Question 1

Which statement best explains the percentage of completion method?

Accepted Answer

A) An accounting method that recognizes revenue and expenses on a contract only after it is completed. 
B) An accounting method that recognizes revenue and expenses on a contract in proportion to the degree of progress. 
C) An accounting method that recognizes an amount of revenue equal to the costs that are expected to be recovered on the contract. 
D) An accounting method that recognizes revenue and expenses based on the fair value of the contract. 
A) An accounting method that recognizes revenue and expenses on a contract only after it is completed. 
B) An accounting method that recognizes revenue and expenses on a contract in proportion to the degree of progress. 
C) An accounting method that recognizes an amount of revenue equal to the costs that are expected to be recovered on the contract. 
D) An accounting method that recognizes revenue and expenses based on the fair value of the contract. B

Question 2

Soorya Manufacturing makes educational toys that are sold to retailers on the following terms: Each type of toy has a fixed wholesale price,is shipped F.O.B.shipping point,and payment is due 45 days after the shipment.The retailer may return a maximum of 45% of an order at the retailer's expense up to 6 months after delivery.Sales are made only to retailers that have a good credit rating.In Soorya's 11 years of existence,the company has experienced a return rate of approximately 15%,a bad debt expense of 5% of sales and an average collection period of 90 days.Soorya provides a bonus to its senior managers based on annual revenues,net of returns.
Required:
a.Identify at least three different revenue recognition points that Soorya could use to record revenue.
b.What revenue recognition criteria should Soorya use to determine when revenue should be recorded?
c.Discuss the pros and cons for 2 alternative recognition points mentioned in point (a).Remember to support your reasoning with case facts.
d.Recommend the recognition point that Soorya should use in its financial statements.

Accepted Answer

a)
1.Record revenues when manufactured
2.Record at signing of contract with retailer
3.Record revenues at shipping point
4.Record revenues 45 days after shipment when payment is due
5.Record revenues after 6 months (when the right of customer return expires)
b)Paragraph 31 of IFRS 15 provides the following revenue recognition criteria for the sale of goods or services: ¶18.An entity shall recognize revenue when (or as)the entity satisfies a performance obligation by transferring a promised good or service (ie an asset)to a customer.An asset is transferred when (or as)the customer obtains control of that asset.Paragraph 34 then establishes that: ¶34 When evaluating whether a customer obtains control of an asset,an entity shall consider any agreement to repurchase the asset.
c)
   d)In this instance control is most likely transferred at time of shipping so option 3 is correct.Note,however that the right of return means that the amount of consideration is variable.In accordance with paragraphs 55 and B21 of IFRS 15 an entity shall recognize revenue only for the amount that it expects to be entitled and establish a refund liability for the difference between this amount and the amount of consideration received (or receivable)

Question 3

Explain how the transaction price should be allocated to the performance obligations in a multiple performance obligation sales arrangement.

Accepted Answer

IFRS 15 requires that enterprises allocate the transaction price to the various performance obligations in a multiple performance obligation sales arrangement based on the observable stand-alone selling prices of the components.If this is not possible paragraph 79 of IFRS 15 identifies three alternatives noting that other approaches may also be suitable.The three alternatives identifies in paragraph 79 are:

Question 4

Algae builds large ships and uses the percentage of completion method of revenue recognition.The following information pertains to the construction contracts it had in place as of its December 31,2018 year-end.
 
How much revenue will Algae recognize in 2017?

Accepted Answer

A) $260 million 
B) $325 million 
C) $433 million 
D) $1,300 million 
A) $260 million 
B) $325 million 
C) $433 million 
D) $1,300 million

Question 5

Nova Construction Company (NCC)entered into a contract to build a school for $1,800,000.Construction commenced on May 1,2017,with a planned completion date of December 31,2019.A summary of the related accounting information is provided below:
 
How much gross profit would be recognized in fiscal 2017 if NCC uses the percentage of completion method?

Accepted Answer

A) $50,000 
B) $100,000 
C) $130,000 
D) $180,000 
A) $50,000 
B) $100,000 
C) $130,000 
D) $180,000

Question 6

Which statement is correct about the impact of estimation errors on construction contracts?

Accepted Answer

A) Underestimating future costs decreases the percentage complete ratio. 
B) Overestimating future costs increases the percentage complete ratio. 
C) Underestimating future costs increases the profit recognized in future periods. 
D) Underestimating future costs increases the profit recognized in the current period. 
A) Underestimating future costs decreases the percentage complete ratio. 
B) Overestimating future costs increases the percentage complete ratio. 
C) Underestimating future costs increases the profit recognized in future periods. 
D) Underestimating future costs increases the profit recognized in the current period.

Question 7

Creation Construction Company (CCC)has contracted to build an office building for Property Corp.The construction started on January 1,2018,and the project was completed on July 1,2021.The contract price was $70 million.Due to uncertainties in the construction process,the two parties to the project agreed to a risk-sharing arrangement whereby Property Corp.covers 50% of all cost overruns in excess of the originally estimated cost of $65 million (e.g. ,if estimated total costs are $69 million,then CCC would receive an additional $2 million for the contract).The following data relate to the construction period.
   
