit balance.
d. Net balance, as income from construction if credit balance, and loss from construction if
debit balance.
*75. Cost estimates on a long-term contract may indicate that a loss will result on completion of
the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion or
cost-recovery method is employed.
Revenue Recognition 18 - 13
b. recognized in the current period under the percentage-of-completion method, but the
cost-recovery method defers recognition of the loss to the time when the contract is
completed.
c. recognized in the current period under the cost-recovery method, but the percentage-
of-completion method defers the loss until the contract is completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or cost-recovery method is employed.
*76. Cost estimates at the end of the second year indicate that a loss will result on completion
of the entire contract. Which of the following statements is correct?
a. Under the cost-recovery method, the loss is not recognized until the year the
construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first
year must not be changed.
c. Under the cost-recovery method, when the billings exceed the accumulated costs, the
amount of the estimated loss is reported as a current liability.
d. Under the cost-recovery method, when the Construction in Process balance exceeds
the billings, the estimated loss is added to the accumulated costs.
*77. When there is a significant increase in the estimated total contract costs but the increase
does not eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the cost-recovery methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase requires
a current period adjustment of excess gross profit recognized on the project in prior
periods.
c. Under the cost-recovery method only, the estimated cost increase requires a current
period adjustment of excess gross profit recognized on the project in prior periods.
d. No current period adjustment is required.
*78. Sources of revenue for franchise companies are
a. assistance for site selection and negotiating lease.
b. bookkeeping and advisory services.
c. sale of initial franchise and continuing fees.
d. advertising and promotion.
MULTIPLE CHOICE—Computational
86. Marle Construction enters into a contract with a customer to build a warehouse for
€950,000 on March 30, 2018 with a performance bonus of €50,000 if the building is
completed by July 31, 2018. The bonus is reduced by €10,000 each week that completion
is delayed. Marle commonly includes these completion bonuses in its contracts and, based
on prior experience, estimates the following completion outcomes:
Completed by Probability
July 31, 2018 65%
August 7, 2018 25%
August 14, 2018 5%
August 21, 2018 5%
87. On June 1, 2018, Johnson & Sons sold equipment to James Landscaping Service in
exchange for a zero-interest bearing note with a face value of €110,000, with payment due
in 12 months. The fair value of the equipment on the date of sale was €100,000. The
amount of revenue to be recognized on this transaction in 2018 is
a. €110,000.
b. €10,000
c. €100,000
d. €100,000 sales revenue and $5,833 interest revenue.
18 - 16 Test Bank for Intermediate Accounting, IFRS Edition, 3e
88. P & G Auto Parts sells parts to AAA Car Repair during 2018. P&G offers rebates of 2% on
purchases up to £60,000 and 3% on purchases above $60,000 if the customer’s purchases
for the year exceed £200,000. In the past, AAA normally purchases £300,000 in parts
during a calendar year. On March 25, 2018, AAA Car Repair purchased £74,000 of parts.
The journal entry to record the purchase includes a
a. debit to Accounts Receivable for £74,000.
b. debit to Accounts Receivable for £72,800.
c. credit to Sales Revenue for £72,380.
d. credit to Sales Revenue for £72,800.
89. Roche Pharmaceuticals entered into a licensing agreement with Zenith Lab for a new drug
under development. Roche will receive €8,100,000 if the new drug receives FDA approval.
Based on prior approval, Roche determines that it is 85% likely that the drug will gain
approval. The transaction price of this arrangement should be
a. €8,100,000.
b. €6,885,000.
c. €1,215,000.
d. €0 until approval is received.
90. Meyer & Smith is a full-service technology company. They provide equipment, installation
services as well as training. Customers can purchase any product or service separately or
as a bundled package. Container Corporation purchased computer equipment, installation
and training for a total cost of €144,000 on March 15, 2018. Estimated standalone fair
values of the equipment, installation, and training are €90,000, €60,000, and €30,000
respectively. The transaction price allocated to equipment, installation and training is
a. €90,000, €60,000, €30,000 respectively
b. €48,000, €48,000, €48,000 respectively
c. €144,000 for the entire bundle.
d. €72,000, €48,000 and €24,000 respectively.
