Revenue Recognition
18 – 21
96. On August 5, 2018, 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, 2018, 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, 2018, 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, 2018. The harvester (cost of $110,000) was delivered on
November 30, 2018. The journal entry to record the contract on November 1, 2018
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, 2018, 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, 2018. The harvester (cost of $110,000) was delivered on
November 30, 2018. 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.
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
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, 2018.
*100. At December 31, 2018, 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 2018 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
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, 2018.
Revenue Recognition
18 – 23
*101. At December 31, 2019, 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, 2019?
a. $13,500,000
b. $7,875,000
c. $7,987,500
d. $8,175,000
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, 2018.
*102. At December 31, 2019, 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,
2019 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
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, 2018.
*103. Seasons Construction completes the remaining 25% of the building construction on
December 31, 2020, 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,
2020?
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
Cooper Construction Company had a contract starting April 2018, to construct a $24,000,000
building that is expected to be completed in September 2020, at an estimated cost of $22,000,000.
At the end of 2018, the costs to date were $10,120,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were $4,800,000 and the cash collected
during 2018 was 3,200,000. Cooper uses the percentage-of-completion method.
*104. For the year ended December 31, 2018, Cooper would recognize gross profit on the
building of:
a. $ 843,333
b. $ 920,000
c. $1,080,000
d. $0
Cooper Construction Company had a contract starting April 2018, to construct a $24,000,000
building that is expected to be completed in September 2020, at an estimated cost of $22,000,000.
At the end of 2018, the costs to date were $10,120,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were $4,800,000 and the cash collected
during 2018 was 3,200,000. Cooper uses the percentage-of–completion method.
*105. At December 31, 2018 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 2018 and was completed in 2019. Data relating to the contract are
summarized below:
Year ended
December 31,
2018 2019
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, 2018, and 2019, 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.
Revenue Recognition
18 – 25
*107. Monroe Construction Company uses the percentage-of-completion method of accounting.
In 2018, Monroe began work on a contract it had received which provided for a contract
price of $37,500,000. Other details follow:
2018
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 2018?
a. $ 1,500,000
b. $19,500,000
c. $ 4,500,000
d. $ 7,500,000
In 2018, 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, 2018, 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 2018 $180,000
*108. How much cash was collected in 2018 on this contract?
a. $300,000
b. $420,000
c. $ 60,000
d. $720,000
In 2018, 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, 2018, 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 2018 $180,000
*109. 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
*110. Adler Construction Co. uses the percentage–of-completion method. In 2018, Adler began
work on a contract for $11,000,000 and it was completed in 2019. Data on the costs are:
Year Ended December 31
2018 2019
Costs incurred $3,900,000 $2,800,000
Estimated costs to complete 2,600,000 —
For the years 2018 and 2019, Adler should recognize gross profit of
2018 2019
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
Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of
$19,200,000. Other details follow:
2018 2019
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
*111. Assume that Gomez uses the percentage-of-completion method of accounting. The portion
of the total gross profit to be recognized as income in 2018 is
a. $1,200,000.
b. $1,600,000.
c. $4,800,000.
d. $6,400,000.
Revenue Recognition
18 – 27
Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of
$19,200,000. Other details follow:
2018 2019
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
*112. Assume that Gomez uses the completed-contract method of accounting. The portion of the
total gross profit to be recognized as income in 2019 is
a. $2,400,000.
b. $3,600,000.
c. $6,200,000.
d. $19,200,000.
Kiner, Inc. began work in 2018 on a contract for $21,000,000. Other data are as follows:
2018 2019
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
*113. If Kiner uses the percentage-of-completion method, the gross profit to be recognized in
2018 is
a. $3,600,000.
b. $4,000,000.
c. $5,400,000.
d. $6,000,000.
Kiner, Inc. began work in 2018 on a contract for $21,000,000. Other data are as follows:
2018 2019
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
*114. If Kiner uses the completed-contract method, the gross profit to be recognized in 2019 is
a. $3,400,000.
b. $7,000,000.
c. $3,500,000.
d. $14,000,000.
*115. Horner Construction Co. uses the percentage-of-completion method. In 2018, Horner
began work on a contract for $22,000,000; it was completed in 2019. The following cost
data pertain to this contract:
Year Ended December 31
2018 2019
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, 2019 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 2018, Horner
began work on a contract for $22,000,000; it was completed in 2019. The following cost
data pertain to this contract:
Year Ended December 31
2018 2019
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 2018 and 2019 would be
2018 2019
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
2018, 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, 2018 At December 31, 2019
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 2019 was
a. $18,000,000.
b. $11,250,000.
c. $6,750,000.
d. $3,000,000.
