Exam 6: Revenue Recognition

The percentage-of-completion and completed contract methods will produce different periodic income amounts, but the Accounts Receivable balances will be equal.

Which of the following would be used in the calculation of the income recognized in the third and final year of a construction contract which is accounted for using the percentage-of-completion method? Contract Price Actual Total Costs Income Previously Recognized 1 Yes No Yes 2 No No Yes 3 Yes Yes No 4 Yes Yes Yes

When goods are sold, the event which triggers revenue recognition is the delivery of the goods.

A construction company signed a contract to build a plant for a customer. Construction covered a four-year period. Data concerning the construction were as follows: Contract price = $780,000 Estimated costs = $600,000 Actual results: Actual cost Billings Year 1* \ 120,000 \ 100,000 Year 2* 100,000 110,000 Year 3* 240,000 240,000 Year 4* 160,000 330,000 *No change in estimated costs. Using the information above, answer the following questions: (a) How much income will be reported in Years 1, 2, 3, and 4 if the completed contract method is used? Year 1: $ Year 2: $ Year 3: $ Year 4: $ (b) How much income will be reported each year if the percentage-of-completion method is used? Year 1: $ Year 2: $ Year 3: $ Year 4: $ (c) What net amount would be reported on the balance sheet for contracts in process at the end of year 1 if the completed contract method is used? $ (d) What net amount would be reported on the balance sheet for contracts in process at the end of year 1 if the percentage-of-completion method is used? $

When rent is received in advance the event that triggers revenue recognition is the passage of time.

Which of the following bases of revenue recognition reflects the greatest degree of uncertainty about future critical events?

The percentage-of-completion method of accounting for long-term construction projects is supported on the basis that it is more conservative than the completed contract method.

Under the percentage-of-completion method of accounting for long-term construction contracts, revenue is recognized as construction progresses (usually on the basis of costs incurred) to attain a matching of revenues and expenses.

The use of the contract based approach to revenue recognition is dependent on whether or not the transaction with the client has commercial substance.

When a barter transaction has no commercial substance, a gain or loss must always be recognized on the income statement as a result of the exchange.

There will be no impact on a company's net assets until revenue is recognized.

Warranty costs related to goods sold on instalment sales should not be accrued.

The amount of revenue recognized by a franchisor will usually depend on the franchise agreement.

If fair values cannot be determined during a barter transaction, the book value method must be used.

A construction company uses the percentage-of-completion method for long-term construction contracts. A particular job was begun in 2006 and completed 2008. During 2007, it appeared that the project would cost 25 percent more than originally expected. Data at each year-end are given below: 2006 2007 2008 End of year estimated cost remaining \ 200,000 \ 100,000 \ -0- Annual cost incurred 200,000 200,000 60,000 The contract price was $700,000. Assuming the company properly recorded income in 2006, how much income should be recorded in 2007?

Non-refundable deposits automatically meet the criteria for immediate revenue recognition.

The completed contract method of accounting for long-term construction-type contracts is preferable when:

Grandon Ltd. began work in 2007 on a contract for $5,400,000. Other data are: 2006 2007 Costs to date \ 1,800,000 \ 4,300,000 Estimated costs to complete 2,700,000 Billings to date 2,000,000 5,400,000 Collections to date 1,600,000 4,600,000 Assuming Grandon uses the completed contract method, calculate the gross profit to be recognized in 2008.

Net instalment accounts receivable is $5,000. Assume the instalment method of revenue recognition is used and a gross profit percentage of 20%. Therefore:

Revenue should not be recognized if the buyer's obligation to pay the seller is contingent on the resale of the product.