91. Meyer & Smith is a full-service technology company. They provide equipment, installation
services as well as training. Customers can purchase any product or service separately or
as a bundled package. Container Corporation purchased computer equipment, installation
and training for a total cost of €144,000 on March 15, 2018. Estimated standalone fair
values of the equipment, installation and training are €90,000, €60,000 and €30,000
respectively. The journal entry to record the transaction on March 15, 2018 will include a
a. credit to Sales Revenue for €144,000.
b. debit to Unearned Service Revenue of €30,000.
c. credit to Unearned Service Revenue of €24,000.
d. credit to Service Revenue of €60,000.
Revenue Recognition 18 - 17
92. Bella Pool Company sells prefabricated pools that cost £80,000 to customers for £144,000.
The sales price includes an installation fee, which is valued at £20,000. The fair value of
the pool is £128,000. The installation is considered a separate performance obligation and
is expected to take 3 months to complete. The transaction price allocated to the pool and
the installation is
a. £124,541 and £19,459 respectively
b. £144,000 and £20,000 respectively
c. £128,000 and £20,000 respectively
d. £110,702 and £17,298 respectively
93. Botanic Choice sells natural supplements to customers with an unconditional sales return if
they are not satisfied. The sales returns extends 60 days. On February 10, 2018, a
customer purchases €4,000 of products (cost €2,000). Assuming that based on prior
experience, estimated returns are 20%. The journal entry to record the expected sales
return and cost of goods sold includes a
a. debit to Cash and a credit to Sales Revenue of €4,000.
b. debit to Allowance for Sales Returns of €800 and a credit to Cost of Goods sold of
€400.
c. debt to Cost of Goods Sold and credit to Inventory for €2,000.
d. credit to Estimated Inventory Returns of €400
94. Botanic Choice sells natural supplements to customers with an unconditional sales return if
they are not satisfied. The sales returns period extends 60 days. On February 10, 2018, a
customer purchases €4,000 of products (cost €2,000). Assuming that based on prior
experience, estimated returns are 20%. The journal entry to record the actual return of
€250 of merchandise includes a
a. credit to Allowance for Sales Returns for €250.
b. credit to Returned Inventory for €125.
c. debit to Returned Inventory for €125.
d. debit to Estimated Inventory Returns for €125.
95. On August 5, 2018, Famous Furniture shipped 40 dining sets on consignment to Furniture
Outlet, Inc. The cost of each dining set was €350 each. The cost of shipping the dining sets
amounted to €3,600 and was paid for by Famous Furniture. On December 30, 2018, the
consignee reported the sale of 30 dining sets at €850 each. The consignee remitted
payment for the amount due after deducting a 6% commission, advertising expense of
€600, and installation and setup costs of €780. The amount cash received by Famous
furniture is
a. €25,500
b. €23,970
c. €22,590
d. €23,370
18 - 18 Test Bank for Intermediate Accounting, IFRS Edition, 3e
96. On August 5, 2018, Famous Furniture shipped 40 dining sets on consignment to Furniture
Outlet, Inc. The cost of each dining set was €350 each. The cost of shipping the dining sets
amounted to €1,800 and was paid for by Famous Furniture. On December 30, 2018, the
consignee reported the sale of 30 dining sets at €850 each. The consignee remitted
payment for the amount due after deducting a 6% commission, advertising expense of
€600, and installation and setup costs of €780. The total profit on units sold for the
consignor is
a. €22,590
b. €10,290
c. €12,090
d. €19,890
97. On November 1, 2018, Green Valley Farm entered into a contract to buy a €150,000
harvester from John Deere. The contract required Green Valley Farm to pay €150,000 in
advance on November 1, 2018. The harvester (cost of €110,000) was delivered on
November 30, 2018. The journal entry to record the contract on November 1, 2018
includes a
a. credit to Accounts Receivable for €150,000.
b. credit to Sales Revenue for €150,000.
c. credit to Unearned Sales Revenue for €150,000.
d. debit to Unearned Sales Revenue for €150,000.
98. On November 1, 2018, Green Valley Farm entered into a contract to buy a €150,000
harvester from John Deere. The contract required Green Valley Farm to pay €150,000 in
advance on November 1, 2018. The harvester (cost of €110,000) was delivered on
November 30, 2018. The journal entry to record the delivery of the equipment includes a
a. debit to Unearned Sales Revenue for €150,000.
b. credit to Unearned Sales Revenue for €150,000.
c. credit to Cost of Goods Sold for €110,000.
d. debit to Inventory for €110,000.