Revenue Recognition
18 – 29
Eilert Construction Company had a contract starting April 2018, to construct a $42,000,000
building that is expected to be completed in September 2019, at an estimated cost of $38,500,000.
At the end of 2018, the costs to date were $17,710,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were $8,400,000 and the cash collected
during 2018 was $5,600,000. Eilert uses the percentage-of-completion method.
*118. For the year ended December 31, 2018, 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 2018, to construct a $42,000,000
building that is expected to be completed in September 2019, at an estimated cost of $38,500,000.
At the end of 2018, the costs to date were $17,710,000 and the estimated total costs to complete
had not changed. The progress billings during 2018 were $8,400,000 and the cash collected
during 2018 was $5,600,000. Eilert uses the percentage-of–completion method.
*119. At December 31, 2018, 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.
*120. Douglas Diners Inc. charges an initial franchise fee of $180,000 broken down as follows:
$ 80,000
23,000
77,000
$180,000
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, 2018, and the franchise commences operation on November 1, 2018. Assuming that no
future services are required by the franchisor once the franchise begins operations, the
entry on November 1, 2018 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.
*121. Douglas Diners Inc. charges an initial franchise fee of $180,000 broken down as follows:
$ 80,000
23,000
77,000
$180,000
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, 2018, and the franchise commences operation on November 1, 2018. 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, 2018 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, 2018 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, 2018, 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, 2018 to record receipt of the initial franchise fee and the continuing franchise
fee for 2018?
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
Revenue Recognition
18 – 31
*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
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
86.
a
93.
b
*100.
c
*107.
c
*114.
b
*121.
a
87.
d
94.
c
*101.
d
*108.
b
*115.
a
*122.
c
88.
c
95.
c
*102.
b
*109.
d
*116.
c
*123.
b
89.
b
96.
b
*103.
c
*110.
c
*117.
b
90.
d
97.
c
*104.
b
*111.
b
*118.
c
91.
c
98.
a
*105.
c
*112.
c
*119.
a
92.
a
99.
b
*106.
c
*113.
a
*120.
d
MULTIPLE CHOICE—CPA Adapted
124. Green Construction Co. has consistently used the percentage-of-completion method of
recognizing revenue. During 2018, 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
2018 2019
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 2019 were
a. $6,720,000.
b. $6,930,000.
c. $7,350,000.
d. $10,080,000.
125. Bruner Constructors, Inc. has consistently used the percentage-of-completion method of
recognizing income. In 2018, Bruner started work on a $49,000,000 construction contract
that was completed in 2019. The following information was taken from Bruner’s 2018
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 2018 on this contract?
a. $4,900,000
b. $3,266,667
c. $2,450,000
d. $1,633,333
126. During 2018, Gates Corp. started a construction job with a total contract price of
$21,000,000. The job was completed on December 15, 2019. Additional data are as follows:
2018 2019
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 2019?
a. $1,350,000
b. $1,875,000
c. $2,850,000
d. $3,750,000
Multiple Choice Answers—CPA Adapted
Item
Ans.
Item
Ans.
Item
Ans.
Revenue Recognition
18 – 33
DERIVATIONS — Computational
No. Answer Derivation
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Revenue Recognition
18 – 35
DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
EXERCISES
Ex. 18-127—Allocate transaction price.
Windsor Windows manufactures and sells custom storm windows for enclosed porches. Windsor
also provides installation service for the windows. The installation process does not involve
changes in the windows, so this service can be provided by other vendors. Windsor enters into the
following contract on June 1, 2018, with a local homeowner. The customer purchases windows for
a price of $4,700 and chooses Windsor to do the installation. Windsor charges the same price for
the windows irrespective of whether it does the installation or not. The price of the installation
service is estimated to have a fair value of $1,200. The customer pays Windsor $4,000 (which
equals the fair value of the windows, which have a cost of $2,300) upon delivery and the
remaining balance upon installation of the windows. The windows are delivered on August 1,
2018, Windsor completes installation on September 15, 2018, and the customer pays the balance
due. Prepare the journal entries for Windsor in 2018. (Round amounts to nearest dollar.)