Question 1

Ford Appliance Center records revenue on the installment sales method. The following information is available for the first two years of business.
$\begin{array}{lrr}&\text { Year } 1&\text { Year } 2\
\text { Sales } & \$ \overline{200,000} & \$ 2 \overline{50,000} \
\text { Cost of goods sold } & 140,000 & 162,500 \
\text { Cash collections: } & & \
\quad \text { Year 1 sales } & 100,000 & 80,000 \
\quad \text { Year 2 sales } & & 130,000
\end{array}$
-Which one of the following entries properly records the deferral of gross profit on Year 2 installment sales not yet collected?

Accepted Answer

A)   DR Cost of installment goods sold  62,500 \quad 62,500 62,500  DR Deferred gross profit-Year  287,500 2 \quad 87,500 287,500 CR Installment sales revenue  150,000 \quad 150,000150,000 
B)     DR Cost of installment goods sold 302,500 DR Deferred gross profit-Year 1 60,000 DR Deferred gross profit-Year 2 87,500 CR Installment sales revenue 450,000\begin{array}{lr}	ext { DR Cost of installment goods sold } & 302,500 \	ext { DR Deferred gross profit-Year 1 } & 60,000 \	ext { DR Deferred gross profit-Year 2 } & 87,500\	ext { CR Installment sales revenue }&450,000\end{array} DR Cost of installment goods sold  DR Deferred gross profit-Year 1  DR Deferred gross profit-Year 2  CR Installment sales revenue ​302,50060,00087,500450,000​ 
C)   DR Deferred gross profit-Year 2 \quad\quad 42,000CR Deferred gross profit-Adjustment to accounts receivable-Year 2 \quad\quad\quad\quad 42,000
D)   DR Deferred gross profit_-Adjustment to accountsReceivable-Year 2 \quad\quad 42,000CR Deferred gross profit-Year 2 \quad\quad 42,000  C

Question 2

When the outcome of a service contract can be reliably estimated,IFRS rules allow firms to recognize contract revenue and expenses using the percentage-of-completion method.

Accepted Answer

A) True 
 B)False  True

Question 3

In both farming and mining there is general agreement that the critical event in adding value usually comes before the actual sale.

Accepted Answer

A) True 
 B)False  True

Question 4

Under the installment sales method,interest charged by the sellers is

Accepted Answer

A)  immaterial and GAAP allows it to be combined with recognized gross profit.
B)  recognized out of the last cash collection of the sale.
C)  recorded separately out of the periodic cash proceeds.
D)  recognized out of the first cash collection of the sale.

Question 5

IFRS and U.S.GAAP rules for revenue recognition and measurement largely overlap.

Accepted Answer

A) True 
 B)False

Question 6

The percentage of completion ratio is determined by dividing costs incurred to date by the contract price.

Accepted Answer

A) True 
 B)False

Question 7

The key accounting issue related to bundled (multiple-element)sales transactions is the amount of revenue to be recognized over the contract period.

Accepted Answer

A) True 
 B)False

Question 8

The correction of an error causes previous year financial statements to be retroactively restated for comparative purposes.

Accepted Answer

A) True 
 B)False

Question 9

The installment sales method recognizes revenue and income proportionately as cash is collected.

Accepted Answer

A) True 
 B)False

Question 10

Initial franchise fees should be recorded as revenue by the franchisor

Accepted Answer

A)  in accordance with the franchise agreement.
B)  when cash is received from the franchisee.
C)  when all material services relating to the sale have been substantially performed.
D)  during the year the franchise agreement is signeD.

Question 11

Even though well-organized markets for agricultural commodities exist,GAAP requires that farmers use only the completed-transaction method of revenue recognition.

Accepted Answer

A) True 
 B)False

Question 12

Earnings management

Accepted Answer

A)  can be used to manipulate earnings.
B)  is mandated under the SEC rules for publicly held companies.
C)  is a new theory of management.
D)  is rarely useD.

Question 13

Ford Appliance Center records revenue on the installment sales method. The following information is available for the first two years of business.
$\begin{array}{lrr}&\text { Year } 1&\text { Year } 2\
\text { Sales } & \$ \overline{200,000} & \$ 2 \overline{50,000} \
\text { Cost of goods sold } & 140,000 & 162,500 \
\text { Cash collections: } & & \
\quad \text { Year 1 sales } & 100,000 & 80,000 \
\quad \text { Year 2 sales } & & 130,000
\end{array}$
-How much realized gross profit on installment sales will Ford recognize in Year 1?

