Deck 8: Revenue Recognition, Receivables, and Advances From Customers

Question 1

If an event or transaction leads to the recognition of revenue, firms match the consumption of any assets (the expense), in time, with the revenue recognized.

Answer 1

True

Question 2

The cost recovery method matches the costs of generating revenue with cash receipts until the seller recovers all its costs.

Answer 2

True

Question 3

The U.S.Internal Revenue Service requires that firms recognize bad debt expense only when they conclude an account is not collectible.

Answer 3

True

Question 4

The write-off of specific customers' accounts has no effect on Accounts Receivable, Net, because the write-off amount decreases Accounts Receivable, Gross, and its contra account, the Allowance for Uncollectibles, by exactly the same amount.

Question 5

The Accounts Receivable, Gross amount less the Allowance for Uncollectibles yields Accounts Receivable, Net, which reflects the amount of cash the firm expects to collect.

Question 6

The financial statements contain information for analyzing the collectibility of accounts receivable and the adequacy of the expense for uncollectible accounts.Typical ratios used for this analysis include the accounts receivable turnover ratio, days receivables outstanding, and write-off percentage.

Question 7

When a firm decides that a particular customer account is uncollectible, it removes that account by debiting the Allowance for Uncollectibles and crediting Accounts Receivable, Gross.This process is called writing off the account.

Question 8

The write-off of specific customers' accounts using the allowance method has no effect on the income statement.

Question 9

Firms that reduce the price charged to a customerafter the firm has delivered the goods and the customer has found them to be unsatisfactory or damaged issue a sales allowance.

Question 10

The percentage-of-completion method provides information about the seller's performance during the contract period; in contrast, the completed contract method reports all profit only when seller completes the contract.

Question 11

Notes receivable is the amount owed to a seller by customers who have purchased goods and services on credit.

Question 12

Both U.S.GAAP and IFRS do not require the allowance method for uncollectible accounts, which involves estimating the amount of uncollectible accounts receivable associated with each accounting period's credit sales.

Question 13

U.S.GAAP and IFRS require that firms disclose sufficient information to allow the reader of financial statements to calculate Accounts Receivable, Gross, Allowance for Uncollectibles, and Accounts Receivable, Net.

Question 14

Under the accrual method, the timing of revenue recognition is influenced by when the services or product are provided.

Question 15

Realization is the presumption that a firm will remain in operation long enough to carry out its current plans, and in the normal course of its operations, realize changes in the fair values of its assets either by using those assets or selling them.

Question 16

A debit balance in the Allowance for Uncollectibles appears on the balance sheet.

Question 17

The method of revenue recognition where the seller collects part of the selling price in cash and at the same time recognizes as expenses each period the same portion of the cost of goods or services sold as the portion of total revenues recognized is called the direct payment method.

Question 18

Bad Debt Expense is also called the Provision for Bad Debts and the Provision for Uncollectible Accounts.

Question 19

If the firm has received a promise of payment but cannot measure this promise with reasonable reliability, and U.S.GAAP would permit revenue to be recognized, but IFRS would not permit revenue to be recognized.

Question 20

U.S.GAAP permits firms to use the installment method or the cost recovery method only when receivables is/are collectible over an extended period and the seller has no reasonable basis for estimating the amount of cash that it will collect.

Question 21

Which section includes income derived from a firm's primary business activities as well as from activities peripherally related to operations? (The firm expects these sources of earnings to continue.)

A)income from continuing operations
B)income, gains, and losses from discontinued operations
C)extraordinary gains and losses
D)retained earnings
E)paid-in-capital

Question 22

U.S.GAAP requires that the completed contract method be used

A)when uncertainty obscures the total costs the contractor will incur in carrying out the project.
B)in situations when a firm has not found a specific buyer while construction progresses.
C)always to recognize income during construction projects.
D)in both circumstances a and b.
E)in none of the above situations.

Question 23

Which of the following is true regarding income recognition?

A)The seller must have substantially performed its obligations to the customer (for example, by transferring ownership of goods to the customer).
B)The seller must have obtained an asset from the customer that it can reliably measure.If the asset is not cash, the seller must be reasonably certain of converting it into cash.
C)The firm recognizes expenses when it consumes assets.
D)If an event or transaction leads to the recognition of revenue, the firm matches the consumption of any assets (the expense), in time, with the revenue recognized.
E)all of the above

Question 24

The method of revenue recognition where the seller has substantial uncertainty about the amount of cash it will collect and matches the costs of generating revenues dollar for dollar with cash receipts until the seller recovers all such costs is called the

A)cash basis method.
B)percentage-of-payment method.
C)installment method.
D)cost-recovery-first method.
E)cost-recovery-last method.

