(1) TRUE-FALSE—Conceptual 1. Companies should recognize revenue when it is realized and when cash is received. 2. Revenues are realized when a company exchanges goods and services for cash or claims to cash. 3. Delayed recognition of revenue is appropriate if the sale does not represent substantial completion of the earnings process. 4. If a company sells its product but gives the buyer the right to return it, the company should not recognize revenue until the sale is collected. 5. Companies can recognize revenue prior to completion and delivery of the product under certain circumstances. 6. Companies must use the percentage-of-completion method when estimates of progress toward completion are reasonably dependable. 7. The most popular input measure used to determine the progress toward completion is the cost-to-cost basis. 8. If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset. 9. The Construction in Process account includes only construction costs under the percentage-of-completion method. 10. Under the completed-contract method, companies recognize revenue and costs only when the contract is completed. 11. The principal advantage of the completed-contract method is that reported revenue reflects final results rather than estimates. 12. Companies must recognize a loss on an unprofitable contract under the percentage-of- completion method but not the completed-contract method. 13. A loss in the current period on a profitable contract must be recognized under both the percentage-of-completion and completed-contract method. 14. Under the completion-of-production basis, companies recognize revenue when agricul- tural crops are harvested since the sales price is reasonably assured and no significant costs are involved in product distribution. 15. The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not completed-contract. 16. Under the installment-sales method, companies defer revenue and income recognition until the period of cash collection.
17. The installment-sales method defers only the gross profit instead of both the sales price and cost of goods sold. 18. Deferred gross profit is generally treated as an unearned revenue and classified as a current liability. 19. Under the cost-recovery method, a company recognizes no revenue or profit until cash payments by the buyer exceed the cost of the merchandise sold. 20. Companies recognize profit under the cost-recovery method only when cash collections exceed the total cost of the goods sold. MULTIPLE CHOICE—Conceptual 21. The revenue recognition principle provides that revenue is recognized when a. it is realized. b. it is realizable. c. it is realized or realizable and it is earned. d. none of these. 22. When goods or services are exchanged for cash or claims to cash (receivables), revenues are a. earned. b. realized. c. recognized. d. all of these. 23. When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are a. earned. b. realized. c. recognized. d. all of these. 24. Which of the following is not an accurate representation concerning revenue recognition? a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. b. Revenue from services rendered is recognized when cash is received or when services have been performed. c. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used. d. Revenue from disposing of assets other than products is recognized at the date of sale. P 25. The process of formally recording or incorporating an item in the financial statements of an entity is a. allocation. b. articulation.
c. realization. d. recognition. P 26. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as a. service revenue. b. deferred service revenue. c. a reduction in installment accounts receivable. d. a direct addition to retained earnings. 27. Which of the following is not a reason why revenue is recognized at time of sale? a. Realization has occurred. b. The sale is the critical event. c. Title legally passes from seller to buyer. d. All of these are reasons to recognize revenue at time of sale. 28. An alternative available when the seller is exposed to continued risks of ownership through return of the product is a. recording the sale, and accounting for returns as they occur in future periods. b. not recording a sale until all return privileges have expired. c. recording the sale, but reducing sales by an estimate of future returns. d. all of these. 29. A sale should not be recognized as revenue by the seller at the time of sale if a. payment was made by check. b. the selling price is less than the normal selling price. c. the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated. d. none of these. 30. The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions? a. The amount of future returns can be reasonably estimated. b. The seller's price is substantially fixed or determinable at time of sale. c. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product. d. The buyer is obligated to pay the seller upon resale of the product. 31. In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be a. the terms of payment in the contract. b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. c. the method commonly used by the contractor to account for other long-term construc-tion contracts. d. the inherent nature of the contractor's technical facilities used in construction.
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