yehisb kne16.doc

CHAPTER 18
REVENUE RECOGNITION
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
F 1. Recognition of revenue.
T 2. Realization of revenue.
T 3. Delayed recognition of revenue.
F 4. Recognizing revenue when right of return exists.
T 5. Recognizing revenue prior to product completion.
F 6. Use of percentage-of-completion method.
T 7. Input measure for contract progress.
T 8. Reporting Construction in Process and Billings on Construction in Process.
F 9. Construction in Process account balance.
F 10. Recognition of revenue under completed-contract method.
T 11. Principal advantage of completed-contract method.
F 12. Recognizing loss on an unprofitable contract.
F 13. Recognizing current period loss on a profitable contract.
T 14. Recognizing revenue under completion-of-production basis.
F 15. Recording a loss on an unprofitable contract.
F 16. Deferring revenue under installment-sales method.
T 17. Deferring gross profit under installment-sales method.
T 18. Classification of deferred gross profit.
F 19. Recognizing revenue under cost-recovery method.
T 20. Recognizing profit under cost-recovery method.
MULTIPLE CHOICE—Conceptual
c 21. Revenue recognition principle.
b 22. Definition of "realized."
a 23. Definition of "earned."
b S
24. Revenue recognition representations.
d P
25. Definition of recognition.
b P
26. Revenue recognition principle.
d 27. Recognizing revenue at point of sale.
d 28. Recording sales when right of return exists.
c 29. Revenue recognition when right of return exists.
d 30. Revenue recognition when right of return exists.
b 31. Appropriate accounting method for long-term contracts.
c 32. Percentage-of-completion method.
b 33. Percentage-of-completion method.
c 34. Classification of progress billings and construction in process.
b 35. Calculation of gross profit using percentage-of-completion.
a 36. Disclosure of earned but unbilled revenues.
b 37. Disadvantage of using percentage-of-completion.
d S
38. Percentage-of-completion input measures.

Test Bank for Intermediate Accounting, Thirteenth Edition
18 - 2
MULTIPLE CHOICE—Conceptual (cont.)
a S
39. Advantage of completed-contract method
c 40. Revenue, cost, and gross profit under the completed-contract method.
a 41. Loss recognition on a long-term contract.
c 42. Accounting for long-term contract losses.
d 43. Criteria for revenue recognition of completion of production.
a 44. Completion-of-production basis.
d S
45. Revenue recognition of completion of production.
b S
46. Treatment of estimated contract cost increase.
c 47. Presentation of deferred gross profit.
c 48. Appropriate use of the installment-sales method.
b 49. Valuing repossessed assets.
b 50. Gross profit deferred under the installment-sales method.
c S
51. Income realization on installment sales.
d P
52. Conservative revenue recognition method.
b 53. Income recognition under the cost-recovery method.
b 54. Income recognition under the cost-recovery method.
d 55. Cost recovery basis of revenue recognition.
b 56. Deposit method of revenue recognition.
d 57. Cost recovery method.
b *58. Types of franchising arrangements.
d *59. Accounting for consignment sales.
d *60. Allocation of initial franchise fee.
a *61. Recognition of continuing franchise fees.
b *62. Future bargain purchase option.
a *63. Option to purchase franchisee's business agreement.
d *64. Revenue recognition by the consignor.
P
These questions also appear in the Problem-Solving Survival Guide.
S
These questions also appear in the Study Guide.
*This topic is dealt with in an Appendix to the chapter.
MULTIPLE CHOICE—Computational
c 65. Computation of total revenue and accounts receivable.
d 66. Computation of total construction expenses.
b 67. Computation of costs and profits in excess of billings balance.
c 68. Computation of total revenue and construction expenses.
b 69. Gross profit recognized under percentage-of-completion.
c 70. Computation of construction in process amount.
b 73. Determine cash collected on long-term construction contract.
d 74. Determine gross profit using percentage-of-completion.
c 75. Gross profit to be recognized using percentage-of-completion.
b 76. Gross profit to be recognized using percentage-of-completion.
c 77. Profit to be recognized using completed-contract method.
a 78. Gross profit to be recognized using percentage-of-completion.

Revenue Recognition 18 - 3
MULTIPLE CHOICE—Computational (cont.)
b 79. Profit to be recognized using completed-contract method.
a 80. Gross profit to be recognized using percentage-of-completion.
c 81. Gross profit to be recognized using completed-contract method.
b 82. Computation of construction costs incurred.
c 83. Gross profit recognized under percentage-of-completion.
a 84. Computation of construction in process amount.
b 85. Loss recognized using completed-contract method.
c 86. Revenue recognition using completed-contract method.
c 87. Reporting a current liability with completed-contract-method.
a 88. Reporting inventory under completed-contract method.
d 89. Gain recognized on repossession—installment sale.
b 90. Calculate loss on repossessed merchandise.
a 91. Calculate loss on repossessed merchandise.
b 92. Interest recognized on installment sales.
b 93. Calculation of deferred gross profit amount.
b 94. Computation of realized gross profit amount.
d 95. Computation of loss on repossession.
d 96. Calculation of gross profit rate.
a 97. Computation of net income from installment sales.
d 98. Computation of realized and deferred gross profit.
a 99. Calculation of gross profit rate.
d 100. Computation of net income from installment sales.
a 101. Computation of realized and deferred gross profit.
c 102. Computation of realized gross profit amount.
b 103. Computation of realized gross profit-cost recovery method.
a 104. Revenue recognized under the cost-recovery method.
d *105. Cancellation of franchise agreement.
c *106. Accounting for initial and annual continuing franchise fees.
b *107. Franchise fee with a bargain purchase option.
d *108. Sales on consignment.
a *109. Reporting inventory on consignment.
MULTIPLE CHOICE—CPA Adapted
a 110. FASB's definition of "recognition."
b 111. Determine contract costs incurred during year.
d 112. Gross profit to be recognized using percentage-of-completion.
d 113. Profit to be recognized using completed-contract method.
c 114. Revenue recognized under completed-production method.
b 115. Determine balance of installment accounts receivable.
c 116. Calculate deferred gross profit—installment sales.
c 117. Calculate deferred gross profit—installment sales.
c 118. Balance of deferred gross profit—installment sales.
c 119. Reporting deferred gross profit—installment sales.
a 120. Effect of collections received on service contracts.

18 - 4
EXERCISES
Item Description
E18-121 Revenue recognition (essay).
E18-122 Revenue recognition (essay).
E18-123 Long-term contracts (essay).
E18-124 Journal entries—percentage-of-completion.
E18-125 Percentage-of-completion method.
E18-126 Percentage-of-completion method.
E18-127 Percentage-of-completion and completed-contract methods.
E18-128 Installment sales.
*E18-131 Franchises.
PROBLEMS
Item Description
P18-132 Long-term construction project accounting.
P18-133 Accounting for long-term construction contracts.
P18-134 Long-term contract accounting—completed-contract.
P18-135 Installment sales.
CHAPTER LEARNING OBJECTIVES
1. Apply the revenue recognition principle.
2. Describe accounting issues for revenue recognition at point of sale.
3. Apply the percentage-of-completion method for long-term contracts.
4. Apply the completed-contract method for long-term contracts.
5. Identify the proper accounting for losses on long-term contracts.
6. Describe the installment-sales method of accounting.
7. Explain the cost-recovery method of accounting.
*8. Explain revenue recognition for franchises and consignment sales.

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 3. TF 22. MC S
24. MC P
26. MC 121. E
2. TF 21. MC 23. MC P
25. MC 110. MC 122. E
4. TF 6. TF 28. MC 30. MC
5. TF 27. MC 29. MC 122. E
7. TF 34. MC 66. MC 72. MC 80. MC 123. E 133. P
8. TF 35. MC 67. MC 73. MC 82. MC 124. E
9. TF 36. MC 68. MC 74. MC 83. MC 125. E
31. MC 37. MC 69. MC 75. MC 84. MC 126. E
32. MC S
38. MC 70. MC 76. MC 111. MC 127. E
33. MC 65. MC 71. MC 78. MC 112. MC 132. P
10. TF 40. MC 81. MC 87. MC 123. E 134. P
11. TF 77. MC 85. MC 88. MC 127. E
S
39. MC 79. MC 86. MC 113. MC 133. P
12. TF 14. TF 41. MC 43. MC S
45. MC 114. MC 133. P
13. TF 15. TF 42. MC 44. MC S
46. MC 132. P
16. TF 49. MC 91. MC 96. MC 101. MC 118. MC 130. E
17. TF 50. MC 92. MC 97. MC 102. MC 119. MC 135. P
18. TF S
51. MC 93. MC 98. MC 115. MC 120. MC
47. MC 89. MC 94. MC 99. MC 116. MC 128. E
48. MC 90. MC 95. MC 100. MC 117. MC 129. E
19. TF P
52. MC 54. MC 56. MC 103. MC
20. TF 53. MC 55. MC 57. MC 104. MC
Learning Objective 8*
58. MC 60. MC 62. MC 64. MC 106. MC 108. MC 131. E
59. MC 61. MC 63. MC 105. MC 107. MC 109. MC
Note: TF = True-False
MC = Multiple Choice
E = Exercise
P = Problem

18 - 6
TRUE-FALSE—Conceptual
1. Companies should recognize revenue when it is realized and when cash is received.
2. Revenues are realized when a company exchanges goods and services for cash or claims
to cash.
3. Delayed recognition of revenue is appropriate if the sale does not represent substantial
completion of the earnings process.
4. 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.
5. Companies can recognize revenue prior to completion and delivery of the product under
certain circumstances.
6. Companies must use the percentage-of-completion method when estimates of progress
toward completion are reasonably dependable.
7. The most popular input measure used to determine the progress toward completion is the
cost-to-cost basis.
8. If the difference between the Construction in Process and the Billings on Construction in
Process account balances is a debit, the difference is reported as a current asset.
9. The Construction in Process account includes only construction costs under the
percentage-of-completion method.
10. Under the completed-contract method, companies recognize revenue and costs only when
the contract is completed.
11. The principal advantage of the completed-contract method is that reported revenue reflects
final results rather than estimates.
12. Companies must recognize a loss on an unprofitable contract under the percentage-of-
completion method but not the completed-contract method.
13. A loss in the current period on a profitable contract must be recognized under both the
percentage-of-completion and completed-contract method.
14. Under the completion-of-production basis, companies recognize revenue when agricul-
tural crops are harvested since the sales price is reasonably assured and no significant
costs are involved in product distribution.
15. 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.
16. Under the installment-sales method, companies defer revenue and income recognition until
the period of cash collection.

