Revenue Recognition
18 – 21
92. Bella Pool Company sells prefabricated pools that cost $80,000 to customers for $144,000.
The sales price includes an installation fee, which is valued at $20,000. The fair value of
the pool is $128,000. The installation is considered a separate performance obligation and
is expected to take 3 months to complete. The transaction price allocated to the pool and
the installation is
a. $124,541 and $19,459 respectively
b. $144,000 and $20,000 respectively
c. $128,000 and $20,000 respectively
d. $110,702 and $17,298 respectively
93. Botanic Choice sells natural supplements to customers with an unconditional sales return if
they are not satisfied. The sales returns extends 60 days. On February 10, 2021, a
customer purchases $4,000 of products (cost $2,000). Assuming that based on prior
experience, estimated returns are 20%. The journal entry to record the expected sales
return and cost of goods sold includes a
a. debit to Cash and a credit to Sales Revenue of $4,000.
b. debit to Allowance for Sales Returns of $800 and a credit to Cost of Goods sold of
$400.
c. debt to Cost of Goods Sold and credit to Inventory for $2,000.
d. credit to Estimated Inventory Returns of $400
94. Botanic Choice sells natural supplements to customers with an unconditional sales return if
they are not satisfied. The sales returns period extends 60 days. On February 10, 2021, a
customer purchases $4,000 of products (cost $2,000). Assuming that based on prior
experience, estimated returns are 20%. The journal entry to record the actual return of
$250 of merchandise includes a
a. credit to Allowance for Sales Returns for $250.
b. credit to Returned Inventory for $125.
c. debit to Returned Inventory for $125.
d. debit to Estimated Inventory Returns for $125.
95. On August 5, 2021, Famous Furniture shipped 40 dining sets on consignment to Furniture
Outlet, Inc. The cost of each dining set was $350 each. The cost of shipping the dining sets
amounted to $3,600 and was paid for by Famous Furniture. On December 30, 2021, the
consignee reported the sale of 30 dining sets at $850 each. The consignee remitted
payment for the amount due after deducting a 6% commission, advertising expense of
$600, and installation and setup costs of $780. The amount cash received by Famous
furniture is
a. $25,500
b. $23,970
c. $22,590
d. $23,370
Test Bank for Intermediate Accounting, Seventeenth Edition
18 – 22
96. On August 5, 2021, Famous Furniture shipped 40 dining sets on consignment to Furniture
Outlet, Inc. The cost of each dining set was $350 each. The cost of shipping the dining sets
amounted to $1,800 and was paid for by Famous Furniture. On December 30, 2021, the
consignee reported the sale of 30 dining sets at $850 each. The consignee remitted
payment for the amount due after deducting a 6% commission, advertising expense of
$600, and installation and setup costs of $780. The total profit on units sold for the
consignor is
a. $22,590
b. $10,290
c. $12,090
d. $19,890
97. On November 1, 2021, Green Valley Farm entered into a contract to buy a $150,000
harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in
advance on November 1, 2021. The harvester (cost of $110,000) was delivered on
November 30, 2021. The journal entry to record the contract on November 1, 2021
includes a
a. credit to Accounts Receivable for $150,000.
b. credit to Sales Revenue for $150,000.
c. credit to Unearned Sales Revenue for $150,000.
d. debit to Unearned Sales Revenue for $150,000.
98. On November 1, 2021, Green Valley Farm entered into a contract to buy a $150,000
harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in
advance on November 1, 2021. The harvester (cost of $110,000) was delivered on
November 30, 2021. The journal entry to record the delivery of the equipment includes a
a. debit to Unearned Sales Revenue for $150,000.
b. credit to Unearned Sales Revenue for $150,000.
c. credit to Cost of Goods Sold for $110,000.
d. debit to Inventory for $110,000.
Revenue Recognition
18 – 23
99. Arizona Communications contracted to set up a call center for the City of Phoenix. Under
the terms of the contract, Arizona Communications will design and set-up a call center with
the following costs:
Design of call center
$20,000
Computers, servers, telephone equipment
$550,000
Software
$170,000
Installation and testing of equipment
$30,000
Selling commission
$50,000
Annual service contract
$100,000
In addition, Arizona Communications will maintain and service the equipment and software
to ensure smooth operations of the call center for an annual fee of $180,000. Ownership of
equipment installed remains with the City of Phoenix. The contract costs that should be
capitalized is
a. $920,000
b. $820,000
c. $720,000
d. $740,000
*100. Seasons Construction is constructing an office building under contract for Cannon
Company and uses the percentage-of-completion method. The contract calls for progress
billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000
and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will
take 3 years to complete, and commences construction on January 2, 2021.
