213) When using the cost recovery method of accounting for long-term construction contracts
under IFRS:
A) Estimated losses on the overall contract are recognized before the contract is completed.
B) Expenses are recorded each period, but revenue is only recognized when the contract is
completed.
C) Companies can use the percentage-of-completion method if that is their preference.
D) Neither gains nor losses are recognized until the contract is completed.
214) When using the cost recovery method of accounting for long-term construction contracts
under IFRS, early in the life of the contract it is typically the case that:
A) Expenses in excess of revenues are recognized.
B) Revenues in excess of expenses are recognized.
C) An equal amount of revenue and expense is recognized.
D) There is no predictable pattern of revenue and expense.
215) The cost recovery method of accounting for long-term construction contracts under IFRS is
sometimes referred to as the:
A) “Sales-neutral approach.”
B) “Completed contract method.”
C) “Multi-step approach.”
D) “Zero profit method.”
216) The percentage-of-completion method violates the general rule for revenue recognition that:
A) Collection is reasonably assured.
B) Costs are known or reasonably estimated.
C) The earnings process is complete.
D) Collections have been received.
217) Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during
2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized
below:
Contract amount
$
3,000,000
Cost:
2017
1,200,000
2018
600,000
Gross profit:
2017
800,000
2018
400,000
Contract billings:
2017
1,500,000
2018
1,500,000
SDH uses the cost recovery method under IFRS to recognize revenue.
What is the journal entry in 2017 to record revenue?
A)
Accounts receivable
1,500,000
Revenue from long-term construction contracts
1,500,000
B)
Accounts receivable
2,300,000
Gross profit
800,000
Revenue from long-term construction contracts
1,500,000
C)
Construction in progress
800,000
Cost of construction
1,200,000
Revenue from long-term construction contracts
2,000,000
D)
Cost of construction
1,200,000
Revenue from long-term construction contracts
1,200,000
218) Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during
2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized
below:
Contract amount
$
3,000,000
Cost:
2017
1,200,000
2018
600,000
Gross profit:
2017
800,000
2018
400,000
Contract billings:
2017
1,500,000
2018
1,500,000
SDH uses the cost recovery method under IFRS to recognize revenue.
In its December 31, 2017, balance sheet, SDH would report:
A) The asset, cost and profits in excess of billings, of $500,000.
B) The liability, billings in excess of cost, of $300,000.
C) The asset, contract amount in excess of billings, of $1,500,000.
D) The asset, deferred profit, of $400,000.
Cost + profits: $1,200,000 + 0 =
1,200,000
Billings:
1,500,000
105
219) Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during
2017 and 2018 under contract with Cactus Development Co. Relevant data are summarized
below:
Contract amount
$
3,000,000
Cost:
2017
1,200,000
2018
600,000
Gross profit:
2017
800,000
2018
400,000
Contract billings:
2017
1,500,000
2018
1,500,000
SDH uses the cost recovery method under IFRS to recognize revenue.
What is SDH’s journal entry to record revenue in 2018?
A)
Accounts receivable
1,500,000
Revenue from long-term construction contracts
1,500,000
B)
Construction in progress
400,000
Cost of construction
600,000
Revenue from long-term construction contracts
1,000,000
C)
Cost of construction
2,000,000
Gross profit
1,000,000
Revenue from long-term construction contracts
3,000,000
D)
Construction in progress
1,200,000
Cost of construction
600,000
Revenue from long-term construction contracts
1,800,000
220) Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in
2018, are presented below:
Bid price
$
450,000
Contract cost:
2017
(180,000
)
2018
(195,000
)
Gross profit:
75,000
Estimated cost to complete:
12/31/2017
$
200,000
12/31/2018
0
Assuming BCC used the cost recovery method to recognize revenue under IFRS, what would
gross profit have been in 2017 and 2018 (rounded to the nearest thousand)?
2017
2018
a.
$
36,000
$
39,000
b.
$
30,000
$
45,000
c.
$
70,000
$
5,000
d.
$
0
$
75,000
A) Option a
B) Option b
C) Option c
D) Option d
221) Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus
operating fees of $500 per month. The initial fee covers site selection, training, computer and
accounting software, and on-site consulting and troubleshooting, as needed, over the first five
years. On March 15, 2017, Tim Cruise signed a franchise contract, paying the standard $6,000
down with the balance due over five years with interest.
Assuming that the initial services to be performed by Flapper Jack’s subsequent to the signing are
substantial and that collection of the receivable is reasonably assured, the journal entry required
at signing would include a credit to:
A) Unearned franchise fee revenue for $36,000.
B) Unearned franchise fee revenue for $30,000.
C) Franchise fee revenue for $36,000.
D) Franchise fee revenue for $6,000.
222) Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus
operating fees of $500 per month. The initial fee covers site selection, training, computer and
accounting software, and on-site consulting and troubleshooting, as needed, over the first five
years. On March 15, 2017, Tim Cruise signed a franchise contract, paying the standard $6,000
down with the balance due over five years with interest.
