Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 1. Which of the following best describes the condition(s) that must be present for the recognition of revenue?
a.
|
The revenue must be earned, measurable, and collected.
|
b.
|
The revenue must be earned, measurable, and collectible.
|
c.
|
The revenue must be earned and collectible.
|
d.
|
The revenue must be measurable and collectible.
|
____ 2. Dilla Construction Company's projects extend over several years and collection of receivables is reasonably certain. Each project has a contract that specifies a price and the rights and obligations of all parties. Both the contractor and the customer are expected to fulfill their contractual obligations on each project. Reliable estimates can be made of the extent of progress and cost to complete each project. The method that the company should use to account for construction revenue is
a.
|
installment sales.
|
b.
|
percentage-of-completion.
|
c.
|
completed-contract.
|
d.
|
cost recovery.
|
____ 3. How should the balances of Progress Billings and Construction in Progress be shown at reporting dates prior to the completion of a long-term contract?
a.
|
Progress Billings as income, Construction in Progress as inventory.
|
b.
|
Net, as income from construction if credit balance, and loss from construction if debit balance.
|
c.
|
Progress Billings as deferred income, Construction in Progress as a current asset.
|
d.
|
Net, as a current asset if debit balance and current liability if credit balance.
|
____ 4. If the percentage-of-completion method is used, what is the basis for determining the gross profit to be recognized in the second year of a three-year contract?
a.
|
Cumulative actual costs incurred only.
|
b.
|
Incremental cost for the second year only.
|
c.
|
Cumulative actual costs and estimated costs to complete.
|
d.
|
No gross profit would be recognized in year 2.
|
____ 5. If the completed-contract method is used, what is the basis for determining the income to be recognized in the second year of a three-year contract?
a.
|
Cumulative actual costs incurred only.
|
b.
|
Incremental cost for the second year only.
|
c.
|
Latest available estimated costs.
|
d.
|
No income would be recognized in year 2.
|
____ 6. Which of the following would be used in the calculation of the gross profit recognized in the third and final year of a construction contract that is accounted for using the percentage-of-completion method?
|
Actual
|
|
Income
|
|
|
Contract
|
Total
|
Previously
|
|
|
Price
|
Costs
|
Recognized
|
|
a.
|
Yes Yes No
|
b.
|
Yes Yes Yes
|
c.
|
Yes No Yes
|
d.
|
No Yes Yes
|
| | | | | |
____ 7. The installment method of recognizing revenue
a.
|
should be used only in cases in which no reasonable basis exists for estimating the collectibility of receivables.
|
b.
|
is not a generally accepted accounting principle under any circumstances.
|
c.
|
should be used for book purposes only if it is used for tax purposes.
|
d.
|
is an acceptable alternative accounting principle for a firm that makes installment sales.
|
____ 8. Assume the percentage-of-completion method of revenue recognition is used on a long-term construction contract. Under this method, revenues that are earned but unbilled at the balance sheet date should be disclosed
a.
|
as a long-term receivable in the noncurrent assets section of the balance sheet.
|
b.
|
only as a footnote disclosure until the customer is billed for the percentage of work completed.
|
c.
|
as construction in progress in the current assets section of the balance sheet.
|
d.
|
as construction in progress in the noncurrent assets section of the balance sheet.
|
____ 9. When using the installment sales method,
a.
|
gross profit is deferred until all cash is received, but revenues and costs are recognized in proportion to the cash collected from the sale.
|
b.
|
gross profit is recognized only after the amount of cash collected exceeds the cost of the item sold.
|
c.
|
revenue, costs, and gross profit are recognized proportionally as the cash is received from the sale of product.
|
d.
|
total revenues and costs are recognized at the point of sale, but gross profit is deferred in proportion to the cash that is uncollected from the sale.
|
____ 10. The completed-contract method of accounting for long-term construction-type contracts is preferable when
a.
|
a contractor is involved in numerous projects.
|
b.
|
the contracts are of a relatively long duration.
|
c.
|
estimates of costs to complete and extent of progress toward completion are reasonably dependable.
|
d.
|
there are inherent uncertainties in the contract beyond normal business risks.
|
____ 11. Which of the following is not a difference between the percentage-of completion and completed-contract methods of accounting for long-term construction contracts?
a.
|
They report different amounts for inventory during the construction period.
|
b.