17. The installment-sales method defers only the gross profit instead of both the sales price
and cost of goods sold.
18. Deferred gross profit is generally treated as an unearned revenue and classified as a
current liability.
19. 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.
20. Companies recognize profit under the cost-recovery method only when cash collections
exceed the total cost of the goods sold.
True-False Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. F 11. T 16. F
2. T 7. T 12. F 17. T
3. T 8. T 13. F 18. T
4. F 9. F 14. T 19. F
5. T 10. F 15. F 20. T
MULTIPLE CHOICE—Conceptual
21. 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.
22. When goods or services are exchanged for cash or claims to cash (receivables), revenues
are
a. earned.
b. realized.
c. recognized.
d. all of these.
23. When the entity has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues, revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.

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S
24. Which of the following is not an accurate representation concerning revenue recognition?
a. Revenue from selling products is recognized at the date of sale, usually interpreted to
mean the date of delivery to customers.
b. Revenue from services rendered is recognized when cash is received or when services
have been performed.
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.
P
25. 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.
P
26. 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.
27. 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.
28. 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.
d. all of these.
29. A sale should not be recognized as revenue by the seller at the time of sale if
a. payment was made by check.
b. the selling price is less than the normal selling price.
c. the buyer has a right to return the product and the amount of future returns cannot be
reasonably estimated.
d. none of these.

30. The FASB concluded that if a company sells its product but gives the buyer the right to
return the product, revenue from the sales transaction shall be recognized at the time of
sale only if all of six conditions have been met. Which of the following is not one of these
six conditions?
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.
31. 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 construc-
tion contracts.
d. the inherent nature of the contractor's technical facilities used in construction.
32. 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.
d. The contract clearly specifies the enforceable rights of the parties, the consideration to
be exchanged, and the manner and terms of settlement.
33. 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. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these
34. How should the balances of progress billings and construction in process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory.
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.
35. In accounting for a long-term construction-type contract using the percentage-of-
completion 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.

18 - 10
36. 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.
37. 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. is likely to assign a small amount of revenue to a period during which much revenue
was actually earned.
d. none of these.
S
38. One of the more popular input measures used to determine the progress toward
completion in the percentage-of-completion method is
a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.
S
39. The principal advantage of the completed-contract method is that
a. reported revenue is based on final results rather than estimates of unperformed work.
b. it reflects current performance when the period of a contract extends into more than
one accounting period.
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.
40. Under the completed-contract method
a. revenue, cost, and gross profit are recognized during the production cycle.
b. revenue and cost are recognized during the production cycle, but gross profit
recognition is deferred until the contract is completed.
c. revenue, cost, and gross profit are recognized at the time the contract is completed.
d. none of these.
41. Cost estimates on a long-term contract may indicate that a loss will result on completion of
the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion or
completed-contract method is employed.
b. recognized in the current period under the percentage-of-completion method, but the
completed-contract method should defer recognition of the loss to the time when the
contract is completed.
c. recognized in the current period under the completed-contract method, but the
percentage-of-completion method should defer the loss until the contract is completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or completed-contract method is employed.

42. 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.
43. 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.
44. 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.
c. No significant costs are involved in selling the product.
d. All of these statements are true.
S
45. For which of the following products is it appropriate to recognize revenue at the completion
of production even though no sale has been made?
a. Automobiles
b. Large appliances
c. Single family residential units
d. Precious metals
S
46. When there is a significant increase in the estimated total contract costs but the increase
does not eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the completed-contract methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
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.
47. 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.

18 - 12
48. 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.
49. 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 repossessedmerchandise at fair value, recording a gain or loss if appropriate.
c. record the repossessed merchandise at book value, recording no gain or loss.
d. none of these.
50. Under the installment-sales method,
a. revenue, costs, and gross profit are recognized proportionate to the cash that is
received from the sale of the product.
b. gross profit is deferred proportionate to cash uncollected from sale of the product, but
total revenues and costs are recognized at the point of sale.
c. gross profit is not recognized until the amount of cash received exceeds the cost of the
item sold.
d. revenues and costs are recognized proportionate to the cash received from the sale of
the product, but gross profit is deferred until all cash is received.
S
51. The realization of income on installment sales transactions involves
a. recognition of the difference between the cash collected on installment sales and the
cash expenses incurred.
b. deferring the net income related to installment sales and recognizing the income as
cash is collected.
c. deferring gross profit while recognizing operating or financial expenses in the period
incurred.
d. deferring gross profit and all additional expenses related to installment sales until cash
is ultimately collected.
P
52. A manufacturer of large equipment sells on an installment basis to customers with
questionable credit ratings. Which of the following methods of revenue recognition is least
likely to overstate the amount of gross profit reported?
a. At the time of completion of the equipment (completion of production method)
b. At the date of delivery (sales method)
c. The installment-sales method
d. The cost–recovery method
53. A seller is properly using the cost-recovery method for a sale. Interest will be earned on the
future payments. Which of the following statements is not correct?
a. After all costs have been recovered, any additional cash collections are included in
income.
b. Interest revenue may be recognized before all costs have been recovered.
c. The deferred gross profit is offset against the related receivable on the balance sheet.
d. Subsequent income statements report the gross profit as a separate item of revenue
when it is recognized as earned.

54. Under the cost-recovery method of revenue recognition,
a. income is recognized on a proportionate basis as the cash is received on the sale of
the product.
b. income is recognized when the cash received from the sale of the product is greater
than the cost of the product.
c. income is recognized immediately.
d. none of these.
55. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of
water, Winser does not recognize any revenue from water sales until the sales exceed the
costs of exploration, the basis of revenue recognition being employed is the
a. production basis.
b. cash (or collection) basis.
c. sales (or accrual) basis.
d. cost recovery basis.
56. The deposit method of revenue recognition is used when
a. the product can be marketed at quoted prices and units are interchangeable.
b. cash is received before the sales transaction is complete.
c. the contract is short-term or the percentage-of-completion method can’t be used.
d. there are no significant costs of distribution.
57. The cost-recovery method
a. is prohibited under current GAAP due to its conservative nature.
b. requires a company to defer profit recognition until all cash payments are received from
the buyer.
c. is used by sellers when there is a reasonable basis for estimating collectibility.
d. recognizes total revenue and total cost of goods sold in the period of sale.
*58. Types of franchising arrangements include all of the following except
a. service sponsor-retailer.
b. wholesaler-service sponsor.
c. manufacturer-wholesaler.
d. wholesaler-retailer.
*59. In consignment sales, the consignee
a. records the merchandise as an asset on its books.
b. records a liability for the merchandise held on consignment.
c. recognizes revenue when it ships merchandise to the consignor.
d. prepares an “account report” for the consignor which shows sales, expenses, and cash
receipts.
*60. Some of the initial franchise fee may be allocated to
a. continuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. All of these may reduce the amount of the initial franchise fee that is recognized as
revenue.

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*61. Continuing franchise fees should be recorded by the franchisor
a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.
*62. Occasionally a franchise agreement grants the franchisee the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the franchisor
should
a. increase revenue recognized from the initial franchise fee by the amount of the
expected future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase the
selling price when the franchisee subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made.
d. None of these.
*63. 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.
*64. 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.
Multiple Choice Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 28. d 35. b 42. c 49. b 56. b *63. a
22. b 29. c 36. a 43. d 50. b 57. d *64. d
23. a 30. d 37. b 44. a 51. c *58. b
24. b 31. b 38. d 45. d 52. d *59. d
25. d 32. c 39. a 46. b 53. b *60. d
26. b 33. b 40. c 47. c 54. b *61. a
27. d 34. c 41. a 48. c 55. d *62. b

