1. When goods or services are exchanged for cash or claims to cash (receivables), revenues are A. earned. B. realized. C. recognized.

D. all of these.

Correct! When goods or services are exchanged for cash or claims to cash (receivables), revenues are realized.

2. An alternative available when the seller is exposed to continued risks of ownership through return of the product is A. recording the sale, and accounting for returns as they occur in future periods. B. not recording a sale until all return privileges have expired. C. recording the sale, but reducing sales by an estimate of future returns. D. all of these.

Correct!

3. 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.

Correct! The principal factor to be considered should be the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is

practicable.

4 Cramer Construction Co. began operations in 2011. Construction activity for 2011 is . shown below. Cramer uses the completed-contract method. Contract Price Billings Collections Costs to Estimated Through Through 12/31/11 Costs to 12/31/11 12/31/11 Complete 1 2 3 $4,350,000 3,600,000 3,300,000 $4,150,000 1,500,000 1,900,000 $3,600,000 1,000,000 1,800,000 $3,400,000 820,000 2,250,000 $1,880,000 1,200,000

Which of the following should be shown on the income statement for 2011 related to Contract 1? A. Gross profit, $750,000 B. Gross profit, $550,000 C. Gross profit, $950,000 D. Gross profit, $200,000

Correct! Contract price $4,350,000 less total costs $3,400,000 equals a gross profit of $950,000.

5. In certain cases, revenue is recognized at the completion of production even though no sale has been made. Which of the following statements is not true? A. Examples involve precious metals or farm equipment. B. The products possess immediate marketability at quoted prices. C. No significant costs are involved in selling the product. D. All of these statements are false.

It is farm products (produce) not equipment that can be considered under the completion-of-production basis.

6. Deferred gross profit on installment sales is generally treated as a (n) A. deduction from installment accounts receivable. B. deduction from installment sales. C. unearned revenue and classified as a current liability. D. deduction from gross profit on sales.

Correct! Deferred gross profit on installment sales is generally treated as an unearned revenue and classified as a current liability.

7. On January 1, 2011, Draper Co. sold land that cost $420,000 for $560,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $225,190 starting on December 31, 2011. Because collection of the note is very uncertain, Draper will use the cost-recovery method. How much revenue from this sale should Draper recognize in 2011? A. $0 B. $42,000 C. $56,000 D. $70,000

Correct! Until the cost of goods sold, $420,000, is collected, no profits are recognized.

8. Which of the following is not an accurate representation concerning revenue recognition? A. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. B. Revenue from services rendered is recognized when cash is received or when services have been performed. C. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used. D. Revenue from disposing of assets other than products is recognized at the date of sale.

Correct! Revenue from services rendered is recognized when services have been performed and billable, not when cash is collected.

9. The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions? A. The amount of future returns can be reasonably estimated. B. The seller's price is substantially fixed or determinable at time of sale. C. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product. D. The buyer is obligated to pay the seller upon resale of the product.

Correct! The buyer is obligated to pay the seller upon resale of the product is not one of these six conditions.

10. Under the percentage-of-completion method, 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, as a current asset if a debit balance, and as a current liability if a credit balance. D. Net, as income from construction if credit balance, and loss from construction if debit balance.

Correct! The balances of progress billings and construction in process should be shown at net, as a current asset if a debit balance, and as a current liability if a credit balance.

11. Under the completed contract method, the Construction in Process account balance will consist of

A. construction costs only. B. gross profit only. C. construction costs and gross profit. D. construction costs and billings.

Under the completed contract method, the Construction in Process account balance consists of construction costs only.

12 Tri-State Builders, Inc. is using the completed-contract method for a $7,350,000 contract that will take two years to complete. Data at December 31, 2011, the end of . the first year, are as follows: Costs incurred to date $ 3,760,000 Estimated costs to complete Billings to date Collections to date 4,030,000 3,220,000 2,990,000

The gross profit or loss that should be recognized for 2011 is A. $0. B. a $440,000 loss. C. a $540,000 loss. D. a $770,000 loss.