Question 25

A common-size income statement expresses each expense and net income as a percentage of

A)assets.
B)revenues.
C)liabilities.
D)expenses.
E)shareholders' equity.

Question 26

Fassino's Wholesale Corporation Fassino Wholesale Corporation ("Fassino's") operates discount retail stores.To shop in a Fassino's store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card.A customer purchases an annual membership from Fassino's for $120, a 20-pack of paper towels for $10.99, and four new tires for $480.The tire purchase includes mounting and aligning by a Fassino's tire technician at the time of initial installation and alignment and tire rotation services for three years afterward.The customer pays with an American Express card.
Using the Fassino's Wholesale Corporation example, when should Fassino's recognize the $120 membership fee as revenue?

A)Fassino's should recognize all of the membership fee ($120.00) at the time that the annual membership fee is sold to the customer because it is nonrefundable.
B)Fassino's should recognize all of the membership fee ($120.00) one year from the time that the annual membership fee is sold to the customer because the membership fee has been fully earned.
C)Fassino's should recognize 1/12th of the membership fee, or $10.00, each month during the annual membership period.
D)Fassino's should recognize two-thirds of the membership fee, or $90.00, at the time that the annual membership fee is sold to the customer because it is nonrefundable, and the other one-third of the membership fee, or $30.00, at the end of the annual membership period.
E)Fassino's should recognize one-quarter of the membership fee, or $30.00, at the time that the annual membership fee is sold to the customer because it is nonrefundable, and the other three-quarters of the membership fee, or $90.00, at the end of the annual membership period.

Question 27

Fassino's Wholesale Corporation Fassino Wholesale Corporation ("Fassino's") operates discount retail stores.To shop in a Fassino's store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card.A customer purchases an annual membership from Fassino's for $120, a 20-pack of paper towels for $10.99, and four new tires for $480.The tire purchase includes mounting and aligning by a Fassino's tire technician at the time of initial installation and alignment and tire rotation services for three years afterward.The customer pays with an American Express card.
When should Fassino's recognize revenue from selling the tires plus mounting, alignment, and rotation services?

A)At the time of initial installation, Fassino's performs its obligation to provide both tires and initial mounting and alignment services.Pete's should recognize revenue for the portion of the $480 selling price applicable to the sale of tires and installation services at the time of installation.
B)Fassino's should delay recognition of revenue for the portion of the $480 selling price applicable to the subsequent alignment and rotation services until it performs the required services.
C)Fassino's should delay recognition of revenue from selling the tires plus mounting, alignment, and rotation services until it performs all of the required services at the end of the three year period.
D)At the time of initial installation, Fassino's should recognize revenue for all of the $480 selling price applicable to the tires plus mounting, alignment, and rotation services.
E)Both choices a and b are correct.

Question 28

Ulrich Co.sells an asset to a buyer for a total sales price of $6,000 with a payment schedule of $2,000 in year 1, $2,000 in year 2, and $2,000 in year 3.The cost of the asset is $5,000.Under the cost-recovery-first method, what amount of net profit is recognized in year 3?

A)$2,000
B)$1,000
C)$666.67
D)$333.33
E)$0

Question 29

Fassino's Wholesale Corporation Fassino Wholesale Corporation ("Fassino's") operates discount retail stores.To shop in a Fassino's store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card.A customer purchases an annual membership from Fassino's for $120, a 20-pack of paper towels for $10.99, and four new tires for $480.The tire purchase includes mounting and aligning by a Fassino's tire technician at the time of initial installation and alignment and tire rotation services for three years afterward.The customer pays with an American Express card.
When should Fassino's recognize revenue from selling the paper towels?

A)Fassino's will recognize $10.99 in revenue at the time it pays the paper towel vendor the wholesale price of the paper towels.
B)Fassino's will recognize $10.99 in revenue at the end of the month of sale.
C)Fassino's will recognize $10.99 in revenue at the end of the quarter of sale.
D)Fassino's will recognize $10.99 in revenue at the time of sale.
E)Fassino's will recognize $10.99 in revenue at the end of the year of sale.

Question 30

Operating risks

A)include variability in sales from changing economic conditions (cyclicality risk).
B)include variability in sales from short product life cycles (because of technological change or changes in consumer taste).
C)include variability of earnings that arises when the firm has a high proportion of fixed costs that do not change as sales change.
D)Answers a, b, and c are correct.
E)None of these answer choices is correct.

