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TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

1) Receipt of cash by the seller at the time of sale is not required for the recognition of revenue.
Answer: True False

2) In accounting, the term "revenue recognition" refers to measuring the expense related to the revenue
for a specific period.
Answer: True False

3) Generally, expenses incurred to generate revenues should be matched to the revenues recognized in
a given period.
Answer: True False

4) 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.
Answer: True False

5) Non-refundable deposits automatically meet the criteria for immediate revenue recognition.
Answer: True False

6) ASPE and IFRS will both follow a contract-based approach to revenue recognition in the future.
Answer: True False

7) The sale of a company's land would necessarily result in a gain or loss, and not a revenue or
expense.
Answer: True False

8) The earnings based and contract based approaches will both result in the same amount of revenue
being recognized over time.
Answer: True False

9) Revenues for certain commodities with a readily available market may be recognized at production
since uncertainties with respect to the sale are likely to be minimal.
Answer: True False

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

Answer: True False

11) 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.
Answer: True False

12) 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.
Answer: True False

1
13) Revenues from peripheral transactions are considered gains, while those from a company's principal
line of business would be considered sales or revenues.
Answer: True False

14) When rent is received in advance the event that triggers revenue recognition is the passage of time.
Answer: True False

15) An initial licensing fee that allows the holder to use the name of another company for a defined
period of time would be capitalized and subsequently amortized over the number of periods
benefitted.
Answer: True False

16) A furniture manufacturer receives a purchase order from a client for a customized wooden cabinet.
The cabinet will be delivered and paid for upon completion which is estimated to be in three months
from now. This event would trigger a journal entry on the manufacturer's books if the earnings
approach were used, but not if the contract approach were used.
Answer: True False

17) Warranty costs related to goods sold on instalment sales should not be accrued.
Answer: True False

18) The use ofthe contract based approach to revenue recognition is dependent on whether or not the
transaction with the client has commercial substance.
Answer: True False

19) Revenue should not be recognized if the buyer's obligation to pay the seller is contingent on the
resale of the product.
Answer: True False

20) The contract price must be known with certainty in order for the contract based approach to be
applied.
Answer: True False

21) There will be no impact on a company's net assets until revenue is recognized.
Answer: True False

22) In
a consignment arrangement, the seller is essentially acting as an agent of the manufacturer of the
goods or their owner.
Answer: True False

23) The gross approach to recording revenues results in higher earnings than does the net method.
Answer: True False

24) Under a bill and hold arrangement, revenue recognition is delayed until the buyer takes possession
of the merchandise.
Answer: True False

2
25) "Billings on contracts" is a contra account to "Accounts Receivable."
Answer: True False

26) Ifa company receives a commission on products it sells but otherwise has no control over selling
prices, it is essentially acting as an agent on behalf of another company, and would likely record
revenue from these sales on a net basis.
Answer: True False

27) When goods are sold, the event which triggers revenue recognition is the delivery of the goods.
Answer: True False

28) Non-refundable payments can normally be recognized upon receipt, since there is no performance
obligation related to these payments.
Answer: True False

29) The percentage-of-completionand completed contract methods will produce different periodic
income amounts, but the Accounts Receivable balances will be equal.
Answer: True False

30) The value of the consideration received must be known or measurable with absolute certainty in
order for revenue to be recognized.
Answer: True False

31) When goods are sold, revenue may still be recognized if there is an insignificant degree of
continuing managerial involvement in some instances.
Answer: True False

32) The transaction price when non-monetary assets are involved in a sale is the value of the non-cash
consideration received.
Answer: True False

33) 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.
Answer: True False

34) Using actual and estimated cost figures to estimate the degree of completion of a long-term
construction project is an example of an input-based approach to estimation.
Answer: True False

35) ABC Inc. uses the percentage of completion method to account for one of its long-term construction
projects. ABC reported a loss on this contract for its most recent fiscal year, but the contract is
expected to be profitable. This is an onerous contract.
Answer: True False