MULTIPLE CHOICE—Computational
Use the following information for questions 65-68:
Seasons Construction is constructing an office building under contract for Cannon Cafe. The
contract calls for progress billings and payments of $620,000 each quarter. The total contract price
is $7,440,000 and Seasons estimates total costs of $7,100,000. Seasons estimates that the
building will take 3 years to complete, and commences construction on January 2, 2010.
65. At December 31, 2010, Seasons estimates that it is 30% complete with the construction,
based on costs incurred. What is the total amount of Revenue from Long-Term Contracts
recognized for 2010 and what is the balance in the Accounts Receivable account assuming
Cannon Cafe has not yet made its last quarterly payment?
Revenue Accounts Receivable
a. $2,480,000 $2,480,000
b. $2,130,000 $ 620,000
c. $2,232,000 $ 620,000
d. $2,130,000 $2,480,000
66. At December 31, 2011, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $7,200,000 due to
unanticipated price increases. What is the total amount of Construction Expenses that
Seasons will recognize for the year ended December 31, 2011?
a. $5,400,000
b. $3,150,000
c. $3,195,000
d. $3,270,000
67. At December 31, 2011, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $7,200,000 due to
unanticipated price increases. What is reported in the balance sheet at December 31, 2011
for Seasons as the difference between the Construction in Process and the Billings on
Construction in Process accounts, and is it a debit or a credit?
Difference between the accounts Debit/Credit
a. $1,690,000 Credit
b. $620,000 Debit
c. $440,000 Debit
d. $620,000 Credit
68. Seasons Construction completes the remaining 25% of the building construction on
December 31, 2012, as scheduled. At that time the total costs of construction are
$7,500,000. What is the total amount of Revenue from Long-Term Contracts and
Construction Expenses that Seasons will recognize for the year ended December 31,
2012?
Revenue Expenses
a. $7,440,000 $7,500,000
b. $1,860,000 $1,875,000
c. $1,860,000 $2,100,000
d. $1,875,000 $1,875,000

18 - 16
The following information relates to questions 69 and 70.
Cooper Construction Company had a contract starting April 2010, to construct a $9,000,000
building that is expected to be completed in September 2012, at an estimated cost of $8,250,000.
At the end of 2010, the costs to date were $3,795,000 and the estimated total costs to complete
had not changed. The progress billings during 2010 were $1,800,000 and the cash collected
during 2010 was 1,200,000.
69. For the year ended December 31, 2010, Cooper would recognize gross profit on the
building of:
a. $316,250
b. $345,000
c. $405,000
d. $0
70. At December 31, 2010 Cooper would report Construction in Process in the amount of:
a. $345,000
b. $3,795,000
c. $4,140,000
d. $3,540,000
71. Hayes Construction Corporation contracted to construct a building for $1,500,000.
Construction began in 2010 and was completed in 2011. Data relating to the contract are
summarized below:
Year ended
December 31,
2010 2011
Costs incurred $600,000 $450,000
Estimated costs to complete 400,000 —
Hayes uses the percentage-of-completion method as the basis for income recognition. For
the years ended December 31, 2010, and 2011, respectively, Hayes should report gross
profit of
a. $270,000 and $180,000.
b. $900,000 and $600,000.
c. $300,000 and $150,000.
d. $0 and $450,000.
72. Monroe Construction Company uses the percentage-of-completion method of accounting.
In 2010, Monroe began work on a contract it had received which provided for a contract
price of $15,000,000. Other details follow:
2010
Costs incurred during the year $7,200,000
Estimated costs to complete as of December 31 4,800,000
Billings during the year 6,600,000
Collections during the year 3,900,000
What should be the gross profit recognized in 2010?
a. $600,000
b. $7,800,000
c. $1,800,000
d. $3,000,000

Use the following information for questions 73 and 74.
In 2010, Fargo Corporation began construction work under a three-year contract. The contract
price is $2,400,000. Fargo uses the percentage-of-completion method for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred to
total estimated costs for completing the contract. The financial statement presentations relating to
this contract at December 31, 2010, follow:
Balance Sheet
Accounts receivable—construction contract billings $100,000
Construction in progress $300,000
Less contract billings 240,000
Costs and recognized profit in excess of billings 60,000
Income Statement
Income (before tax) on the contract recognized in 2010 $60,000
73. How much cash was collected in 2010 on this contract?
a. $100,000
b. $140,000
c. $20,000
d. $240,000
74. What was the initial estimated total income before tax on this contract?
a. $300,000
b. $320,000
c. $400,000
d. $480,000
75. Adler Construction Co. uses the percentage-of-completion method. In 2010, Adler began
work on a contract for $3,300,000 and it was completed in 2011. Data on the costs are:
Year Ended December 31
2010 2011
Costs incurred $1,170,000 $840,000
Estimated costs to complete 780,000 —
For the years 2010 and 2011, Adler should recognize gross profit of
2010 2011
a. $0 $1,290,000
b. $774,000 $516,000
c. $810,000 $480,000
d. $810,000 $1,290,000
Gomez, Inc. began work in 2010 on contract #3814, which provided for a contract price of
$7,200,000. Other details follow:
2010 2011
Costs incurred during the year $1,200,000 $3,675,000
Estimated costs to complete, as of December 31 3,600,000 0
Billings during the year 1,350,000 5,400,000
Collections during the year 900,000 5,850,000

18 - 18
76. Assume that Gomez uses the percentage-of-completion method of accounting. The portion
of the total gross profit to be recognized as income in 2010 is
a. $450,000.
b. $600,000.
c. $1,800,000.
d. $2,400,000.
77. Assume that Gomez uses the completed-contract method of accounting. The portion of the
total gross profit to be recognized as income in 2011 is
a. $900,000.
b. $1,350,000.
c. $2,325,000.
d. $7,200,000.
Kiner, Inc. began work in 2010 on a contract for $8,400,000. Other data are as follows:
2010 2011
Costs incurred to date $3,600,000 $5,600,000
Estimated costs to complete 2,400,000 —
Billings to date 2,800,000 8,400,000
Collections to date 2,000,000 7,200,000
78. If Kiner uses the percentage-of-completion method, the gross profit to be recognized in
2010 is
a. $1,440,000.
b. $1,600,000.
c. $2,160,000.
d. $2,400,000.
79. If Kiner uses the completed-contract method, the gross profit to be recognized in 2011 is
a. $1,360,000.
b. $2,800,000.
c. $1,400,000.
d. $5,600,000.
80. Horner Construction Co. uses the percentage-of-completion method. In 2010, Horner
began work on a contract for $5,500,000; it was completed in 2011. The following cost data
pertain to this contract:
Year Ended December 31
2010 2011
Cost incurred during the year $1,950,000 $1,400,000
Estimated costs to complete at the end of year 1,300,000 —
The amount of gross profit to be recognized on the income statement for the year ended
December 31, 2011 is
a. $800,000.
b. $860,000.
c. $900,000.
d. $2,150,000.

81. If the completed-contract method of accounting was used, the amount of gross profit to be
recognized for years 2010 and 2011 would be
2010 2011
a. $2,250,000. $0.
b. $2,150,000. $(100,000).
c. $0. $2,150,000.
d. $0. $2,250,000.
82. Remington Construction Company uses the percentage-of-completion method. During
2010, the company entered into a fixed-price contract to construct a building for Sherman
Company for $30,000,000. The following details pertain to the contract:
At December 31, 2010 At December 31, 2011
Percentage of completion 25% 60%
Estimated total cost of contract $22,500,000 $25,000,000
Gross profit recognized to date 1,875,000 3,000,000
The amount of construction costs incurred during 2011 was
a. $15,000,000.
b. $9,375,000.
c. $5,625,000.
d. $2,500,000.
Eilert Construction Company had a contract starting April 2011, to construct a $15,000,000
building that is expected to be completed in September 2012, at an estimated cost of $13,750,000.
At the end of 2011, the costs to date were $6,325,000 and the estimated total costs to complete
had not changed. The progress billings during 2011 were $3,000,000 and the cash collected
during 2011 was $2,000,000. Eilert uses the percentage-of-completion method.
83. For the year ended December 31, 2011, Eilert would recognize gross profit on the building
of
a. $0.
b. $527,083.
c. $575,000.
d. $675,000.
84. At December 31, 2011, Eilert would report Construction in Process in the amount of
a. $6,900,000.
b. $6,325,000.
c. $5,900,000.
d. $575,000.

18 - 20
85. Hiser Builders, Inc. is using the completed-contract method for a $5,600,000 contract that
will take two years to complete. Data at December 31, 2010, the end of the first year, are
as follows:
Costs incurred to date $2,560,000
Estimated costs to complete 3,280,000
Billings to date 2,400,000
Collections to date 2,000,000
The gross profit or loss that should be recognized for 2010 is
a. $0.
b. a $240,000 loss.
c. a $120,000 loss.
d. a $105,600 loss.
Use the following information for questions 86 through 88.
Gorman Construction Co. began operations in 2010. Construction activity for 2010 is shown
below. Gorman uses the completed-contract method.
Billings Collections Estimated
Contract Through Through Costs to Costs to
Contract Price 12/31/10 12/31/10 12/31/10 Complete
1 $3,200,000 $3,150,000 $2,600,000 $2,150,000 —
2 3,600,000 1,500,000 1,000,000 820,000 $1,880,000
3 3,300,000 1,900,000 1,800,000 2,250,000 1,200,000
86. Which of the following should be shown on the income statement for 2010 related to
Contract 1?
a. Gross profit, $450,000
b. Gross profit, $1,000,000
c. Gross profit, $1,050,000
d. Gross profit, $600,000
87. Which of the following should be shown on the balance sheet at December 31, 2010
related to Contract 2?
a. Inventory, $680,000
b. Inventory, $820,000
c. Current liability, $680,000
d. Current liability, $1,500,000
88. Which of the following should be shown on the balance sheet at December 31, 2010
related to Contract 3?
a. Inventory, $200,000
b. Inventory, $350,000
c. Inventory, $2,100,000
d. Inventory, $2,250,000