Question 31

The method of revenue recognition where the seller collects parts of the selling price in cash and at the same time recognizes as expenses each period the same portion of the cost of goods or services sold as the portion of total revenues recognized is called the

A)completed contract method.
B)direct payment method.
C)installment method.
D)cost-recovery-first method.
E)cost-recovery-last method.

Question 32

Cowden Properties Cowden Properties sold a condominium to Ms.Roberts for $90,000.Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000.The contract for sale required Ms.Roberts to pay the $90,000 as follows:
Year 1 - $ 5,000
Year 2 - $10,000
Year 3 - $30,000
Year 4 - $45,000
Refer to the Cowden Properties example.Under the installment method, how much net profit would Cowden recognize in year 1?

A)$1,667
B)$2,667
C)$3,333
D)$3,667
E)$5,000

Question 33

The percentage-of-completion method

A)is affected by the actual schedule of cash collection.
B)cannot be used if the contract specifies that the contractor will receive the entire contract price only on completing construction.
C)measures the proportion of total work carried out during the accounting period either from engineers' estimates of the degree of completion or from the ratio of costs incurred to date to the total costs expected for the entire contract.
D)is not a method allowed by U.S.GAAP.
E)none of the above.

Question 34

The percentage-of-sales procedure arises from the idea that uncollectible amounts will vary with the volume of credit business.The firm estimates the appropriate percentage by studying its own experience or by inquiring into the experience of similar firms.Default rates generally fall within the range of .01% to .02% of credit sales.

Question 35

When a firm's construction activities meet the criteria for revenue recognition as construction progresses, the firm usually recognizes revenue during the construction period using the

A)completed contract method.
B)cost recovery first method.
C)percentage-of-completion method.
D)installment method.
E)cost recovery last method.

Question 36

Cowden Properties Cowden Properties sold a condominium to Ms.Roberts for $90,000.Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000.The contract for sale required Ms.Roberts to pay the $90,000 as follows:
Year 1 - $ 5,000
Year 2 - $10,000
Year 3 - $30,000
Year 4 - $45,000
Refer to the Cowden Properties example.If Cowden uses the installment method, how much cost is recognized as expense in year 3?

A)$10,000
B)$15,000
C)$20,000
D)$25,000
E)$30,000

Question 37

Cowden Properties Cowden Properties sold a condominium to Ms.Roberts for $90,000.Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000.The contract for sale required Ms.Roberts to pay the $90,000 as follows:
Year 1 - $ 5,000
Year 2 - $10,000
Year 3 - $30,000
Year 4 - $45,000
Refer to the Cowden Properties example.If Cowden uses the cost-recovery-first method, how much profit is recognized in year 4?

A)$45,000
B)$40,000
C)$30,000
D)$20,000
E)$15,000

Question 38

The SRI company provides substantial services after the time of product sale and this condition introduces uncertainty.Which of the following is true?

A)Under some circumstances the firm recognizes revenue sometime after the sale.
B)Under some circumstances this uncertainty is sufficient to preclude the firm's recognizing revenue at the time of sale.
C)The firm always recognizes revenue at the time of sale.
D)Both choices a and b are true.
E)None of the above is true.

Question 39

If the firm has received a promise of payment but cannot measure this promise with reasonable reliability,

A)U.S.GAAP would permit revenue to be recognized, but IFRS would not permit revenue to be recognized.
B)U.S.GAAP would not permit revenue to be recognized, but IFRS would permit revenue to be recognized.
C)neither U.S.GAAP nor IFRS would permit revenue to be recognized.
D)U.S.GAAP and IFRS would permit revenue to be recognized.
E)none of the above

Question 40

The percentage-of-completion method measures the proportion of total work carried out during the accounting period either from engineers' estimates of the degree of completion or from the ratio of costs incurred to date to the total costs expected for the entire contract.

Question 41

Conceptual guidance in U.S.GAAP refers to the selling entity having earned the revenues (that is, having completed the earnings process).IFRS refers to

A)transferring the risks and rewards of ownership to customers (in the case of revenues involving goods).
B)having rendered services (in the case of revenues involving services).
C)measuring the costs of any obligations that the seller has not performed at the time it recognizes revenue with reasonable reliability.
D)all of the above.
E)none of the above.