Revenue Recognition 18 - 19
99. Arizona Communications contracted to set up a call center for the City of Phoenix. Under
the terms of the contract, Arizona Communications will design and set-up a call center with
the following costs:
Seasons Construction is constructing an office building under contract for Cannon Company and
uses the percentage-of-completion method. The contract calls for progress billings and payments
of €1,550,000 each quarter. The total contract price is €18,600,000 and Seasons estimates total
costs of €17,750,000. Seasons estimates that the building will take 3 years to complete, and
commences construction on January 2, 2018.
*100. At December 31, 2018, Seasons estimates that it is 30% complete with the construction,
based on costs incurred. What is the total amount of Revenue from Long-Term Contracts
recognized for 2018 and what is the balance in the Accounts Receivable account assuming
Cannon Company has not yet made its last quarterly payment?
Revenue Accounts Receivable
a. €6,200,000 €6,200,000
b. €5,325,000 €1,550,000
c. €5,580,000 €1,550,000
d. €5,325,000 €6,200,000
Seasons Construction is constructing an office building under contract for Cannon Company and
uses the percentage-of-completion method. The contract calls for progress billings and payments
of €1,550,000 each quarter. The total contract price is €18,600,000 and Seasons estimates total
costs of €17,750,000. Seasons estimates that the building will take 3 years to complete, and
commences construction on January 2, 2018.
*101. At December 31, 2019, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to €18,000,000 due
to unanticipated price increases. What is the total amount of Construction Expenses that
Seasons will recognize for the year ended December 31, 2019?
a. €13,500,000
18 - 20 Test Bank for Intermediate Accounting, IFRS Edition, 3e
b. €7,875,000
c. €7,987,500
d. €8,175,000
Seasons Construction is constructing an office building under contract for Cannon Company and
uses the percentage-of-completion method. The contract calls for progress billings and payments
of €1,550,000 each quarter. The total contract price is €18,600,000 and Seasons estimates total
costs of €17,750,000. Seasons estimates that the building will take 3 years to complete, and
commences construction on January 2, 2018.
*102. At December 31, 2019, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to €18,000,000 due
to unanticipated price increases. What is reported in the statement of financial position at
December 31, 2019 for Seasons as the difference between the Construction in Process
and the Billings on Construction in Process accounts, and is it a debit or a credit?
Difference between the accounts Debit/Credit
a. €4,225,000 Credit
b. €1,550,000 Debit
c. €1,100,000 Debit d. €1,550,000
Credit
Seasons Construction is constructing an office building under contract for Cannon Company and
uses the percentage-of-completion method. The contract calls for progress billings and payments
of €1,550,000 each quarter. The total contract price is €18,600,000 and Seasons estimates total
costs of $17,750,000. Seasons estimates that the building will take 3 years to complete, and
commences construction on January 2, 2018.
*103. Seasons Construction completes the remaining 25% of the building construction on
December 31, 2020, as scheduled. At that time the total costs of construction are
€18,750,000. What is the total amount of Revenue from Long-Term Contracts and
Construction Expenses that Seasons will recognize for the year ended December 31,
2020?
Revenue Expenses
a. €18,600,000 €18,750,000
b. €4,650,000 € 4,687,500
c. €4,650,000 € 5,250,000
d. €4,687,500 € 4,687,500
Cooper Construction Company had a contract starting April 2018, to construct a €24,000,000
building that is expected to be completed in September 2020, at an estimated cost of €22,000,000.
At the end of 2018, the costs to date were €10,120,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were €4,800,000 and the cash collected
during 2018 was €3,200,000. Cooper uses the percentage-of-completion method.
*104. For the year ended December 31, 2018, Cooper would recognize gross profit on the
building of:
a. € 843,333
b. € 920,000
Revenue Recognition 18 - 21
c. €1`,080,000
d. €0
Cooper Construction Company had a contract starting April 2018, to construct a €24,000,000
building that is expected to be completed in September 2020, at an estimated cost of €22,000,000.
