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Accounting 64 Final ch 18 Questions
And Answers
A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable that the option will be exercised. When recording the initial franchise fee, the franchisor should
a. record the entire initial franchise fee as a deferred credit which will reduce the franchisor's investment in the purchased outlet when the option is exercised.
b. record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid when the option is exercised.
c. record the portion of the initial franchise fee which is attributable to the bargain purchase option as a reduction of the future amounts receivable from the franchisee.
d. None of these. - โ โ A Revenue is recognized by the consignor when the
a. goods are shipped to the consignee. b. consignee receives the goods. c. consignor receives an advance from the consignee. d. consignor receives an account sales from the consignee. - โ โ D Companies should recognize revenue when it is realized and when cash is received. - โ โ False. When it is earned Revenues are realized when a company exchanges goods and services for cash or claims to cash. - โ โ True Delayed recognition of revenue is appropriate if the sale does not represent substantial completion of the earnings process. - โ โ True If a company sells its product but gives the buyer the right to return it, the company should not recognize revenue until the sale is collected. - โ โ False Companies can recognize revenue prior to completion and delivery of the product under
method but not the completed-contract method. - โ โ False A loss in the current period on a profitable contract must be recognized under both the percentage-of-completion and completed-contract method. - โ โ False Under the completion-of-production basis, companies recognize revenue when agricultural crops are harvested since the sales price is reasonably assured and no significant costs are involved in product distribution. - โ โ True The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not completed-contract. - โ โ False Under the installment-sales method, companies defer revenue and income recognition until the period of cash collection. - โ โ False The installment-sales method defers only the gross profit instead of both the sales price and cost of goods sold. - โ โ True Deferred gross profit is generally treated as an unearned revenue and classified as a
current liability. - โ โ True Under the cost-recovery method, a company recognizes no revenue or profit until cash payments by the buyer exceed the cost of the merchandise sold. - โ โ False Companies recognize profit under the cost-recovery method only when cash collections exceed the total cost of the goods sold. - โ โ True The revenue recognition principle provides that revenue is recognized when a. it is realized. b. it is realizable. c. it is realized or realizable and it is earned. d. none of these. - โ โ C When goods or services are exchanged for cash or claims to cash (receivables), revenues are
a. earned. b. realized. c. recognized.
c. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used.
d. Revenue from disposing of assets other than products is recognized at the date of sale. - โ โ B The process of formally recording or incorporating an item in the financial statements of an entity is a. allocation. b. articulation. c. realization. d. recognition. - โ โ D Dot Point, Inc. is a retailer of washers and dryers and offers a three- year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as
a. service revenue.
b. deferred service revenue. c. a reduction in installment accounts receivable. d. a direct addition to retained earnings. - โ โ B Which of the following is not a reason why revenue is recognized at time of sale? a. Realization has occurred. b. The sale is the critical event. c. Title legally passes from seller to buyer. d. All of these are reasons to recognize revenue at time of sale. - โ โ D An alternative available when the seller is exposed to continued risks of ownership through return of the product is
a. recording the sale, and accounting for returns as they occur in future periods.
b. not recording a sale until all return privileges have expired.
c. recording the sale, but reducing sales by an estimate of future returns.
a. The amount of future returns can be reasonably estimated.
b. The seller's price is substantially fixed or determinable at time of sale.
c. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product.
d. The buyer is obligated to pay the seller upon resale of the product. - โ โ D In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term construction contracts.
d. the inherent nature of the contractor's technical facilities used in construction. - โ โ B The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit balance. - โ โ C In accounting for a long-term construction-type contract using the percentage-ofcompletion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the
a. total costs incurred to date. b. total estimated cost. c. unbilled portion of the contract price. d. total contract price. - โ โ B How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue
recognition is used?
a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for the portion of work completed. - โ โ A The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable uncertainty.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used. - โ โ A Cost estimates at the end of the second year indicate a loss will result on completion of the entire contract. Which of the following statements is correct?
a. Under the completed-contract method, the loss is not recognized until the year the construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed.
c. Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.
d. Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs. - โ โ C The criteria for recognition of revenue at the completion of production of precious metals and farm products include
a. an established market with quoted prices. b. low additional costs of completion and selling. c. units are interchangeable. d. all of these. - โ โ D In certain cases, revenue is recognized at the completion of production even though no sale has been made. Which of the following statements is not true?
a. Examples involve precious metals or farm equipment.
b. The products possess immediate marketability at quoted prices.
b. Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
c. Under the completed-contract method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
d. No current period adjustment is required. - โ โ B Deferred gross profit on installment sales is generally treated as a(n)
a. deduction from installment accounts receivable.
b. deduction from installment sales.
c. unearned revenue and classified as a current liability.
d. deduction from gross profit on sales. - โ โ C The installment-sales method of recognizing profit for accounting purposes is acceptable if
a. collections in the year of sale do not exceed 30% of the total sales price.
b. an unrealized profit account is credited.
c. collection of the sales price is not reasonably assured.
d. the method is consistently used for all sales of similar merchandise. - โ โ C The method most commonly used to report defaults and repossessions is
a. provide no basis for the repossessed asset thereby recognizing a loss.
b. record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