Question 42

Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000.Estimated costs for the contract are:
$\begin{array}{ll}\text { Year 4 } & \$ 5,600,000 \\\text { Year } 5 & \$ 11,200,000 \\\text { Year 6 } & \$ 5,600,000\end{array}$
$\text { Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows: }$
$\begin{array}{ll}\text { Year } 4 & \$ 4,200,000 \\\text { Year } 5 & \$ 7,000,000 \\\text { Year 6 } & \$ 16,800,000\end{array}$ Refer to the Rock Aerospace Company example.Income from the contract for Year 5 under the cost-recovery-first method is:

A)$1,000,000
B)$1,400,000
C)$2,800,000
D)$3,360,000
E)None of the above

Question 43

In year 1, Southern Construction agrees to construct a school building for $12,000,000, receiving payments for the work of $6,000,000 in both year 1 and year 2.Southern estimates that the costs will be $4,000,000 in Year 1 and $6,000,000 in Year 2.If Southern uses the percentage-of-completion method (based on total costs), what amount of profit is recognized in each year of the contract?
$\text { Year } 1 \quad \text { Year } 2$

A) $\$ 0 \quad \$ 2,000,000$
B) $\$ 2,000,000 \quad \$ 0$
C) $\$ 1,000,000 \quad \$ 1,000,000$
D) $\$ 800,000 \quad \$ 1,200,000$
E) $\$ 2,000,000 \quad \$ 1,000,000$

Question 44

Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000.Estimated costs for the contract are:
$\begin{array}{ll}\text { Year 4 } & \$ 5,600,000 \\\text { Year } 5 & \$ 11,200,000 \\\text { Year 6 } & \$ 5,600,000\end{array}$
$\text { Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows: }$
$\begin{array}{ll}\text { Year } 4 & \$ 4,200,000 \\\text { Year } 5 & \$ 7,000,000 \\\text { Year 6 } & \$ 16,800,000\end{array}$ Refer to the Rock Aerospace Company example.Income from the contract for Year 5 under the completed contract method is:

A)$1,000,000
B)$1,400,000
C)$2,800,000
D)$3,360,000
E)None of the above

Question 45

Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000.Estimated costs for the contract are:
$\begin{array}{ll}\text { Year 4 } & \$ 5,600,000 \\\text { Year } 5 & \$ 11,200,000 \\\text { Year 6 } & \$ 5,600,000\end{array}$
$\text { Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows: }$
$\begin{array}{ll}\text { Year } 4 & \$ 4,200,000 \\\text { Year } 5 & \$ 7,000,000 \\\text { Year 6 } & \$ 16,800,000\end{array}$ Refer to the Rock Aerospace Company example.Income from the contract for Year 5 under the installment method is:

A)$1,000,000
B)$1,400,000
C)$2,800,000
D)$3,360,000
E)None of the above

Question 46

Jaymar Software Corporation sells SPAM BE GONE to customers, who receive the software and have access to postdelivery telephone support and the right to receive certain upgrades and enhancements if and when Jaymar Software develops them.Jaymar Software sells SPAM BE GONE for approximately $100; customers pay cash or with a credit card.When should Jaymar Software recognize revenue from selling SPAM BE GONE?

A)It recognizes revenue from sale of the software at the time of delivery and revenue associated with future obligations over the product's life cycle.
B)It recognizes revenue from sale of the software over the product's life cycle and revenue associated with future obligations at the time of delivery.
C)It recognizes revenue from sale of the software and the revenue associated with future obligations over the product's life cycle.
D)It recognizes revenue from sale of the software and the revenue associated with future obligations at the time of delivery.
E)none of the above.

Question 47

Project Paso Vineyards processes grapes into champagne, which it bottles, corks, and places on shelves in underground caverns to age for several years.During the aging process, the winemakers hand-turn the bottles a quarter rotation every few months; also, at fixed intervals, they release yeast gases to preclude unwanted fermentation.Assume that Project Paso contracts to sell a quantity of champagne to a customer for €30 million.Under the terms of the contract, Project Paso will store the champagne in its caverns and perform all necessary functions associated with the aging process (for example, turning the bottles and releasing yeast gases).The selling price includes the costs of producing the champagne and providing services during the aging process.The customer pays Project Paso €15 million at the beginning of the aging and storage process, and agrees to pay the remainder in five years upon delivery of the champagne.When should Project Paso Vineyards recognize revenue from selling the champagne?

A)Project Paso Vineyards should delay revenue recognition until it delivers the champagne to the customer.
B)Project Paso Vineyards should recognize revenue when it sells the champagne to the customer.
C)Project Paso Vineyards should recognize one fifth of the revenue per year after it sells the champagne to the customer.
D)Project Paso Vineyards should recognize one half of the revenue 2 1/2 years after it sells the champagne to the customer.
E)none of the above.

Question 48

Firms extending credit to customers should

A)strive for zero uncollectible accounts to eliminate the need for establishing a bad debt expense and maintaining an allowance for uncollectible accounts.
B)grant credit indiscriminately otherwise the firm may be charged with discrimination in the granting of credit and could be found to be in violation of Federal laws.
C)grant credit to a given group of customers whenever the amount collected from the credit sales to that group exceeds the cost of goods sold and the other costs of serving that group.
D)should ignore collection efforts aimed at those customers who have not paid their bills because the cost of staffing and maintaining a collection department are never cost effective.
E)none of the above.

Question 49

Rogers Manufacturing sells an old machine to KSS Corp.which is having financial difficulty.Rogers agrees to accept payment over 3 years.The adjusted basis of the machine to the seller is $5,000 and the buyer is expected to make payments of $2,000 per year for 3 years.What amount of net profit is recognized by the seller in year 3 if the seller uses the installment method? (Assume that the buyer makes the payments.)

A)$2,000
B)$1,000
C)$333.33
D)$0
E)$666.67

Question 50

In year 1, Northern Construction agrees to build a fire station that will be completed in year 2.Construction starts in year 1.The station will have costs of $2,000,000 in year 1 and $2,000,000 in year 2.Northern receives payment for the station of $5,000,000 in advance, in year 1.If Northern uses the completed contract method, what net profit is recognized by Northern in each year?
$\text { Year } 1 \quad \text { Year } 2$

A) $\$ 0 \quad \$ 1,000,000$
B) $\$ 1,000,000 \quad \$ 0$
C) $\$ 3,000,000 \quad(\$ 2,000,000)$
D) $\$ 500,000 \quad \$ 500,000$
E) $\$ 250,000 \quad \$ 750,000$

Question 51

Recognizing income after the time of sale is

A)never appropriate.
B)always appropriate.
C)never in accordance with U.S.GAAP.
D)appropriate for some specific circumstances.
E)never in accordance with IFRS.

Question 52

When the seller has received cash, but has not earned all of the revenues represented by the cash by providing goods and services, the seller has incurred an obligation to provide goods or services. These liabilities

A)are referred to as deferred performance obligations.
B)may use an account title of Advances from Customers.
C)may use an account title of Deferred Revenues.
D)may use an account title of Unearned Revenues.
E)can be all of the above.

Question 53

When the customer pays with a credit card

A)the retailer receives payment from the credit card issuer promptly, typically within a few days.
B)the retailer treats the transaction like a cash sale.
C)the credit card issuer bears the risk of nonpayment by the customer.
D)the customer compensates the issuer by paying finance charges and other fees.
E)all of the above.

Question 54

(CMA adapted, Dec 92 #18) The mining industry frequently recognizes revenue using the completion of production method.This method is acceptable under the revenue recognition principle because
$\begin{array}{ccc}\text { Sales prices are } & \text { Assets are } & \text { Production cost } \\\text { reasonably } & \text { readily } & \text { can be readily }\\\text { assured } & \text {realizable } & \text {determined }\end{array}$

A) $\begin{array}{lll}\text { Yes } & \text { Yes } & \text { No }\end{array}$
B) $\begin{array}{lll}\text { Yes } & \text { No } & \text { Yes }\end{array}$
C) $\begin{array}{lll}\text { No } & \text { Yes } & \text { No }\end{array}$
D) $\text { No } \quad \text { No } \quad \text { Yes }$
E) $\text { No } \quad \text { Yes } \quad \text { Yes }$

Question 55

Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000.Estimated costs for the contract are:
$\begin{array}{ll}\text { Year 4 } & \$ 5,600,000 \\\text { Year } 5 & \$ 11,200,000 \\\text { Year 6 } & \$ 5,600,000\end{array}$
$\text { Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows: }$
$\begin{array}{ll}\text { Year } 4 & \$ 4,200,000 \\\text { Year } 5 & \$ 7,000,000 \\\text { Year 6 } & \$ 16,800,000\end{array}$ Refer to the Rock Aerospace Company example.Income from the contract for Year 5 under the percentage-of-completion method is:

A)$1,000,000
B)$1,400,000
C)$2,800,000
D)$3,360,000
E)None of the above

Question 56

The percentage-of-completion method

A)recognizes a portion of the contract price as revenue during each accounting period of construction.
B)bases the amount of revenue, expense, and income on the proportion of total work performed during the accounting period.
C)measures the proportion of total work carried out during the accounting period either from engineers' estimates of the degree of completion or from the ratio of costs incurred to date to the total costs expected for the entire contract.
D)all of the above.
E)none of the above.

Question 57

The cost recovery method

A)matches the costs of generating revenue with cash receipts until the seller recovers all its costs.
B)is a method by which the seller sets expenses equal to revenue in each period until it recovers all its costs.
C)is a method by which the seller does not recognize gross margin in income until it has recovered all of the costs of the sale.
D)is a method by which the seller reports revenue without any matching expenses in its income statement after cumulative cash receipts equal total costs.
E)all of the above.

Question 58

Sao Paulo Trains Inc., incorporated in Brazil, manufactures high-speed trains.In this industry, the time to manufacture products usually exceeds one year.Assume that Sao Paulo Trains recently signed a €8 billion contract to provide 10 new high-speed trains to a customer in the European Union.The customer has paid a deposit of €500 million and will pay the remainder in equal installments over the next four years.When should Sao Paulo Trains recognize the revenue from this contract?

A)at the time Sao Paulo Trains signs the contract and receives €500 million cash from the customer
B)assuming that Sao Paulo Trains can reliably estimate both the revenue from the contract and the costs to complete the contract, it will recognize revenue (as well as the costs associated with delivering on the contract) over the contract life.
C)Sao Paulo Trains will recognize all of the revenue (as well as all of the costs associated with delivering on the contract) at the completion of the contract
D)at the time Sao Paulo Trains signs the contract and receives the cash payments from the customer
E)none of the above

Question 59

An accounting issue for accounts receivable is measurement of the amount on the balance sheet. With regard to measurement, both U.S.GAAP and IFRS require that sellers report accounts receivable _____.

A)the amount that all customers have agreed to pay
B)at the present value of future cash flows
C)net of the estimated uncollectible amount
D)at the future value of present cash flows
E)plus the estimated uncollectible amount

Question 60

Wigs and Torys Plc.is a leading operator of pubs and pub restaurants in the United Kingdom.It operates and franchises about 10 wine restaurants under the name Bottoms Up Bar, primarily in London.Suppose that in contracting with a franchisee of an Bottoms Up Bar wine restaurant, Wigs and Torys agrees to provide services, including site selection, décor design, marketing, advertising, and recruiting; and the franchisee agrees to pay Wigs and Torys £100,000.It is common in the industry to permit the franchisee to pay in equal installments over several years.When should Wigs and Torys recognize revenue from the franchisee contract?

A)at the time Wigs and Torys Plc.signs the contract with the franchisee
B)as the cash is received by Wigs and Torys from the franchisee
C)as the income is earned by Wigs and Torys
D)at the end of the franchise period
E)half should be recognized when Wigs and Torys Plc.signs the contract with the franchisee and the other half after all the installments are received

Question 61

When firms that are temporarily short of cash and unable to borrow from usual sources convert accounts receivable into cash by pledging the accounts receivable, they disclose this information

A)on the income statement, only.
B)on the balance sheet, only.
C)on both the income statement and the balance sheet.
D)by a footnote to the financial statements.
E)in managements' discussion and analysis.

Question 62

Healthy Lawn Maintenance Company Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013.It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days.During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year.It made journal entries at the end of each month.
The 2013 year-end balance in Accounts Receivable, Gross, for Healthy Lawn Maintenance is $1,085,000 An aging of these accounts receivable shows that the estimated uncollectible amount is $24,200. Before aging the accounts, the Allowance for Uncollectibles has a debit balance of $15,000 from writing off actual accounts during 2013.Healthy Lawn Maintenance would record the following adjusting entry at the end of 2013 to obtain a credit balance in the Allowance for Uncollectibles of $24,200:

A)Bad Debt Expense........................................24,200 Allowance for Uncollectibles ................................24,200
B)Allowance for Uncollectibles ............................ .. .24,200 Bad Debt Expense........................................24,200
C)Allowance for Uncollectibles ............................ .. .39,200 Bad Debt Expense........................................39,200
D)Bad Debt Expense........................................39,200 Allowance for Uncollectibles .......... ......................39,200
E)Allowance for Uncollectibles ............................ .. .15,000 Bad Debt Expense........................................15,000

Question 63

Recognizing revenue before the seller collects cash requires estimating the amount of uncollectible accounts with reasonable accuracy.Both U.S.GAAP and IFRS require the

A)direct method for uncollectible accounts, only.
B)direct charge off method for uncollectible accounts, only.
C)allowance method for uncollectible accounts, only.
D)allowance method and the direct charge off method for uncollectible accounts.
E)indirect method for uncollectible accounts, only.

Question 64

Healthy Lawn Maintenance Company Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013.It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days.During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year.It made journal entries at the end of each month.
If Healthy Lawn Maintenance's customers remitted $1,900,000 in cash during 2013, it would make the following journal entries with the following aggregated amounts:

A)Accounts Receivable, Gross-specific accounts ....... .. .... 1,900,000 Cash ............................................. ... 1,900,000
B)Cash .............................................. 1,900,000 Accounts Receivable, net-specific accounts ... ............... 1,900,000
C)Cash .............................................. 1,900,000 Accounts Receivable, Gross-specific accounts ................ 1,900,000
D)Cash .............................................. 1,900,000 Notes Receivable, Gross-specific accounts ...................1,900,000
E)Notes Receivable, Gross-specific accounts .................. 1,900,000 Cash ................. ............................... 1,900,000

Question 65

The firm may transfer the accounts receivable to a legally separate entity that issues debt securities to investors. Which of the following is/are true?

A)The firm remits to investors the cash received from customers as those cash receipts occur.
B)The firm may be obligated to make payments to investors in securities if the customers fail to make sufficient cash payments to pay the principal and interest on the debt securities.
C)The transfer is called securitization, a process that transforms an asset (accounts receivable) into securities held by investors.
D)all of the above
E)none of the above

Question 66

When a firm decides that a particular customer account is uncollectible, it removes that account by debiting the _____ and crediting _____ This process is called writing off the account.

A)Accounts Receivable, Gross; Allowance for Uncollectibles
B)Accounts Receivable, Net; Allowance for Uncollectibles
C)Allowance for Uncollectibles; Accounts Receivable, Gross
D)Allowance for Uncollectibles; Accounts Receivable, Net
E)Bad Debt Expense; Accounts Receivable, Net

Question 67

There are two approaches that management can use to estimate the amount of credit sales that would prove to be uncollectible, they are the _____. Over time, the two methods, correctly used, will give the same cumulative income and asset totals.U.S.GAAP and IFRS do not require firms to use one or the other, and some firms use both methods.

A)gross amount of sales procedure and the aging-of-accounts-receivable procedure.
B)percentage-of-sales procedure and the aging-of-accounts-receivable procedure.
C)percentage-of-cost of good sold procedure and the amount of accounts-receivable procedure.
D)percentage-of-cost of good sold procedure and the aging-of-notes-receivable procedure.
E)gross amount of sales procedure and the amount of accounts-receivable procedure.

Question 68

Healthy Lawn Maintenance Company Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013.It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days.During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year.It made journal entries at the end of each month.
Healthy Lawn Maintenance deems uncollectible any customer account not paid after six months.This means that every accounting period, Healthy Lawn Maintenance ascertains which accounts remained uncollected for six months, and treats these customer accounts as uncollectible by writing them off. If, during 2013, Healthy Lawn Maintenance identified accounts of specific customers totaling $20,000 with unpaid balances for six months and wrote them off, the journal entry would be as follows:

A)Bad Debt Expenses ...... ..........................20,000 Accounts Receivable-gross ........ ................ 20,000
B)Bad Debt Expenses ...... ......................... .20,000 Accounts Receivable-specific accounts ................20,000
C)Allowance for Uncollectibles .............................20,000 Accounts Receivable-specific accounts ................20,000
D)Allowance for Uncollectibles ........................ 20,000 Accounts Receivable-gross ........ .................20,000
E)Allowance for Uncollectibles .........................20,000 Bad Debt Expenses ................................. 20,000

Question 69

Healthy Lawn Maintenance Company Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013.It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days.During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year.It made journal entries at the end of each month.
Assume that Healthy Lawn Maintenance estimates that it will not collect 2% of total credit sales in a given month.At the end of each month, it makes an adjusting entry. The aggregate effect of these entries during 2013 is as follows:

A)Bad Debt Expense.............................. ....40,000 Accounts Receivable, net.. ...............................40,000
B)Allowance for Uncollectibles ............................40,000 Bad Debt Expense................................. ....40,000
C)Bad Debt Expense.............................. ....40,000 Allowance for Uncollectibles ...............................40,000
D)Bad Debt Expense.............................. ....40,000 Accounts Receivable, gross ...............................40,000
E)Accounts Receivable, gross ............................40,000 Bad Debt Expense................................. ....40,000

Question 70

A firm that transfers its receivables in exchange for cash can

A)use its accounts receivable as collateral for a loan from a bank or other financial institution.
B)factor its accounts receivable to a bank or other financial institution in exchange for cash.
C)transfer the accounts receivable to a legally separate entity that issues debt securities to investors.
D)use all of the above.
E)use none of the above.