At the end of 2018, the costs to date were €10,120,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were €4,800,000 and the cash collected
during 2018 was €3,200,000. Cooper uses the percentage-of-completion method.
*105. At December 31, 2018 Cooper would report Construction in Process in the amount of:
a. € 920,000
b. €10,120,000
c. €11,040,000
d. € 9,440,000
In 2018, Fargo Corporation began construction work under a three-year contract. The contract
price is €7,200,000. Fargo uses the percentage-of-completion method for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred to
total estimated costs for completing the contract. The financial statement presentations relating to
this contract at December 31, 2018, follow:
Statement of Financial PositionAccounts receivable—construction contract billings
€300,000
Construction in progress €900,000
Less contract billings 720,000
Costs and recognized profit in excess of billings 180,000
Income Statement
Income (before tax) on the contract recognized in 2018 €180,000
In 2018, Fargo Corporation began construction work under a three-year contract. The contract
price is €7,200,000. Fargo uses the percentage-of-completion method for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred to
total estimated costs for completing the contract. The financial statement presentations relating to
this contract at December 31, 2018, follow:
Statement of Financial PositionAccounts receivable—construction contract billings
€300,000
Construction in progress €900,000
Less contract billings 720,000
Costs and recognized profit in excess of billings 180,000
Income Statement
Income (before tax) on the contract recognized in 2018 €180,000
*109. What was the initial estimated total income before tax on this contract?
a. €900,000
b. €960,000
c. €1,200,000
d. €1,440,000
*110. Adler Construction Co. uses the percentage-of-completion method. In 2018, Adler began
work on a contract for £11,000,000 and it was completed in 2019. Data on the costs are:
Year Ended December 31
2018 2019
Costs incurred £3,900,000 £2,800,000
Estimated costs to complete 2,600,000 —
For the years 2018 and 2019, Adler should recognize gross profit of
2018 2019
a. £0 £4,300,000
b. £2,580,000 £1,720,000
Revenue Recognition 18 - 23
c. £2,700,000 £1,600,000
d. £2,700,000 £4,300,000
Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of
€19,200,000. Other details follow:
2018 2019
Costs incurred during the year €3,200,000 €9,800,000
Estimated costs to complete, as of December 31 9,600,000 0
Billings during the year 3,600,000 14,400,000
Collections during the year 2,400,000 15,600,000
*111. Assume that Gomez uses the percentage-of-completion method of accounting. The portion
of the total gross profit to be recognized as income in 2018 is
a. €1,200,000.
b. €1,600,000.
c. €4,800,000.
d. €6,400,000.
18 - 24 Test Bank for Intermediate Accounting, IFRS Edition, 3e
Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of
€19,200,000. Other details follow:
2018 2019
Costs incurred during the year €3,200,000 €9,800,000
Estimated costs to complete, as of December 31 9,600,000 0
Billings during the year 3,600,000 14,400,000
Collections during the year 2,400,000 15,600,000
*112. Assume that Gomez uses the cost-recovery method of accounting. The portion of the total
gross profit to be recognized as income in 2019 is
a. €2,400,000.
b. €3,600,000.
c. €6,200,000.
d. €19,200,000.
Kiner, Inc. began work in 2018 on a contract for €21,000,000. Other data are as follows:
2018 2019
Costs incurred to date €9,000,000 €14,000,000
Estimated costs to complete 6,000,000 —
Billings to date 7,000,000 21,000,000
Collections to date 5,000,000 18,000,000
*113. If Kiner uses the percentage-of-completion method, the gross profit to be recognized in
2018 is
a. €3,600,000.
b. €4,000,000.
c. €5,400,000.
d. €6,000,000.
Kiner, Inc. began work in 2018 on a contract for €21,000,000. Other data are as follows:
2018 2019
Costs incurred to date €9,000,000 €14,000,000
Estimated costs to complete 6,000,000 —
Billings to date 7,000,000 21,000,000
Collections to date 5,000,000 18,000,000
*114. If Kiner uses the cost-recovery method, the gross profit to be recognized in 2019 is
a. €3,400,000.
b. €7,000,000.
c. €3,500,000.
d. €14,000,000.
