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69 Cards in this Set

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1. Revenue is not recognized under the realization principle unless the earnings process is complete or virtually complete and there is reasonable certainty about collectibility of the asset received.
TRUE
2. The first disclosure note to the financial statements is typically the summary of significant accounting policies.
TRUE
3. SAB 101 was issued by the FASB to clarify its guidelines on revenue recognition.
FALSE
4. Use of the installment sales method requires that firms track the gross-profit percentage associated with a particular sale.
TRUE
5. When collectibility of accounts receivable is difficult to estimate, companies must use the cost recovery method.
FALSE
6. Use of the installment sales method indicates little uncertainty about collection of the receivable.
FALSE
7. Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment method and the cost recovery method.
TRUE
8. When the right of return exists, revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns.
TRUE
9. When the right of return exists and a seller cannot make reliable estimates of future returns, they can use the installment method.
FALSE
10. Under the percentage-of-completion method, amounts billed and the cash actually received affect income recognition.
FALSE
11. Under the percentage-of-completion method, the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete.
TRUE
12. Firms have free choice as to whether they use the percentage-of-completion method or the completed contract method to account for a long-term contract.
FALSE
13. The percentage-of-completion and completed contract methods calculate different amounts of total profit or loss for a particular contract.
FALSE
14. Use of the percentage-of-completion method is dependent on a firm's ability to make dependable forecasts of future costs.
TRUE
15. Under the completed contract method, gross profit or loss is never recognized until the contract is completed.
FALSE
16. Under the cost recovery method used to account for long-term contracts under IFRS, equal amounts of revenue and cost are recognized until all costs are recovered.
TRUE
17. Estimated losses on long-term contracts are recognized ratably over the contract term regardless of the revenue recognition method used.
FALSE
18. Revenue from the sale of computer software is always recognized at the point of sale.
FALSE
19. Recognition of franchise fee revenue is dependent on judgments of both substantial performance and fee collectibility.
TRUE
20. Initial franchise fees are always recognized on the date they are received.
FALSE
20. Initial franchise fees are always recognized on the date they are received.
FALSE
21. When accounting for multiple-element software arrangements, the revenue for each element is based on the separate prices stated for each element in the software contract.
FALSE
22. When accounting for multiple-deliverable arrangements, EITF 00-21 indicates that sellers can separately record revenue for a part of an arrangement even if the part does not have value to the customer on a stand-alone basis.
FALSE
23. A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection.
FALSE
24. The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high.
TRUE
25. A company could improve its return on assets by increasing its income or by increasing its total assets.
FALSE
26. Return on Shareholders' Equity is increased if a firm can maintain its return on assets but increase its leverage.
TRUE
57. Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and:
A. Revenue is realized.
B. Any receivable is collected.
C. Collection is reasonably certain.
D. Collection is absolutely assured.
C. Collection is reasonably certain.
58. Merchandise sold FOB shipping point indicates that:
A. The seller pays the freight.
B. The buyer holds title after the merchandise leaves the seller's location.
C. The common carrier holds title until the merchandise is delivered.
D. The sale is not consummated until the merchandise reaches the point to which it is being shipped.
B. The buyer holds title after the merchandise leaves the seller's location.
59. Merchandise sold FOB destination indicates that:
A. The seller holds title until the merchandise is received at the buyer's location.
B. The buyer is responsible for delivery of the merchandise to the destination.
C. The full order is back ordered to its destination.
D. The buyer pays the freight to the destination.
A. The seller holds title until the merchandise is received at the buyer's location.
60. Which of the following was not a criterion for revenue recognition in SAB 101?
A. Cash has been collected.
B. Collectiblity is reasonably assured.
C. Persuasive evidence of an arrangement exists.
D. The seller's price to the buyer is fixed or determinable.
A. Cash has been collected.
61. For a typical manufacturing company, the most common critical point for recognizing revenue is the date:
A. An order is received.
B. Production is completed.
C. The product is delivered.
D. Payment is received.
C. The product is delivered.
62. Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:
A. Installment sales method.
B. Point of sales method.
C. Cost recovery method.
D. Answer A or C is correct.
D. Answer A or C is correct.
63. Bert's Meat Market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:
A. Point of sale.
B. Installment sales.
C. Cost recovery.
D. Answer B or C is correct.
D. Answer B or C is correct.
On December 15, 2009, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2010, and December 15, 2011. Ignore interest charges. Rigsby has a December 31 year-end.