89. Oliver Co. uses the installment-sales method. When an account had a balance of $8,400,
no further collections could be made and the dining room set was repossessed. At that
time, it was estimated that the dining room set could be sold for $2,400 as repossessed, or
for $3,000 if the company spent $300 reconditioning it. The gross profit rate on this sale
was 70%. The gain or loss on repossession was a
a. $5,880 loss.
b. $6,000 loss.
c. $600 gain.
d. $180 gain.
90. Spicer Corporation has a normal gross profit on installment sales of 30%. A 2009 sale
resulted in a default early in 2011. At the date of default, the balance of the installment
receivable was $24,000, and the repossessed merchandise had a fair value of $13,500.
Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss on
repossession should be
a. $0.
b. a $3,300 loss.
c. a $3,300 gain.
d. a $7,500 loss.
91. Fryman Furniture uses the installment-sales method. No further collections could be made
on an account with a balance of $18,000. It was estimated that the repossessed furniture
could be sold as is for $5,400, or for $6,300 if $300 were spent reconditioning it. The gross
profit rate on the original sale was 40%. The loss on repossession was
a. $4,800.
b. $4,500.
c. $12,000.
d. $12,600.
92. Melton Company sold some machinery to Addison Company on January 1, 2010. The
cash selling price would have been $568,620. Addison entered into an installment sales
contract which required annual payments of $150,000, including interest at 10%, over five
years. The first payment was due on December 31, 2010. What amount of interest income
should be included in Melton's 2011 income statement (the second year of the contract)?
a. $15,000
b. $47,548
c. $30,000
d. $41,862

18 - 22
93. Carperter Company has used the installment method of accounting since it began
operations at the beginning of 2011. The following information pertains to its operations for
2011:
Installment sales $ 1,400,000
Cost of installment sales 980,000
Collections of installment sales 560,000
General and administrative expenses 140,000
The amount to be reported on the December 31, 2011 balance sheet as Deferred Gross
Profit should be
a. $168,000.
b. $252,000.
c. $336,000.
d. $840,000.
94. Daily, Inc. appropriately used the installment method of accounting to recognize income in
its financial statement. Some pertinent data relating to this method of accounting include:
2010 2011
Installment sales $750,000 $900,000
Cost of sales 450,000 630,000
Gross profit $300,000 $270,000
Collections during year:
On 2010 sales 250,000 250,000
On 2011 sales 300,000
What amount to be realized gross profit should be reported on Daily’s income statement for
2011?
a. $165,000
b. $190,000
c. $220,000
d. $270,000
95. Sutton Company sells plasma-screen televisions on an installment basis and appropri-ately
uses the installment-sales method of accounting. A customer with an account balance of
$5,600 refuses to make any more payments and the merchandise is repossessed. The
gross profit rate on the original sale is 40%. Sutton estimates that the television can be
sold as is for $1,750, or for $2,100 if $140 is spent to refurbish it. The loss on repossession
is
a. $3,850.
b. $2,240.
c. $1,610.
d. $1,400.
Use the following information for questions 96-98.
During 2010, Vaughn Corporation sold merchandise costing $1,500,000 on an installment basis
for $2,000,000. The cash receipts related to these sales were collected as follows: 2010,
$800,000; 2011, $700,000; 2012, $500,000.

96. What is the rate of gross profit on the installment sales made by Vaughn Corporation
during 2010?
a. 75%
b. 60%
c. 40%
d. 25%
97. If expenses, other than the cost of the merchandise sold, related to the 2010 installment
sales amounted to $90,000, by what amount would Vaughn’s net income for 2010 increase
as a result of installment sales?
a. $110,000
b. $177,500
c. $200,000
d. $710,000
98. What amount would be shown in the December 31, 2011 financial statement for realized
gross profit on 2010 installment sales, and deferred gross profit on 2010 installment sales,
respectively?
a. $175,000 and $375,000
b. $325,000 and $175,000
c. $375,000 and $125,000
d. $175,000 and $125,000
Use the following information for questions 99 – 101.
During 2010, Martin Corporation sold merchandise costing $2,100,000 on an installment basis for
$3,000,000. The cash receipts related to these sales were collected as follows: 2010, $1,200,000;
2011, $1,050,000; 2012, $750,000.
99. What is the rate of gross profit on the installment sales made by Martin Corporation during
2010?
a. 30%
b. 40%
c. 60%
d. 70%
100. If expenses, other than the cost of the merchandise sold, related to the 2010 installment
sales amounted to $120,000, by what amount would Martin’s net income for 2010 increase
as a result of installment sales?
a. $1,080,000
b. $360,000
c. $270,000
d. $240,000
101. What amount would be shown in the December 31, 2011 financial statements for realized
gross profit on 2010 installment sales, and deferred gross profit on 2010 installment sales,
respectively?
a. $315,000 and $225,000
b. $585,000 and $315,000
c. $225,000 and $675,000
d. $315,000 and $675,000

18 - 24
Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is
unable to reliably predict bad debts. During 2010, Coaster sold equipment costing $2,400,000 for
$3,600,000. The terms of the sale were 20% down, with equal payments due quarterly over the
next 3 years. All payments for 2010 were made on schedule. Round answers to two places.
102. Assuming that Coaster uses the installment method of accounting for its installment sales,
what amount of realized gross profit will Coaster report in its income statement for the year
ended December 31, 2010?
a. $1,680,000
b. $1,120,000
c. $560,000
d. $369,600
103. Assuming that Coaster uses the cost-recovery method of accounting for its installment
sales, what amount of realized gross profit will Coaster report in its income statement for
the year ended December 31, 2011?
a. $0
b. $240,000
c. $316,800
d. $960,000
104. On January 1, 2010, Shaw Co. sold land that cost $210,000 for $280,000, receiving a note
bearing interest at 10%. The note will be paid in three annual installments of $112,595
starting on December 31, 2010. Because collection of the note is very uncertain, Shaw will
use the cost-recovery method. How much revenue from this sale should Shaw recognize in
2010?
a. $0
b. $21,000
c. $28,000
d. $70,000
*105. On April 1, 2010 Weston, Inc. entered into a franchise agreement with a local business-
man. The franchisee paid $240,000 and gave a $160,000, 8%, 3-year note payable with
interest due annually on March 31. Weston recorded the $400,000 initial franchise fee as
revenue on April 1, 2010. On December 30, 2010, the franchisee decided not to open an
outlet under Weston's name. Weston canceled the franchisee's note and refunded
$128,000, less accrued interest on the note, of the $240,000 paid on April 1. What entry
should Weston make on December 30, 2010?
a. Loss on Repossessed Franchise.......................................... 128,000
Cash........................................................................... 128,000
b. Loss on Repossessed Franchise.......................................... 118,400
Cash........................................................................... 118,400
c. Loss on Repossessed Franchise.......................................... 278,400
Cash........................................................................... 118,400
Note Receivable ........................................................ 160,000
d. Revenue from Franchise Fees.............................................. 400,000
Interest Income.......................................................... 9,600
Cash........................................................................... 118,400
Note Receivable ........................................................ 160,000
Revenue from Repossessed Franchise.................... 112,000

*106. On January 1, 2010 Dairy Treats, Inc. entered into a franchise agreement with a company
allowing the company to do business under Dairy Treats's name. Dairy Treats had performed
substantially all required services by January 1, 2010, and the franchisee paid the initial franchise
fee of $560,000 in full on that date. The franchise agreement specifies that the franchisee must
pay a continuing franchise fee of $48,000 annually, of which 20% must be spent on advertising by
Dairy Treats. What entry should Dairy Treats make on January 1, 2010 to record receipt of the
initial franchise fee and the continuing franchise fee for 2010?
a. Cash....................................................................................... 608,000
Franchise Fee Revenue............................................ 560,000
Revenue from Continuing Franchise Fees ............... 48,000
b. Cash....................................................................................... 608,000
Unearned Franchise Fees......................................... 608,000
c. Cash....................................................................................... 608,000
d. Prepaid Advertising ............................................................... 9,600
Cash....................................................................................... 608,000
*107. Wynne Inc. charges an initial franchise fee of $920,000, with $200,000 paid when the
agreement is signed and the balance in five annual payments. The present value of the
future payments, discounted at 10%, is $545,872. The franchisee has the option to
purchase $120,000 of equipment for $96,000. Wynne has substantially provided all initial
services required and collectibility of the payments is reasonably assured. The amount of
revenue from franchise fees is
a. $200,000.
b. $721,872.
c. $745,872.
d. $920,000.
On May 1, 2010, TV Inc. consigned 80 TVs to Ed's TV. The TVs cost $270. Freight on the
shipment paid by Ed’s TV was $600. On July 10, TV Inc. received an account sales and $12,900
from Ed's TV. Thirty TVs had been sold and the following expenses were deducted:
Freight $600
Commission (20% of sales price) ?
Advertising 390
Delivery 210
*108. The total sales price of the TVs sold by Ed's TV was
a. $15,375.
b. $16,125.
c. $16,388.
d. $17,625.

18 - 26
*109. The inventory of TVs will be reported on whose balance sheet and at what amount?
Balance Sheet of Amount of Inventory
a. TV Inc. $13,875
b. TV Inc. $13,500
c. Ed's TV $13,875
d. Ed's TV $13,500
Multiple Choice Answers—Computational
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
65. c 72. c 79. b 86. c 93. b 100. d *107. b
66. d 73. b 80. a 87. c 94. b 101. a *108. d
67. b 74. d 81. c 88. a 95. d 102. c *109. a
68. c 75. c 82. b 89. d 96. d 103. b
69. b 76. b 83. c 90. b 97. a 104. a
70. c 77. c 84. a 91. a 98. d *105. d
71. c 78. a 85. b 92. b 99. a *106. c
MULTIPLE CHOICE—CPA Adapted
110. According to the FASB's conceptual framework, the process of reporting an item in the
financial statements of an entity is
a. recognition.
b. realization.
c. allocation.
d. matching.
111. Green Construction Co. has consistently used the percentage-of-completion method of
recognizing revenue. During 2010, Green entered into a fixed-price contract to construct an
office building for $12,000,000. Information relating to the contract is as follows:
At December 31
2010 2011
Percentage of completion 15% 45%
Estimated total cost at completion $9,000,000 $9,600,000
Gross profit recognized (cumulative) 600,000 1,440,000
Contract costs incurred during 2011 were
a. $2,880,000.
b. $2,970,000.
c. $3,150,000.
d. $4,320,000.