*115. Horner Construction Co. uses the percentage-of-completion method. In 2018, Horner
began work on a contract for €22,000,000; it was completed in 2019. The following cost
data pertain to this contract:
Year Ended December 31
2018 2019
Cost incurred during the year €7,800,000 €5,600,000
Revenue Recognition 18 - 25
*116. Horner Construction Co. uses the percentage-of-completion method. In 2018, Horner
began work on a contract for €22,000,000; it was completed in 2019. The following cost
data pertain to this contract:
Year Ended December 31
2018 2019
Cost incurred during the year €7,800,000 €5,600,000
Estimated costs to complete at the end of year 5,200,000 —
If the completed-contract method of accounting was used, the amount of gross profit to be
recognized for years 2018 and 2019 would be
2018 2019
a. €9,000,000. €0.
b. €8,600,000. € (400,000).
c. €0. €8,600,000.
d. €0. €9,000,000.
Eilert Construction Company had a contract starting April 2018, to construct a €42,000,000
building that is expected to be completed in September 2019, at an estimated cost of €38,500,000.
At the end of 2018, the costs to date were €17,710,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were €8,400,000 and the cash collected
during 2018 was €5,600,000. Eilert uses the percentage-of-completion method.
*118. For the year ended December 31, 2018, Eilert would recognize gross profit on the building
of
a. €0.
b. €1,475,833.
18 - 26 Test Bank for Intermediate Accounting, IFRS Edition, 3e
c. €1,610,000.
d. €1,890,000.
Eilert Construction Company had a contract starting April 2018, to construct a €42,000,000
building that is expected to be completed in September 2019, at an estimated cost of $38,500,000.
At the end of 2018, the costs to date were €17,710,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were €8,400,000 and the cash collected
during 2018 was €5,600,000. Eilert uses the percentage-of-completion method.
*119. At December 31, 2018, Eilert would report Construction in Process in the amount of
a. €19,320,000.
b. €17,710,000.
c. €16,520,000.
d. € 1,610,000.
*120. Douglas Diners Inc. charges an initial franchise fee of €180,000 broken down as follows:
Upon signing of the agreement, a payment of €80,000 is due. Thereafter, two annual
payments of €50,000 are required. The credit rating of the franchisee is such that it would
have to pay interest of 8% to borrow money. The franchise agreement is signed on August
1, 2018, and the franchise commences operation on November 1, 2018. Assuming that no
future services are required by the franchisor once the franchise begins operations, the
entry on November 1, 2018 would include
a. a credit to Unearned Franchise Revenue for €80,000.
b. a credit to Service Revenue for €23,000.
c. a credit to Sales Revenue for €77,000.
d. a debit to Unearned Franchise Revenue for €80,000.
*121. Douglas Diners Inc. charges an initial franchise fee of €180,000 broken down as follows:
Upon signing of the agreement, a payment of €80,000 is due. Thereafter, two annual
payments of €50,000 are required. The credit rating of the franchisee is such that it would
have to pay interest of 8% to borrow money. The franchise agreement is signed on August
1, 2018, and the franchise commences operation on November 1, 2018. Assume that the
total training fees includes training services for the period leading up to the franchise
opening (€11,000 value) and for 3 months following opening. The journal entry on August
1, 2018 would include
Revenue Recognition 18 - 27
a. Cash.................................................................................... 1,064,000
Franchise Fee Revenue........................................... 980,000
Franchise Revenue.................................................. 84,000
b. Cash.................................................................................... 1,064,000
Unearned Franchise Revenue................................. 1,064,000
c. Cash.................................................................................... 1,064,000
Franchise Fee Revenue........................................... 980,000
Franchise Revenue.................................................. 67,200
Unearned Franchise Revenue................................. 16,800
d. Prepaid Advertising.............................................................. 16,800
Cash.................................................................................... 1,064,000
Franchise Fee Revenue........................................... 980,000
Franchise Revenue.................................................. 84,000
Unearned Franchise Revenue................................. 16,800
*123. Wynne Inc. charges an initial franchise fee of €2,300,000, with €500,000 paid when the
agreement is signed and the balance in five annual payments. The present value of the
future payments, discounted at 10%, is €1,364,680. The franchisee has the option to
purchase €300,000 of equipment for €240,000. Wynne has substantially provided all initial
services required and collectibility of the payments is reasonably assured. The amount of
revenue from franchise fees is
a. € 500,000.
b. €1,804,680.
c. €1,864,680.
d. €2,300,000.