$7,350,000 less ($3,760,000 + $4,030,000) indicates a loss of $440,000. Wrong! Do not recognize revenue and gross profit until the contract is completed (the point of sale)

13. The installment-sales method of recognizing profit for accounting purposes is acceptable if A. collections in the year of sale do not exceed 30% of the total sales price. B. an unrealized profit account is credited. C. there is no reasonable basis of estimating the uncollectibility of the sales price. D. the method is consistently used for all sales of similar merchandise.

Correct! The installment-sales method of recognizing profit for accounting purposes is acceptable if there is no reasonable basis for estimating the uncollectibility of the sales price.

14. On July 1, 2011, Fletcher Co. sold equipment that cost $84,000 for $112,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $45,038 starting on June 30, 2012. Because collection of the note is very uncertain, Fletcher will use the cost-recovery method. How much revenue from this sale should Fletcher recognize in 2012? A. $0 B. $4,200 C. $5,600 D. $28,000

Correct! Until the cost of goods sold, $84,000, is collected, no profits are recognized.

15. Revenue is considered to be earned when: A. a company exchanges goods or services for cash or claims to cash. B. it is realized or realizable. C. a company has substantially completed what it must in order to be entitled to the benefits represented by the revenues. D. assets received by the company in exchange for goods or services are readily convertible to known amounts of cash or claims to cash

Revenue is considered earned when the earnings process is complete or virtually complete.

16. Revenue from selling assets other than inventory is generally recognized: A. at the date of sale. B. at the completion of production.

C. after costs are recovered. D. as cash is collected.

Revenue from selling assets other than inventory is usually recognized at the date of sale.

17. When a seller is exposed to continued risks of ownership through return of the product, the seller should recognize revenue: A. when all return privileges have expired. B. immediately, but reduce revenue by an estimate of future returns. C. at the time of sale and account for returns as they occur. D. at the time of sale only if 6 specific conditions are met.

If a company sells products and gives the buyer the right to return it, revenue should be recognized at the time of sale only if 6 specific conditions are met.

18. An initial franchise fee is recognized as revenue by the franchisor when A. the franchise agreement is signed. B. the initial franchise probationary period has expired. C. the franchisor has no remaining obligation to refund any cash and has provided all the initial services required under the contract and when collection of the fee is reasonably assured. D. when it is probable that the franchisee will exercise the option to purchase.

The initial franchise fee is recognized as revenue by the franchisor when they have made substantial performance the collection of the fee is reasonably assured.

19. The completed-contract method should be used only when: A. an entity has primarily short-term contracts. B. there are inherent hazards in the contract beyond normal, recurring business

risks. C. the conditions for using the percentage-of-completion method cannot be met. D. All of the options are correct.

The completed-contract method should be used when any of the options exist.

20. A very popular measure used to determine the progress toward completion under the percentage-of-completion method is the: A. cost-to-cost method. B. efforts expended method. C. output method. D. units of work performed method.

The cost-to-cost basis is a popular measure to determine progress toward completion.

21. The Billings on Construction in Process account is reported as: A. revenue on the income statement. B. a current asset only. C. a current liability only. D. either a current asset or current liability.

Billings on Construction in Process is reported as a current asset or current liability, depending on whether its balance is larger or smaller than the Construction in Process account balance.

22. Under the completed-contract method, which of the following are recorded each period during construction? A. Revenues. B. Gross profit.

C. Costs. D. All of the options.

Only costs are recorded each period under the completed-contract method.

23. A loss on an unprofitable long-term contract is recognized in the current period under: A. the completed-contract method only. B. the percentage-of-completion method only. C. both the completed-contract and the percentage-of-completion methods. D. neither the completed-contract nor the percentage-of-completion methods.

Under both methods, a loss on an unprofitable long-term contract is recognized in the current period.