112. Bruner Constructors, Inc. has consistently used the percentage-of-completion method of
recognizing income. In 2010, Bruner started work on a $35,000,000 construction contract
that was completed in 2011. The following information was taken from Bruner's 2010
accounting records:
Progress billings $11,000,000
Costs incurred 10,500,000
Collections 7,000,000
Estimated costs to complete 21,000,000
What amount of gross profit should Bruner have recognized in 2010 on this contract?
a. $3,500,000
b. $2,333,334
c. $1,750,000
d. $1,166,667
113. During 2010, Gates Corp. started a construction job with a total contract price of $3,500,000.
The job was completed on December 15, 2011. Additional data are as follows:
2010 2011
Actual costs incurred $1,350,000 $1,525,000
Estimated remaining costs 1,350,000 —
Billed to customer 1,200,000 2,300,000
Received from customer 1,000,000 2,400,000
Under the completed-contract method, what amount should Gates recognize as gross
profit for 2011?
a. $225,000
b. $312,500
c. $475,000
d. $625,000
114. Hogan Farms produced 800,000 pounds of cotton during the 2010 season. Hogan sells all
of its cotton to Ott Co., which has agreed to purchase Hogan's entire production at the
prevailing market price. Recent legislation assures that the market price will not fall below
$.70 per pound during the next two years. Hogan's costs of selling and distributing the
cotton are immaterial and can be reasonably estimated. Hogan reports its inventory at
expected exit value. During 2010, Hogan sold and delivered to Ott 600,000 pounds at the
market price of $.70. Hogan sold the remaining 200,000 pounds during 2011 at the market
price of $.72. What amount of revenue should Hogan recognize in 2010?
a. $420,000
b. $432,000
c. $560,000
d. $576,000

18 - 28
115. Braun, Inc. appropriately uses the installment-sales method of accounting to recognize
income in its financial statements. Some pertinent data relating to this method of
accounting include:
2010 2011
Installment sales $750,000 $720,000
Cost of installment sales 570,000 504,000
Gross profit $180,000 $216,000
Rate of gross profit 24% 30%
Balance of deferred gross profit at year end:
2010 $108,000 $ 36,000
2011 198,000
Total $108,000 $234,000
What amount of installment accounts receivable should be presented in Braun's December
31, 2011 balance sheet?
a. $720,000
b. $810,000
c. $780,000
d. $866,666
116. Hartz Co., which began operations on January 1, 2010, appropriately uses the installment-
sales method of accounting. The following information pertains to Hartz's operations for the
year 2010:
Installment sales $1,200,000
Regular sales 480,000
Cost of regular sales 288,000
Collections on installment sales 288,000
The deferred gross profit account in Hartz's December 31, 2010 balance sheet should be
a. $115,200.
b. $192,000.
c. $364,800.
d. $480,000.
117. On January 1, 2010, Orton Co. sold a used machine to King, Inc. for $350,000. On this
date, the machine had a depreciated cost of $245,000. King paid $50,000 cash on January
1, 2010 and signed a $300,000 note bearing interest at 10%. The note was payable in
three annual installments of $100,000 beginning January 1, 2011. Orton appropriately
accounted for the sale under the installment method. King made a timely payment of the
first installment on January 1, 2011 of $130,000, which included interest of $30,000 to date
of payment. At December 31, 2011, Orton has deferred gross profit of
a. $70,000.
b. $66,000.
c. $60,000.
d. $51,000.

118. Piper Co. began operations on January 1, 2010 and appropriately uses the installment
method of accounting. The following information pertains to Piper's operations for 2010:
Installment sales 1,800,000
Cost of installment sales 1,080,000
Collections on installment sales 825,000
The balance in the deferred gross profit account at December 31, 2010 should be
a. $330,000.
b. $495,000.
c. $390,000.
d. $720,000.
119. Moon Co. records all sales using the installment method of accounting. Installment sales
contracts call for 36 equal monthly cash payments. According to the FASB's conceptual
framework, the amount of deferred gross profit relating to collections 12 months beyond
the balance sheet date should be reported in the
a. current liabilities section as a deferred revenue.
b. noncurrent liabilities section as a deferred revenue.
c. current assets section as a contra account.
d. noncurrent assets section as a contra account.
120. Crane, Inc. is a retailer of home appliances and offers a service contract on each appliance
sold. Crane sells appliances on installment contracts, but all service contracts must be paid
in full at the time of sale. Collections received for service contracts should be recorded as
an increase in a
a. deferred revenue account.
b. sales contracts receivable valuation account.
c. stockholders' valuation account.
d. service revenue account.
Multiple Choice Answers—CPAAdapted
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
110. a 112. d 114. c 116. c 118. c 120. a
111. b 113. d 115. b 117. c 119. c
DERIVATIONS — Computational
No. Answer Derivation
65. c $7,440,000  .30 = $2,232,000.
66. d ($7,200,000  .75) – ($7,100,000  .30) = $3,270,000.
67. b ($7,440,000  .75) – ($620,000  8) = $620,000 debit.
68. c $7,440,000  .25 = $1,860,000
$7,500,000 – ($7,200,000  .75) = $2,100,000.

18 - 30
DERIVATIONS — Computational (cont.)
69. b ($9,000,000 – $8,250,000)  ($3,795,000 ÷ $8,250,000) = $345,000.
70. c $3,795,000 + $345,000 = $4,140,000.
71. c $600,000
—————————— ×($1,500,000 – $1,000,000) = $300,000
$600,000 + $400,000
($1,500,000 – $1,050,000) – $300,000 = $150,000.
72. c $7,200,000
———————————×($15,000,000 – $12,000,000) = $1,800,000.
$7,200,000 + $4,800,000
73. b $240,000 – $100,000 = $140,000.
74. d $300,000 – $60,000 = $240,000
$240,000
————————— ×($2,400,000 – Total estimated cost) = $60,000
Total estimated cost
Total estimated cost = $1,920,000
$2,400,000 – $1,920,000 = $480,000.
75. c $1,170,000
—————- ×($3,300,000 – $1,950,000) = $810,000
$1,950,000
($3,300,000 – $2,010,000) – $810,000 = $480,000.
76. b $1,200,000
————— ×($7,200,000 – $4,800,000) = $600,000.
$4,800,000
77. c $7,200,000 – $4,875,000 = $2,325,000.
78. a $3,600,000
————— ×($8,400,000 – $6,000,000) = $1,440,000.
$6,000,000
79. b $8,400,000 – $5,600,000 = $2,800,000.
80. a [$1,950,000 ÷ ($1,950,000 + $1,300,000)] × $2,250,000 = $1,350,000
($5,500,000 – $3,350,000) – $1,350,00 = $800,000.
81. c $5,500,000 – $3,350,000 = $2,150,000.

82. b ($25,000,000 × .60) – ($22,500,000 × .25) = $9,375,000.
83. c ($6,325,000 ÷ $13,750,000) × $1,250,000 = $575,000.
84. a ($6,325,000 ÷ $13,750,000) × $1,250,000 = $575,000.
$6,325,000 + $575,000 = $6,900.000.
85. b $5,600,000 – ($2,560,000 + $3,280,000) = –$240,000.
86. c $3,200,000 – $2,150,000 = $1,050,000.
87. c $1,500,000 – $820,000 = $680,000.
88. a ($2,250,000 – $150,000) – $1,900,000 = $200,000.
89. d $8,400 – $5,880 = $2,520
($3,000 – $300) – $2,520 = $180 gain.
90. b $24,000 – $7,200 = $16,800
$16,800 – $13,500 = $3,300 loss.
91. a $18,000 – $7,200 = $10,800
($6,300 – $300) – $10,800 = $4,800 loss.
92. b 2010: $150,000 – ($568,620 × 10%) = $93,138.
2011: ($568,620 – $93,138) × 10% = $47,548.
93. b [($1,400,000 – $980,000) ÷ $1,400,000] × $840,000 = $252,000.
94. b ($300,000 ÷ $750,000) × $250,000 = $100,000
[($270,000 ÷ $900,000) × $300,000] + $100,000 = $190,000.
95. d [$5,600 × (1 – .40)] – ($2,100 – $140) = $1,400.
96. d ($2,000,000 – $1,500,000) ÷ $2,000,000 = 25%
97. a ($800,000 × .25) – $90,000 = $110,000,
98. d $700,000 × .25 = $175,000; $500,000 × .25 = $125,000.
99. a ($3,000,000 – $2,100,000) ÷ $3,000,000 = 30%.
100. d ($1,200,000  .30) – $120,000 = $240,000.
101. a $1,050,000  .30 = $315,000
$900,000 – [($1,200,000 + $1,050,000)  .30] = $225,000.