Required:
Calculate the estimated gross profit (loss)for 2018,2019,2020,and 2021,assuming that the percentage of completion method is used.

Accepted Answer

The answer of Creation Construction Company (CCC)has contracted to build...

Question 8

Which of the following is TRUE when goods are sold on on an installment basis?

Accepted Answer

A) Revenue is recognized at time of the initial sale. 
B) Cost of goods sold is debited for the cost of the merchandise sold. 
C) Revenue is not recognized until all monies due under the contract have been collected. 
D) The deferred gross profit liability is debited as cash is collected. 
A) Revenue is recognized at time of the initial sale. 
B) Cost of goods sold is debited for the cost of the merchandise sold. 
C) Revenue is not recognized until all monies due under the contract have been collected. 
D) The deferred gross profit liability is debited as cash is collected.

Question 9

Simple Inc.had sales of $1,500,000,including:
• $30,000 of goods sold that were on consignment from an unrelated company on December 28,2018
• $10,000 of goods shipped F.O.B shipping point on December 28,2018.
• $20,000 of goods shipped F.O.B.destination point on December 31,2018.
On its income statement,what amount of net sales should Simple Inc.record for 2018?

Accepted Answer

A) $1,440,000 
B) $1,470,000 
C) $1,480,000 
D) $1,490,000 
A) $1,440,000 
B) $1,470,000 
C) $1,480,000 
D) $1,490,000

Question 10

Which of the following methods of revenue recognition would be selected when a vendor has another firm acting as its selling agent?

Accepted Answer

A) Cost recovery method. 
B) Returned goods method. 
C) Installment sales method. 
D) Consignment sales method. 
A) Cost recovery method. 
B) Returned goods method. 
C) Installment sales method. 
D) Consignment sales method.

Question 11

On July 1,2017,Cusak Construction Company Inc.contracted to build an office building for Candy Lane Corp.for a total contract price of $2,150,000.On July 1,Cusak estimated that it would take between two and three years to complete the building.In October 2019,the building was deemed substantially completed.Following are accumulated contract costs incurred,estimated costs to complete the contract,and accumulated billings to Candy Lane in 2017,2018,and 2019.
   
Required:
Using the percentage of completion method,calculate the revenue and profit or loss to be recognized as a result of this contract for the years ended December 31,2017,2018,and 2019.The company used the cost-to-cost method to estimate the percentage complete.

Accepted Answer

The answer of On July 1,2017,Cusak Construction Company Inc.contracted to...

Question 12

Jennifer Furnishings frequently has sales involving "no down payment and no payments for three months." Three months after the purchase date,customers make four equal monthly payments (i.e. ,they make equal payments 3,4,5,and 6 months after purchase).Each payment is one-quarter of the purchase price.The company has a December 31 year-end.During 2018,the company made the following sales on installment plans.Jennifer makes 15% gross profit on these sales.
   
Required: Using the installment sales method and ignoring the time value of money
a)Determine the balance of installment accounts receivable at December 31,2018.
b)Determine the amount of deferred gross profit as at December 31,2018.(Round to the nearest whole dollar. )
c)Determine the sales revenue to recognize in 2018 for installment sales made in the year.

Accepted Answer

a)The installment accounts receivable ar

Question 13

Coral Corporation builds large cruise ships on a contract basis.The company uses the percentage of completion method of revenue recognition.The following information pertains to the construction contracts it had in place as of its December 31,2018 year-end.
   
Required:
a.Calculate the revenue to be recognized in 2017 and in 2018.
b.While examining the Coral financial statements,the auditors noted that there was an error in the estimate of costs to complete the contracts in 2017.The cost to complete should have been $600 million instead of $800 million.Explain how this would be accounted for in the financial statements.
c.In light of the evidence noted in (b),how much revenue should be recognized in 2018?

Accepted Answer

a.
2017: $400 million
(Percent complete

Question 14

Why is there risk of earnings overstatement in accounting for construction contracts?

Accepted Answer

A) The long term nature of such contracts makes them a low risk area. 
B) Allocation of revenue and expenses between two or more periods simplifies the accounting. 
C) Significant professional judgment is required to make estimates used in the calculations. 
D) Percentage of completion method reduces the potential for earnings management,manipulation and errors. 
A) The long term nature of such contracts makes them a low risk area. 
B) Allocation of revenue and expenses between two or more periods simplifies the accounting. 
C) Significant professional judgment is required to make estimates used in the calculations. 
D) Percentage of completion method reduces the potential for earnings management,manipulation and errors.

Question 15

Simply Manufacturers has signed an order to supply 10,000 chairs at a price to be determined sixty days after delivery.Payment is due at that time.The price per chair may range from $0 to $100 depending on a series of events,the outcome of which cannot be accurately predicted.Which of the following factors is most likely to precludes Simply from recognizing revenue at time of delivery.