At December 31, 2021, 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 2021 and what is the balance in the Accounts Receivable account assuming
Cannon Company has not yet made its last quarterly payment?
Revenue Accounts Receivable
a. $6,200,000 $6,200,000
b. $5,325,000 $1,550,000
c. $5,580,000 $1,550,000
d. $5,325,000 $6,200,000
*101. Seasons Construction is constructing an office building under contract for Cannon
Company and uses the percentage-of-completion method. The contract calls for progress
billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000
and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will
take 3 years to complete, and commences construction on January 2, 2021.
Test Bank for Intermediate Accounting, Seventeenth Edition
18 – 24
At December 31, 2022, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $18,000,000 due
to unanticipated price increases. What is the total amount of Construction Expenses that
Seasons will recognize for the year ended December 31, 2022?
a. $13,500,000
b. $7,875,000
c. $7,987,500
d. $8,175,000
*102. Seasons Construction is constructing an office building under contract for Cannon
Company and uses the percentage-of-completion method. The contract calls for progress
billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000
and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will
take 3 years to complete, and commences construction on January 2, 2021.
At December 31, 2022, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $18,000,000 due
to unanticipated price increases. What is reported in the balance sheet at December 31,
2022 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. $4,225,000 Credit
b. $1,550,000 Debit
c. $1,100,000 Debit
d. $1,550,000 Credit
*103. Seasons Construction is constructing an office building under contract for Cannon
Company and uses the percentage-of-completion method. The contract calls for progress
billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000
and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will
take 3 years to complete, and commences construction on January 2, 2021. At the end of
2022, estimated total costs were $18,000,000.
Seasons Construction completes the remaining 25% of the building construction on
December 31, 2023, as scheduled. At that time the total costs of construction are
$18,750,000. What is the total amount of Revenue from Long-Term Contracts and
Construction Expenses that Seasons will recognize for the year ended December 31,
2023?
Revenue Expenses
a. $18,600,000 $18,750,000
b. $ 4,650,000 $ 4,687,500
c. $ 4,650,000 $ 5,250,000
d. $ 4,687,500 $ 4,687,500
Revenue Recognition
18 – 25
*104. Cooper Construction Company had a contract starting April 2021, to construct a
$24,000,000 building that is expected to be completed in September 2023, at an estimated
cost of $22,000,000. At the end of 2021, the costs to date were $10,120,000 and the
estimated total costs to complete had not changed. The progress billings during 2021 were
$4,800,000 and the cash collected during 2021 was 3,200,000. Cooper uses the
percentage–of-completion method.
For the year ended December 31, 2021, Cooper would recognize gross profit on the
building of:
a. $ 843,333
b. $ 920,000
c. $1,080,000
d. $0
*105. Cooper Construction Company had a contract starting April 2021, to construct a
$24,000,000 building that is expected to be completed in September 2023, at an estimated
cost of $22,000,000. At the end of 2021, the costs to date were $10,120,000 and the
estimated total costs to complete had not changed. The progress billings during 2021 were
$4,800,000 and the cash collected during 2021 was 3,200,000. Cooper uses the
percentage-of-completion method.
At December 31, 2021 Cooper would report Construction in Process in the amount of:
a. $ 920,000
b. $10,120,000
c. $11,040,000
d. $ 9,440,000
*106. Hayes Construction Corporation contracted to construct a building for $7,500,000.
Construction began in 2021 and was completed in 2022. Data relating to the contract are
summarized below:
Year ended
December 31,
2021 2022
Costs incurred $3,000,000 $2,250,000
Estimated costs to complete 2,000,000 —
Hayes uses the percentage-of-completion method as the basis for income recognition. For
the years ended December 31, 2021, and 2022, respectively, Hayes should report gross
profit of
a. $1,350,000 and $900,000.
b. $4,500,000 and $3,000,000.
c. $1,500,000 and $750,000.
d. $0 and $2,250,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
18 – 26
*107. Monroe Construction Company uses the percentage–of-completion method of accounting.
