Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-17
62. On October 1, 2018, $30,000 of annual magazine subscriptions were sold by Cat World
Magazines. The total cost of the subscribed magazines is $18,000, equal to $1,500 per
month. The subscribed magazines are delivered on the first day of each month
beginning on October 1, 2018. What is the amount of the cost of the magazines to be
recognized during 2018?
a. $18,000
b. $12,600
c. $2,400
d. $4,500
63. On March 1, 2018, $60,000 of annual magazine subscriptions were sold by Traveler’s
Monthly Magazines. The subscribed magazines are delivered on the first day of each
month beginning on March 1, 2018. The total cost of the subscribed magazines is
$30,000 or $2,500 per month. How much profit will the company recognize during 2018?
a. $60,000
b. $33,000
c. $25,000
d. $5,000
Solution:
3-18 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
64. On March 1, 2018, $72,000 of annual magazine subscriptions were sold by Traveler’s
Monthly Magazines. The subscribed magazines are delivered on the first day of each
month beginning on March 1, 2018. The total cost of the subscribed magazines is
$30,000 or $2,500 per month. How much profit will the company recognize during 2019?
a. $5,000
b. $8,250
c. $25,000
d. $2,750
Solution:
65. Joseph Corporation purchased an extruding machine on January 1, 2016 for $30,000.
The machine is expected to be used for 5 years, and the company believes an equal
portion of the cost should be allocated to each accounting period. Based on this
information, what is the net book value of the machine on January 1, 2018?
a. $6,000
b. $18,000
c. $12,000
d. $30,000
66. Karr Construction built a levee for the state of Mississippi over a three-year period. The
contracted price for the levee was $3,000,000. The costs incurred by Karr and the
payments from the state over the three year period are as follows:
2017
2018
2019
Total
Costs incurred by
Karr
$600,000
$800,000
$200,000
$1,600,000
Payments from
Mississippi
$1,200,000
$800,000
$1,000,000
$3,000,000
If revenue is recognized when payments are received, which of the following present the
net income amounts reported in 2017, 2018, and 2019, respectively?
a. $1,200,000; $800,000; $1,000,000
b. $600,000; $0; $800,000
c. $800,000; $800,000; $800,000
d. $600,000; $400,000; $200,000
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-19
67. Karr Construction built a levee for the state of Mississippi over a three-year period. The
contracted price for the levee was $3,000,000. The costs incurred by Karr and the
payments from the state over the three year period are as follows:
2017
2019
Total
Costs incurred
by Karr
$600,000
$200,000
$1,600,000
Payments from
Mississippi
$1,200,000
$1,000,000
$3,000,000
If revenue is recognized in proportion to the costs incurred by Karr, how much net
income is reported in 2018?
a. $200,000
b. $400,000
c. $700,000
d. $800,000
3-20 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
68. Karr Construction built a levee for the state of Mississippi over a three-year period. The
contracted price for the levee was $3,000,000. The costs incurred by Karr and the
payments from the state over the three year period are as follows:
2017
2018
2019
Total
Costs incurred
by Karr
$600,000
$800,000
$200,000
$1,600,000
Payments from
Mississippi
$1,200,000
$800,000
$1,000,000
$3,000,000
If revenue is recognized in proportion to the costs incurred by Karr, how much net
income is reported in 2019?
a. $1,200,000
b. $800,000
c. $600,000
d. $175,000
69. Jeter Company ordered 400 toy wagons from Lamar, Inc. on May 1, 2018. Jeter
Company paid for them on May 20 at a cost of $3 each. Jeter sold 50 of them on June 2, 2018,
for $4 each to Gilloz Company. Gilloz Company paid Jeter on June 10.
On which date should Jeter Company recognize revenue?
a. May 1
b. May 20
c. June 10
d. June 2
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-21
70. Jeter Company ordered 400 toy wagons from Lamar, Inc. on May 1, 2018. Jeter
Company paid for them on May 20 at a cost of $3 each. Jeter sold 50 of them on June 2,
2018, for $4 each to Gilloz Company. Gilloz Company paid Jeter on June 10.
How much revenue should Jeter Company recognize at the preferred point of revenue
recognition?
a. $240
b. $100
c. $1,000
d. $200
71. Jeter Company ordered 400 toy wagons from Lamar, Inc. on May 1, 2018. Jeter
Company paid for them on May 20 at a cost of $3 each. Jeter sold 50 of them on June 2,
2018, for $4 each to Gilloz Company. Gilloz Company paid Jeter on June 10.