125. Bruner Constructors, Inc. has consistently used the percentage-of-completion method of
recognizing income. In 2018, Bruner started work on a €49,000,000 construction contract
that was completed in 2019. The following information was taken from Bruner's 2018
accounting records:
126. During 2018, Gates Corp. started a construction job with a total contract price of
£21,000,000. The job was completed on December 15, 2019. Additional data are as follows:
2018 2019
Actual costs incurred during the year £8,100,000 £9,150,000
Estimated remaining costs 8,100,000 —
Billed to customer 7,200,000 13,800,000
Received from customer 6,000,000 14,400,000
Revenue Recognition 18 - 29
Under the cost-recovery method, what amount should Gates recognize as gross profit for
2019?
a. £1,350,000
b. £1,875,000
c. £2,850,000
d. £3,750,000
DERIVATIONS — Computational
No. Answer Derivation
86. a €950,000 + (€50,000 .65) + (€40,000 .25) + (€30,000 .05) +
(€20,000 .05) = €995,000
96. b (30)( €850 – €350) – (30 €850)(.06) – €1,800 – €600 – €780 = €10,290.
97. c
98. a
*106. c £3,000,000
———————————— ×(£7,500,000 – £5,000,000) = £1,500,000
£3,000,000 + £2,000,000
*107. c €18,000,000
———————————— ×(€37,500,000 – €30,000,000) = €4,500,000.
€18,000,000 + €12,000,000
€720,000
————————— ×(€7,200,000 – Total estimated cost) = €180,000
Total estimated cost
*110. c £3,900,000
—————- ×(£11,000,000 – £6,500,000) = £2,700,000
£6,500,000
*111. b €3,200,000
————— ×(€19,200,000 – €12,800,000) = €1,600,000.
€12,800,000
*113. a €9,000,000
————— ×(€21,000,000 – €15,000,000) = €3,600,000.
€15,000,000
*120. d
*121. a
€14,700,000
*125. d —————— ×(€49,000,000 – €44,100,000) = €1,633,333.
€44,100,000
EXERCISES
Solution 18-127
June 1, 2018
No entry – neither party has performed under the contract.
On August 1, 2018, Windsor has two performance obligations: (1) the delivery of the windows and
(2) the installation of the windows.
Windows £4,000
Installation 1,200
Total £5,200
Allocation
Windows (£4,000 £5,200) X £4,700 £3,615
Installation (£1,200 £5,200) X £4,700 1,085
Revenue recognized £4,700
(round to nearest dollar)
August 1, 2018
Cash.................................................................................... 4,000
Accounts Receivable........................................................... 700
Unearned Service Revenue......................................... 1,085
Sales Revenue............................................................. 3,615
Instructions
(a) Prepare journal entries for Lake Company to record all the events noted above assuming sales
and receivables are entered at gross selling price.
(b) Prepare the journal entry assuming that Sue Black did not remit payment until August 5.
Solution 18-128
(a)
July 2
July 3
Allowance for Sales Returns......................................................... 350
Accounts Receivable........................................................ 350
July 7
Delivery Expense.......................................................................... 20
Cash................................................................................. 20
The journal entry to record payment within the discount period is as follows.
July 12
In each instance in which maintenance services are provided, the maintenance service is
separately priced within the arrangement at €240. Additionally, the incremental amount charged by
Appliance Store for installation approximates the amount charged by independent third parties.
Dishwashers are sold subject to a general right of return. If a customer purchases a dishwasher
with installation and/or maintenance services, in the event Appliance Store does not complete the
service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds
€1,140.
Instructions
(a) Assume that a customer purchases a dishwasher with both installation and maintenance
services for €1,450. Based on its experience, Appliance Store believes that it is probable that
the installation of the equipment will be performed satisfactorily to the customer. Assume that
the maintenance services are priced separately. Identify the separate performance obligations
related to the Appliance Store revenue arrangement.
18 - 36 Test Bank for Intermediate Accounting, IFRS Edition, 3e
(b) Indicate the amount of revenue that should be allocated to the dishwasher the installation, and
to the maintenance contract.