18 - 32
102. c ($3,600,000 – $2,400,000) ÷ $3,600,000 = 33 1/3%
($3,600,000  .20) + [(3,600,000  .80)  4/12)] = $1,680,000
$1,680,000  33 1/3% = $560,000.
103. b [($3,600,000  .20) + ($3,600,000  .80  8/12] – $2,400,000 = $240,000.
104. a $0.
*105. d Revenue = $400,000
Interest income = $160,000 ×8% ×9/12 = $9,600
Cash = $128,000 – $9,600 = $118,400
Repossession revenue: $240,000 – $128,000 = $112,000.
*106. c Cash = $560,000 + $48,000 = $608,000
Franchise Fee Revenue = $560,000
Unearned Franchise Fees = $48,000 ×20% = $9,600
Revenue from Continuing Franchise Fees = $48,000 – $9,600 = $38,400.
*107 b $200,000 + $545,872 – $24,000 = $721,872.
*108. d Sales – (Sales ×20%) – $600 – $390 – $210 = $12,900
.8 Sales = $14,100
Sales = $17,625.
*109. a ($270 ×50) + [($600 ÷ 80) ×50] = $13,875.
DERIVATIONS — CPA Adapted
110. a Conceptual.
111. b ($9,600,000 ×45%) – ($9,000,000 ×15%) = $2,970,000.
$10,500,000
112. d —————— ×($35,000,000 – $31,500,000) = $1,166,667.
$31,500,000
113. d $3,500,000 – $1,350,000 – $1,525,000 = $625,000.
114. c 800,000 lbs. ×$.70 = $560,000.
115. b ($36,000 ÷ 24%) + ($198,000 ÷ 30%) = $810,000.
116. c $1,200,000 – $720,000 = $480,000 gross profit (40% gross profit rate)
$480,000 – ($288,000 ×.4) = $364,800.

DERIVATIONS — CPA Adapted (cont.)
117. c $300,000 + $50,000 = $350,000
$350,000 – $245,000 = $105,000 gross profit (30% gross profit rate)
($300,000 – $100,000) × 30% = $60,000.
118. c $1,800,000 – $1,080,000 = $720,000 (40% gross profit rate)
$720,000 – ($825,000 ×40%) = $390,000.
119. c Conceptual.
120. a Conceptual.
EXERCISES
Ex. 18-121— Revenue recognition (essay).
The revenue recognition principle provides that revenue is recognized when (1) it is realized or
realizable and (2) it is earned.
Instructions
Explain when revenues are (a) realized, (b) realizable, and (c) earned.
Solution 18-121
(a) Revenues are realized when goods or services are exchanged for cash or claims to cash
(receivables).
(b) Revenues are realizable when assets received in exchange are readily convertible to known
amounts of cash or claims to cash.
(c) Revenues are earned when the earnings process is complete or virtually complete.
Ex. 18-122—Revenue recognition (essay).
The earning of revenue by a business is recognized for accounting purposes when the transaction
is recorded. Revenue is often recognized at time of sale.
Instructions
At what times, other than at time of sale, may it be appropriate to recognize revenue? Explain and
justify each of these times.

18 - 34
Solution 18-122
Revenue is also recognized (1) during production, (2) at completion, and (3) at collection.
(1) During production. The most common situation is the use of the percentage-of-completion
method for long-term construction contracts. The point of sale is much less significant than
production activity. If the contractor can expect to perform the contractual obligation, the
revenue is assured by the contract. To defer recognition until completion of the entire contract
misrepresents the efforts (costs) and accomplishments (revenues) of the interim periods. If
progress toward completion can be estimated with reasonable accuracy, the percentage-of-
completion method should be used.
(2) At completion. Examples of revenue recognition at completion of production involve precious
metals and agricultural products with quoted prices. These sales prices are reasonably
assured, there are low additional costs of distribution, and unit costs cannot be determined
because of joint costs.
(3) At collection. When collection is highly uncertain and there is no reasonably objective basis
for estimating the degree of collectibility, revenue should not be recognized until cash is
received. In addition, if collection costs and bad debts are expected to be high and their
amount cannot be reasonably estimated, revenue recognition should be deferred.
Ex. 18-123—Long-term construction contracts (essay).
In accounting for long-term construction contracts (those taking longer than one year to complete),
the two methods commonly followed are percentage-of-completion and completed-contract.
Instructions
(a) Discuss how earnings on long-term construction contracts are recognized and computed
under these two methods.
(b) Under what circumstances should one method be used over the other?
(c) How are job costs and interim billings reflected on the balance sheet under the percentage-of-
completion method and the completed-contract method?
Solution 18-123
(a) The revenue recognized on a long-term construction contract under the percentage-of-
completion method is determined by applying a percentage representing the degree of
completion to the total contract price at the end of the accounting period. The percentage
may be derived by dividing the costs incurred to date by the total estimated costs of the
entire contract based on the most recent information. The revenue so derived is then
reduced by the direct contract costs to determine the gross profit recognized in the initial
period.
In subsequent periods, since the percentage-of-completion method described produces
cumulative results, revenue and gross profit recognized in prior periods must be subtracted
to obtain current revenue and gross profit to be recognized.

Solution 18-123 (cont.)
Under the completed-contract method, no earnings are recognized until the contract is
substantially completed. For the period in which completion occurs, gross revenues include
the total contract price. Total job costs incurred are deducted from gross revenues, resulting
in recognition of the entire amount of gross profit in the completion period. If it is expected
that a loss will occur on the contract, a provision for loss should be recognized immediately
under both the completed-contract method and the percentage-of-completion method.
(b) The percentage-of-completion method should be used when estimates of the bases upon
which progress is measured are reasonably dependable and all the following conditions
exist:
1. The contract clearly specifies the enforceable rights regarding goods or services to be
provided and received by the parties, the consideration to be exchanged, and the
manner and terms of settlement.
2. The buyer can be expected to satisfy all obligations under the contract.
3. The contractor can be expected to perform the contractual obligation.
The completed-contract method should be used when inherent hazards or lack of depend-
able estimates cause the forecasts to be of doubtful value.
(c) Under the percentage-of-completion method, a schedule is made of the contracts in process,
showing the total costs incurred as of the end of a given period, the estimated gross profit
recognized based on the degree of completion, and the total billings rendered on each
individual contract. If costs incurred plus recognized profits exceed the related billings on a
contract, this net figure is shown as a current asset. This treatment shows that the contractor
has not fully billed the customer for work performed to date and has a claim against the
customer for that portion of work completed but not yet billed. If billings on a contract exceed
costs incurred plus estimated profits, this net figure is shown as a current liability, which
means that the contractor has overbilled the customer for work done to date and must
complete the work represented by the excess billings.
Under the completed-contract method, the treatment of excess costs and billings is the same
as under the percentage-of-completion method except that estimated profits are not
computed because profit recognition is deferred until a contract is completed. The excess of
costs over related billings on a contract is a current asset while the excess of billings over
related costs on a contract is a current liability.
Ex. 18-124—Journal entries—percentage-of-completion.
Dixon Construction Company was awarded a contract to construct an interchange at the junction
of U.S. 94 and Highway 30 at a total contract price of $8,000,000. The estimated total costs to
complete the project were $6,000,000.
Instructions
(a) Make the entry to record construction costs of $3,600,000, on construction in process to date.
(b) Make the entry to record progress billings of $2,000,000.
(c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-
completion basis.

18 - 36
Solution 18-124
(a) Construction in Process ................................................................. 3,600,000
Materials, Cash, Payables, Etc.......................................... 3,600,000
(b) Accounts Receivable...................................................................... 2,000,000
Billings on Construction in Process.................................... 2,000,000
(c) Construction Expenses .................................................................. 3,600,000
Construction in Process (60% complete)....................................... 1,200,000
Revenue from Long-Term Contracts ................................. 4,800,000
Ex. 18-125—Percentage-of-completion method.
Dalton Construction Co. contracted to build a bridge for $5,000,000. Construction began in 2010
and was completed in 2011. Data relating to the construction are:
2010 2011
Costs incurred $1,650,000 $1,375,000
Estimated costs to complete 1,350,000 —
Dalton uses the percentage-of-completion method.
Instructions
(a) How much revenue should be reported for 2010? Show your computation.
(b) Make the entry to record progress billings of $1,650,000 during 2010.
(c) Make the entry to record the revenue and gross profit for 2010.
(d) How much gross profit should be reported for 2011? Show your computation.
Solution 18-125
(a) $1,650,000
————— × $5,000,000 = $2,750,000
$3,000,000
(b) Accounts Receivable...................................................................... 1,650,000
Billings on Construction in Process ................................... 1,650,000
(c) Construction Expenses .................................................................. 1,650,000
Construction in Process ................................................................. 1,100,000

(d) Revenue $5,000,000
Costs 3,025,000
Total gross profit 1,975,000
Recognized in 2010 (1,100,000)
Recognized in 2011 $ 875,000
Or
Total revenue $5,000,000
Recognized in 2010 (2,750,000)
Recognized in 2011 2,250,000
Costs in 2011 (1,375,000)
Gross profit in 2011 $ 875,000
Ex. 18-126—Percentage-of-completion method.
Penner Builders contracted to build a high-rise for $14,000,000. Construction began in 2010 and is
expected to be completed in 2013. Data for 2010 and 2011 are:
2010 2011
Costs incurred to date $1,800,000 $5,200,000
Estimated costs to complete 7,200,000 4,800,000
Penner uses the percentage-of-completion method.
Instructions
(a) How much gross profit should be reported for 2010? Show your computation.
(b) How much gross profit should be reported for 2011?
(c) Make the journal entry to record the revenue and gross profit for 2011.
Solution 18-126
(a) $1,800,000
————— × $5,000,000 = $1,000,000
$9,000,000
(b) $5,200,000
—————— × $4,000,000 = $2,080,000
$10,000,000
Less 2010 gross profit 1,000,000
Gross profit in 2011 $1,080,000
(c) Construction in Process ................................................................. 1,080,000
Construction Expenses .................................................................. 3,400,000

