Exam 3: Additional Topics in Income Determination

Under the cost recovery method of revenue recognition

Ford Appliance Center records revenue on the installment sales method. The following information is available for the first two years of business. Year 1 Year 2 Sales \ \ 2 Cost of goods sold 140,000 162,500 Cash collections: Year 1 sales 100,000 80,000 Year 2 sales 130,000 -Which one of the following entries properly records the installment sales for Year 2?

The Sarver Farm has completed the fall harvest with 50,000 bushels of premium wheat. The wheat cost $75,000 from planting to harvest and the market price of the wheat on the day it is placed in the silo is $2.50 per bushel. Sarver sells 42,000 bushels in Year 1 and holds the remaining 8,000 until Year 2 when it sells for $3.00 per bushel. -Using the completed transaction (sales)method,how much net income should Sarver recognize in Year 1?

Continuing franchise fees should be recorded by the franchisor

At the beginning of 2013,the Arbuckle Construction Company signed a contract with the state to build a highway for $10,000,000.The project is estimated to be completed by the end of 2015.Arbuckle will bill the state in installments over the construction period per a schedule in the contract.Information related to the contract is as follows: 2013 2014 2015 Actual construction costs incurred during the year \3 ,000,000 \2 ,200,000 \3 ,300,000 Actual construction costs incurred in prior years - 3,000,000 5,200,000 Cumulative actual construction costs 3,000,000 5,200,000 8,500,000 Estimated costs to complete at end of year \4 ,500,000 \2 ,800,000 \- Total construction costs 7,500,000 8,000,000 8,500,000 Billings made over the course of the year \3 ,500,000 \3 ,000,000 \3 ,500,000 Cash collections during the year 2,800,000 3,300,000 3,900,000 Because the highway is being built in an area that is home to the Eastern Spadefoot Toad (an endangered species),Arbuckle is required to construct a toad habitat to replace the one being lost in the project.As Arbuckle has no prior experience building swamps,it believes it is not able to reasonably estimate the contract's completion costs.Assume that Arbuckle follows IFRS rules when accounting for construction contracts. Required: Prepare the journal entry that Arbuckle would make at the end of each year to appropriately recognize profit on the project.

The account "Billings on Construction in Progress" is shown on the balance sheet as a liability account.

Under IFRS,service revenue should be recognized when it is probable that future economic benefits will be received and the entity can reliably measure all of the following except the

Companies that fail to meet analysts' earnings expectations

Revenue from nonrefundable up-front fees

If the critical event and measurability conditions are satisfied,revenue may be recognized before the sale

When applying the installment sales method the accounting system must match collections with the specific sales year to which the cash collections relate in order to apply the correct

The installment sales method is considered more conservative than the cost recovery method because when using the installment sales method,a portion of gross profit is recognized on each dollar collected.

Noah Construction Company is building a large complex for a contract price of $5,000,000. This is a three-year project estimated to cost $4,000,000 and the following information is available: (\ in thousands) Year 1 Year 2 Year 3 Costs incurred \ 1,000 \ 1,500 \ 1,250 Estimated completion costs \ 3,000 \ 1,500 \ 10 Billings \ 750 \ 1,750 \ 2,500 Cash collected \ 500 \ 1,500 \ 3,000 -Using the percentage-of-completion method of revenue recognition,how much income is recognized in Year 2?

If the critical event and measurability conditions are not satisfied,revenue may be recognized after the sale

The SEC through its review of companies' filings sometimes identifies accounting irregularities that require correction.

Gifford Construction Corporation has entered into a long-term fixed contract to build a performing arts center for Philbin University.The fixed price is $71,500,000.The costs,estimated costs,and billing activity for the three years of the contract are shown below: 201 2014 2015 Construction costs incurred to date 20,000,000 45,000,000 70,000,000 Estimated future costs 35,000,000 30,000,000 0 Billings to date 24,700,000 43,758,000 71,500,000 Cash collections to date 20,995,000 41,570,100 71,500,000 Required: a.Compute the gross profit to be recognized under the percentage-of-completion method on Gifford's income statements for each year under the contract. b.Compute construction in progress net of billings under the percentage-of-completion method at the end of 2013 and 2014.Be sure to indicate whether the balance is classified as an asset or liability. c.Compute the gross profit to be recognized under the completed contract method on Gifford's income statements for each year under the contract. d.Which method is more conservative:the percentage-of-completion method or the completed contract method? Explain.

When losses occur on long-term contracts using the completed contract method,they are recognized at the completion of the contract.

A sale should not be recognized as revenue by the seller at time of sale if payment is made by check.

Under the "cost recovery method," after the cost of the merchandise sold on an installment basis has been recovered,any cash collected in excess of this amount is recorded as recognized gross profit on the seller's income statement.

Internet companies that simply act as agent or broker in a transaction must record sales based on