(c) Prepare the necessary journal entry for the Appliance Store.
Solution 18-129
(a) The separate performance obligations are the dishwasher, installation, and maintenance
service, since each item has standalone value to the customer.
Instructions
(a) Prepare the journal entry to record this transaction on December 31, 2018.
(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Dieker
sold an extended warranty (service type warranty) for an additional 2 years (2020–2021) for
$2,000.
Solution 18-130
(a) Cash............................................................................................. 125,000
Sales Revenue................................................................. 125,000
(b) Dieker should recognize €1,000 of warranty revenue in 2020 and 2021.
Cash............................................................................................. 127,000
Sales Revenue................................................................. 125,000
Unearned Warranty Revenue........................................... 2,000
Revenue Recognition 18 - 37
Instructions
(a) Prepare the journal entry on July 1, 2018, for Ellsbury.
(b) Prepare the journal entry on July 15, 2018, for Ellsbury.
(c) Prepare the journal entry on July 31, 2018, for Ellsbury.
Solution 18-131
(a) July 1, 2018
No entry – neither party has performed on July 1, 2018.
Instructions
(a) Make the entry to record construction costs of €7,200,000, on construction in process to date.
(b) Make the entry to record progress billings of €4,000,000.
(c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-
completion basis.
*Solution 18-132
(a) Construction in Process................................................................ 7,200,000
Materials, Cash, Payables................................................ 7,200,000
Instructions
(a) How much revenue should be reported for 2018? Show your computation.
(b) Make the entry to record progress billings of $4,100,000 during 2018.
(c) Make the entry to record the revenue and gross profit for 2018.
(d) How much gross profit should be reported for 2019? Show your computation.
*Solution 18-133
(a) €3,300,000
————— × €10,000,000 = €5,500,000
€6,000,000
*Solution 18-134
(a) €4,500,000
————— × €12,500,000 = €2,500,000
€22,500,000
(b) €13,000,000
—————— × €10,000,000 =€5,200,000
€25,000,000
Less 2018 gross profit 2,500,000
Gross profit in 2019 €2,700,000
Percentage-of-Completion Cost-Recovery
Gross Profit Gross Profit
2017 ____________ 2017 ____________
*Solution 18-135
Percentage-of-Completion Cost-Recovery
Gross Profit Gross Profit
2017 €2,025,000a 2017 —
2018 € 495,000b 2018 —
2019 €1,080,000c 2019 $3,600,000d
a
€4,500,000
—————— × €5,400,000 = €2,025,000
€12,000,000
b
€`7,920,000
—————— × €4,200,000 = €2,520,000
€13,200,000
*Ex. 18-136—Franchises.
Pasta Inn charges an initial fee of €2,400,000 for a franchise, with $480,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the annual
payments, discounted at 10%, is €1,521,000. The franchisee has the right to purchase €90,000 of
kitchen equipment and supplies for €75,000. An additional part of the initial fee is for advertising to
be provided by Pasta Inn during the next five years. The value of the advertising is €1,000 a
month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the
initial services required by the contract.
Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in good form.
*Solution 18-136
Total fee €2,400,000
Amount due €1,920,000
Present value of payments (1,521,000) (399,000)
Bargain purchase (15,000)
Advertising (€1,000 × 60) (60,000)
Revenue from franchise fees €1,926,000
Cash.......................................................................................... 480,000
Notes Receivable...................................................................... 1,920,000
Discount on Notes Receivable ...................................... 399,000
Franchise Revenue........................................................ 1,926,000
Unearned Franchise Revenue ...................................... 75,000
18 - 42 Test Bank for Intermediate Accounting, IFRS Edition, 3e
PROBLEMS
Instructions
Respond to the requirements related to the following independent revenue arrangements for
Master Grill products and services.
(a) Master Grill offers contract MG100 which is comprised of a free-standing gas grill for small
patio use plus installation to a customer’s gas line for a total price £950. On a standalone
basis, the grill sells for £800 (cost £470), and Master Grill estimates that the fair value of the
installation service (based on cost-plus estimation) is £200. Master Grill signed 15 MG100
contracts on May 30, 2018, and customers paid the contract price in cash. The grills were
delivered and installed on June 15, 2018. Prepare journal entries for Master Grill for MG100
in May and June 2018.
