Exam 18: Revenue Recognition

Use the following information for questions 83 and 84. Eilert Construction Company had a contract starting April 2015, to construct a $21,000,000 building that is expected to be completed in September 2016, at an estimated cost of $19,250,000. At the end of 2015, the costs to date were $8,855,000 and the estimated total costs to complete had not changed. The progress billings during 2015 were $4,200,000 and the cash collected during 2015 was $2,800,000. Eilert uses the percentage-of-completion method. -At December 31, 2015, Eilert would report Construction in Process in the amount of

Newton Co. had installment sales of $1,000,000 and cost of installment sales of $750,000 in 2014. A 2014 sale resulted in a default in 2016, at which time the balance of the installment receivable was $36,000. The repossessed merchandise had a fair value of $21,000. Instructions (a) Calculate the rate of gross profit on 2014 installment sales. (b) Make the entry to record the repossession.

Hiser Builders, Inc. is using the completed-contract method for a $9,800,000 contract that will take two years to complete. Data at December 31, 2015, the end of the first year, are as follows: Costs incurred to date \ 4,480,000 Estimated costs to complete 5,740,000 Billings to date 4,200,000 Collections to date 3,500,000 The gross profit or loss that should be recognized for 2015 is

The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of these necessary conditions?

On January 1, 2014, Orton Co. sold a used machine to King, Inc. for $1,050,000. On this date, the machine had a depreciated cost of $735,000. King paid $150,000 cash on January 1, 2014 and signed a $900,000 note bearing interest at 10%. The note was payable in three annual installments of $300,000 plus interest beginning January 1, 2015. Orton appropriately accounted for the sale under the installment-sales method. King made a timely payment of the first installment on January 1, 2015 of $390,000, which included interest of $90,000 to date of payment. At December 31, 2015, Orton has deferred gross profit of

A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported?

Use the following information for questions 99 - 101. During 2014, Martin Corporation sold merchandise costing $3,500,000 on an installment basis for $5,000,000. The cash receipts related to these sales were collected as follows: 2014, $2,000,000; 2015, $1,750,000; 2016, $1,250,000. -What is the rate of gross profit on the installment sales made by Martin Corporation during 2014?

Which of the following is not an accurate representation concerning revenue recognition?

The cost-recovery method

The earning of revenue by a business is recognized for accounting purposes when the transaction is recorded. Revenue is often recognized at time of sale. InstructionsAt what times, other than at time of sale, may it be appropriate to recognize revenue? Explain and justify each of these times.

The revenue recognition principle provides that revenue is recognized when

Moon Co. records all sales using the installment-sales method of accounting. Installment sales contracts call for 36 equal monthly cash payments. According to the FASB's conceptual framework, the amount of deferred gross profit relating to collections 12 months beyond the balance sheet date should be reported in the

Under the deposit method

A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable that the option will be exercised. When recording the initial franchise fee, the franchisor should

Use the following information for questions 102 and 103. Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is unable to reliably predict bad debts. During 2014, Coaster sold equipment costing $4,800,000 for $7,200,000. The terms of the sale were 20% down, with equal payments due quarterly over the next 3 years. All payments for 2014 were made on schedule. Round answers to two places. -Assuming that Coaster uses the installment-sales method of accounting for its installment sales, what amount of realized gross profit will Coaster report in its income statement for the year ended December 31, 2014?

Use the following information for questions 83 and 84. Eilert Construction Company had a contract starting April 2015, to construct a $21,000,000 building that is expected to be completed in September 2016, at an estimated cost of $19,250,000. At the end of 2015, the costs to date were $8,855,000 and the estimated total costs to complete had not changed. The progress billings during 2015 were $4,200,000 and the cash collected during 2015 was $2,800,000. Eilert uses the percentage-of-completion method. -For the year ended December 31, 2015, Eilert would recognize gross profit on the building of

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?

Under the completion-of-production basis, companies recognize revenue when agricul-tural crops are harvested since the sales price is reasonably assured and no significant costs are involved in product distribution.

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?

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