|
They report different amounts for progress billings during the construction period.
|
c.
|
They cause a different cash inflow during the construction period.
|
d.
|
They report different amounts for accounts receivable during the construction period.
|
____ 12. The theoretical support for using the percentage-of-completion method of accounting for long-term construction projects is that it
a.
|
is more conservative than the completed-contract method.
|
b.
|
reports a lower Net Income figure than the completed-contract method.
|
c.
|
more closely conforms to the cost principle.
|
d.
|
produces a realistic matching of expenses with revenues.
|
____ 13. If a company uses the completed-contract method of accounting for long-term construction contracts, then during the period of construction, financial information related to a long-term contract will
a.
|
appear on both the income statement and balance sheet during the construction period.
|
b.
|
appear only on the income statement during the period of construction.
|
c.
|
appear only on the balance sheet during the period of construction.
|
d.
|
not appear on the financial statements.
|
____ 14. When the percentage-of-completion method of accounting for long-term construction projects is used, why is Construction in Progress increased by the annual recognized gross profit on long-term construction contracts?
a.
|
The cost of the contract has increased.
|
b.
|
The project's value has increased above cost.
|
c.
|
The economy experiences inflation over the construction period.
|
d.
|
Construction in Progress is not increased by the annual recognized profit.
|
____ 15. When comparing the percentage-of-completion and completed-contract methods of accounting for long-term construction contracts, both methods will report
a.
|
the same balances each period in the Progress Billings account.
|
b.
|
the same expense for cost of construction each year.
|
c.
|
the same amount of income in the year of completion.
|
d.
|
the same inventory carrying value each year during the construction period.
|
____ 16. The cost recovery method
a.
|
is used only when circumstances surrounding a sale are so uncertain that earlier recognition is impossible.
|
b.
|
is the most common method of accounting for real estate sales.
|
c.
|
is similar to percentage-of-completion accounting.
|
d.
|
is never acceptable under generally accepted accounting principles.
|
____ 17. Franchise fees are properly recognized as revenue
a.
|
when received in cash.
|
b.
|
when a contractual agreement has been signed.
|
c.
|
after the franchise business has begun operations.
|
d.
|
after the franchiser has substantially performed its service.
|
____ 18. Goods on consignment should be included in the inventory of
a.
|
the consignor but not the consignee.
|
b.
|
both the consignor and the consignee.
|
c.
|
the consignee but not the consignor.
|
d.
|
neither the consignor nor the consignee.
|
____ 19. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be recognized by the
a.
|
consignor when the goods are shipped to the consignee.
|
b.
|
consignee when the goods are shipped to the third party.
|
c.
|
consignor when notification is received the consignee has sold the goods.
|
d.
|
consignee when cash is received from the customer.
|
____ 20. A company uses the percentage-of-completion method to account for a four year construction contract. Progress billings sent in the second year that were collected in the third year would
a.
|
be included in the calculation of the income recognized in the second year.
|
b.
|
be included in the calculation of the income recognized in the third year.
|
c.
|
be included in the calculation of the income recognized in the fourth year.
|
d.
|
not be included in the calculation of the income recognized in any year.
|
____ 21. In accounting for a long-term construction contract for which there is a projected profit, the balance in the Construction in Progress account at the end of the first year of work using the percentage-of-completion method would be
a.
|
zero.
|
b.
|
the same as the completed-contract method.
|
c.
|
higher than the completed-contract method.
|
d.
|
lower than the completed-contract method.
|
____ 22. On May 1, 2009, Green Construction Company entered into a fixed-price contract to construct an apartment building for P3,000,000. Green appropriately accounts for this contract under the percentage-of-completion method. Information relating to the contract is as follows:
|
2009
|
2010
|
At December 31:
|
|
|
Percentage of completion ........
|
20%
|
60%
|
Estimated costs at completion ...
|
P2,250,000
|
P2,400,000
|
Income recognized (cumulative) ..
|
P 150,000
|
P 360,000
|
What is the amount of contract costs incurred during the year ended December 31, 2010?
a.
|
P600,000
|
b.
|
P960,000
|
c.
|
P990,000
|
d.
|
P1,440,000
|
____ 23. C & J Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. Last year C & J started work on a P4,500,000 construction contract, which was completed this year. The accounting records disclosed the following data for last year:
Progress billings .....................................
|
P1,650,000
|
Costs incurred ........................................
