Chapter 18

Question 0

What are revenues?

Answer 0

Are inflows of assets and/or settlements of liabilities from delivering or producing goods, rendering services, or other earnings activities that constitute a company’s ongoing major or central operations during a period

Question 1

When is revenue recognized?

Answer 1

When it is realized or realizable and earned

Question 2

What is recognition?

Answer 2

The process of formally recording or incorporating an item in the accounts of an entity

Question 3

When is revenue considered realized?

Answer 3

When goods and services are exchanged for cash or claims to cash (receivables)

Question 4

When is revenue considered realizable?

Answer 4

When assets received in exchange are readily convertible to known amounts of cash or claims to cash

Question 5

When is revenue considered earned?

Answer 5

When a company has substantially accomplished what it must do to be entitled to the benefits represented by the revenue, that is, when the earning process is complete or virtually complete

Question 6

What is a violation of the revenue recognition principle?

Answer 6

Accounting for construction contracts

Question 7

What is done with construction contract revenue?

Answer 7

Recognized prematurely

Question 8

What is done with installment sale revenue?

Answer 8

Defer revenue because unsure if it is collectible

Question 9

What approach is used to account for construction contracts under the percentage of completion method?

Answer 9

Cost dollar approach

Question 10

What kind of account is the construction in process account?

Answer 10

Asset account

Question 11

What journal entry is made to record costs of construction under the percentage of completion method?

Answer 11

Debit construction in process, and credit materials, cash, payables, etc. for costs incurred to date

Question 12

What kind of account is billings on construction?

Answer 12

Contra-asset account to construction in process

Question 13

How are construction in process and billings on construction presented on balance sheet?

Answer 13

Billings on construction and construction in process netted on balance sheet

Question 14

How are progress billings recorded under the percentage of completion method?

Answer 14

Debit accounts receivable and credit billings on construction for amount of progress billings

Question 15

What journal entry is made to record collections under the percentage of completion method?

Answer 15

Debit cash and credit accounts receivable for amount of cash collected

Question 16

What journal entry is made to recognize revenue and gross profit?

Answer 16

Debit or credit construction in process for gross profit to be recognized and debit construction expense for costs recorded in period and credit or debit revenue from long term contracts for revenue recognized

Question 17

What journal entry is made to record final approval of a contract under the percentage of completion method?

Answer 17

Debit billings on construction and credit construction in process for amount of contract

Question 18

What happens in the event of a negative construction or loss?

Answer 18

Debit revenue account and credit construction in process

Question 19

When is the final approval of contract recorded?

Answer 19

Recorded in the last year only

Question 20

Percentage of completion formula

Answer 20

Costs to date/total projected cost

Question 21

Revenue to be recognized formula

Answer 21

Contract price x percent completed - revenue recognized in prior period

Question 22

Gross profit to be recognized formula

Answer 22

(Cash collected x percent completed) - gross profit recognized in prior period

Question 23

What is the difference between the completed contract method and percentage of completion method?

Answer 23

Timing if recognition of revenue, no revenue recognized until very end

Question 24

What journal entry is used to record final approval of contract under completed contract method?

Answer 24

Debit billings on construction and credit revenues from long- term contracts for amount of contract

Question 25

What journal entry is used to record expenses of contract under percentage of completion method?

Answer 25

Debit construction expense and credit construction in process for total costs incurred

Question 26

What are the similarities between the percentage of completion method and the completed contract method?

Answer 26

Similar accounts used, same revenues used, same expenses used, same profit

Question 27

What are installment sales?

Answer 27

Moderately conservative method of collecting on bad debts

Question 28

What journal entry is made when installment sales are made?

Answer 28

Debit installment accounts receivable and credit installment sales for amount of sale

Question 29

What journal entry is made when cash is collected for installment sales?

Answer 29

Debt cash and credit installment accounts receivable for amount of cash collected

Question 30

What journal entry is made to record cost of goods sold for installment sales?

Answer 30

Debit cost of installment sales and credit inventory

Question 31

What journal entry is made To close installment accounts?

Answer 31

Debit installment sales for amount of sale and credit cost of installment sales for cost and deferred gross profit for difference between sale amount and cost

Question 32

WHat journal entry is made to record realized gross profit?

Answer 32

Debit deferred gross profit for gross profit collected and credit realized gross profit

Question 33

What journal entry is made to close the accounts at the end of the period?

Answer 33

Debit realized gross profit and credit income summary for amount of deferred profit collected

Question 34

Amount of deferred gross profit calculation

Answer 34

Accounts receivable collected x gross profit percentage

Question 35

Gross profit percentage calculation

Answer 35

Gross profit/installment sales

Question 36

When are installment sales mostly seen?

Answer 36

During a hurting economy

Question 37

What are the three types of installment sales?

Answer 37

Regular sale with collection, default sale, and default sake with damage to property

Question 38

What kind of account is deferred gross profit?

Answer 38

Liability until customer pays

Question 39

How does increased revenue effect the financials?

Answer 39

Increases net income, earnings per share, share price, and therefore increases share based compensation

Question 40

What is required for a contract to be considered special?

Answer 40

Multiple accounting years with a 2 year minimum and must involve very material dollar amounts

Question 41

What two requirements must e met to use percentage of completion method?

Answer 41

Reliable estimates which relates to earning and reasonable certainty of collection which relates to realizability

Question 42

What is the secondary method of accounting for contracts?

Answer 42

Completed contract method

Question 43

When is revenue recognized under the completed contract method?

Answer 43

When the project is complete

Question 44

Explain the IFRS standard for contracts.

Answer 44

Require all companies to use the percentage of completion an completed contracts method is not allowed

Question 45

When are installment sales used?

Answer 45

When there is doubt about the ability to pay

Question 47

What is the cost recovery method?

Answer 47

Worst case scenario, most companies do not use this, no profit recognized

Question 48

What kind of account is deferred gross profit?

Answer 48

Liability account until customer pays

Question 49

What happens if there are damages or restoration costs associated with the repossession of inventory?

Answer 49

record the inventory at net fair value by subtracting all costs of damages and restoration

Question 50

What are installment sales driven by?

Answer 50

by customers ability or inability to pay

Question 51

What are the three ways to handle installment sales?

Answer 51

1) recognize all profits and pretend the doubt does not exist (never do this), 2) cost-recovery method: no recognition and ultra-conservative, 3) installment sales approach: based on gross profit %, moderately conservative and have deferred gross profit