In 2021, Monroe began work on a contract it had received which provided for a contract
price of $37,500,000. Other details follow:
2021
Costs incurred during the year $18,000,000
Estimated costs to complete as of December 31 12,000,000
Billings during the year 16,500,000
Collections during the year 9,500,000
What should be the gross profit recognized in 2021?
a. $ 1,500,000
b. $19,500,000
c. $ 4,500,000
d. $ 7,500,000
In 2021, Fargo Corporation began construction work under a three-year contract. The contract
price is $7,200,000. 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, 2021, follow:
Balance Sheet
Accounts receivable—construction contract billings $300,000
Construction in progress $900,000
Less contract billings 720,000
Costs and recognized profit in excess of billings 180,000
Income Statement
Income (before tax) on the contract recognized in 2021 $180,000
*108. How much cash was collected in 2021 on this contract?
a. $300,000
b. $420,000
c. $ 60,000
d. $720,000
*109. In 2021, Fargo Corporation began construction work under a three-year contract. The
contract price is $7,200,000. 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, 2021, follow:
Balance Sheet
Accounts receivable—construction contract billings $300,000
Construction in progress $900,000
Less contract billings 720,000
Costs and recognized profit in excess of billings 180,000
Revenue Recognition
18 – 27
Income Statement
Income (before tax) on the contract recognized in 2021 $180,000
What was the initial estimated total income before tax on this contract?
a. $900,000
b. $960,000
c. $1,200,000
d. $1,440,000
None
*110. Adler Construction Co. uses the percentage-of-completion method. In 2021, Adler began
work on a contract for $11,000,000 and it was completed in 2022. Data on the costs are:
Year Ended December 31
2021 2022
Costs incurred $3,900,000 $2,800,000
Estimated costs to complete 2,600,000 —
For the years 2021 and 2022, Adler should recognize gross profit of
2021 2022
a. $0 $4,300,000
b. $2,580,000 $1,720,000
c. $2,700,000 $1,600,000
d. $2,700,000 $4,300,000
*111. Gomez, Inc. began work in 2021 on contract #3814, which provided for a contract price of
$19,200,000. Other details follow:
2021 2022
Costs incurred during the year $3,200,000 $9,800,000
Estimated costs to complete, as of December 31 9,600,000 0
Billings during the year 3,600,000 14,400,000
Collections during the year 2,400,000 15,600,000
Assume that Gomez uses the percentage-of-completion method of accounting. The portion
of the total gross profit to be recognized as income in 2021 is
a. $1,200,000.
b. $1,600,000.
c. $4,800,000.
d. $6,400,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
18 – 28
*112. Gomez, Inc. began work in 2021 on contract #3814, which provided for a contract price of
$19,200,000. Other details follow:
2021 2022
Costs incurred during the year $3,200,000 $9,800,000
Estimated costs to complete, as of December 31 9,600,000 0
Billings during the year 3,600,000 14,400,000
Collections during the year 2,400,000 15,600,000
Assume that Gomez uses the completed-contract method of accounting. The portion of the
total gross profit to be recognized as income in 2022 is
a. $2,400,000.
b. $3,600,000.
c. $6,200,000.
d. $19,200,000.
*113. Kiner, Inc. began work in 2021 on a contract for $21,000,000. Other data are as follows:
2021 2022
Costs incurred to date $9,000,000 $14,000,000
Estimated costs to complete 6,000,000 —
Billings to date 7,000,000 21,000,000
Collections to date 5,000,000 18,000,000
If Kiner uses the percentage-of-completion method, the gross profit to be recognized in
2021 is
a. $3,600,000.
b. $4,000,000.
c. $5,400,000.
d. $6,000,000.
*114. Kiner, Inc. began work in 2021 on a contract for $21,000,000. Other data are as follows:
2021 2022
Costs incurred to date $9,000,000 $14,000,000
Estimated costs to complete 6,000,000 —
Billings to date 7,000,000 21,000,000
Collections to date 5,000,000 18,000,000
If Kiner uses the completed-contract method, the gross profit to be recognized in 2022 is
a. $3,400,000.
b. $7,000,000.
c. $3,500,000.
d. $14,000,000.