Question 71

A firm may use its accounts receivable as collateral for a loan from a bank or other financial institution.Which of the following is/are true?

A)The firm physically maintains control of the accounts receivable, collects cash from customers, and repays the loan.
B)If the firm fails to repay the loan, the lender can claim the receivables.
C)If the firm has used its accounts receivable as collateral for a loan, the firm will continue to show those receivables as an asset (and there will also be a loan payable liability).
D)The firm should disclose the lending arrangement in its financial reports.
E)all of the above

Question 72

Discuss how accounts receivable can be analyzed.

Question 73

Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by selling accounts receivable to a bank or financing company.This is called

A)assigning accounts receivable.
B)pledging accounts receivable.
C)factoring accounts receivable.
D)transferring accounts receivable.
E)none of the above.

Question 74

Healthy Lawn Maintenance Company Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013.It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days.During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year.It made journal entries at the end of each month.
(Use the Healthy Lawn information to answer this question.) The aggregate effect of these entries during 2013 is as follows:

A)Sales Revenue ......................................2,000,000 Accounts Receivable, Gross .................. ............2,000,000
B)Sales Revenue ......................................2,000,000 Accounts Receivable, Net .................... ............2,000,000
C)Accounts Receivable, Net ................. ............2,000,000 Sales Revenue ............... .........................2,000,000
D)Accounts Receivable, Gross ............... ............2,000,000 Sales Revenue .........................................2,000,000
E)Notes Receivable, Gross ...... ........... ............2,000,000 Sales Revenue .........................................2,000,000

Question 75

A firm may factor its accounts receivable to a bank or other financial institution in exchange for cash. Which of the following is/are not true?

A)The lender physically controls the receivables and collects cash from customers.
B)Accounts receivable that the firm has factored do not appear on the balance sheet.
C)The firm has sold the accounts receivable.
D)The firm should disclose the factoring arrangement in its financial reports.
E)None of the above.

Question 76

Sales returns affect net cash collections when a customer has the right to return a product for a refund, and the firm can reasonably estimate the amount of returns at the time of sale, U.S.GAAP and IFRS

A)require that the firm use the allowance method to estimate and recognize the effects of returns.
B)the selling firm debits a revenue contra account for expected returns to reduce current period revenues to the estimated amount that will not be returned.
C)require that the firm measures revenues based on the amount of cash it expects to collect from current period sales.
D)preclude revenue recognition when customers have the right to return goods unless the firm can reasonably estimate the amount of returns.
E)all of the above

Question 77

Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by

A)assigning accounts receivable and forwarding amounts collected to the lending institution.
B)pledging its accounts receivable to the lending agency as collateral for a loan.
C)factoring the accounts receivable to a bank or financing company to obtain cash.
D)all of the above.
E)none of the above.

Question 78

The percentage-of-sales procedure arises from the idea that uncollectible amounts will vary with the volume of credit business.The firm estimates the appropriate percentage by studying its own experience or by inquiring into the experience of similar firms.Default rates generally fall within the range of _____of credit sales.

A).01% to .02%
B)1% to 2%
C)10% to 20%
D)21% to 30%
E)31% to 40%

Question 79

After the firm estimates the amount of uncollectible accounts associated with the credit sales of each period, it makes an adjusting entry to debit _____ and credit _____.

A)Bad Debt Expense; Accounts Receivable, Net
B)Bad Debt Expense; Accounts Receivable, Gross
C)Allowance for Uncollectibles; Bad Debt Expense
D)Bad Debt Expense; Allowance for Uncollectibles
E)Allowance for Uncollectibles; Accounts Receivable, Gross

Question 80

Allowance for Uncollectibles contra account appears among the _____ on a firm's balance sheet as a(n) _____.

A)liability; subtraction
B)liability; addition
C)assets; addition
D)assets; subtraction
E)shareholders' equity; subtraction