24. A loss in the current period on a contract expected to be profitable upon completion is recognized in the current period under: A. the completed-contract method only. B. the percentage-of-completion method only. C. both the completed-contract and percentage-of-completion methods. D. neither the completed-contract nor percentage-of-completion methods.

A loss in the current period on a profitable contract is recognized in the current period under the percentage-of-completion method only.

25. Deferred gross profit on installment sales is generally reported as A. a contra revenue account.. B. a current liability. C. a contra asset account. D. a deduction from gross profit.

Deferred gross profit on installment sales is generally considered unearned revenue and is classified as a current liability.

26. The loss (gain) on repossession of merchandise is the difference between the estimated fair value of the merchandise and: A. its original cost. B. the balance of the installment receivable. C. unrecovered cost of the merchandise. D. the deferred gross profit.

The difference between the estimated fair value of the merchandise and its unrecovered cost is the loss (gain) on repossession 1. Deferred gross profit on installment sales is generally classified as a (an): A. contra-account. B. current asset. C. current liability. D. other asset.

Deferred gross profit on installment sales is generally classified as a current liability.

2. No profit is recognized until cash receipts exceed the seller's cost of the merchandise under the: A. percentage-of-completion method. B. installment sales method. C. cost recovery method. D. cost recovery method and the installment sales method.

Under the cost recovery method, no profit is recognized until cash receipts exceed the seller's cost.

3. Under the cost recovery method, which of the following is reported in the period of sale? A. Cost of goods sold. B. Gross profit. C. Sales. D. Both sales and cost of goods sold.

Both sales and cost of goods sold are reported in the period of sale.

4. With respect to IFRS and revenue recognition, all the following statements are true except: A. IFRS does not permit the completed-contract method of accounting for longterm construction contracts. B. under IFRS, if revenues and costs are difficult to estimate, then companies recognize revenue only to the extent of the cost incurreda zero-profit approach. C. in long-term construction contracts, IFRS requires recognition of a loss immediately if the overall contract is going to be unprofitable. D. IFRS has more-detailed revenue recognition rules compared to U.S. GAAP.

IFRS has less-detailed revenue recognition rules compared to U.S. GAAP.

5. The revenue recognition principle states that revenue is recognized when it is earned and realized or realizable. A. True B. False

Revenue is recognized when it is earned and it is realized or realizable.

6. Revenue is realized when assets a company receives in exchange for goods or services are readily convertible to known amounts of cash or claims to cash.

A. True B. False

Revenue is realizable when assets a company receives in exchange for goods or services are readily convertible to known amounts of cash or claims to cash.

7. Trade loading and channel stuffing are used to overstate revenues and window dress the financial statements. A. True B. False

Both are examples of booking sales before they have been earned.

8. Under the deposit method, no revenue is recognized until the sale is complete. A. True B. False

Under the deposit method, cash is received before the sales transaction is completed.

9. Under the installment-sales method, gross profit is recognized in the periods that cash is received, rather than in the period of sale. A. True B. False

Each time cash is received, the installment-sales method recognizes gross profit equal to the gross profit percentage times the amount of cash received.

10. The completed-contract method recognizes revenues, costs, and gross profit as a company makes progress toward completion on a long-term contract.

A. True B. False

The percentage-of-completion method recognizes revenues, costs, and gross profit as a company makes progress toward completion on a long-term contract.

11. A loss in the current period on a profitable contract must be recognized in full in the current period under the completed-contract method. A. True B. False

A loss in the current period on a profitable contract must be recognized in full in the current period under the percentage-of-completion method.

12. In consignment sales, the consignor uses a modified version of the sale basis of revenue recognition. A. True B. False

The consignor recognizes revenue only after receiving notification of sale and the cash remittance from the consignee.

13. Companies commonly recognize revenues from manufacturing and selling activities at point of sale (usually meaning delivery). A. True B. False

The two conditions for recognizing revenue (being realized or realizable and being earned) have been met by the time a company delivers products or renders services to customers.