Accepted Answer

A)  $20,000
B)  $30,000
C)  $60,000
D)  $100,000

Question 14

In the case of goods sold on layaway,

Accepted Answer

A)  the seller should not recognize revenue until the products are delivered to the customer.
B)  the cash received to date should be recognized as an asset until merchandise is delivered to the customer.
C)  revenue should be recognized under the installment sales method.
D)  the seller should recognize revenue before products are delivered to the customer.

Question 15

Andy's Skateboards,Inc.reported a retained earnings balance of $300,000 at December 31,2013.In June 2014,Andy's internal audit staff discovered two errors that were made in preparing the 2013 financial statements that are considered material:
a.Merchandise costing $50,000 that was on consignment at various consignee locations was mistakenly omitted from the 2013 ending inventory.
b.Equipment purchased in January 2,2013 for $150,000 was capitalized and depreciated using straight-line depreciation,a 10-year useful life,and $5,000 salvage value.The capitalized amount included $30,000 for repairs of the equipment which suffered major damage when it was struck by a forklift during installation.
Required:
a.What amount should Andy's Skateboards report as a prior period adjustment to beginning retained earnings at January 1,2014? (Ignore taxes)
b.Prepare the journal entries that Andy's Skateboards would make in June 2014 to correct the errors made in 2013.Assume that depreciation for 2014 is made as a year-end adjusting entry.(Ignore taxes)

Accepted Answer

The answer of Andy's Skateboards,Inc.reported a retained earnings balance of...

Question 16

Stringent rules do not exist for determining when revenue has been earned and is realizable thus leaving some flexibility for management to "manage earnings" within the confines of generally accepted accounting principles.

Accepted Answer

A) True 
 B)False

Question 17

A seller may recognize revenue when the production of the goods is complete if the buyer requests that the transaction be on a "bill and hold" basis and has a substantial business purpose for such a request.

Accepted Answer

A) True 
 B)False

Question 18

When it's highly uncertain whether customers will make the cash payments called for in a contract,then the sale itself is not the critical event in creating value.

Accepted Answer

A) True 
 B)False

Question 19

Research indicates that fewer firms report slightly negative earnings than slightly positive earnings,suggesting that managers of firms that would otherwise report a slight loss are finding ways to prop up earnings.

Accepted Answer

A) True 
 B)False

Question 20

Producers of commodities have well-organized markets for their products,thus an established price is available for as many units as they choose to sell.

Accepted Answer

A) True 
 B)False

Exam 3: Additional Topics in Income Determination

When the outcome of a service contract can be reliably estimated,IFRS rules allow firms to recognize contract revenue and expenses using the percentage-of-completion method.

In both farming and mining there is general agreement that the critical event in adding value usually comes before the actual sale.

Under the installment sales method,interest charged by the sellers is

IFRS and U.S.GAAP rules for revenue recognition and measurement largely overlap.

The percentage of completion ratio is determined by dividing costs incurred to date by the contract price.

The key accounting issue related to bundled (multiple-element)sales transactions is the amount of revenue to be recognized over the contract period.

The correction of an error causes previous year financial statements to be retroactively restated for comparative purposes.

The installment sales method recognizes revenue and income proportionately as cash is collected.

Initial franchise fees should be recorded as revenue by the franchisor

Even though well-organized markets for agricultural commodities exist,GAAP requires that farmers use only the completed-transaction method of revenue recognition.

Earnings management

In the case of goods sold on layaway,

Stringent rules do not exist for determining when revenue has been earned and is realizable thus leaving some flexibility for management to "manage earnings" within the confines of generally accepted accounting principles.

A seller may recognize revenue when the production of the goods is complete if the buyer requests that the transaction be on a "bill and hold" basis and has a substantial business purpose for such a request.

When it's highly uncertain whether customers will make the cash payments called for in a contract,then the sale itself is not the critical event in creating value.

Research indicates that fewer firms report slightly negative earnings than slightly positive earnings,suggesting that managers of firms that would otherwise report a slight loss are finding ways to prop up earnings.

Producers of commodities have well-organized markets for their products,thus an established price is available for as many units as they choose to sell.