64. In 2009, Rigsby would recognize realized gross profit of:
A. $500,000.
B. $ 0.
C. $900,000.
D. $100,000.
D. $100,000.
On December 15, 2009, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2010, and December 15, 2011. Ignore interest charges. Rigsby has a December 31 year-end.

65. In 2010, Rigsby would recognize realized gross profit of:
A. $ 0.
B. $450,000.
C. $300,000.
D. $400,000.
D. $400,000.
On December 15, 2009, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2010, and December 15, 2011. Ignore interest charges. Rigsby has a December 31 year-end.
66. In its December 31, 2009, balance sheet, Rigsby would report:
A. Realized gross profit of $100,000.
B. Deferred gross profit of $100,000.
C. Installment receivables (net) of $3,200,000.
D. Installment receivables (net) of $4,000,000.
C. Installment receivables (net) of $3,200,000.
On December 15, 2009, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2010, and December 15, 2011. Ignore interest charges. Rigsby has a December 31 year-end.
67. At December 31, 2010, Rigsby would report in its balance sheet:
A. Realized gross profit of $500,000.
B. Deferred gross profit of $400,000.
C. Realized gross profit of $400,000.
D. Cost of installment sales $1,600,000.
B. Deferred gross profit of $400,000.
Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2008. Collections on this sale were $20,000 in 2008, $15,000 in 2009, and $20,000 in 2010.

68. In 2008, Reliable would recognize gross profit of:
A. $ 0.
B. $25,000.
C. $ 8,090.
D. $ 8,333.
A. $ 0.
Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2008. Collections on this sale were $20,000 in 2008, $15,000 in 2009, and $20,000 in 2010.

69. In 2009, Reliable would recognize gross profit of:
A. $ 0.
B. $ 6,000.
C. $ 5,000.
D. $10,000.
C. $ 5,000.
Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2008. Collections on this sale were $20,000 in 2008, $15,000 in 2009, and $20,000 in 2010.

70. In 2010, Reliable would recognize gross profit of:
A. $ 0.
B. $ 6,000.
C. $ 8,000.
D. $20,000.
D. $20,000.
Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2008. Collections on this sale were $20,000 in 2008, $15,000 in 2009, and $20,000 in 2010.


71. In its 2008 year-end balance sheet, Reliable would report installment receivables (net) of:
A. $20,000.
B. $35,000.
C. $25,909.
D. $10,000.
D. $10,000.
Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2008. Collections on this sale were $20,000 in 2008, $15,000 in 2009, and $20,000 in 2010.


72. In its 2009 year-end balance sheet, Reliable would report installment receivables (net) of:
A. $ 0.
B. $20,000.
C. $ 4,000.
D. $15,000.
A. $ 0.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2008 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2008, $300,000 in 2009, and $300,000 in 2010 associated with those sales. In 2009 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2009, $400,000 in 2010, and $400,000 in 2011 associated with those sales. In 2011 Lake also repossessed $200,000 of jet skis that were sold in 2009. Those jet skis had a fair value of $75,000 at the time they were repossessed.

73. Total cash collections on installment sales during 2009 would be:
A. $700,000.
B. $300,000.
C. $800,000.
D. $0.
C. $800,000.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2008 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2008, $300,000 in 2009, and $300,000 in 2010 associated with those sales. In 2009 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2009, $400,000 in 2010, and $400,000 in 2011 associated with those sales. In 2011 Lake also repossessed $200,000 of jet skis that were sold in 2009. Those jet skis had a fair value of $75,000 at the time they were repossessed.

74. In 2008, Lake would recognize realized gross profit of:
A. $150,000.
B. $ 0.
C. $300,000.
D. $450,000.
A. $150,000.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2008 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2008, $300,000 in 2009, and $300,000 in 2010 associated with those sales. In 2009 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2009, $400,000 in 2010, and $400,000 in 2011 associated with those sales. In 2011 Lake also repossessed $200,000 of jet skis that were sold in 2009. Those jet skis had a fair value of $75,000 at the time they were repossessed.

75. In 2010, Lake would recognize realized gross profit of:
A. $ 0.
B. $450,000.
C. $310,000.
D. $700,000.
C. $310,000.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2008 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2008, $300,000 in 2009, and $300,000 in 2010 associated with those sales. In 2009 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2009, $400,000 in 2010, and $400,000 in 2011 associated with those sales. In 2011 Lake also repossessed $200,000 of jet skis that were sold in 2009. Those jet skis had a fair value of $75,000 at the time they were repossessed.