18 - 38
Ex. 18-127—Percentage-of-completion and completed-contract methods.
On February 1, 2010, Marsh Contractors agreed to construct a building at a contract price of
$6,000,000. Marsh estimated total construction costs would be $4,000,000 and the project would
be finished in 2012. Information relating to the costs and billings for this contract is as follows:
2010 2011 2012
Total costs incurred to date $1,500,000 $2,640,000 $4,600,000
Estimated costs to complete 2,500,000 1,760,000 -0-
Customer billings to date 2,200,000 4,000,000 5,600,000
Collections to date 2,000,000 3,500,000 5,500,000
Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting
and for completed-contract accounting, show the gross profit that should be recorded for 2010,
2011, and 2012.
Percentage-of-Completion Completed-Contract
Gross Profit Gross Profit
2010 ___________ 2010 __________
2011 ___________ 2011 __________
2012 ___________ 2012 __________
Solution 18-127
Percentage-of-Completion Completed-Contract
Gross Profit Gross Profit
2010 $750,000a 2010 —
2011 $210,000b 2011 —
2012 $440,000c 2012 $1,400,000d
a$1,500,000
————— × $2,000,000 = $750,000
$4,000,000
b$2,640,000
————— × $1,600,000 = $960,000
$4,400,000
Less 2010 gross profit (750,000)
2011 gross profit $210,000
cTotal revenue $6,000,000
Total costs 4,600,000
Total gross profit 1,400,000
Recognized to date (960,000)
2012 gross profit $ 440,000
dTotal revenue $6,000,000
Total costs 4,600,000
Total gross profit $1,400,000

Ex. 18-128—Installment sales.
Newton Co. had installment sales of $1,000,000 and cost of installment sales of $700,000 in 2010.
A 2010 sale resulted in a default in 2012, at which time the balance of the installment receivable
was $30,000. The repossessed merchandise had a fair value of $15,000.
Instructions
(a) Calculate the rate of gross profit on 2010 installment sales.
(b) Make the entry to record the repossession.
Solution 18-128
(a) $300,000 ÷ $1,000,000 = 30%
(b) Repossessed Merchandise ............................................................. 15,000
Deferred Gross Profit, 2010 (.30 × $30,000)................................... 9,000
Loss on Repossession..................................................................... 6,000
Installment Accounts Receivable, 2010 .................................. 30,000
Sawyer Furniture Company concluded its first year of operations in which it made sales of
$800,000, all on installment. Collections during the year from down payments and installments
totaled $300,000. Purchases for the year totaled $400,000; the cost of merchandise on hand at
the end of the year was $80,000.
Instructions
Using the installment-sales method, make summary entries to record:
(a) the installment sales and cash collections;
(b) the cost of installment sales;
(c) the unrealized gross profit;
(d) the realized gross profit.
Solution 18-129
(a) Installment Accounts Receivable................................................... 800,000
Installment Sales ................................................................ 800,000
Cash................................................................................................ 300,000
Installment Accounts Receivable....................................... 300,000
(b) Cost of Installment Sales ($400,000 – $80,000) ........................... 320,000
Inventory ............................................................................. 320,000
(c) Installment Sales ............................................................................ 800,000
Cost of Installment Sales.................................................... 320,000
Deferred Gross Profit (60%)............................................... 480,000
(d) Deferred Gross Profit (60% × $300,000) ....................................... 180,000
Realized Gross Profit on Installment Sales ....................... 180,000

18 - 40
Finley Company sells office equipment. On January 1, 2011, Finley entered into an installment
sale contract with Miller Company for a six-year period expiring January 1, 2017. Equal annual
payments under the installment sale are $936,000 and are due on January 1. The first payment
was made on January 1, 2011.
Additional information is as follows:
The cash selling price of the equipment, i.e., the amount that would be realized on an
outright sale, is $4,584,000.
The cost of sales relating to the equipment is $3,825,000.
The finance charges relating to the installment period are $1,032,000 based on a stated
interest rate of 9% which is appropriate. For tax purposes, Finley appropriately uses the
accrual basis for recording finance charges.
Circumstances are such that the collection of the installment sale is reasonably assured.
The installment sale qualified for the installment method of reporting for tax purposes.
Assume that the income tax rate is 30%.
Instructions
What income (loss) before income taxes should Finley appropriately record as a result of this
transaction for the year ended December 31, 2011? Show supporting computations in good form.
Solution 18-130
(Note: For financial accounting purposes, the installment-sales method is not used, and the full
gross profit is recognized in the year of sale, because collection of the receivable is reasonably
assured.)
Finley Company
Computation of Income Before Income Taxes
On Installment Sale Contract
For the Year Ended December 31, 2011
Sales $4,584,000
Cost of Sales 3,825,000
Gross Profit 759,000
Interest Revenue (Schedule I) 328,320
Income before Income Taxes $1,087,320
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales) $4,584,000
Payment made on January 1, 2011 936,000
Balance outstanding at 12/31/11 3,648,000
Interest rate 9%
Interest Revenue $ 328,320

*Ex. 18-131—Franchises.
Pasta Inn charges an initial fee of $800,000 for a franchise, with $160,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the annual
payments, discounted at 10%, is $507,200. The franchisee has the right to purchase $60,000 of
kitchen equipment and supplies for $50,000. An additional part of the initial fee is for advertising to
be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a
month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the
initial services required by the contract.
Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in good form.
*Solution 18-131
Total fee $800,000
Discount $ 640,000
(507,200) (132,800)
Bargain purchase (10,000)
Advertising ($1,000 × 60) (60,000)
$597,200
Cash............................................................................................. 160,000
Notes Receivable ........................................................................ 640,000
Discount on Notes Receivable ....................................... 132,800
Revenue from Franchise Fees ....................................... 597,200
Unearned Franchise Fees .............................................. 70,000
PROBLEMS
Pr. 18-132—Long-term construction project accounting.
Dobson Construction specializes in the construction of commercial and industrial buildings. The
contractor is experienced in bidding long-term construction projects of this type, with the typical
project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion
method of revenue recognition since, given the characteristics of the contractor's business and
contracts, it is the most appropriate method. Progress toward completion is measured on a cost to
cost basis. Dobson began work on a lump-sum contract at the beginning of 2011. As bid, the
statistics were as follows:
Lump-sum price (contract price) $4,000,000
Estimated costs
Labor $ 850,000
Materials and subcontractor 1,750,000
Indirect costs 400,000 3,000,000
$1,000,000

18 - 42
Pr. 18-132 (cont.)
At the end of the first year, the following was the status of the contract:
Billings to date $2,230,000
Costs incurred to date
Labor $ 464,000
Materials and subcontractor 1,098,000
Indirect costs 193,000 1,755,000
Latest forecast total cost 3,000,000
It should be noted that included in the above costs incurred to date were standard electrical and
mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs
should not be considered in the costs incurred to date.
Instructions
(a) Compute the percentage of completion on the contract at the end of 2011.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2011.
(c) Make the journal entry to record the income (loss) for 2011 on Dobson's books.
(d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of
Dobson Construction at the end of 2011 related to its construction accounts. Also indicate
where these items would be classified on the balance sheet. Billings collected during the year
amounted to $1,980,000.
(e) Assume the latest forecast on total costs at the end of 2011 was $4,050,000. How much
income (loss) would Dobson report for the year 2011?
Solution 18-132
(a) Costs to date $1,755,000
Less materials on job site (105,000)
$1,650,000
Costs Incurred to Date
—————————— = Percentage of Completion
Total Estimated Costs
$1,650,000
————— = 55%
$3,000,000
(b) 55% × $4,000,000 = $2,200,000
Costs incurred 1,650,000
Gross profit $ 550,000
(c) Construction Expense.................................................................... 1,650,000
Construction in Process ................................................................. 550,000
Revenue from Long-Term Project...................................... 2,200,000

(d) Current Assets
Accounts receivable $250,000 ($2,230,000 – $1,980,000)
Current Liability
Billings in excess of contract costs and
recognized profit $30,000 ($2,230,000 – $2,200,000)
(e) Total loss reported in 2011
Contract price $4,000,000
Estimated cost to complete 4,050,000
Amount of loss to be reported $ (50,000)
Pr. 18-133—Accounting for long-term construction contracts.
The board of directors of Ogle Construction Company is meeting to choose between the
completed-contract method and the percentage-of-completion method of accounting for long-term
contracts in the company's financial statements. You have been engaged to assist Ogle's
controller in the preparation of a presentation to be given at the board meeting. The controller
provides you with the following information:
1. Ogle commenced doing business on January 1, 2011.
2. Construction activities for the year ended December 31, 2011, were as follows:
Total Contract Billings Through Cash Collections
Project Price 12/31/11 Through 12/31/11
A $ 515,000 $ 340,000 $ 310,000
B 690,000 210,000 210,000
C 475,000 475,000 390,000
D 200,000 100,000 65,000
E 480,000 400,000 400,000
$2,360,000 $1,525,000 $1,375,000
Contract Costs Estimated
Incurred Through Additional Costs to
Project 12/31/11 Complete Contracts
A $ 424,000 $101,000
B 195,000 455,000
C 350,000 -0-
D 123,000 97,000
E 320,000 80,000
$1,412,000 $733,000
3. Each contract is with a different customer.
4. Any work remaining to be done on the contracts is expected to be completed in 2012.