Revenue Recognition
18 – 29
*115. Horner Construction Co. uses the percentage–of-completion method. In 2021, Horner
began work on a contract for $22,000,000; it was completed in 2022. The following cost
data pertain to this contract:
Year Ended December 31
2021 2022
Cost incurred during the year $7,800,000 $5,600,000
Estimated costs to complete at the end of year 5,200,000 —
The amount of gross profit to be recognized on the income statement for the year ended
December 31, 2022 is
a. $3,200,000.
b. $3,440,000.
c. $3,600,000.
d. $8,600,000.
*116. Horner Construction Co. uses the percentage–of-completion method. In 2021, Horner
began work on a contract for $22,000,000; it was completed in 2022. The following cost
data pertain to this contract:
Year Ended December 31
2021 2022
Cost incurred during the year $7,800,000 $5,600,000
Estimated costs to complete at the end of year 5,200,000 —
If the completed-contract method of accounting was used, the amount of gross profit to be
recognized for years 2021 and 2022 would be
2021 2022
a. $9,000,000. $0.
b. $8,600,000. $(400,000).
c. $0. $8,600,000.
d. $0. $9,000,000.
*117. Remington Construction Company uses the percentage–of-completion method. During
2021, the company entered into a fixed-price contract to construct a building for Sherman
Company for $36,000,000. The following details pertain to the contract:
At December 31, 2021 At December 31, 2022
Percentage of completion 25% 60%
Estimated total cost of contract $27,000,000 $30,000,000
Gross profit recognized to date 2,250,000 3,600,000
The amount of construction costs incurred during 2022 was
a. $18,000,000.
b. $11,250,000.
c. $6,750,000.
d. $3,000,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
18 – 30
Eilert Construction Company had a contract starting April 2021, to construct a $42,000,000
building that is expected to be completed in September 2022, at an estimated cost of $38,500,000.
At the end of 2021, the costs to date were $17,710,000 and the estimated total costs to complete
had not changed. The progress billings during 2021 were $8,400,000 and the cash collected
during 2021 was $5,600,000. Eilert uses the percentage-of-completion method.
*118. For the year ended December 31, 2021, Eilert would recognize gross profit on the building
of
a. $0.
b. $1,475,833.
c. $1,610,000.
d. $1,890,000.
Eilert Construction Company had a contract starting April 2021, to construct a $42,000,000
building that is expected to be completed in September 2022, at an estimated cost of $38,500,000.
At the end of 2021, the costs to date were $17,710,000 and the estimated total costs to complete
had not changed. The progress billings during 2021 were $8,400,000 and the cash collected
during 2021 was $5,600,000. Eilert uses the percentage–of-completion method.
*119. At December 31, 2021, Eilert would report Construction in Process in the amount of
a. $19,320,000.
b. $17,710,000.
c. $16,520,000.
d. $ 1,610,000.
None
*120. Douglas Diners Inc. charges an initial franchise fee of $180,000 broken down as follows:
Rights to trade name, market area, and proprietary know–how
Training services
Equipment (cost of $21,600)
Total initial franchise fee
Upon signing of the agreement, a payment of $80,000 is due. Thereafter, two annual
payments of $50,000 are required. The credit rating of the franchisee is such that it would
have to pay interest of 8% to borrow money. The franchise agreement is signed on August
1, 2021, and the franchise commences operation on November 1, 2021. Assuming that no
future services are required by the franchisor once the franchise begins operations, the
entry on November 1, 2021 would include
a. a credit to Unearned Franchise Revenue for $80,000.
b. a credit to Service Revenue for $23,000.
c. a credit to Sales Revenue for $77,000.
d. a debit to Unearned Franchise Revenue for $80,000.
Revenue Recognition
18 – 31
*121. Douglas Diners Inc. charges an initial franchise fee of $180,000 broken down as follows:
Rights to trade name, market area, and proprietary know–how
Training services
Equipment (cost of $21,600)
Total initial franchise fee
Upon signing of the agreement, a payment of $80,000 is due. Thereafter, two annual
payments of $50,000 are required. The credit rating of the franchisee is such that it would
have to pay interest of 8% to borrow money. The franchise agreement is signed on August
1, 2021, and the franchise commences operation on November 1, 2021. Assume that the
total training fees includes training services for the period leading up to the franchise
opening ($11,000 value) and for 3 months following opening. The journal entry on August
1, 2021 would include
a. a credit to Unearned Service Revenue for $23,000.
b. a credit to Unearned Service Revenue for $12,000.
c. a debit to Sales Revenue for $77,000.
d. a debit to Unearned Franchise Revenue for $80,000.
