CPA Exam Questions 1. b. The earnings process is completed upon delivery of the product.

Therefore, in 2011, revenue for 50,000 gallons at $3 each is recognized. The payment terms do not affect revenue recognition. 2. d. The deferred gross profit in the balance sheet at December 31, 2012 should be the balances in the accounts receivable accounts for 2011 and 2012 multiplied times the appropriate gross profit percentage: Accounts Receivable 2011 2012 Total Sales 600,000 900,000 Less: Collections (300,000) (300,000) Less: Write Offs (200,000) (50,000) Accounts Receivable Balance 100,000 550,000 x Gross Profit Rate x 30% x 40% Deferred Gross Profit 12/31/2012 30,000 220,000 The Combined Deferred Gross Profit in the Balance Sheet is $250,000 ($220,000 + $30,000). 3. a. a. Gross profit realized b. Percentage c. Collections on sales (a/b) Total sales Balance uncollected Year of sale 2011 2012 $240,000 $200,000 30% 40% $800,000 $500,000 1,000,000 2,000,000 $200,000 $1,500,000

The total uncollected balance is $1,700,000 ($200,000 + $1,500,000). 4. d. Construction-in-progress represents the costs incurred plus the cumulative pro-rata share of gross profit under the percentage-of-completion method of accounting. Construction-inprogress does not include the cumulative effect of gross profit recognition under the completed contract method. 5. c. 2011 actual costs $20,000 Total estimated costs 60,000 Ratio = 1/3 Contract Price x 100,000 Revenue 33,333 2011 actual costs -20,000 Gross profit $13,333 6. d. Since the total cost of the contract, $3,100,000 ($930,000 + $2,170,000) is projected to exceed the contract price of $3,000,000, the excess cost of $100,000 must be recognized as a loss in 2011. CMA Exam Questions

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c. Revenue is recognized when (1) realized or realizable and (2) earned. On May 28, $500,000 of the sales price was realized while the remaining $500,000 was realizable in the form of a receivable. The revenue was earned on May 28 since the title of the goods passed to the purchaser. The cost-recovery method is not used because the receivable was not deemed uncollectible until June 10.

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d. Based on the revenue recognition principle, revenue is normally recorded at the time of the sale or, occasionally, at the time cash is collected. However, sometimes neither the sales basis nor the cash basis is appropriate, such as when a construction contract extends over several accounting periods. As a result, contractors ordinarily recognize revenue using the percentage-of-completion method so that some revenue is recognized each year over the life of the contract. Hence, this method is an exception to the general principle of revenue recognition, primarily because it better matches revenues and expenses. b. Given that one-third of all costs have already been incurred ($6,000,000), the company should recognize revenue equal to one-third of the contract price, or $8,000,000. Revenues of $8,000,000 minus costs of $6,000,000 equals a gross profit of $2,000,000.

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