|
1,350,000
|
Collections ...........................................
|
1,050,000
|
Estimated cost to complete ............................
|
2,700,000
|
How much income should C & J have recognized on this contract last year?
a.
|
P105,000
|
b.
|
P150,000
|
c.
|
P300,000
|
d.
|
P350,000
|
____ 24. Jessup Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. During 2009, Jessup started work on a P1,500,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2009:
Costs incurred ........................................
|
P 465,000
|
Estimated cost to complete ............................
|
1,085,000
|
Progress billings .....................................
|
550,000
|
Collections ...........................................
|
350,000
|
How much loss should Jessup have recognized in 2009?
a.
|
P15,000
|
b.
|
P35,000
|
c.
|
P50,000
|
d.
|
P115,000
|
____ 25. Shepard Construction Company has consistently used the percentage-of- completion method. On January 10, 2009, Shepard began work on a P3,000,000 construction contract. At the inception date, the estimated cost of construction was P2,250,000. The following data relate to the progress of the contract:
Gross profit recognized at December 31, 2009 ..........
|
P 300,000
|
Costs incurred Jan. 10, 1999, through Dec. 31, 2010 ...
|
1,800,000
|
Estimated cost to complete at December 31, 2010 .......
|
600,000
|
How much gross profit should Shepard recognize for the year ended December 31, 2010?
a.
|
P150,000
|
b.
|
P262,500
|
c.
|
P300,000
|
d.
|
P450,000
|
____ 26. For a construction firm using the completed-contract method, if costs exceed billings on some contracts by P1,000,000 and billings exceed costs by P800,000 on others, the contracts should ordinarily be reported as a
a.
|
current asset of P200,000.
|
b.
|
current liability of P200,000.
|
c.
|
current asset of P1,000,000 less a contra-current asset of P800,000.
|
d.
|
current asset of P1,000,000 and a current liability of P800,000.
|
____ 27. Salmon Construction Company uses the percentage-of-completion method of accounting. In 2009, Salmon began work on a project which had a contract price of P1,600,000 and estimated costs of P1,200,000. Additional information is as follows:
|
2009
|
2010
|
Costs incurred during the year ............
|
P240,000
|
P1,060,000
|
Estimated costs to complete, as of
12/31/09 ................................
|
960,000
|
|
Billings during the year ..................
|
290,000
|
1,310,000
|
Collections during the year ...............
|
250,000
|
1,200,000
|
The amount of gross profit Salmon should recognize on this contract during 2009 is
a.
|
P40,000.
|
b.
|
P80,000.
|
c.
|
P100,000.
|
d.
|
P200,000.
|
____ 28. Brown Construction Company uses the percentage-of-completion method for long-term construction contracts. A specific job was begun in 2009 and completed in 2011. The contract price was P1,400,000 and cost information as of each year-end is given below:
|
2009
|
2010
|
2011
|
End of year estimated cost to
complete ......................
|
P400,000
|
P200,000
|
P 0
|
Annual cost incurred ............
|
400,000
|
400,000
|
120,000
|
Assuming Brown correctly recorded gross profit in 2009, how much gross profit should the company record in 2010?
a.
|
P0
|
b.
|
P20,000
|
c.
|
P300,000
|
d.
|
P320,000
|
____ 29. The following data relate to a construction job started by Worthington Co. during 2009:
Total contract price ..................................
|
P300,000
|
Actual costs incurred during 2009 .....................
|
60,000
|
Estimated remaining costs .............................
|
120,000
|
Billed to customer during 2009 ........................
|
90,000
|
Received from customer during 2010 ....................
|
30,000
|
Under the completed-contract method, how much should Worthington recognize as gross profit for 2009?
a.
|
P0
|
b.
|
P30,000
|
c.
|
P40,000
|
d.
|
P90,000
|
____ 30. The following data relate to a construction job started by Worthington Co. during 2009:
Total contract price ..................................
|
P300,000
|
Actual costs incurred during 2009 .....................
|
60,000
|
Estimated remaining costs .............................
|
120,000
|
Billed to customer during 2009 ........................
|
90,000
|
Received from customer during 2009 ....................
|
30,000
|
Under the percentage-of-completion method, how much should Worthington recognize as gross profit for 2009?
a.
|
P0
|
b.
|
P40,000
|
c.
|
P80,000
|
d.
