Question 1

Once a decision to restructure is made,GAAP requires companies to

Accepted Answer

A) accrue for the cost of services to be provided in some future period by lawyers and accountants. 
B) overstate estimated charges for future expenditures when such charges are difficult to measure. 
C) take excessive restructuring write-offs thereby complying with the conservatism principle. 
D) estimate the future costs they expect to incur to carry out the restructuring.

Question 2

Authoritative guidance on bundled (multiple-element)software sales transactions states that if a software sales arrangement includes multiple,distinct elements,the revenue from the arrangement should be allocated to the various elements based on prevailing industry practices.

Accepted Answer

A) True 
 B)False

Question 3

Construction contracts usually require purchasers to make progress payments to the contractor as construction progresses.

Accepted Answer

A) True 
 B)False

Question 4

Intentional misstatement of estimates

Accepted Answer

A) are highly unusual in financial reporting. 
B) do not have any impact on earnings. 
C) are unlikely to draw attention from the external auditor if they fall within acceptable ranges. 
D) are acceptable under GAAP.

Question 5

When losses occur on long-term contracts using the percentage-of-completion method,they are recognized

Accepted Answer

A) in their entirety as soon as it becomes known that a loss will be suffered. 
B) at the completion of the project. 
C) proportionately over the contract period using costs incurred as a base. 
D) evenly over the contract perioD.

Question 6

Interest payments are included when computing the recognized gross profit on installment sales.

Accepted Answer

A) True 
 B)False

Question 7

Cost-plus contracts

Accepted Answer

A) refers to contracts that are modified from their original terms during the course of the contract. 
B) refers to contracts where the contractor is not expected to recover all costs incurred in completing the project. 
C) are only used in countries where IFRS rules are followed. 
D) are those for which the contractor is reimbursed for allowable or otherwise defined costs plus a profit markup.

Question 8

The key accounting issue related to bundled (multiple-element)sales transactions is how much of the lump-sum contract price should be recognized up front when the product is delivered to the customer,and how much should be deferred and recognized as the seller satisfies its commitment for other deliverables specified in the contract.

Accepted Answer

A) True 
 B)False

Question 9

U.S.GAAP allows companies to use the cost recovery method for recognizing profits

Accepted Answer

A) when collections on installment sales occur over an extended period and there is no reasonable basis for estimating collectibility. 
B) on any installment sale. 
C) only when selling to companies with strong credit ratings. 
D) if they are in industries where this is the accepted practice.

Question 10

Under the percentage-of-completion method,the profit to be recognized in any year is based on the ratio of incurred contract costs divided by estimated total contract costs.

Accepted Answer

A) True 
 B)False

Question 11

In franchise arrangements,the franchisor gives the franchisee the exclusive right to sell a product or service in a given locale and to use the franchisor's name for a specified period of time.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) proportionately over the contract period using costs incurred as a base. 
B) evenly over the contract period. 
C) in their entirety as soon as it becomes known that a loss will be suffered. 
D) at the completion of the project.

Question 13

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

Accepted Answer

A) $0 
B) $30,000 
C) $60,000 
D) $100,000

Question 14

A typical franchise agreement calls for only the payment of an initial franchise fee which is recorded as revenue in the period it is received.

Accepted Answer

A) True 
 B)False

Question 15

A series of immaterial errors spread across several accounts

Accepted Answer

A) will always have a material impact on earnings. 
B) must always be corrected. 
C) if found by the auditors,will result in a disclaimer. 
D) can,in the aggregate,have a material effect on bottom line earnings.

Question 16

The earliest moment that the critical event and measurability are both satisfied for revenue recognition is usually

Accepted Answer

A) before the sale. 
B) after the sale. 
C) at the time of sale. 
D) when payment is receiveD.

Question 17

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:
$\begin{array}{llll}(\$ \text { in thousands) } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 }\
\text { Costs incurred } & \$ 1,000 & \$ 1,500 & \$ 1,250 \
\text { Estimated completion costs } & \$ 3,000 & \$ 1,500 & \$ 10 \
\text { Billings } & \$ 750 & \$ 1,750 & \$ 2,500 \
\text { Cash collected } & \$ 500 & \$ 1,500 & \$ 3,000
\end{array}$
-Which one of the following entries would be made in Year 1 to record the costs incurred using the percentage-of-completion method of revenue recognition?

Accepted Answer

A)  DR Inventory: Construction in progress $\quad$$\quad$$1,000,000$
CR Accounts payable, cash, etc.$\quad$$\quad$$1,000,000$ 
B)  DR Inventory: Construction in progress $\quad 1,000,000$
CR Income on long-term construction contract$\quad 1,000,000$ 
C)  DR Inventory: Construction in progress $\quad 1,000,000$
CR Billings on construction in progress$\quad 1,000,000$ 
D)  DR Income on long-term construction contract $ \quad 1,000,000 $ 
CR Accounts payable, cash, etc. $ \quad 1,000,000 $

Question 18

Extended time of completion of the project and accurate measurement of its progress towards completion are the only attributes necessary for the appropriate utilization of the percentage-of-completion method of revenue recognition.

Accepted Answer

A) True 
 B)False

Question 19

When the outcome of a service contract cannot be reliably estimated,IFRS rules require firms to use the completed contract method.

Accepted Answer

A) True 
 B)False

Question 20

"Big bath" restructuring charges are believed to not adversely affect stock prices.

Accepted Answer

A) True 
 B)False

Exam 3: Additional Topics in Income Determination

Once a decision to restructure is made,GAAP requires companies to

Authoritative guidance on bundled (multiple-element)software sales transactions states that if a software sales arrangement includes multiple,distinct elements,the revenue from the arrangement should be allocated to the various elements based on prevailing industry practices.

Construction contracts usually require purchasers to make progress payments to the contractor as construction progresses.

Intentional misstatement of estimates

When losses occur on long-term contracts using the percentage-of-completion method,they are recognized

Interest payments are included when computing the recognized gross profit on installment sales.

Cost-plus contracts

U.S.GAAP allows companies to use the cost recovery method for recognizing profits

Under the percentage-of-completion method,the profit to be recognized in any year is based on the ratio of incurred contract costs divided by estimated total contract costs.

In franchise arrangements,the franchisor gives the franchisee the exclusive right to sell a product or service in a given locale and to use the franchisor's name for a specified period of time.

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

A typical franchise agreement calls for only the payment of an initial franchise fee which is recorded as revenue in the period it is received.

A series of immaterial errors spread across several accounts

The earliest moment that the critical event and measurability are both satisfied for revenue recognition is usually

Extended time of completion of the project and accurate measurement of its progress towards completion are the only attributes necessary for the appropriate utilization of the percentage-of-completion method of revenue recognition.

When the outcome of a service contract cannot be reliably estimated,IFRS rules require firms to use the completed contract method.

"Big bath" restructuring charges are believed to not adversely affect stock prices.