Exam 9: Setting up New Team Members

The method of depreciation that most companies use for tax purposes results in lower income in the early years of an asset's life than would be computed if the company used straight-line depreciation.

There is no one theoretically best way to allocate costs among time periods.

If a company has been in existence for some time, it is sometimes true that income would be higher if it uses the installment method of accounting for sales than if it uses the immediate recognition method.

The Jolly Company makes sales on an installment basis. In 2016, it sells items with a cost of $120 million. The total sales price is $125 million. Ignoring interest payments, customers pay in five equal installments, of $25 million each, with one payment in each of 2016, 2017, 2018, 2019, and 2020. If the company uses the cost recovery method of accounting for this sale, the gross profit it will recognize in 2016 is

Normally, the SEC would not expect delivery of goods and services to have occurred by the time revenue is recognized.

On November 20, Routledge Publishing prints 4,000 copies of an accounting textbook. In December, Routledge Publishing ships 1,000 copies to various bookstores, who have the right to return the books if they can't sell them within three months. Historically, the bookstores typically return 4% of the books. Under GAAP, what is the correct accounting for these events?

One of the SEC's criteria for revenue to be recognized is that delivery of goods or services has occurred.

The Jolly Company makes sales on an installment basis. In 2016, it sells items with a cost of $120 million. The total sales price is $125 million. Ignoring interest payments, customers pay in five equal installments, of $25 million each, with one payment in each of 2016, 2017, 2018, 2019, and 2020. If the company uses the cost recovery method of accounting for this sale, the gross profit it will recognize in 2020, the year the last installment is received is

The formula for computing annual depreciation expense using the straight-line method includes only the cost of the asset and its expected useful life.

In general, use of the installment method of accounting for a single sale with payments received over a period of time is more conservative than recognition of revenue at the time of shipment.

Under both GAAP and IFRS, if a company believes that a long-term contract will lose money, it must recognize the expected losses immediately, and should not allocate any losses to future periods.

Under GAAP rules, companies normally recognize revenue at the time they deliver goods or services to the customer, as long as they can reasonably estimate the likelihood of collecting any accounts receivable.

The formula for computing annual depreciation expense using the straight-line method includes the cost of the asset, its salvage value, and its expected useful life.

According to the FASB, at any time, the cost minus the accumulated depreciation of a company's machinery will usually equal its net realizable value.

A company that sells multiple deliverables for a single price should normally allocate the revenue among the various deliverables based on the relative selling prices of these deliverables.

One of the SEC's criteria for revenue to be recognized is that there must always be a written agreement between the buyer and the seller.

The formula for computing annual depreciation expense using the double declining balance method includes the cost of the asset and the expected useful life of the asset, but not the salvage value.

GAAP requires companies doing work under long-term contracts to use the percentage of completion method, unless they are unable to reliably estimate costs or their percentage of completion.

One of the SEC's criteria for revenue to be recognized is that there must be persuasive evidence of agreement between the buyer and seller.

If a company has been operating for many years, it is sometimes true that it would report higher income in a year if it used the double declining balance depreciation method than if it used the straight-line method.