|
P100,000
|
____ 31. Rainbow Construction Company uses the percentage-of-completion method for long-term construction contracts. The company started a project with a contract price of P2,750 in 2009. Given the following data, what is the balance in Construction in Progress for this contract at the end of 2009?
|
2009
|
2010
|
Costs incurred this year ..................
|
P 400
|
P 500
|
Total estimated costs remaining at end
of year .................................
|
1,600
|
1,000
|
a.
|
P150
|
b.
|
P400
|
c.
|
P550
|
d.
|
P1,750
|
____ 32. Lake Construction Company uses the percentage-of-completion method for long-term construction contracts. The company has a project with a contract price of P7,000 on which P600 of gross profit has been recognized in prior years. Information for the current year is as follows:
Total cost incurred through current year ...............
|
P5,000
|
Estimated costs remaining at end of current year .......
|
2,800
|
What is the loss that Lake should recognize in the current year?
a.
|
P600
|
b.
|
P800
|
c.
|
P1,400
|
d.
|
No loss should be recognized.
|
____ 33. Brooke Company began operations on January 1, 2009, and uses the installment sales method of accounting. The company has the following information available for 2009 and 2010:
|
2009
|
2010
|
Installment sales .........................
|
P4,500,000
|
P5,400,000
|
Gross profit on sales .....................
|
30%
|
40%
|
Cash collections on 2009 sales ............
|
1,500,000
|
3,600,000
|
Cash collections on 2010 sales ............
|
|
4,200,000
|
The realized gross profit for 2010 would be
a.
|
P1,680,000.
|
b.
|
P2,760,000.
|
c.
|
P3,120,000.
|
d.
|
P4,320,000.
|
____ 34. Lake Construction Company uses the completed-contract method for long-term construction contracts. The information for a specific contract as of January 1, 2009, is shown below.
Costs incurred to date ................................
|
P 700,000
|
Contract price ........................................
|
2,000,000
|
Estimated remaining cost to complete ..................
|
800,000
|
P600,000 of cost was incurred during 2009 and on December 31, 2009, the estimated remaining cost to complete was still P800,000. The correct balance for the Construction in Progress at December 31, 2009 is
a.
|
P600,000.
|
b.
|
P700,000.
|
c.
|
P1,200,000.
|
d.
|
P1.300,000.
|
____ 35. In 2009, Aldaus Corp. began construction work under a three-year contract. The contract price is P800,000. Aldaus used the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial presentations relating to this contract at December 31, 2009, appear below.
Balance Sheet
|
Accounts receivable--construction contract
billings ..................................
|
|
P15,000
|
Construction in progress ....................
|
P50,000
|
|
Less contract billings ......................
|
(47,000)
|
|
Cost of uncompleted contract in excess of
billings ..................................
|
|
3,000
|
|
|
|
Income Statement
|
Income (before tax) on the contract
recognized in year 1 ......................
|
|
P10,000
|
How much cash was collected in 2009 on this contract?
a.
|
P32,000
|
b.
|
P35,000
|
c.
|
P47,000
|
d.
|
P50,000
|
____ 36. Paral Company began operations on January 2, 1999, and appropriately used the installment sales method of accounting. The following data are available for 2009 and 2010:
|
2009
|
2010
|
Installment sales ..........................
|
P3,000,000
|
P3,600,000
|
Gross profit on sales ......................
|
30%
|
40%
|
Cash collections from:
|
|
|
2009 sales ...............................
|
P1,000,000
|
P1,200,000
|
2010 sales ...............................
|
--
|
P1,400,000
|
The realized gross profit for 2010 is
a.
|
P1,440,000.
|
b.
|
P1,040,000.
|
c.
|
P920,000.
|
d.
|
P780,000.
|
____ 37. Wedtec Enterprises, which began operations on January 1, appropriately uses the installment method of accounting. The following information is available for its first year:
Gross profit on sales .................................
|
40%
|
Deferred gross profit at December 31 ..................
|
P120,000
|
Cash collected, including down payments ...............
|
P225,000
|
What is the total amount of Wedtec's installment sales for the first year?
a.
|
P300,000
|
b.
|
P345,000
|
c.
|
P425,000
|
d.
|
P525,000
|
____ 38. Leno Distributing, which began operating on January 1, appropriately uses the installment method of accounting. The following information pertains to Leno's operations for the first year:
Installment sales ......................................