3
36) ABC Inc. uses the percentage of completion method to account for one of its long-term construction
projects. Last year the company recorded revenue of $1 million during the first year of one of its
projects, which at the time was expected to be profitable. Nearly one year later, the company has
incurred substantial cost-overruns. The company now expects the contract to lose $500,000. This is
an onerous contract. ABC should therefore record a loss of $500,000 on this contract for the current
year.
Answer: True False

37) The amount of revenue recognized by a franchisor will usually depend on the franchise agreement.
Answer: True False

38) When one company is acting as an agent on behalf of another company or individual, it will
normally report revenues on a net basis.
Answer: True False

39) Economic Value Added (EVA) is the difference between a product's input cost and final sales price.
This figure is dependent up on the firm's earnings process.
Answer: True False

40) 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.
Answer: True False

41) As a general rule, the greater the uncertainty involved with respect to a sales transaction, the longer
one would delay revenue recognition.
Answer: True False

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

43) Under IFRS, sales contracts with multiple deliverables should be split according to their relative fair
values if possible, and accounted for accordingly.
Answer: True False

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

45) Biological assets are generally recognized at their net realizable values, with gains and losses
flowing through income.
Answer: True False

46) Ifa client presents an extreme credit risk, the seller would be more likely to use the Installment
Sales method to account for the transaction than the Cost Recovery Method.
Answer: True False

4
47) 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.
Answer: True False

48) The use of actual and expected costs to determine the percentage of completion on a long term
project is an example of an output method approach to evaluating contract progress.
Answer: True False

49) 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.
Answer: True False

50) 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.
Answer: True False

51) When goods are sold f.o.b. shipping point, the revenue earnings process is usually not considered to
be complete until the buyer has received the goods and inspected them.
Answer: True False

52) The earliest point at which all criteria for revenue recognition are met is known as a critical event.
Answer: True False

53) 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.
Answer: True False

54) When a one year-lease-term is signed, the lessor earns revenue with the passage of time.
Answer: True False

55) Revenues must always be recognized at a single point in time.

Answer: True False

56) Ifsales are made on "FOB destination" terms, the revenue earning process is completed when the
products are removed from the seller's place of business by the common carrier.
Answer: True False

57) If fair values cannot be determined during a barter transaction, the book value method must be used.
Answer: True False

58) Under the percentage-of-completion method of accounting for long-term construction contracts,
revenue is recognized only when the construction is completed.
Answer: True False

5
59) 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.
Answer: True False

60) Under the completed contract method, all construction costs are accumulated in an inventory
account.
Answer: True False

61) Bearer plants are recorded at their fair value less costs to sell.
Answer: True False

62) Once biological assets become ready for sale, they effectively become inventory. Deemed cost in
this case is fair value of the items less their selling costs. Subsequently they are valued at their fair
value less costs to sell with gains and losses flowing to income.
Answer: True False

63) When cash is collected on account and the instalment sales method is used, the debit is to instalment
accounts receivable and the credit is to cash.
Answer: True False

64) The completed-contract method of revenue recognition recognizes revenue on a long-term project as
work progresses so that timely information is provided.
Answer: True False

65) 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.
Answer: True False

66) A long-term contract is automatically considered onerous if a loss is recognized in any given year.
Answer: True False

67) Ifit becomes apparent that a long term project will result in a loss, the full amount of the loss must
be accounted for in the year it is first estimable.
Answer: True False

68) Most construction companies cannot afford to wait until the completion of the contract to collect
their billings.
Answer: True False

69) When using completed contract method of recognizing revenue, the billings to the customer are
debited to cash and credited to progress billings.
Answer: True False

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

Answer: True False

6
 71) Non-monetary transactions lacking commercial substance can never result in a gain or loss being
recorded.
Answer: True False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

72) ABC Inc. sold a DVD player to a client on June 30th, Year 2 for $150. The DVD player, which came
with a 2-year warranty, was thought to be worth $100 if sold without the warranty.

As a result of this sale, how much sales/revenue would ABC Inc. take into income on its December
31st, Year 2 income statement?
A) $125.00 B) $100.00 C) $112.50 D) $150.00
Answer: C

73) Which of the following would not be considered a multiple-deliverable arrangement?