(b) Master Grill sells its specialty combination gas/wood-fired grills to local restaurants. Each grill
is sold for £1,200 (cost £670) on credit with terms 2/20, net/60. Prepare the journal entries for
the sale of 20 grills on August 1, 2018, and upon payment, assuming the customer paid on
(1) August 20, 2018, and (2) September 29, 2018. Assume the company records sales net.
Solution 18-137
(a) The total revenue of £14,250 (£950 X 15) should be allocated to the two performance
obligations based on their relative fair values. In this case, the fair value of the grills is
considered £12,000 (£800 X 15) and the fair value of the installation fee is £3,000 (£200 X
15). The total fair value to consider is therefore £15,000 (£12,000 + £3,000). The allocation is
as follows.
Cash.......................................................................................... 14,250
Unearned Service Revenue (Installation)....................... 2,850
Unearned Sales Revenue.............................................. 11,400
Accounts Receivable
[£24,000 – (2% X £24,000)]......................................... 23,520
Sales Revenue......................................................... 23,520
2. August 1, 2018
Accounts Receivable
[£24,000 – (2% X £24,000)]......................................... 23,520
Sales Revenue......................................................... 23,520
It should be noted that included in the above costs incurred to date were standard electrical and
mechanical materials stored on the job site, but not yet installed, costing €210,000. These costs
should not be considered in the costs incurred to date.
Instructions
(a) Compute the percentage of completion on the contract at the end of 2018.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2018.
(c) Make the journal entry to record the income (loss) for 2018 on Dobson's books.
(d) Indicate the account(s) and the amount(s) that would be shown on the statement of financial
position of Dobson Construction at the end of 2018 related to its construction accounts. Also
indicate where these items would be classified on the statement of financial position.Billings
collected during the year amounted to $3,800,000.
(e) Assume the latest forecast on total costs at the end of 2018 was €8,120,000. How much
income (loss) would Dobson report for the year 2018?
Solution 18-138
(a) Costs to date €2,610,000
Less materials on job site (210,000)
€2,400,000
€2,400,000
————— = 40%
€6,000,000
Current Liability
Billings in excess of contract costs and
recognized profit €1,300,000 (€4,500,000 – €3,200,000)
(c) Indicate the balances that would appear in the statement of financial position at December
31, 2018 for the following accounts for Project D (fourth project), assuming that the
percentage-of-completion method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process
(d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D
(fourth project), if the completed-contract method is used?
Solution 18-139
(a) (1) and (2)
Projects A B C D E
Contract price €500,000 €720,000 €475,000 €200,000 €450,000
Contract costs incurred 424,000 195,000 350,000 123,000 320,000
Additional costs
to complete 101,000 455,000 -0- 97,000 80,000
Total cost 525,000 650,000 350,000 220,000 400,000
Total gross profit
or (loss) € (25,000) € 70,000 €125,000 € (20,000) € 50,000
The amount reported as income (loss) under the cost-recovery method for 2018 is:
Project A € (25,000)
B -0-
C 125,000
D (20,000)
E -0-
€ 80,000
The amount reported as income (loss) under the percentage-of-completion method for 2018 is:
Project A € (25,000)
B 21,000 €70,000 × (€195,000 ÷ €650,000)
C 125,000
D (20,000)
E 40,000 €50,000 × (€320,000 ÷ €400,000)
€141,000
Revenue Recognition 18 - 47
Each of the above contracts is with a different customer, and any work remaining at December 31,
2018 is expected to be completed in 2019.
Instructions
Prepare a partial income statement and a partial statement of financial to indicate how the above
contract information would be reported. Evans uses the cost-recovery method.
Solution 18-140
Evans Construction, Inc.
Income Statement
For the Year 2018
Revenue from long-term contracts (contract Z) €233,000
Cost of construction (contract Z) 158,000
Gross profit € 75,000
Provision for loss (contract Y)* 27,000
*Contract costs through 12/31/18 €105,000
Estimated costs to complete 252,000
Total estimated costs 357,000
Total contract price 330,000
Loss recognized in 2018 € 27,000
18 - 48 Test Bank for Intermediate Accounting, IFRS Edition, 3e