*122. On January 1, 2021 Dairy Treats, Inc. entered into a franchise agreement with a company
allowing the company to do business under Dairy Treats’ name. Dairy Treats had
performed substantially all required services by January 1, 2021, and the franchisee paid
the initial franchise fee of $980,000 in full on that date. The franchise agreement specifies
that the franchisee must pay a continuing franchise fee of $84,000 annually, of which 20%
must be spent on advertising by Dairy Treats. What entry should Dairy Treats make on
January 1, 2021 to record receipt of the initial franchise fee and the continuing franchise
fee for 2021?
a. Cash ………………………………………………………………………… 1,064,000
Franchise Fee Revenue ……………………………………. 980,000
Franchise Revenue ………………………………………….. 84,000
b. Cash ………………………………………………………………………… 1,064,000
Unearned Franchise Revenue …………………………... 1,064,000
c. Cash ………………………………………………………………………… 1,064,000
Franchise Fee Revenue ……………………………………. 980,000
Franchise Revenue ………………………………………….. 67,200
Unearned Franchise Revenue …………………………... 16,800
d. Prepaid Advertising …………………………………………………….. 16,800
Cash ………………………………………………………………………… 1,064,000
Franchise Fee Revenue ……………………………………. 980,000
Franchise Revenue ………………………………………….. 84,000
Unearned Franchise Revenue …………………………... 16,800
Test Bank for Intermediate Accounting, Seventeenth Edition
18 – 32
*123. Wynne Inc. charges an initial franchise fee of $2,300,000, with $500,000 paid when the
agreement is signed and the balance in five annual payments. The present value of the
future payments, discounted at 10%, is $1,364,680. The franchisee has the option to
purchase $300,000 of equipment for $240,000. 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. $ 500,000.
b. $1,804,680.
c. $1,864,680.
d. $2,300,000.
Multiple Choice Answers—Computational
MULTIPLE CHOICE—CPA Adapted
*124. Green Construction Co. has consistently used the percentage-of-completion method of
recognizing revenue. During 2021, Green entered into a fixed-price contract to construct an
office building for $28,000,000. Information relating to the contract is as follows:
At December 31
2021 2022
Percentage of completion 15% 45%
Estimated total cost at completion $21,000,000 $22,400,000
Gross profit recognized (cumulative) 1,400,000 3,360,000
Contract costs incurred during 2022 were
a. $6,720,000.
b. $6,930,000.
c. $7,350,000.
d. $10,080,000.
Revenue Recognition
18 – 33
*125. Bruner Constructors, Inc. has consistently used the percentage-of-completion method of
recognizing income. In 2021, Bruner started work on a $49,000,000 construction contract
that was completed in 2022. The following information was taken from Bruner’s 2021
accounting records:
Progress billings $15,400,000
Costs incurred 14,700,000
Collections 9,600,000
Estimated costs to complete 29,400,000
What amount of gross profit should Bruner have recognized in 2021 on this contract?
a. $4,900,000
b. $3,266,667
c. $2,450,000
d. $1,633,333
*126. During 2021, Gates Corp. started a construction job with a total contract price of
$21,000,000. The job was completed on December 15, 2022. Additional data are as follows:
2021 2022
Actual costs incurred during the year $8,100,000 $9,150,000
Estimated remaining costs 8,100,000 —
Billed to customer 7,200,000 13,800,000
Received from customer 6,000,000 14,400,000
Under the completed-contract method, what amount should Gates recognize as gross
profit for 2022?
a. $1,350,000
b. $1,875,000
c. $2,850,000
d. $3,750,000
Multiple Choice Answers—CPA Adapted
Test Bank for Intermediate Accounting, Seventeenth Edition
18 – 34
DERIVATIONS — Computational
No. Answer Derivation
Revenue Recognition
18 – 35
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Test Bank for Intermediate Accounting, Seventeenth Edition
18 – 36
DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation