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c. $1,850,000
d. $1,800,000
156. Which of the following is not true about contract assets?
a. Contract assets are recorded when payment depends on something other than the
passage of time.
b. Contract assets are recognized when the seller has a conditional right to receive
payment.
c. Contract assets are recognized when the seller has been paid in advance for at
least partially fulfilling its performance obligations.
d. Contract assets are not the same as accounts receivable.
157. Which of the following is not true about contract liabilities?
a. Contract liabilities are only recognized when the seller has a conditional right to
receive payment.
b. Contract liabilities might be called deferred revenue.
c. Contract liabilities are recognized when the seller has been paid in advance of
satisfying its performance obligations.
d. Contract liabilities may be shown on a separate line of the balance sheet.
158. Gupta Industries received a $300,000 prepayment from Packard Associates for
the sale of new equipment. Gupta will bill Packard an additional $100,000 upon delivery
of the equipment. Upon receipt of the $300,000 prepayment, how much should Holt
recognize for a contract asset, a contract liability, and accounts receivable?
a. Contract asset: $0; contract liability: $300,000, accounts receivable, $0.
b. Contract asset: $300,000; contract liability: $0, accounts receivable, $0.
c. Contract asset: $0; contract liability: $300,000, accounts receivable, $100,000.
d. Contract asset: $300,000; contract liability: $0, accounts receivable, $100,000.
159. Which of the following is not something that revenue recognition disclosures
typically should help investors to understand?
a. Timing of revenue and cash flows
b. Outstanding performance obligations
c. Significant judgments used to estimate transaction prices
d. Significant fluctuations in long-term debt necessary to increase revenue in the
future
160. Which of the following is not true about revenue recognition with respect to long-
term construction contracts?
a. Long-term construction contracts often are viewed as having a single performance
obligation, because goods and services fail the “separately identifiable” criterion.
b. Long-term construction contracts often satisfy the criteria for recognizing revenue
over time.
c. Long-term construction contracts require accounting for construction in progress
as well as billings to customers.
d. Long-term construction contracts typically include multiple performance
obligations because of all the different types of goods and services included for
each project.
161. Which of the following is least likely to be a reason why a long-term construction
contract would qualify for revenue recognition over time?
a. The customer consumes the benefit of the seller’s work as it is performed.
b. The customer controls the asset as it is created.
c. The seller is creating an asset that has no alternative use to the seller, and the
seller has the legal right to receive payment for progress to date.
d. The seller is constructing an addition to property that is owned by the customer.
162. Which of the following is true about accounting for long-term construction
contracts?
a. Contract assets are likely to be larger if revenue is recognized over time than if
revenue is recognized at a point in time.
b. Contract assets are likely to be smaller if revenue is recognized over time than if
revenue is recognized at a point in time.
c. Contract assets are likely to be the same size regardless of whether revenue is
recognized over time or at a point in time.
d. There is no way to tell how revenue recognition timing will affect the size of
contract assets without more information.
163. Which of the following is not true about accounting for long-term construction
contracts?
a. Long-term construction contracts could show a contract asset or contract liability,
depending on the relation between construction in progress and billings.
b. Billings on contracts in progress is a contra account to accounts receivable.
c. Gross profit is debited to construction in progress.
d. When a customer is billed for payment due, billings on contracts in progress is
credited at the same time accounts receivable is debited.
164. A rationale for recognizing revenue over the life of a contract rather than at a
single point in time is that:
a. Results are more conservative.
b. It provides a better measure of periodic accomplishment.
c. It is a better match with legal ownership.
d. It results in a lower income tax.
165. Revenue on a long-term contract should not be recognized according to the
proportion of the performance obligation that has been completed if:
a. Completion rates are certain.
b. Profits are low.
c. Projects are more than five years to completion.
d. The arrangement does not qualify for revenue recognition over time.
166. With respect to delaying revenue recognition until completion of a long-term
contract, it is the case that:
a. Estimated losses on the overall contract are recognized before the contract is
completed.
b. Expenses are recognized each period, but revenue is only recognized when the
contract is completed.
c. Use of this approach is not permitted under generally accepted accounting principles.
d. Neither gains nor losses are recognized until the contract is completed.
167. When accounting for revenue over time for a long-term contract, the percentage
of completion used to recognize revenue in the first year usually is determined by
measuring:
a. Costs incurred in the first year, divided by estimated remaining costs to complete the
project.
b. Costs incurred in the first year, divided by estimated total costs for the completed
project.
c. Costs incurred in the first year, divided by estimated gross profit.
d. Costs incurred in the first year, divided by estimated total costs to be incurred in the
remaining years of the project.
Use the following to answer questions 168–170:
Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under
contract with Cactus Development Co. Relevant data are summarized below:
Contract
amount
$3,000,000
Cost:
2015
1,200,000
2016
600,000
Gross profit:
2015
800,000
2016
400,000
Contract
billings:
2015
1,500,000
2016
1,500,000
ADH recognizes revenue over time with respect to these contracts.
168. What would be the journal entry made in 2015 to record revenue?
a.
Accounts receivable
1,500,000
Revenue from long-term
contracts
1,500,000
b.
Accounts receivable
2,300,000
Gross profit
800,000
Revenue from long-term
contracts
1,500,000
c.
Construction in progress
800,000
Cost of construction
1,200,000
Revenue from long-term
contracts
2,000,000
d.
Accounts receivable
1,500,000
Billings in excess of cost
300,000
Revenue for long-term contracts
1,800,000
169. In its December 31, 2015, balance sheet, ADH would report:
a. The contract asset, cost and profits in excess of billings, of $500,000.
b. The contract liability, billings in excess of cost, of $300,000.
c. The contract asset, contract amount in excess of billings, of $1,500,000.
d. The contract asset, deferred profit, of $400,000.
170. For 2016, what is the journal entry to record revenue?
a.
Accounts receivable
1,500,000
Revenue from long-term
contracts
1,500,000
b.
Construction in progress
400,000
Cost of construction
600,000
Revenue from long-term
contracts
1,000,000
c.
Cost of construction
2,000,000
Gross profit
1,000,000
Revenue from long-term
contracts
3,000,000
d.
Accounts receivable
1,500,000
Cost of construction
600,000
Gross profit
600,000
Deferred revenue
300,000
Use the following to answer questions 171–173:
Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under
contract with Cactus Development Co. Relevant data are summarized below:
Contract
amount
$3,000,000
Cost:
2015
1,200,000
2016
600,000
Gross profit:
2015
800,000
2016
400,000
Contract
billings:
2015
1,500,000
2016
1,500,000
ADH recognizes revenue upon completion of the contract.
171. For 2015, what is the journal entry to record revenue?
a.
Accounts receivable
1,500,000
Revenue from long-term
contracts
1,500,000
b.
Accounts receivable
2,300,000
Gross profit
800,000
Revenue from long-term
contracts
1,500,000
c.
Construction in progress
800,000
Cost of construction
1,200,000
Revenue from long-term
contracts
2,000,000
d.
No entry.
172. In its December 31, 2015, balance sheet, ADH would report:
a. The contract asset, cost and profits in excess of billings, of $500,000.
b. The contract liability, billings in excess of cost, of $300,000.
c. The contract asset, contract amount in excess of billings, of $1,500,000.
d. The contract asset, deferred profit, of $400,000.
173. What is the journal entry in 2016 to record revenue?
a.
Accounts receivable
1,500,000
Revenue from long-term
contracts
1,500,000
b.
Construction in progress
400,000
Cost of construction
600,000
Revenue from long-term
contracts
1,000,000
c.
Cost of construction
2,000,000
Gross profit
1,000,000
Revenue from long-term
contracts
3,000,000
d.
Construction in progress
1,200,000
Cost of construction
1,800,000
Revenue from long-term
contracts
3,000,000
Use the following to answer questions 174–176:
JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2
recognizes revenue upon contract completion.
Cost incurred
Estimated Cost to
Complete
2015
$ 250,000
$1,550,000
2016
1,600,000
500,000
2017
450,000
0
174. In 2015, JRE2 would report (rounded to the nearest thousand) gross profit (loss)
of:
a. $0.
b. $(100,000).
c. $ 56,000.
d. $ 73,000.
175. In 2016, JRE2 would report (rounded to the nearest thousand) gross profit (loss)
of:
a. $(223,000).
b. $(150,000).
c. $(206,000).
d. $0.
176. In 2017, JRE2 would report (rounded to the nearest thousand) gross profit (loss)
of:
a. $(100,000).
b. $50,000.
c. $123,000.
d. $2,000.
Use the following to answer questions 177–179:
Indiana Co. began a construction project in 2016 with a contract price of $150 million to be
received when the project is completed in 2018. During 2016, Indiana incurred $36 million of
costs and estimates an additional $84 million of costs to complete the project. Indiana
recognizes revenue over time and for this project recognizes revenue over time according to the
percentage of the project that has been completed.
177. Indiana:
a. Recognized no gross profit or loss on the project in 2016.
b. Recognized $6 million loss on the project in 2016.
c. Recognized $9 million gross profit on the project in 2016.
d. Recognized $36 million loss on the project in 2016.
178. In 2017, Indiana incurred additional costs of $58.5 million and estimated an
additional $40.5 million in costs to complete the project. Indiana:
a. Recognized $15 million gross profit on the project in 2017.
b. Recognized $13.5 million gross profit on the project in 2017.
c. Recognized $6 million gross profit on the project in 2017.
d. Recognized $1.5 million gross profit on the project in 2017.
2017.
179. Suppose that, in 2017, Indiana incurred additional costs of $63.75 million and
estimated an additional $42.75 million in costs to complete the project. Indiana:
a. Recognized $3.75 million loss on the project in 2017.
b. Recognized $5.25 million gross profit on the project in 2017.
c. Recognized $7.5 million gross profit on the project in 2017.
d. Recognized $1.5 million loss on the project in 2017.
Use the following to answer questions 180–184:
In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project.
CCC recognizes revenue over time according to percentage of completion for this contract, and
provides the following information (dollars in millions):
Accounts receivable, 12/31/2016 (from construction progress
billings)
$37.5
Actual construction costs incurred in 2016
$135
Cash collected on project during 2016
$105
Construction in progress, 12/31/2016
$207
Estimated percentage of completion during 2016
60%
180. What is the amount of gross profit on the project recognized by CCC during
2016?
a. $160 million.
b. $72 million.
c. $48 million.
d. Cannot be determined from the given information.
181. What are CCC's estimated remaining construction costs on the project at the end
of 2016?
a. $90 million.
b. $135 million.
c. $225 million.
d. $0.
182. What is the fixed contract price for CCC's project?
a. $120 million.
b. $225 million.
c. $345 million.
d. $349.5 million.
183. What were the construction billings by CCC during 2016?
a. $142.5 million.
b. $67.5 million.
c. $37.5 million.
d. Cannot be determined from the given information.
184. How much cash remains to be collected by CCC on the project?
a. $70 million.
b. $202.5 million.
c. $240 million.
d. Cannot be determined from the given information.
Use the following to answer questions 185–187:
Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2016,
are presented below:
Bid price
$450,000
Contract cost:
2015
(180,000
)
2016
(195,000
)
Gross profit:
75,000
Estimated cost to
complete:
12/31/2015 $200,000
12/31/2016 0
185. Assuming BCC recognizes revenue over time according to percentage of
completion for this contract, the gross profit recognized in 2015 would be (rounded to the
nearest thousand):
a. $33,000.
b. $36,000.
c. $69,000.
d. $30,000.
186. Assuming BCC recognizes revenue over time according to percentage of
completion for this contract, the gross profit recognized in 2016 would be (rounded to the
nearest thousand):
a. $ 6,000.
b. $39,000.
c. $42,000.
d. $45,000.
187. Assuming BCC recognizes revenue upon project completion, what would gross
profit have been in 2015 and 2016 (rounded to the nearest thousand)?
2015
2016
a.
$36,000
$39,000
b.
$30,000
$45,000
c.
$70,000
$ 5,000
d.
$ 0
$75,000
188. In the DuPont formula, return on assets equals:
a. Gross margin on sales x Inventory turnover.
b. Profit margin on sales x Inventory turnover.
c. Gross margin on sales x Asset turnover.
d. Profit margin on sales x Asset turnover.
189. A company is effectively leveraging when:
a. The return on assets exceeds the return on shareholders' equity.
b. The return on shareholders' equity exceeds the return on assets.
c. The return on shareholders' equity is increasing.
d. The return on assets is increasing.
Use the following to answer questions 190–194:
Excerpts from Dowling Company's December 31, 2016 and 2015, financial statements and key
ratios are presented below (all numbers are in millions):
2016
2015
Accounts receivable (net)
$20
$16
Net sales
$115
100
Cost of goods sold
$60
55
Net income
$20
17
Inventory turnover
5.22
Return on assets
10.3%
Equity Multiple
2.36
190. Dowling's 2016 profit margin is (rounded):
a. 17.4%.
b. 18.5%.
c. 18.0%.
d. 16.5%.
191. Dowling's 2016 average collection period is (rounded):
a. 50 days.
b. 63 days.
c. 57 days.
d. 51 days.
