Raya University

College of Business and Economics

Department of Accounting and Finance
Financial Accounting –I

Test Two (15%)

Time Allowed: 1 hour and 20 minutes

Name_______________________________________ID.No_____________Section_______

Part One: Multiple Choice (5 points)

Choose the best answer from the given alternatives and provide your answer on the answer
sheet provided!

1. Which of the following is most likely to appear in a single-step format of the income
statement?
A. Cost of goods sold B. Sales discounts C. Purchases D. Advertising expense
2. Which of the following qualifies as a discontinued operation?
A. discontinuation by a company of its design, manufacture, and sale of children’s wear in one
location leaving the other locations
B. shifting production and marketing activities of a line of business between locations
C. sale by a company of its electronics division that represents the company’s only activity in
electronics industry
D. change in operations resulting from technological improvement
3. Which of the following is prospectively adjusted to the financial statements?
A. cumulative effect of change in accounting principle B. change in accounting estimates
C. corrections of errors D. prior period adjustments E. None
4. To which of the following income items is Intra-Period Tax Allocation not applicable?
A. gain or loss from an extraordinary item B. income from operations
C. gain or loss on a discontinued operation D. unusual gains and losses

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5. Which of the following statements is not correct?
A. the most significant event for revenue recognition is the point of sale
B in consignments, the consignor recognizes revenue when the consignor provides the goods to
the consignee
C. if the balance of Construction In Process (CIP) to date exceeds the billings to date, a construction
company should record it as a current liability
D. if a company has short-term contracts, the appropriate method for revenue recognition is
percentage of completion
E. B and D F. All except A
Part Two: Work-out (10 points)
Show all the necessary steps for your answer on the answer sheet provided!
1. On April 1, 2012, ABC Company sold machinery for $720,000. The sale is to be collected as
follows:
2012 2013 2014
Cash collections $220,000 $260,000 $240,000
The machinery was purchased at a cost of $486,000.
Required: compute realized gross profit for each year using the cost recovery method? 3 points
2. The following data were obtained for the years 2001, 2002 and 2003 related to ‘Y’ Company.
The company began making installment sales in 2001.
2001 2002
Installment sales $300,000 $430,000
Cost of installment sales 240,000 322,500
Cash collections on sales of 2001 120,000 150,000
Cash collections on sales of 2002 –0– 130,000
Required: calculate realized gross profit for each year using the installment sales method? 2
points

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3. At the beginning of 2010, XYZ Construction Company agreed to construct a meeting hall at
‘Z’ University at a price of $6,400,000. The construction will be completed at the end of 2012.
The following information is related to the costs, billings, and collections for this contract.
2010 2011 2012
Costs incurred to date $1,210,000 $4,060,000 $5,800,000
Estimated costs yet to be incurred 4,290,000 1,740,000 –0–
Progress billings to date 1,280,000 4,416,000 6,400,000
Cash collections to date 1,152,000 4,160,000 6,400,000
Required:
i. Compute the amount of revenue and gross profit to be recognized at the end of each year,
assume that the company uses percentage-of-completion method? 2 points
ii. Prepare journal entries to record costs of construction, billings, and cash collections for
2012 under percentage-of-completion method? 1.5 points
iii. Compute the amount of revenue and gross profit to be recognized at the end of each year,
assume that the company uses the completed contract method? 1.5 points

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