76. In its December 31, 2009, balance sheet, Lake would report:
A. Deferred gross profit of $700,000.
B. Deferred gross profit of $1,050,000.
C. Installment receivables (net) of $750,000.
D. Installment receivables (net) of $900,000.
C. Installment receivables (net) of $750,000.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2008 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2008, $300,000 in 2009, and $300,000 in 2010 associated with those sales. In 2009 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2009, $400,000 in 2010, and $400,000 in 2011 associated with those sales. In 2011 Lake also repossessed $200,000 of jet skis that were sold in 2009. Those jet skis had a fair value of $75,000 at the time they were repossessed.

77. In 2011, Lake would record a loss on repossession of:
A. $45,000.
B. $200,000.
C. $120,000.
D. $80,000
A. $45,000.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the cost recovery method to recognize revenue on these installment sales. In 2008 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2008, $300,000 in 2009, and $300,000 in 2010 associated with those sales. In 2009 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2009, $400,000 in 2010, and $400,000 in 2011 associated with those sales. In 2011 Lake also repossessed $200,000 of jet skis that were sold in 2009. Those jet skis had a fair value of $75,000 at the time they were repossessed.

78. In 2008, Lake would recognize realized gross profit of:
A. $150,000.
B. $ 0.
C. $300,000.
D. $450,000.
B. $ 0.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the cost recovery method to recognize revenue on these installment sales. In 2008 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2008, $300,000 in 2009, and $300,000 in 2010 associated with those sales. In 2009 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2009, $400,000 in 2010, and $400,000 in 2011 associated with those sales. In 2011 Lake also repossessed $200,000 of jet skis that were sold in 2009. Those jet skis had a fair value of $75,000 at the time they were repossessed.


79. In 2010, Lake would recognize realized gross profit of:
A. $ 0.
B. $300,000.
C. $310,000.
D. $700,000.
B. $300,000.
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the cost recovery method to recognize revenue on these installment sales. In 2008 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2008, $300,000 in 2009, and $300,000 in 2010 associated with those sales. In 2009 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2009, $400,000 in 2010, and $400,000 in 2011 associated with those sales. In 2011 Lake also repossessed $200,000 of jet skis that were sold in 2009. Those jet skis had a fair value of $75,000 at the time they were repossessed.


80. In its December 31, 2009, balance sheet, Lake would report:
A. Deferred gross profit of $700,000.
B. Deferred gross profit of $600,000.
C. Installment receivables (net) of $700,000.
D. Installment receivables (net) of $400,000.
D. Installment receivables (net) of $400,000.
81. Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy, and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:
A. When Boomerang delivers a computer to a customer.
B. When Boomerang receives cash from the customer.
C. When a customer returns a computer.
D. Never, because the right of return is unconditional.
A. When Boomerang delivers a computer to a customer.
82. Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy, and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing gross profit associated with one of these sales?
A. No time delay, recognize gross profit upon delivery.
B. Gunk should recognize gross profit as cash is received under the installment method.
C. Gunk should defer gross until costs are recovered under the cost recovery method.
D. Three years, after the right of return has expired.
D. Three years, after the right of return has expired.
83. Sweeney most likely should recognize revenue when:
A. He paints the painting, as the painting is accreting.
B. When he transfers a painting to a barbershop.
C. When the barbershop sells the painting.
D. When the barbershop's right of return expires.
C. When the barbershop sells the painting.
84. After Sweeney has transferred a painting to a barbershop, the painting:
A. Should be counted in Sweeney's inventory until the barbershop sells it.
B. Should be counted in the barbershop's inventory, as they now possess it.
C. Should be counted in either Sweeney's or the barbershop's inventory, depending on which incurred the cost of preparing the painting for display.
D. None of these.
A. Should be counted in Sweeney's inventory until the barbershop sells it
85. The rationale for adoption of the percentage-of-completion method is that:
A. Results are more conservative.
B. It provides a measure of periodic accomplishment.
C. It is a better match with legal ownership.
D. It results in a lower income tax.
B. It provides a measure of periodic accomplishment.
86. The percentage-of-completion method is preferable to the completed contract method and should only be avoided if
A. Completion rates are certain.
B. Profits are low.
C. Projects are more than five years to completion.
D. There is a lack of dependable estimates or inherent hazards cause forecasts to be doubtful.
D. There is a lack of dependable estimates or inherent hazards cause forecasts to be doubtful.
87. When using the completed contract method of accounting for long-term contracts:
A. Estimated losses on the overall contract are recognized before the contract is completed.
B. Expenses are recorded each period, but revenue is only recognized when the contract is completed.
C. Use of this method is not permitted under generally accepted accounting principles.
D. Neither gains nor losses are recognized until the contract is completed.
A. Estimated losses on the overall contract are recognized before the contract is completed.
88. When using the percentage-of-completion method of accounting for long-term contracts, the percentage of completion used to recognize gross profit in the first year usually is determined by measuring:
A. Costs incurred in the first year, divided by estimated remaining costs to complete the project.
B. Costs incurred in first year, divided by estimated total costs of the completed project.
C. Costs incurred in first year, divided by estimated gross profit.
D. None of these is correct.
B. Costs incurred in first year, divided by estimated total costs of the completed project.
89. The percentage-of-completion method violates the general rule on revenue recognition that:
A. Collection is reasonably assured.
B. Costs are known or reasonably estimated.
C. The earnings process is complete.
D. Collections have been received.
C. The earnings process is complete.
Arizona Desert Homes (ADH) constructed a new subdivision during 2008 and 2009 under contract with Cactus Development Co. Relevant data are summarized below:




