Exam 6: Revenue Recognition

Under a bill and hold arrangement, revenue recognition is delayed until the buyer takes possession of the merchandise.

It may be argued that the earnings based approaches is more focused on the income statement while the contract based approach focuses on the balance sheet.

Company X has a machine with a book value of $10,000 and a fair value of $15,000. Company Y has a machine with a book value of $16,000 and a fair value of $14,000. Company X and Y exchange machines. In addition, Company X gives $1,000 to Company Y as a result of the exchange. The transaction is deemed to have commercial substance and the fair value measurement of the assets are equally reliable. Company X would record the machine acquired from Company Y at:

In selecting an accounting method for a newly contracted long-term construction project, the principle factor to be considered should be:

Revenue is recognized at the time of sale under the:

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. Calculate the January 1, 2007 balance of Construction in Process.

A shipyard contracted with a foreign government to build a small naval vessel. The contract calls for the foreign government to pay the shipyard $10,000,000 upon the completion and delivery of the vessel in 2008. The shipyard engineers estimated the costs to complete the vessel at $8,200,000. Under each of the situations that follow, show the income that would have to be reported assuming the percentage-of-completion method is used to recognize income. Show your computations. a. Income to be reported in 2006, assuming $2,000,000 has been spent and the engineers estimate an additional $6,800,000 will be spent to complete the vessel. 2001 income that should be reported is (pick one below): $280,000 $272,727 $1,200,000 Computations: b. Income to be reported in 2007, assuming $6,000,000 has already been spent and the engineers estimate an additional $3,4000,000 will be spent to complete the vessel. 2007 income is (pick one below): $110,252 $382,978 $548,936 Computations: c. Income to be reported in 2008, assuming $8,800,000 has already been spent to complete and deliver the vessel to the foreign government, which immediately paid their bill. 2008 income is (pick one below): $961,022 $777,332 $600,000 $1,200,000 $817,021 Computations:

In the critical event that the revenue is not recognized at the time of the sale due to a return privilege, the gross margin is to be recognized only after the return privilege has expired.

The principle disadvantage of using the percentage-of-completion method of recognizing revenue from long-term construction contracts is that it:

Grandon Ltd. began work in 2006 on a contract for $5,400,000. Other data are: 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 percentage-of-completion method, calculate the gross profit to be recognized in 2006.

Collectability must be certain in order for revenue to be recognized.

Under the percentage of completion method, $400 of profit has been recognized in prior years on a project with a contract price of $5,000. Data available as follow: Total cost incurred till date = $3,000 Estimated costs remaining at end of current year = $2,500 What profit or loss is recognized in the current year?

A purchase order received from a client would trigger a journal entry under the earnings-based revenue recognition approach, but not on the contract-based approach.

Under IFRS, interest revenue must be recognized using the effective interest method, and dividend revenue must be recognized when the right to receive them has been established, and there are no significant uncertainties.

Under IFRS, sales contracts with multiple deliverables may be treated as though they were a single element, for the sake of simplicity.

In accounting, the term "revenue recognition" refers to:

Given the following data for a firm which uses the percentage of completion method on long-term construction contracts, determine the ending balance of the account which is the net of Construction- in-Process, and Billings on Contracts, at the end of Year 1, the first year of this project. Costs incurred = $20,000 Billings = $26,000 Cash collected = $15,000 Estimated remaining cost to complete, as of 12-31-2001 = $30,000 Contract price = $60,000

A construction company uses the percentage-of-completion method of accounting. In 2007, the company began work on a government contract, which had a contract price of $4,000,000 and estimated costs of $3,000,000. Additional data were as follows: 2007 2008 Costs incurred this year \ 600,000 \ 2,550,000 Estimated cost to complete as of 12/31/2007 2,400,000 -0- Billings during the year 720,000 3,080,000 Collections during the year 500,000 3,100,000 Calculate the gross profit to be recognized during 2007.

Under contract, ABC Corporation delivers 500 units to Customer A for $200 each on 1 March. ABC's documented policy is to allow a customer to return any unused product within 30 days and receive a full refund. The cost of each product is $150. Based on historical experience, ABC estimates that 2% of the units will be returned. ABC expects that the returned products can be resold. On March 15^th, the customer returned 8 units to ABC. No other returns were received during the month. Required: Record all of ABC Inc' journal entries for the month.

When work to be done and costs to be incurred on a long-term contract can be estimated dependably, which of the following methods of revenue recognition is preferable?