A) A product sold with a manufacturer's warranty which covers only product assurances, where
only the product has a separately identifiable revenue stream.
B) A product sold with a manufacturer's warranty, where both the product and warranty have
separately identifiable revenue streams.
C) Customer Loyalty Programs.
D) Franchise Fees
Answer: A

74) In a normal sale, generally the most uncertain factor in the revenue recognition process is:
A) The realizability of the resource or item received by the seller
B) The relevance of the resource or item received by the seller
C) The seller's fulfillment of its responsibility in the transaction
D) The measurability of the resource or item received by the seller
Answer: A

75) Which of the following is not required for the recognition of revenue?
A) Seller must receive an item ultimately realizable in cash, noncash resources, or claims to cash.
B) The transaction must create a measurable financial statement element which fulfills the
definition of a revenue.
C) The earnings process must be essentially complete.
D) Receipt of cash by the seller at the time of sale.
Answer: D

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

A) Identifying sources of revenue.
B) Identifying transactions that should be recorded as revenue in the current reporting period.
C) Identifying transactions that result in an inflow of cash from customers.
D) Measuring the expense related to the revenue for a specific period.
E) Identifying the period when the customer first indicates the need for a good or service.
Answer: B

7
77) The revenue principle states that revenue should be recognized only when a(n):
A) Exchange transaction involving goods or services has occurred and the earnings process is
essentially completed.
B) Exchange transaction involving goods and services has occurred and a cash down payment has
been received.
C) Completed earnings process can be projected.
D) Sale or service transaction has occurred.
Answer: A

78) Inselecting an accounting method for a newly contracted long-term construction project, the
principle factor to be considered should be:
A) The method usually used by the contractor to account for other long-term construction
contracts.
B) How reliable would an estimate be of the progress toward contract completion?
C) The terms of payment in the contract.
D) The kind of technical facilities used in construction.
Answer: B

79) When work to be done and costs to be incurred on a long-term contract cannot be reliably estimated,
which of the following methods of revenue recognition is preferable?
A) Sales method B) Completed contract method
C) Instalment method D) Percentage-of-completion method
Answer: B

80) Whichof the following statements regarding the percentage-of-completion and completed contract
methods of accounting for long-term construction contracts are true?
A) They recognize different amounts of income for the construction period.
B) Under only the percentage of completion method is it possible to recognize a loss for the period
when an overall profit is expected on the contract.
C) Neither requires losses to be recognized in the period of occurrence.
D) They produce the same inventory carrying values during the construction period.
Answer: B

81) Which of the following is not a difference between the percentage-of- completion and completed
contract methods of accounting for long-term construction contracts?
A) They report different inventory amounts during the construction period.
B) One records income (loss) each period during the construction period and the other does not.
C) They cause different cash inflows during the construction period.
D) One requires estimates of completion during the construction period and the other does not.
Answer: C

8
82) The percentage-of-completion method of accounting for long-term construction projects is
supported on the basis that it:
A) Produces a realistic matching of expenses with revenues.
B) is more conservative than the completed contract method.
C) Understates cost of goods sold.
D) Better conforms to the cost principle.
Answer: A

83) Choose the correct statement concerning the percentage-of-completion method of accounting for a
firm with only one current long-term construction contract in process (assume no loss is projected):
A) It is possible to have both a net current asset account and a net current liability account in this
situation.
B) If the construction- in- process account exceeds the billings account, total costs to date must
exceed total billings to date.
C) If the construction- in- process account exceeds the billings account, total costs to date must
exceed total cash received on the contract to date.
D) The net current asset account (net of construction- in- process, and billings) exceeds that same
account under the completed contract method.
Answer: D

84) Which of the following is the most conservative (slowest to recognize) revenue recognition method?
A) Production method B) Percentage of completion method
C) Instalment method of revenue recognition D) Cost recovery method
Answer: D