ADH uses the percentage-of-completion method to recognize revenue.

90. What would be the journal entry made in 2008 to record revenue?
A.

B.

C.

D.
c
Arizona Desert Homes (ADH) constructed a new subdivision during 2008 and 2009 under contract with Cactus Development Co. Relevant data are summarized below:




ADH uses the percentage-of-completion method to recognize revenue.

91. In its December 31, 2008 balance sheet, ADH would report:
A. The asset, cost and profits in excess of billings, of $500,000.
B. The liability, billings in excess of cost, of $300,000.
C. The asset, contract amount in excess of billings, of $1,500,000.
D. The asset, deferred profit, of $400,000.
A. The asset, cost and profits in excess of billings, of $500,000.
Arizona Desert Homes (ADH) constructed a new subdivision during 2008 and 2009 under contract with Cactus Development Co. Relevant data are summarized below:




ADH uses the percentage-of-completion method to recognize revenue.
92. What would be the journal entry to record revenue in 2009?
A.

B.

C.

D.
B
ADH2 constructed a new subdivision during 2008 and 2009 under contract with Cactus Development Co. Relevant data are summarized below:




ADH2 uses the completed contract method to recognize revenue.

93. What would be the journal entry made in 2008 to record revenue?
A.

B.

C.
D. No entry.
D
ADH2 constructed a new subdivision during 2008 and 2009 under contract with Cactus Development Co. Relevant data are summarized below:




ADH2 uses the completed contract method to recognize revenue.
94. In its December 31, 2008 balance sheet, ADH2 would report:
A. The asset, cost and profits in excess of billings, of $500,000.
B. The liability, billings in excess of cost, of $300,000.
C. The asset, contract amount in excess of billings, of $1,500,000.
D. The asset, deferred profit, of $ 400,000.
B
ADH2 constructed a new subdivision during 2008 and 2009 under contract with Cactus Development Co. Relevant data are summarized below:




ADH2 uses the completed contract method to recognize revenue.



95. What would be the journal entry to record revenue in 2009?
A.

B.

C.

D.
D
Sahara Desert Homes (SDH) reports under IFRS, and constructed a new subdivision during 2008 and 2009 under contract with Cactus Development Co. Relevant data are summarized below:



SDH uses the cost recovery method under IFRS to recognize revenue.

96. What would be the journal entry made in 2008 to record revenue?
A.

B.

C.

D.
D
Sahara Desert Homes (SDH) reports under IFRS, and constructed a new subdivision during 2008 and 2009 under contract with Cactus Development Co. Relevant data are summarized below:



SDH uses the cost recovery method under IFRS to recognize revenue.


97. In its December 31, 2008 balance sheet, SDH would report:
A. The asset, cost and profits in excess of billings, of $500,000.
B. The liability, billings in excess of cost, of $300,000.
C. The asset, contract amount in excess of billings, of $1,500,000.
D. The asset, deferred profit, of $ 400,000.
B
Sahara Desert Homes (SDH) reports under IFRS, and constructed a new subdivision during 2008 and 2009 under contract with Cactus Development Co. Relevant data are summarized below:



SDH uses the cost recovery method under IFRS to recognize revenue.


98. What would be the journal entry SDH would use to record revenue in 2009?
A.

B.

C.

D.
D