Accepted Answer

A) The purchaser bears the significant risks and rewards of ownership. 
B) The revenue is variable in nature. 
C) The purchaser is not obligated to pay for the goods at time of delivery. 
D) Simply had not paid its suppliers for the materials used to manufacture the chairs. 
A) The purchaser bears the significant risks and rewards of ownership. 
B) The revenue is variable in nature. 
C) The purchaser is not obligated to pay for the goods at time of delivery. 
D) Simply had not paid its suppliers for the materials used to manufacture the chairs.

Question 16

Which statement about the percentage of completion method is correct?

Accepted Answer

A) This method recognizes revenue on a straight-line basis. 
B) This method can only be used if there are no uncertainties about how much the contract will cost or how long it will take to complete. 
C) This method allocates revenue,not construction costs. 
D) This method allocates construction costs,not revenue. 
A) This method recognizes revenue on a straight-line basis. 
B) This method can only be used if there are no uncertainties about how much the contract will cost or how long it will take to complete. 
C) This method allocates revenue,not construction costs. 
D) This method allocates construction costs,not revenue.

Question 17

Shear Company sells computer equipment with a 2-year warranty.Prior experience indicates that costs associated with this warranty average 1% in the first year and 2% in the second year.In 2018,Shear had sales of $1,800,000.It paid $250,000 for materials and labour to make warranty-related repairs in 2018.What amount should the warranty expense for 2018 be?

Accepted Answer

A) $18,000 
B) $36,000 
C) $54,000 
D) $250,000 
A) $18,000 
B) $36,000 
C) $54,000 
D) $250,000

Question 18

Community Apartments Inc.(CA Inc. )is building a luxury condominium for a contract price of $68,000,000.This is estimated to be a three-year project with an estimated cost of $54,000,000.CA Inc.uses the percentage-of-completion method of revenue recognition,using the cost-to-cost method of estimating the percentage complete.The following is the best available information at the end of each year:
   
Required:
a.Compute the amount of gross profit to be recognized in Year 1,Year 2,and Year 3.Show computations in tabular form provided below:
   
b.Determine the performance that would be reported under the cash basis and accrual basis of accounting for Year 1 of this company.Explain how revenues are matched with expenses when the percentage of completion basis is used.
c.Complete the PARTIAL Balance Sheet for Year 1
Current assets
   
Current Liabilities

Accepted Answer

a.( in $ thousands)
 @#IMG-DLM& 
b.
Under the cash

Question 19

In September,Fast-Foods Inc.(FF)sells a franchise for an initial fee of $150,000 and ongoing fees based on 3% of gross profit.FF estimates that 20% of the initial fee relates to initial training,store design and opening activities;the remaining 80% relate to activities to be performed over 3 years.How much revenue should be recorded in September?

Accepted Answer

A) $4,500 
B) $30,000 
C) $120,000 
D) $150,000 
A) $4,500 
B) $30,000 
C) $120,000 
D) $150,000

Question 20

Compare and contrast the revenue recognition criteria for a transaction involving the sale of goods with a transaction involving the provision of services.

Accepted Answer

The five-step revenue recognit

Which statement best explains the percentage of completion method?

Explain how the transaction price should be allocated to the performance obligations in a multiple performance obligation sales arrangement.

Algae builds large ships and uses the percentage of completion method of revenue recognition.The following information pertains to the construction contracts it had in place as of its December 31,2018 year-end. How much revenue will Algae recognize in 2017?

Which statement is correct about the impact of estimation errors on construction contracts?

Which of the following is TRUE when goods are sold on on an installment basis?

Which of the following methods of revenue recognition would be selected when a vendor has another firm acting as its selling agent?

Why is there risk of earnings overstatement in accounting for construction contracts?

Which statement about the percentage of completion method is correct?

Compare and contrast the revenue recognition criteria for a transaction involving the sale of goods with a transaction involving the provision of services.

Fundamentals of Financial Accounting Theory

Conceptual Frameworks for Financial Reporting

Accrual Accounting

Cash and Receivables

Inventories

Financial Assets

Property, plant and Equipment

Intangible Assets, goodwill, mineral Resources, and Government Grants

Applications of Fair Value to Non-Current Assets

Filters

Exam 4: Revenue and Recognition

Which statement best explains the percentage of completion method?

Explain how the transaction price should be allocated to the performance obligations in a multiple performance obligation sales arrangement.

Algae builds large ships and uses the percentage of completion method of revenue recognition.The following information pertains to the construction contracts it had in place as of its December 31,2018 year-end. How much revenue will Algae recognize in 2017?

Which statement is correct about the impact of estimation errors on construction contracts?

Which of the following is TRUE when goods are sold on on an installment basis?

Which of the following methods of revenue recognition would be selected when a vendor has another firm acting as its selling agent?

Why is there risk of earnings overstatement in accounting for construction contracts?

Which statement about the percentage of completion method is correct?

Compare and contrast the revenue recognition criteria for a transaction involving the sale of goods with a transaction involving the provision of services.

Fundamentals of Financial Accounting Theory

Conceptual Frameworks for Financial Reporting

Accrual Accounting

Cash and Receivables

Inventories

Financial Assets

Property, plant and Equipment

Intangible Assets, goodwill, mineral Resources, and Government Grants

Applications of Fair Value to Non-Current Assets

Filters