Question 1

When research and development costs are incurred in the expectation of future benefits but it is not possible,at the reporting date,to establish that it is probable that future economic benefits will eventuate,then:

Accepted Answer

A)  the costs should be recognised as an asset 
B)  the costs should be recognised as expense together with estimated revenue 
C)  the costs should be recognised as expense prior to recognition of revenues 
D)  no action should be taken.

Question 2

Highrise Constructions Ltd had a large 3-year project with total revenue of $5 000 000 and estimated total costs of $4 200 000. The project was 25% complete at the end of the first year, 55% complete at the end of the second year, and 100% complete at the end of the third year. Revenues and costs were as estimated.
-What profit was earned during the second year if the percentage of completion method was used?

Accepted Answer

A)  $200 000 
B)  $240 000 
C)  $440 000 
D)  $1 500 000.

Question 3

Use the information below to answer the following questions:
Multi-Storey Builders Ltd had a large 3-year project with total revenue of $8 000 000 and estimated total costs of $6 500 000. The project was 20% complete at the end of the first year, 70% complete at the end of the second year, and 100% complete at the end of the third year. Revenues and costs were as estimated.
-What profit was earned during the first year if the percentage of completion method was used?

Accepted Answer

A)  $300 000 
B)  $750 000 
C)  $1 500 000 
D)  $1 600 000.

Question 4

Use the information below to answer the following questions:
Freda Ltd decided to change its accounting for long service leave in order to accrue expense sooner than had been done previously. The effect on provision for employee entitlements as at the end of 2011 was to increase it by $14 000. By the end of 2009, the liability would go up by $21 000. The company’s income tax rate is 35%.
-What would be the effect of the change on 2012 net profit?

Accepted Answer

A)  It would be $13 650 higher. 
B)  It would be $13 650 lower. 
C)  It would be $21 000 higher. 
D)  It would be $21 000 lower.

Question 5

Which of the following transactions may NOT give rise to revenues?

Accepted Answer

A)  receiving government grants 
B)  disposing of assets for book value 
C)  forgiveness of liabilities 
D)  cash received for services provided.

Question 6

Revenue recognition means that:

Accepted Answer

A)  revenue is not recorded until payment by the customer 
B)  the recording of expenses is delayed until the related revenue has been earned 
C)  revenue is recorded when earned 
D)  revenue when a deposit is received.

Question 7

Use the information below to answer the following questions:
On 1 January 2010, Romulus Ltd signed a contract worth $21 000 000 to construct a light rail from here to there. The light rail was to be built over 3 years, with progress payments of $7 000 000 to be made at the end of each year. Estimated costs were $15 000 000 and the following costs incurred and paid by Romulus Ltd were in accordance with estimates and represented the percentage completed in each year:
$\begin{array}{llcc}
 & \text {\$  }   \
 \text {2010  } &\$ 8000000 \
 \text { 2011 } &\$ 5000000 \
 \text { 2012} &\$ 2000000 \
 \text {  } &\
 \text {  } &\
\end{array}$

The project was completed in December 2012.
-Using the percentage of completion method,what profit would Romulus Ltd report in 2012?

Accepted Answer

A)  $7 000 000 
B)  $6 000 000 
C)  $800 000 
D)  $280 000.

Question 8

Which of the following is NOT necessary in order to recognise revenue under the percentage of completion method?

Accepted Answer

A)  Total costs for the project are reasonably determinable. 
B)  The contract price (total revenue)must be reasonably certain. 
C)  There must be a reasonable assurance of payment. 
D)  Engineering estimates of the percentage of completion have been made.

Question 9

Toy Company manufactures toy koalas.Transactions for the year 2012 were as follows: 
(i)16 000 koalas were manufactured at a cost of $30 each.
(ii)12 000 koalas were sold for $50 each.
(iii)Cash was collected on 7000 of the items sold.
What was the reported profit for the year 2012 if revenue was recognised at the point of sale?

Accepted Answer

A)  $140 000 
B)  $240 000 
C)  $320 000 
D)  $350 000.

Question 10

Junction Company had the following transactions,among others,during August.Which transaction represented an expense during August?

Accepted Answer

A)  It paid $3300 in settlement of a loan obtained 3 months earlier. 
B)  It paid $500 for advertising performed in June. 
C)  It purchased $500 of repairs on account for the delivery truck,account will be paid during September. 
D)  It paid dividend to shareholders.

Question 11

Which of the following is one of the key criteria that must normally be met in order that revenue may be recognised?