18 - 44
Instructions
(a) Prepare a schedule by project, computing the amount of income (or loss) before selling,
general, and administrative expenses for the year ended December 31, 2011, which would
be reported under:
(1) The completed-contract method.
(2) The percentage-of-completion method (based on estimated costs).
(b) Prepare the general journal entry(ies) to record revenue and gross profit on project B (second
project) for 2011, assuming that the percentage-of-completion method is used.
(c) Indicate the balances that would appear in the balance sheet at December 31, 2011 for the
following accounts for Project D (fourth project), assuming that the percentage-of-completion
method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process
(d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D
(fourth project), if the completed-contract method is used?
Solution 18-133
(a) (1) and (2)
Projects A B C D E
Contract price $515,000 $690,000 $475,000 $200,000 $480,000
Contract costs incurred 424,000 195,000 350,000 123,000 320,000
Additional costs
to complete 101,000 455,000 -0- 97,000 80,000
Total cost 525,000 650,000 350,000 220,000 400,000
Total gross profit
or (loss) $ (10,000) $ 40,000 $125,000 $ (20,000) $ 80,000
The amount reported as income (loss) under the completed-contract method for 2011 is:
Project A $(10,000)
B -0-
C 125,000
D (20,000)
E -0-
$ 95,000
The amount reported as income (loss) under the percentage-of-completion method for 2011 is:
Project A $(10,000)
B 12,000 $40,000 × ($195,000 ÷ $650,000)
C 125,000
D (20,000)
E 64,000 $80,000 × ($320,000 ÷ $400,000)
$171,000

(b) Construction in Process ................................................................. 12,000
Construction Expenses .................................................................. 195,000
Revenue from Long-term Contracts................................... 207,000
(c) Billings $100,000
Cash collections 65,000
Accounts receivable $ 35,000
Billings on Construction in Process 100,000
Costs incurred $123,000
Loss reported (20,000)
Construction in process $103,000
(d) The account balances would be the same.
Pr. 18-134—Long-term contract accounting (completed-contract).
Evans Construction, Inc. experienced the following construction activity in 2011, the first year of
operations.
Cash Cost Estimated
Total Billings Collections Incurred Additional
Contract through through through Costs to
Contract Price 12/31/11 12/31/11 12/31/11 Complete
X $260,000 $165,000 $155,000 $182,000 $ 63,000
Y 330,000 115,000 115,000 100,000 247,000
Z 233,000 233,000 198,000 158,000 -0-
$823,000 $513,000 $468,000 $440,000 $310,000
Each of the above contracts is with a different customer, and any work remaining at December 31,
2011 is expected to be completed in 2012.
Instructions
Prepare a partial income statement and a partial balance sheet to indicate how the above contract
information would be reported. Evans uses the completed-contract method.
Solution 18-134
Evans Construction, Inc.
Income Statement
For the Year 2011
Revenue from long-term contracts (contract Z) $233,000
Cost of construction (contract Z) 158,000
Provision for loss (contract Y)* 17,000
*Contract costs through 12/31/11 $100,000
Estimated costs to complete 247,000
Total estimated costs 347,000
Total contract price 330,000
Loss recognized in 2011 $ 17,000

18 - 46
Evans Construction, Inc.
Balance Sheet
As of 12/31/11
Current assets:
Accounts receivable ($513,000 – $468,000) $ 45,000
Inventories
Construction in process (contract X) $182,000
Less: Billings 165,000
Unbilled contract costs 17,000
Current liabilities:
Billings ($115,000) in excess of contract costs ($100,000) 15,000
Estimated loss from long-term contracts 17,000
Pr. 18-135—Installment sales.
Houser Appliances accounts for all sales of its merchandise on the installment basis. Following is
the unadjusted trial balance at 12/31/12.
Cash $45,000
Installment accounts receivable—2010 20,000
Inventory 27,400
Repossessed merchandise 4,600
Accounts payable $ 37,600
Deferred gross profit—2010 12,000
Deferred gross profit—2011 26,400
Common stock 125,000
Retained earnings 10,000
Installment sales 120,000
Loss on repossessions 3,000
Operating expenses 13,000
$331,000 $331,000
Additional information:
2010 gross profit rate: 25%
Total cash receipts during 2012: $118,000
Merchandise sold in 2011 was repossessed in 2012 and the following entry was prepared:
Deferred Gross Profit—2011....................................................... 2,400
Repossessed Merchandise......................................................... 4,600
Loss on Repossessions .............................................................. 3,000
Installment Accounts Receivable—2011 ........................ 10,000

Pr. 18-135 (cont.)
Instructions
(a) What is the gross profit rate for 2011? Show supporting computations.
(b) What is the gross profit rate for 2012? Show supporting computations.
(c) Of the total cash receipts in 2012, how much represents collections from installment sales of:
(Show supporting computations.)
(1) 2010?
(2) 2011?
(3) 2012?
(d) What is the total realized gross profit in 2012? Show supporting computations.
Solution 18-135
(a) Determined from the repossession entry:
Deferred gross profit $2,400
———— = 24%
Installment accounts receivable $10,000
b) Installment sales $120,000
Cost of sales 78,000
Gross profit $42,000
————- = 35% gross profit rate
Installment sales $120,000
(c) 2010 Deferred gross profit balance $ 12,000
Gross profit rate ÷ 25%
Beginning accounts receivable $ 48,000
Beginning accounts receivable $ 48,000
Ending accounts receivable (20,000)
Cash collected $ 28,000
2011 Deferred gross profit balance $ 26,400
Gross profit rate ÷ 24%
Beginning accounts receivable* $110,000
Beginning accounts receivable* $110,000
Ending accounts receivable* (50,000)
2012 Installment sales—2012 $120,000
Accounts receivable—2012 (90,000)
(d) Total realized gross profit in 2012
From 2010 $28,000 × 25% = $ 7,000
2011 $60,000 × 24% = 14,400
2012 $30,000 × 35% = 10,500
$31,900
*Excluding accounts receivable for repossessed merchandise.

18 - 48
IFRS QUESTIONS
True/False
1. The International Accounting Standards Board (IASB) defines revenue to include both
revenues and gains.
2. iGAAP bases revenue recognition on the concepts of “earned” and “realized or realizable.”
3. iGAAP prohibits use of the percentage-of-completion method of accounting for long-term
construction contracts.
4. iGAAP requires immediate recognition of a loss if the overall contract is going to be
unprofitable.
5. Terry Company is unable to reliably estimate revenues and costs associated with its only long-
term construction contract. Under iGAAP, Terry Company must use the completed-contract
method to account for this contract.
Answers to True/False:
1. True
2. False
3. False
4. True
5. False
Multiple Choice
1. The joint project of the Financial Accounting Standards Board (FASB) and the International
Accounting Standards Board (IASB) related to revenue recognition includes
I. Evaluating a “customer-consideration” model
II. Eliminating inconsistencies in the existing conceptual guidance
III. Establishing a single, comprehensive standard
a. II and III only.
b. I and II only.
c. I, II, and III.
d. Neither I, II, nor III are currently included in the joint project of the FASB and IASB.
2. Belgium Co. is constructing a tunnel for $800 million. Construction began in 2009 and is
estimated to be completed in 2014. At December 31, 2011, Belgium has incurred costs totaling
$356 million with $85 million of that incurred in 2011, $143 million in 2010, and the remainder
during 2009. Belgium believes that it completed 30% of the tunnel during 2011, although that
may change based on future activity. Belgium Co. uses iGAAP for its accounting and regards
its cost numbers as very uncertain. What amount of revenue should Belgium Co. recognize for
the year ended December 31, 2011?
a. No revenue should be recognized until the contract is completed in 2014.
b. $356 million
c. $240 million
d. $85 million

3. Portugal, Inc. has the following amounts related to its activities for the year ended December
31, 2011:
Sales to customers $5,000,000
Gain on sale of equipment $ 360,000
Gain on sale of investments $ 760,000
Loss on sale of land $ 240,000
Portugal, Inc. uses iGAAP for its external financial reporting. How much revenue should
Portugal, Inc. report on its income statement for the year ended December 31, 2011?
a. $5,000,000
b. $5,760,000
c. $6,120,000
d. $5,880,000
4. Under iGAAP, the standard for revenue recognition states that the
I. Revenue be realized or realizable.
II. Economic benefits associated with the transaction will flow to the company selling the
goods.
III. Costs must be capable of being reliably measured.
a. I, II, and III.
b. I and III only.
c. II only.
d. II and III only.
5. iGAAP for revenue recognition
a. is enforced by an international enforcement body, the IASB, which is comparable to the
U.S. SEC.
b. bases revenue recognition on the concepts of “earned” and “realized or realizable.”
c. permits use of the completed-contract method when costs are difficult to estimate.
d. contains limited industry-specific guidance.
Answers to Multiple Choice:
1. c
2. d
3. c
4. d
5. d
Short Answer:
1. What is a major difference between iGAAP and U.S. GAAP as regards revenue recognition
practices?
1. The general concepts and principles used for revenue recognition are similar between U.S. GAAP
and iGAAP. When they differ is in the detail. U.S. GAAP provides specific guidance related to
revenue recognition in many different industries. That is not the case for iGAAP. Also, the SEC has
issued broad and specific guidance for public companies in the United States related to revenue
recognition. Again the IASB does not have a regulatory body that provides additional guidance.
2. iGAAP prohibits the use of the completed-contract method in accounting for long-term
contracts. If revenues and costs are difficult to estimate, how must companies account for
long-term contracts?
2. If revenues and costs are difficult to estimate, then companies recognize revenue only to the extent
of the cost incurred – a zero-profit approach.

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