Exam 18: Income Recognition and Measurement of Net Assets

A client in the software industry comes to you for an explanation of how to recognize revenue from the sale of software.The company does not provide any services related to the software, but has agreements to deliver software. Required: Explain how the presence or absence of significant production, modification, or customization affects revenue recognition for agreements to deliver software.

Exhibit 18-1 In 2010, Alpha Construction began work on a contract with a price of $850, 000 and estimated costs of $595, 000.Data for each year of the contract are as follows: 2010 2011 2012 Costs incurred chring the year \ 238,000 \ 319,600 \ 105,000 Estimated costs to complete 357,000 139,400 -0- Partial billings 260,000 210,000 380,000 Collections 240,000 200,000 410,000 - Refer to Exhibit 18-1.Under the percentage-of-completion method of revenue recognition, gross profit in 2010 would be

The deposit method is usually associated with

Exhibit 18-2 The following information relates to a project of the Sarasota Construction Company: 2010 2011 2012 Construction costs incurred \ 136,000 \ 546,500 \ 200,000 Estimated costs to complete 714,000 227,500 -- The contract price was $1, 000, 000.Sarasota used the percentage-of-completion method of revenue recognition. - Refer to Exhibit 18-2.What amount of gross profit was recognized in 2010?

Smith sells computer software to Miller that requires significant construction.When recognizing revenue, Smith

In selecting the appropriate method of recognizing revenue, which of the following qualitative characteristics of useful accounting information is paramount to the decision?

The percentage-of-completion method does not

IFRS provide guidance that differs from GAAP regarding the procedures to use in construction contracts' future costs estimates.Discuss how the treatments differ.

On January 1, 2010, Walters, Inc.purchased a risky investment for $100.It was decided to use the cost recovery method of revenue recognition.Cash collections on accounts receivable related to the asset were as follows: 2010 \ 70 2011 40 2012 30 Which of the following represent the realized gross profit that Walters should recognize for each year? 2010 2011 2012 I. \ 0 \ 10 \ 30 II. \ 70 \ 40 \ 30 III. \ 0 \ 30 \ 30 IV \ 0 \ 110 \ 30

Inventory is increased from cost to selling price when revenue is recognized During At Time At Time of Production of Sale Cash Receipt I. No No No II. Yes No Yes III. No No Yes IV Yes No No

The installment method is usually associated with

A new construction company owner comes to you for advice on how to account for the first long-term construction project his company has been awarded.He is under the impression that he can use either the completed-contract or the percentage-of-completion methods in all circumstances. Required: Explain to your client when each method is required.

Exhibit 18-5 Morris Co.sold a franchise at an initial franchise fee of $5, 000.A down payment of $800 was received with the balance covered by the issuance of a $4, 200, 6% note, payable by the franchisee in four equal annual installments.The refund period has expired and the collectibility of the note is reasonably assured. - Refer to Exhibit 18-5.If all material services have been substantially performed, which entry to record the franchise is correct?

When a company uses the percentage-of-completion method for revenue recognition, the most difficult approach to determine the percentage completed is using

Exhibit 18-1 In 2010, Alpha Construction began work on a contract with a price of $850, 000 and estimated costs of $595, 000.Data for each year of the contract are as follows: 2010 2011 2012 Costs incurred chring the year \ 238,000 \ 319,600 \ 105,000 Estimated costs to complete 357,000 139,400 -0- Partial billings 260,000 210,000 380,000 Collections 240,000 200,000 410,000 -Refer to Exhibit 18-1.Under the percentage-of-completion method of revenue recognition, the balance in Construction in Progress at the end of 2011 would be

In real estate sales, what method of revenue recognition must be used if the sale is not consummated?

If Consignment-out has a debit balance, the account should be disclosed on the balance sheet as a(n)

Exhibit 18-2 The following information relates to a project of the Sarasota Construction Company: 2010 2011 2012 Construction costs incurred \ 136,000 \ 546,500 \ 200,000 Estimated costs to complete 714,000 227,500 -- The contract price was $1, 000, 000.Sarasota used the percentage-of-completion method of revenue recognition. - Refer to Exhibit 18-2.What amount of gross profit was recognized in 2012?

An excess of Construction in Progress over Partial Billings for long-term contracts accounted for on the percentage-of-completion method should be shown as a

The Naples Company uses the percentage-of-completion method and the cost-to-cost method for its long-term construction contracts.On one such contract, Naples expects total revenues of $260, 000 and total costs of $200, 000.During the first year, Naples incurred costs of $50, 000 and billed the customer $30, 000 under the contract.At what net amount should Naples' Construction in Progress for this contract be reported at the end of the first year?