Assume that at the time of signing the contract, collection of the receivable was assured and that
service obligations were substantial. However, by October 20, 2017, substantially all continuing
obligations had been met. The journal entry required at October 20, 2017 would include a:
A) Credit to franchise fee receivable for $27,000.
B) Debit to unearned franchise fee revenue for $36,000.
C) Credit to franchise fee revenue for $9,000.
D) Debit to unearned franchise fee revenue for $27,000.
223) Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus
operating fees of $500 per month. The initial fee covers site selection, training, computer and
accounting software, and on-site consulting and troubleshooting, as needed, over the first five
years. On March 15, 2017, Tim Cruise signed a franchise contract, paying the standard $6,000
down with the balance due over five years with interest.
Assume at March 15, 2017, the time of signing the contract, collection of the receivable was
reasonably assured and there were no significant continuing obligations. The journal entry at
signing would include a:
A) Credit to franchise fee revenue for $36,000.
B) Credit to franchise fee revenue for $9,000.
C) Credit to unearned franchise fee revenue for $36,000.
D) Credit to unearned franchise fee revenue for $27,000.
224) The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of
$50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national
advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS can recognize
revenue associated with the $50,000:
A) When Steffi signs the agreement and pays the cash.
B) As soon as RS has assisted Steffi in setting up the store.
C) Gradually as RS provides advertising and administration services.
D) Only after the store has operated long enough for the chance of business failure to be remote.
225) The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of
$50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national
advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement.
RS can recognize revenue associated with the $50,000:
A) When Steffi signs the agreement, so long as RS has sufficient experience with similar
arrangements to estimate uncollectible accounts.
B) As soon as RS has assisted Steffi in setting up the store, so long as RS has sufficient
experience with similar arrangements to estimate uncollectible accounts.
C) Gradually as RS provides advertising and administration services.
D) When RS receives installment payments from Steffi, so long as RS has sufficient experience
with similar arrangements to estimate uncollectible accounts.
226) The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of
$50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national
advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement.
RS has no experience estimating uncollectible accounts associated with these sorts of notes. RS
can recognize:
A) $50,000 of revenue when Steffi signs the agreement.
B) $50,000 of revenue as soon as it has assisted Steffi in setting up the store.
C) Revenue under the installment sales method, starting when Steffi signs the agreement.
D) Revenue under the installment sales method, as soon as it has assisted Steffi in setting up the
store.
227) Sullivan Software sells packages of a software program and one year’s worth of technical
support for $500. Its packaging lists the $500 sales price as comprised of a software program at a
price of $450 and technical support with a price of $100, with a $50 discount for the package
deal. All of Sullivan’s sales are for cash, and there are no returns. Sullivan sells the software
program separately for $475 and offers a year of technical support separately for $75.
Sullivan should recognize revenue for the two parts of the arrangement as follows:
A) Recognize the entire $500 when the customer pays cash to buy the package.
B) Recognize the portion of the $500 attributable to the software program when the customer
pays cash to buy the package; defer the portion attributable to technical support and recognize
over the support period.
C) Defer the entire $500 and recognize over the support period.
D) Recognize the entire $500 upon conclusion of the support period.
228) Sullivan Software sells packages of a software program and one year’s worth of technical
support for $500. Its packaging lists the $500 sales price as comprised of a software program at a
price of $450 and technical support with a price of $100, with a $50 discount for the package
deal. All of Sullivan’s sales are for cash, and there are no returns. Sullivan sells the software
program separately for $475 and offers a year of technical support separately for $75.
The amount of revenue that GAAP, regarding software revenue recognition, would require
Sullivan to attribute to the software program (as opposed to the technical support) is (rounded):
A) $450.
B) $475.
C) $432.
D) $400.
229) GAAP that covers revenue recognition for multiple-element arrangements requires that a
seller recognize revenue for a particular part if:
A) The part has value on a stand-alone basis.
B) Customer acceptance of the part is not contingent on successful delivery of a later part.
C) The part constitutes at least a “preponderance of the fair value” of the total arrangement.
D) Both the part has value on stand-alone basis and customer acceptance of the part is not
contingent on successful delivery of a later part are required.
230) Under GAAP, with respect to multiple-element arrangements, if the revenue for a particular
part of a multiple-element arrangement does not qualify for separate recognition, it is:
A) Never recognized.
B) Recognized when the contract is signed or persuasive evidence of an arrangement exists.
C) Recognized when revenue for the other parts is recognized.
D) Recognized at the end of the contract.
231) “VSOE” stands for:
A) “Vendor-specific objective evidence.”
B) “Vendor substantiation of earnings.”
C) “Value-specified operating earnings.”
D) “Variable set overhead earned.”
113
232) “VSOE” is necessary to separately recognize revenue in multiple-element contracts for:
A) All service contracts.