14. Under the percentage-of-completion method, a company accumulates construction costs plus gross profit earned to date in the Construction in Process inventory account. A. True B. False

Under the percentage-of-completion method, a company accumulates construction costs plus gross profit earned to date in the Construction in Process inventory account.

15. General revenue recognition principles are provided by IFRS contain limited detailed or industry specific guidance. A. True B. False

It is true that general revenue recognition principles are provided by IFRS that are consistent with U.S. GAAP but contain limited detailed or industry specific guidance.

16. Which of the following transactions results in the recognition of revenue? A. Permitting use of an asset. B. Sale of assets other than inventory. C. Rendering a service. D. All of the above.

All of the options will result in recognizing revenue.

17. Revenue earned from permitting others to use enterprise assets is recognized:

A. at the point of sale. B. as time passes. C. when cash is collected. D. None of the above.

When others are using an enterprise's assets, such as cash, revenue is earned with the passage of time, e.g., interest revenue.

18. Franklin Builders, Inc. is using the completed-contract method for a $6,250,000 contract that will take three years to complete. Data at December 31, 2011, the end of the first year, are as follows: Costs incurred to date $3,120,000 Estimated costs to complete 3,330,000 Billings to date 2,960,000 Collections to date 2,770,000 The gross profit or loss that should be recognized for 2011 is A. $0. B. a $160,000 loss. C. a $200,000 loss. D. a $66,667 loss.

$6,250,000 ($3,120,000 + $3,330,000) = $200,000 loss

19. When a loss occurs in the current period on a profitable long-term contract, the loss is: A. recognized under the completed-contract method. B. not recognized under either the completed-contract method or the percentageof-completion method. C. recognized under both the completed-contract method and the percentage-ofcompletion method. D. recognized under the percentage-of-completion method.

The loss is recognized under the percentage-of-completion method as a change in accounting estimate.

20. Under the completion-of-production basis, revenue is recognized if: A. the sales price is reasonably assured. B. the units produced are interchangeable. C. no significant costs are involved in distributing the product. D. All of the above.

All of the options must be present for revenue to be recognized under this basis.

21. Carroll Co. began operations on July 1, 2011 and appropriately uses the installment method of accounting. The following information pertains to Carroll's operations for 2011: Installment sales 720,000 Cost of installment sales 432,000 General and administrative 72,000 expenses Collections on installment sales 330,000 The balance in the deferred gross profit account at December 31, 2011 should be A. $115,200. B. $156,000. C. $288,000. D. $90,000.

$720,000 $432,000 = $288,000 (40% gross profit rate); $288,000 ($330,000 ?40%) = $156,000.

22. Deferred gross profit on installment sales is reported on the financial statements as: A. a deduction from gross profit on the income statement. B. a current liability on the balance sheet. C. a long-term asset on the balance sheet. D. other revenue on the income statement.

Deferred gross profit is viewed as unearned revenue and reported as a current liability.

23. Repossessed merchandise on an installment sale should be recorded at: A. its original cost. B. zero. C. net realizable value. D. fair market value.

The objective should be to put any asset acquired on the books at its fair market value.

24. On September 1, 2011, Shalimar Co. sold manufacturing equipment that cost $620,500 for $910,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $365,933.75 starting on August 31, 2012. Because collection of the note is very uncertain, Shalimar will use the cost-recovery method. How much revenue from this sale should Shaw recognize in 2012? A. $0 B. $33,900 C. $62,600 D. $96,500

Profit is only recognized after the cost of goods sold has been recovered through payments made by the customer.

25. Under the deposit method: A. cash is received at the point of sale. B. cash is received after the sales transaction is completed. C. cash is not received until some event occurs in the future. D. cash is received before the sales transaction is completed.

Cash has been received, but recognition of a sale is delayed until it can be determined that a sale has occurred for accounting purposes.