85) During theperiod of construction, financial information related to a long-term contract, which is
being accounted for using, the completed contract method will:
A) Appear only on the balance sheet during the period of construction.
B) Not appear on the financial statements.
C) Appear on both the income statement and balance sheet during the construction period.
D) Appear only on the income statement during the period of construction.
Answer: A

86) Why is construction-in-progress increased by the annual recognized profit on long-term construction
contracts?
A) Because the cost of the project is reduced.
B) Because work has been done.
C) Because the contract price has increased.
D) Because the project's value is increased above cost.
Answer: D

9
87) 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.
A) Under percentage of completion, the balance equals cost to date less billings, if profit has been
recognized.
B) Under percentage of completion, the balance equals cost to date less billings, less total
projected loss.
C) Under completed contract, the balance equals total estimated profit less billings.
D) Under completed contract, the balance equals cost plus billings.
Answer: B

88) The principle disadvantage of using the percentage-of-completion method of recognizing revenue
from long-term construction contracts is that it:
A) is likely to assign a small amount of revenue to a period during which much revenue actually
was earned.
B) is unacceptable for tax purposes.
C) Gives results based upon estimates, which may be subject to considerable uncertainty.
D) May require that inter-period tax allocation procedures be used.
Answer: C

89) The percentage-of-completion and completed contract methods of accounting for long-term
construction contracts will produce:
A) The same amount of income in the year of completion.
B) Equal balances each period in the Billings On Contracts account.
C) The same cost of construction (expense) each year for a project.
D) The same inventory carrying value each year during the construction period.
Answer: B

90) P-Dog Inc. has a loyalty points program which awards two customer loyalty points for every $100 of
goods purchased. During the year, the company sold $200,000 of goods in the store and awarded
4,000 points which can be redeemed and used towards future purchases. The stand-alone selling
price for the goods sold is $150,000. Based on past experience, P-Dog expects that only 80% of the
points will actually be redeemed. The stand-alone selling price of the points is $1.50 per point.
Based on the information provided, the amount of revenue that P-Dog will report on its statement of
comprehensive income for the year would be:
A) $154,800. B) $193,798. C) $200,000. D) $150,000.
Answer: B

10
91) Under the completed contract method of income recognition on long-term construction contracts:
A) The accumulated amount in the "Construction-in-Progress" account is essentially the amount of
cost of goods sold at completion date.
B) Income is accumulated in the "Construction-in-Progress" account.
C) "Construction-in-Progress" is reduced when billings are collected.
D) The balance in the "Construction-in-Progress" account is reported on the balance sheet as a
long-term asset until the date of completion.
Answer: A

92) Under the percentage-of-completion method of income recognition on long-term construction

contracts:
A) Income is accumulated in the "Construction-in-Progress" inventory account.
B) The ending inventory is the same as it would be if accounted for under the completed contract
method.
C) No income amount is closed each period to income summary.
D) The percentage of completion in any year depends on the proportion of billings collected.
Answer: A

93) 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:
A) Record the note at its discounted value.
B) Fully reserve the note by creating an allowance contra account.
C) Record a $200,000 gain on the sale of land.
D) Use the cost recovery method of accounting.
Answer: D

94) Net instalment accounts receivable is $5,000. Assume the instalment method of revenue recognition
is used and a gross profit percentage of 20%. Therefore:
A) $6,250 at sales price has not been collected B) $5,000 at sales price has not been collected
C) $1,250 of gross profit has been recognized D) $6,250 of cost has not been collected
Answer: A

95) Revenue is recognized at the time of sale under the:

A) Sales method when goods are sold on credit.
B) Collection method.
C) Instalment method.
D) Cost recovery method.
E) Percentage-of-completion method.
Answer: A

11
96) Grocery storesrecognize most of their revenue based on the:
A) Proportional performance method.
B) Cost recovery method.
C) Instalment method.
D) Specific performance method.
E) Sales method.
Answer: E

97) Which of the following bases of revenue recognition reflects the greatest degree of uncertainty about
future critical events?
A) Sales method applied to sales of a department store
B) Production method on cost-plus-fixed-fee contract
C) Percentage-of-completion method on construction contract
D) Cost recovery method applied to a bond investment
Answer: D