Accepted Answer

A)  All costs of generating the revenue must have been paid in full. 
B)  The amount of revenue can be precisely measured in dollar terms. 
C)  Cash must have been received. 
D)  The economic benefit will probably flow to the seller.

Question 12

Use the information below to answer the following questions. Each question is to be considered separately.
The income statement of Berrima Barbed Wire Ltd is:
$ \begin{array}{lr} & \$ \ \text { Revenue } & 22,000 \ \text { Expense } & \underline{12,000} \ \text { Profit before income tax } & 10,000 \ \text { Income tax expense }(30 \%) & \underline{3,000} \ \text { Net profit } & \underline{7,000}\end{array} $
-If salaries expense amounting to $3000 were eliminated,what would be the effect on net profit after tax?

Accepted Answer

A)  It would decrease by $2100. 
B)  It would decrease by $3000. 
C)  It would increase by $2100. 
D)  It would increase by $3000.

Question 13

Use the information below to answer the following questions:
The profit for a particular project of Blue Fin Ltd, using the percentage of completion method, was $470 000 for year 1 and $690 000 for year 2 (completion).
-What difference would there be to profit for year 2 if the completion of production method were used?

Accepted Answer

A)  Profit would be $1 160 000 higher. 
B)  Profit would be $690 000 higher. 
C)  Profit would be $470 000 lower. 
D)  Profit would be $470 000 higher.

Question 14

Holidays Ltd manufactures caravans. Transactions for the year ended 30 June 2012 were as follows:
(i)	1200 caravans were manufactured at a cost of $15 000 each.
(ii)	1000 caravans were sold for $20 000 each.
(iii)	Cash was collected on 950 of the caravans sold.
-What was the reported profit for the year ended 30 June 2012 if revenue was recognised when cash was received?

Accepted Answer

A)  $5 000 000 
B)  $6 000 000 
C)  $24 000 000 
D)  $4 000 000.

Question 15

Which of the following statements about the percentage of completion method of revenue recognition is NOT true?

Accepted Answer

A)  The percentage of completion method reflects the economics of what is happening. 
B)  The percentage of completion method is more conservative than the completion of production method. 
C)  Total costs must be reasonably determinable. 
D)  The use of this method requires considerable judgment.

Question 16

Use the information below to answer the following questions. Each question is to be considered separately.
The income statement of Berrima Barbed Wire Ltd is:
$ \begin{array}{lr} & \$ \ \text { Revenue } & 22,000 \ \text { Expense } & \underline{12,000} \ \text { Profit before income tax } & 10,000 \ \text { Income tax expense }(30 \%) & \underline{3,000} \ \text { Net profit } & \underline{7,000}\end{array} $
-If revenue increased by 30%,with no effect on expenses other than income tax,what would be the effect on net after tax profit?

Accepted Answer

A)  It would increase by $6600. 
B)  It would decrease by $6600. 
C)  It would increase by $4620. 
D)  It would decrease by $4620.

Question 17

Use the information below to answer the following questions:
Leslie Ltd has found an error in its revenue account: an invoice for $3000 was recorded as revenue in 2011 when it should have been recorded in 2012. The company’s income tax rate is 40% and there was no corresponding error in cost of goods sold.
-Assuming that the dividend is unchanged,what is the effect of the error on retained profits at end of 2011?

Accepted Answer

A)  It is $1200 too high. 
B)  It is $1800 too high. 
C)  It is $3000 too high. 
D)  There is no effect.

Question 18

Use the information below to answer the following questions:
Leslie Ltd has found an error in its revenue account: an invoice for $3000 was recorded as revenue in 2011 when it should have been recorded in 2012. The company’s income tax rate is 40% and there was no corresponding error in cost of goods sold.
-What is the effect of the error on the 2008 net profit?

Accepted Answer

A)  It is $3000 too high. 
B)  It is $1800 too high. 
C)  It is $1200 too high. 
D)  It is $3000 too low.

Question 19

Use the information below to answer the following questions:
The percentage of completion profit for a particular project of Redgate Ltd was $200 000 for year 1 and $220 000 for year 2 (completion).
-What difference would there be in profit for year 2 if the completion of production method were used?

Accepted Answer

A)  Profit would be $200 000 higher. 
B)  Profit would be $200 000 lower. 
C)  Profit would be $220 000 higher. 
D)  Profit would be $420 000 higher.

Question 20

Although revenue may be recognised at various points in the revenue generation sequence,it is normally recognised when:

Accepted Answer

A)  customers forward a firm order 
B)  the product is delivered to customer 
C)  the customer pays for the goods 
D)  the warranty period expires.

Exam 13: Revenue and Expense Recognition: Additional Concepts