Exam 6: Revenue Recognition

On April 30, Green Ltd. sold land with a book value of $600,000 to Brown Ltd. for its market value of $800,000. Brown Ltd. gave Green Ltd. a 12 percent, $800,000 note secured only by the land. At the date of sale, Brown Ltd. was in a very poor financial position and its continuation as a going concern was very questionable. Green Ltd. should:

When a grocery store sells groceries and receives payment in the form of a cheque, the revenue principle would state that the revenue should not be recognized until the cheque clears the bank.

As a general rule, the greater the uncertainty involved with respect to a sales transaction, the longer one would delay revenue recognition.

The percentage-of-completion method for long-term construction contracts can be used if at least the ultimate collection of the contract price is reasonably certain.

The percentage- of -completion method of accounting for long-term construction-type contracts is preferable when estimates of costs to complete and extent of progress toward completion are reasonably dependable.

Given the following data, what is the balance in construction-in-process at the end of 2006 under the percentage of completion method for a project begun in 2006 with a contract price of $1,100? 2006 2007 Costs incurred this year \ 100 \ 200 Total estimated costs remaining at end of year 700 400

Payment on account of progress billings, when using the percentage of completion method of recognizing revenue are debited to cash and credited to progress billings.

ASPE and IFRS will both follow a contract-based approach to revenue recognition in the future.

Bearer plants are recorded at their fair value less costs to sell.

The percentage-of-completion method of accounting for long-term construction-type contracts is preferable when:

The value of the consideration received must be known or measurable with absolute certainty in order for revenue to be recognized.

Under IFRS, goods sold under Bill and Hold provisions must be on hand and ready for immediate delivery if revenue is to be recognized.

Non-monetary transactions by definition involve no exchange of cash.

Choose the correct description of the net balance of costs in excess of billings on long-term contracts. Assume only one current contract, and that contract price does not equal total estimated contract cost at the end of the current year.

During the period of construction, financial information related to a long-term contract, which is being accounted for using, the completed contract method will:

The January 1, 2006 status of long-term construction project No. 6 follows. Assume the completed contract method. Costs incurred to date = $20,000 Contract price = $80,000 Estimated remaining cost to complete = $40,000 On December 31, 2006, the estimated remaining cost to complete was still $40,000, and $25,000 of cost had been incurred during 2006. What is the January 1, 2007 balance of Construction-in-Process?

Revenues from peripheral transactions are considered gains, while those from a company's principal line of business would be considered sales or revenues.

Non-monetary transactions lacking commercial substance can never result in a gain or loss being recorded.

Under the percentage-of-completion method of income recognition on long-term construction contracts:

The following data relates to a firm, which grants a liberal right of return to its customers: Total credit sales for the year \ 100,000 Gross profit percentage 40\% Collections on account \ 60,000 Actual returns during the year \ 20,000 Accounts receivable for which the return privilege has yet to expire as of the year-end \ 5,000 The firm is unable to estimate returns Required: (a) The summary entries to account for sales-related transactions during the year, and any adjusting entries (assume a perpetual inventory system). (b) The relevant ending balance sheet accounts, and the income statement. (c) The entry during the following year assuming the $5,000 of goods is returned before the return privilege expired. (d) The entry during the following year assuming the return privilege expired on the $5,000 of accounts receivable.