98) Revenue isrecognized prior to the time of sale under the:

A) Completed contract method. B) Specific performance method.
C) Production method. D) Instalment sales method.
Answer: C

99) Whichof the following methods of revenue recognition is appropriate for use by a real estate broker
whose sole activity is sale of realty on a commission basis?
A) Proportional performance method B) Specific performance method
C) Completed performance method D) Collection method
Answer: B

12
100) A corporation incurred $111,000 costs to extract a diamond. The diamond turned out to be flawed,
so the company decided to break it into small pieces and sell diamond chips. The company was
uncertain if the diamond chips would sell at all. The diamond chips did sell, and the company had
the following sales and accounts receivable balances over the five following years:

Accounts Receivable
Balance Sales
January 1, 2001 $0 $15,000 for 2001
January 1, 2002 10,500 30,000 for 2002
January 1, 2003 25,500 60,000 for 2003
January 1, 2004 40,500 24,000 for 2004
January 1, 2005 78,000 15,000 for 2005

The accountant recommended that the company use the cost recovery method of income recognition.
Using this method, the company will recognize revenue as follows:

2013 2014
1 $60,000 $60,000
2 24,000 24,000
3 0 0
4 6,000 0
5 Not determinable based on the data given

A) Choice 1 B) Choice 2 C) Choice 3 D) Choice 4 E) Choice 5

Answer: C

101) A corporation sold goods for $10 million during 2007. Of this amount, $6 million were in cash, and
$4 million was on account. However, the company collected $2 million of the sales on account
during 2007. In conformity with the revenue principle, the amount of revenue that should be
recognized in 2007 is:
A) $8 million B) $6 million C) $4 million D) $2 million E) $10 million
Answer: E

102) A construction company has contracted with a major university to build a new sports complex. The
contract calls for two sports arenas to be built in the next three years. The company will receive
$24,000,000 for the project and their engineers originally estimated a total cost to construct the two
arenas of $20,400,000. The two arenas are scheduled for completion in May of 2007. If an actual
cost of $9,200,000 is expended in 2004, and the engineers estimate another $12,800,000 is to be
expended to complete construction, how much income is to be recognized under the
percentage-of-completion method in 2004?
A) $1,163,636 B) $836,364 C) $2,000,000 D) $3,600,000
Answer: B

13
103) 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 during the year $600,000 $2,550,000
Estimated costs to complete, as of 2,400,000
12/31/2007
Billing during the year 720,000 3,080,000
Collections during the year 500,000 3,100,000

The portion of the total contract income to be recognized during 2007 is:
A) $200,000 B) $250,000 C) $120,000 D) $1,000,000
Answer: A

104) 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 $200,000 $100,000 $-0-
remaining
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?
A) $10,000 B) $160,000 C) $192,000 D) $42,000
Answer: A

105) Under the percentage-of-completion method, a company has recognized $40,000 of profit through to
the beginning of the current year on a contract, and total estimated contract cost is $500,000 at that
time. The contract price is $800,000. What is the percent of completion at the beginning of the
current year?
A) 15.8% B) Insufficient data C) 8% D) 13.33%
Answer: D

14
106) Given the following data, what is profit in 2007 under the percentage-of-completion method for a
project begun in 2006 with a contract price of $1,000?

2006 2007
Costs incurred this year $100 $200
Total estimated costs remaining at 700 400
end of year

A) $104 B) $61 C) $129 D) $86

Answer: A

107) 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 700 400
of year

A) $400 B) $100 C) $138 D) $38

Answer: C

108) 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) $400 loss B) $900 loss C) $500 loss D) no profit or loss
Answer: B

109) A firm uses the instalment method of revenue recognition on an item with a cash selling price of
$1,000 and cost of $600. During the year of sale, the firm received $250 from the customer.
Therefore, the net instalment account receivable equals which of the following amounts at the end
of the year of sale?
A) $300 B) $450 C) $750 D) $400
Answer: B