B) All product contracts.
C) All contracts that involve at least one non-software element.
D) Software contracts.
233) Squeaky Shine provides car washing services in Jersey City, New Jersey. A three-month
pass for automatic car wash sells for $60, which entitles the customer for an unlimited number of
car washes during the contract period. Squeaky Shine estimates that pass holders wash their cars
equally throughout the three-month period. On December 1st, customers purchased $1,260 of the
three-month passes, with usage of the passes occurring evenly throughout the contract period.
Required:
1) Prepare the journal entries that Squeaky Shine would record on December 1 and on December
31, 2018, with respect to this transaction.
2) State the account titles and amounts that will be included in Squeaky Shine’s 2018 income
statement and balance sheet.
114
234) Assume that a customer enrolls in AAA’s Premier Membership, which provides 12 months
of roadside assistance for $120. On August 1, 2018, a customer purchases a contract that runs
from that date through July 31, 2019. Given that roadside assistance requests occur equally
throughout the contract period, AAA uses “proportion of time” as its measure of progress toward
completion.
Required:
1) Prepare the journal entries that AAA would record on August 1 and on December 31, 2018,
with respect to this transaction.
2) State the amounts included in relevant accounts in AAA’s 2018 income statement and balance
sheet.
235) Lux Hotels, Inc. has signed a service outsourcing contract with Deluxe Rooms, Inc. for $3
million, which was received in cash at contract inception. Under the agreement, Deluxe Rooms
is obligated to clean and prepare over 5,000 hotels rooms managed by Lux Hotel on a daily basis
from August 1, 2018 to July 31, 2019.
Required:
Prepare any journal entry that Delux would record:
(1) at inception of the contract and
(2) at the end of 2018 to recognize all revenue associated with this contract that should be
recognized in 2018.
236) Poseidon Corporation, based in Greece, specializes in painting cargo ships. On December 1,
2018 Poseidon received $300,000 in advance from Worldwide Shipping, Inc. to paint a 40,000-
ton cargo vessel. The painting process is scheduled to begin on December 1, 2018, and the ship
is to be returned to Worldwide in four months. Worldwide retains legal title to the ship during
the contract period, and can sell the ship to another shipper during the contract period if it so
chooses.
Required:
Assuming Poseidon uses “proportion of time” as its measure of progress toward completion,
prepare any journal entry that Poseidon would record:
(1) at inception of the contract
(2) at the end of 2018 to recognize all revenue associated with this contract that should be
recognized in 2018. Ignore any costs associated with providing the painting service.
237) Accorsi & Sons specializes in selling and installing upscale home theater systems. On
March 1, 2018, Accorsi sold a premium home theater package that includes a projector, set of
surround speakers, and high quality leather seats, along with complete installation service, for
$32,500. If sold separately, each of these goods or services would have cost $15,000 (projector),
$12,500 (speakers), $17,500 (seats), and $3,000 (installation), respectively.
Required:
How much of the transaction price would be allocated to the projector, the speakers, the leather
seats, and the installation service, assuming that each of these four parts of the contract is a
separate performance obligation? Show your work.
238) Baldi Piano manufactures customized pianos for concert halls. On July 1, 2018, Baldi
signed a contract to deliver a concert piano for $150,000. Under the contract, Baldi is also
obligated to provide a one-year maintenance service. If sold separately, the piano and the
maintenance service would have cost $140,000 and $20,000, respectively.
Required:
How much of the transaction price would be allocated to the piano and the maintenance service,
assuming they are separate performance obligations? Show your work.
Use the information below to answer the following questions:
The Rink offers annual $200 memberships that entitle members to unlimited use of ice-skating
facilities and locker rooms. Each new membership also entitles the member to receive ten “20%
off a $5 meal” coupons that are redeemable at the Rink’s snack bar. The Rink estimates that
approximately 80% of the coupons will be redeemed, and that, if the coupons weren’t redeemed,
$5 meals still would be discounted by 5% because of ongoing promotions.
239) Calculate how much of the transaction price should be allocated to each performance
obligation in the contract. Show your work.
240) Prepare the journal entry to recognize the sale of a new membership. Clearly identify
revenue or deferred revenue associated with each performance obligation.
241) Antonio’s Car Services provides maintenance services for motorized vehicles. In March
2018, Rick placed an order for a new set of tires for $350. When a customer purchases goods or
services in excess of $300, Antonio’s gives the customer a 25% discount coupon for future
purchases made in the next three months. Antonio’s estimates that approximately 80% of
customers utilize the coupon and that on average those customers will purchase goods or services
that typically sell for $75.
Required:
(a) How many performance obligations are in Rick’s contract? Explain the reasons for your
answer.
(b) Prepare a journal entry to record revenue for this transaction, assuming that Antonio’s uses
the residual method to estimate the stand-alone selling price of new tires sold without the
discount coupon.