|
P1,000,000
|
Cost of installment sales ..............................
|
600,000
|
General and administrative expenses ....................
|
100,000
|
Collections on installment sales .......................
|
200,000
|
The balance in the deferred gross profit account at December 31 should be
a.
|
P400,000.
|
b.
|
P320,000.
|
c.
|
P240,000.
|
d.
|
P200,000.
|
____ 39. On January 3, 2009, Lincoln Services, Inc., signed an agreement authorizing Lisa Company to operate as a franchisee over a 20-year period for an initial franchise fee of P100,000 received when the agreement was signed. Lisa commenced operations on July 1, 2009, at which date all of the initial services required of Lincoln had been performed. The agreement also provides that Lisa must pay a continuing franchise fee equal to 5% of the revenue from the franchise annually to Lincoln. Lisa's franchise revenue for 2009 was P800,000. For the year ended December 31, 2009, how much should Lincoln record as revenue from franchise fees in respect of the Lisa franchise?
a.
|
P140,000
|
b.
|
P90,000
|
c.
|
P45,000
|
d.
|
P42,500
|
____ 40. Assume the Randall Corporation sold P30,000 worth of merchandise on the installment basis. The cost of the merchandise was P24,000, and collectibility of the receivable is uncertain. Collection in the current year on the account is P8,000. How much gross profit should be reported as realized?
a.
|
P1,600
|
b.
|
P2,000
|
c.
|
P6,000
|
d.
|
P8,000
|
____ 41. On November 30, Northrup Company consigned 90 freezers to Watson Company for sale at P1,600 each and paid P1,200 in transportation costs. A report of sales was received on December 30 from Watson reporting the sale of 20 freezers, together with a remittance of the P27,200 balance due. The remittance was net of the agreed 15% commission. How much, and in what month, should Northrup recognize as consignment sales revenue?
a.
|
P0 P32,000
|
b.
|
P0 P27,200
|
c.
|
P144,000 P0
|
d.
|
P142,800 P0
|
____ 42. Layton Construction Company has consistently used the percentage-of completion method of recognizing income. During 2010, Layton entered into a fixed-price contract to construct an office building for P10,000,000. Information relating to the contract is as follows:
|
December 31
|
|
2009
|
2010
|
Percentage of completion ..............
|
20%
|
60%
|
Estimated total cost at completion ....
|
P7,500,000
|
P8,000,000
|
Income recognized (cumulative) ........
|
500,000
|
1,200,000
|
Contract costs incurred during 2010 were
a.
|
P3,200,000.
|
b.
|
P3,300,000.
|
c.
|
P3,500,000.
|
d.
|
P4,800,000.
|
____ 43. Hillson Company began operations on January 1, 2009, and appropriately uses the installment method of accounting. The following data are available for 2009 and 2010:
|
2009
|
2010
|
Installment sales .....................
|
P1,200,000
|
P1,500,000
|
Cash collections from:
|
|
|
2009 sales ..........................
|
400,000
|
500,000
|
2010 sales ..........................
|
--
|
600,000
|
Gross profit on sales .................
|
30%
|
40%
|
The realized gross profit for 2010 is
a.
|
P240,000.
|
b.
|
P390,000.
|
c.
|
P440,000.
|
d.
|
P600,000.
|
____ 44. Seahawks, Inc. had the following consignment transactions during December:
Inventory shipped on consignment to Ashe Company ........
|
P18,000
|
Freight paid by Seahawks ................................
|
900
|
Inventory received on consignment from Fenn Company .....
|
12,000
|
Freight paid by Fenn ....................................
|
500
|
No sales of consigned goods were made through December 31. Seahawks' December 31 balance sheet should include consigned inventory at
a.
|
P18,900.
|
b.
|
P18,000.
|
c.
|
P12,500.
|
d.
|
P12,000.
|
Answer Section
MULTIPLE CHOICE
1. B
2. B
3. D
4. C
5. D
6. B
7. A
8. C
9. D
10. D
11. C
12. D
13. C
14. B
15. A
16. A
17. D
18. A
19. C
20. D
21. C
22. C
23. B
24. C
25. A
26. D
27. B
28. B
29. A
30. B
31. C
32. C
33. B
34. C
35. A
36. C
37. D
38. B
39. A
40. A
41. A
42. B
43. B
44. A