15
110) A firm uses the instalment method of revenue recognition on an item with a cash selling price of
$1,000 and cost of $600. During the year of sale, the firm received $250 from the customer.
Thereafter, no more cash is received. The firm repossesses the item, worth $500 at that time. The
entry to record the repossession includes:
A) Gain $50 B) Gain $200 C) Loss $350 D) Loss $250
Answer: A

111) A corporation, which began business on January 1, 2006, appropriately uses the instalment sales
method of reporting for accounting purposes. The following data were available for the years 2006
and 2007:

2006 2007
Instalment sales $1,050 $1,260
Cost of instalment sales 840 945
General and administrative expenses 105 126
Cash collected on 2006 instalment sales 450 375
Cash collected on 2007 instalment sales 600

The balance in the deferred gross profit control account on December 2007 should be:
A) $525 B) $210 C) $159 D) $315
Answer: B

112) 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) Billings in excess of costs $2,000 B) Billings in excess of costs $667

C) Costs in excess of billings $5,000 D) Costs in excess of billings $14,000
Answer: A

16
113) 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?
A) $45,000 B) $30,000 C) $50,000 D) $40,000
Answer: A

114) 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

A) Choice 1 B) Choice 2 C) Choice 3 D) Choice 4

Answer: D

115) The completed contract method of accounting for long-term construction-type contracts is
preferable when:
A) The contracts are of a relatively long duration.
B) Estimates of costs to complete and extent of progress toward completion are reasonably
dependable.
C) A contractor is involved in numerous projects.
D) Lack of dependable estimates or inherent hazards cause forecasts to be doubtful.
Answer: D

17
116) When progress billings are sent on a long-term contract, what type of account should be credited
under the completed contract method and percentage-of-completion method?

Completed contract Percentage-of-completion

1 Contra asset Revenue
2 Contra asset Contra asset
3 Revenue Revenue
4 Revenue Contra asset

A) Choice 1 B) Choice 2 C) Choice 3 D) Choice 4

Answer: B

117) The percentage-of-completion method of accounting for long-term construction-type contracts is

preferable when:
A) A contractor is involved in numerous projects.
B) The collectability of progress billings from the customer is reasonably assured.
C) The contracts are of a relatively short duration.
D) Estimates of costs to complete and extent of progress toward completion are reasonably
dependable.
Answer: D

118) A sale should NOT be recognized as revenue by the seller at the time of sale if:
A) the goods are sold on credit.
B) the buyer has a right to return the product and the amount of future returns cannot be
reasonably estimated.
C) payment was made by cheque.
D) the selling price is less than the normal selling price.
Answer: B

119) 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:
A) $16,000. B) $15,000. C) $14,000. D) $10,000.
Answer: B

18
120) 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 $10,000 and a fair value of $9,000. 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 lack commercial substance. Assuming that the book value
method is used, Company X would record:
A) no gain or loss on this transaction. B) a loss of $2,000 on this transaction.
C) a gain of $1,000 on this transaction. D) a loss of $1,000 on this transaction.
Answer: B

121) 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?
A) Completed-contract method. B) Instalment method.
C) Percentage-of-completion method. D) None of these answers are correct.
Answer: C

122) The criteria for recognition of revenue at completion of production of precious metals and farm
products include:
A) units of production are interchangeable.
B) low additional costs of completion and selling.
C) an established market with quoted prices.
D) All of these answers are correct.
Answer: D

123) The method most commonly used to report defaults and repossessions is:
A) record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
B) provide no basis for the repossessed asset, thereby recognizing a loss.
C) record the repossessed merchandise at book value, recording no gain or loss.
D) None of these answers are correct.
Answer: A

19
ESSAY. Write your answer in the space provided or on a separate sheet of paper.

124) 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 2,400,000 -0-
12/31/2007
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.

Answer:
Contract price $4,000,000
Costs incurred during the year $600,000
Estimated costs to complete, as of 12/31/2007 2,400,000
Total estimated costs 3,000,000
Total estimated gross margin $1,000,000

Percentage completion 600,000/3,000,000 20%

Gross profit to be recognized: 20% of $1,000,000 = $200,000

20
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