Which amount represents Jeter Company’s input market related to this sale?
a. $150
b. $1,200
c. $1,600
d. $250
3-22 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
MATCHING QUESTIONS
1. Match the descriptions listed in letters a through e below with the proper assumption
numbered from 1 through 4 below.
Descriptions
a. The economic life of an entity can be divided into time periods.
b. The financial statements should contain transactions related to only the business
and not the individual owners.
c. Purchasing power of money is constant over time.
d. The dollar value attached to an item on a company’s balance sheet is determined
by the market in which the company operates.
e. Life of the entity is indefinite.
____ 1. Economic entity assumption
____ 2. Stable dollar assumption
____ 3. Going concern assumption
____ 4. Fiscal period assumption
2. For each financial statement item listed in 1 through 5 below, identify the financial
statement valuation (listed in a through f) at which it should be reported. You may use
each letter more than once or not at all.
Financial Statement Valuations
a. Residual value
e. Estimated sales price
b. Present value
f. Original cost less accumulated depreciation
c. Original cost
d. Fair market value
____ 1. Cash
____ 2. Short-term investments
____ 3. Accounts receivable
____ 4. Long-term liabilities
____ 5. Office building
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-23
3. Match the descriptions listed in letters a through e below with the proper valuation
numbered from 1 through 4.
Descriptions
a. Amount paid is reduced by the measured amount used up
b. Amount that would have to be paid to acquire the same asset at
the balance sheet date
c. Discounted cash flows
d. Amount derived from net equity of company
e. Amount received if the asset were sold
____ 1. Present value
____ 2. Fair market value
____ 3. Replacement cost
____ 4. Residual interest
4. For each financial statement item listed in 1 through 5 below, identify at which financial
statement valuation (listed in a through g) the item should be reported. You may use
each letter more than once or not at all.
Financial Statement Valuations
a. Present value
b. Fair market value
c. Original cost
d. Original cost less accumulated depreciation
e. Lower of cost or market
____ 1. Inventory
____ 2. Plant and equipment (book value)
____ 3. Land used for plant site
____ 4. Current liabilities
____ 5. Long-term notes receivable
3-24 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
5. For each financial concept listed in 1 through 5 below, identify in which category (listed
in a through f) it should be matched. You may use each letter more than once or not at
all.
Categories
a. Similar events are measured using identical accounting methods from one period to
the next.
b. Expense is recognized in the same period that its generated revenue is recognized.
c. Different firms use identical accounting methods to measure similar events.
d. Present value of future cash flows.
e. Significant portion of effort made; major portion of cost incurred, objectively
measured, and reasonably assured of ultimate cash receipt.
f. Reliable measure that is verified by documented evidence.
____ 1. Comparability
____ 2. Objectivity
____ 3. Revenue recognition principle
____ 4. Matching principle
____ 5. Consistency
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-25
SHORT PROBLEMS
1. On May 1, 2018, $12,000 of annual magazine subscriptions were sold by Glolar, Inc.
The subscribed magazines are delivered on the first day of each month beginning on
May 1, 2018. The total cost of the subscribed magazines is $3,600 or $300 per month.
A. Determine the amount of revenue during 2018.
B. Explain how the matching concept is applied relative to the magazines.
2. During 2003, Jeter Company purchased property for its plant for $90,000. During
December of 2018, a similar neighboring plot of land was sold for $120,000. At what
amount would land be measured on Jeter Company’s December 31, 2018 balance
sheet?
3. During January of 2018, Barry Corporation purchased five acres of land for cash of
$120,000 from Foley Company. On December 31, 2018, after Barry built its plant, it was
estimated that the land’s fair market value was $140,000. At what amount would land be
measured on Barry’s December 31, 2018 balance sheet?
4. On December 31, 2018, total assets and liabilities are measured at $24,000 and
$16,000, respectively. The total market value of the company’s common stock is $9,000.
At what amount would shareholders‘ equity be measured on the December 31, 2018
balance sheet?
3-26 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
5. Equipment with an original cost of $23,000 has a fair market value of $19,000, current
replacement cost of $26,000, and a book value of $21,000 on December 31, 2018. At
what amount would net equipment be measured on the December 31, 2018 balance
sheet?
6. Short-term investments have an original cost of $2,500 and a market price of $3,500 at
December 31, 2018. At what amount would the investments be measured on the
December 31, 2018 balance sheet?
7. Accounts receivable have a face value of $10,000 and a present value of $9,000 on
December 31, 2018. At what amount would the accounts receivable be measured on the
December 31, 2018 balance sheet?
8. Equipment with an original cost of $165,000 has a fair market value of $195,000 and
accumulated depreciation of $45,000 on December 31, 2018. What amount would the
December 31, 2018 balance sheet show as the equipment’s net book value?
9. On December 1, 2018, Karr Company purchased inventory for $54,000. On December
31, 2018, the replacement cost of that inventory is $57,000. At what amount would
inventory be measured on the December 31, 2018 balance sheet?
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-27
10. During 2018 and 2019, Orange Company recognized $100,000 and $120,000 of sales,
respectively. The inflation rate between 2018 and 2019 was 10 percent. Did sales
increase 20 percent from 2018 to 2019? Explain.
11. On October 1, 2018, $30,000 of annual magazine subscriptions were sold by Motocross
Monthly Magazines. The subscribed magazines are delivered on the first day of each
month beginning on October 1, 2018. The total cost of the subscribed magazines is
$18,000 or $1,500 per month. Determine the amount of revenue and the cost of the
magazines to be recognized during 2018 and 2019, respectively. How much profit will
the company recognize during 2018 and 2019?
12. Zurich Corporation sells cases of champagne to customers for $300 a case. Each
customer pays $50 when the case is picked up and then $50 a month for the next five
months. The cost of a case of champagne is $60. Although the payment plan has
significantly increased sales, Zurich has decided to delay the recognition of revenue until
cash is received because of the questionable credit history of the new customers. During
January, 2018, 10 cases of champagne were sold and the initial payment of $50 per
case was collected. The normal first payment of $50 a case was collected on February
1, 2018. List the four revenue recognition criteria and state how each criterion is either
met or not met based on the information provided.
3-28 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
13. During 2018, Hamot Company sold $40,000 of computer chips to a distributor on
account. The distributor planned to sell those chips to a German company. The sold
chips were shipped to a warehouse owned by Hamot and were still there on December
31, 2018. Hamot’s CFO left two messages for the distributor but received no return calls.
The distributor has had no prior dealings with Hamot or any other manufacturer of
computer chips. None of the past due balance of $40,000 has been paid. How much
sales revenue associated with this transaction would be reported on the income
statement for the year ending December 31, 2018? Explain your selection.
14. Victor Corporation purchased a packaging machine on January 1, 2018 for $12,000. The
machine is expected to be used for 3 years, and the company believes an equal portion
of the cost should be allocated to each accounting period. How much expense should
Victor recognize during 2018? What concept is illustrated?
15. On January 27, 2018, Lock Company entered into a three-year agreement with Strong
Enterprises to supply 2,000 ounces of platinum for $200 an ounce. During 2018, Lock
mined and purified the 2,000 ounces of platinum at a cost of $200,000. The platinum
was shipped on January 14, 2019 and arrived on January 15, 2019, at Strong’s
warehouse. What is Lock’s revenue and gross profit recognized during 2018, consistent
with the criteria for revenue recognition and the matching concept? Explain.
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-29
16. On October 1, 2018, $24,000 of annual magazine subscriptions were sold by Kitchen
Design Magazines. The subscribed magazines are delivered on the first day of each
month beginning on October 1, 2018. The total cost of the subscribed magazines is
$9,000, equal to $750 per month. Determine the amount of revenue and the cost of the
magazines to be recognized during 2018.
3-30 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
SHORT ESSAY QUESTIONS
1. Large public accounting firms employ graduates from state-supported universities, many
of who are graduates with accounting degrees. These firms’ reliance on and use of the
product of subsidized educational institutions seem to imply that these colleges and
universities are important assets. However, they are not recognized as assets on the
balance sheets of these public accounting firms. Which one of the four basic
assumptions might be used to justify the exclusion of educational assets from the
balance sheets of the public accounting firms?
2. What is the fiscal period assumption and why is it used?
3. Name the four basic assumptions of financial accounting. Indicate why these
assumptions, as a group, are important.
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-31
4. Explain the ‘markets’ in which a business entity operates.
5. Why is inflation ignored in accounting?
6. Why are market values not used for property, plant, and equipment on the balance
sheet?
7. When is present value be used on the financial statements? Give an example in your
explanation.
3-32 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
8. On October 1, 2018, $16,000 of annual magazine subscriptions were sold by Boating
Monthly. The subscribed magazines are delivered on the first day of each month
beginning on October 1, 2018. The total cost of the subscribed magazines is $6,000 or
$500 per monthly delivery. Using the four criteria necessary for revenue recognition,
present an argument for not recognizing $10,000 of revenue during 2018.
9. If a company changes its accounting method, does this mean that consistency is
violated?
10. What is the most critical question in the matching process? Why is it critical?
11. Why is materiality a major problem in accounting?