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Questions and Answers of Accounting

What are the two general criteria that must be satisfied before a company can recognize revenue?
Explain why, in most cases, a seller recognizes revenue when it delivers its product rather than when it produces the product.
Revenue recognition for most installment sales occurs at the point of delivery of the product or service. Under what circumstances would a seller delay revenue recognition for installment sales
Distinguish between the installment sales method and the cost recovery method of accounting for installment sales.
How does a company report deferred gross profit resulting from the use of the installment sales method in its balance sheet?
Revenue recognition for most product sales that allow the right of return occurs at the point of product delivery. Under what circumstances would revenue recognition be delayed?
Describe a consignment sale. When does a consignor recognize revenue for a consignment sale?
Service revenue is recognized either at one point in time or over extended periods. Explain the rationale for recognizing revenue using these two approaches.
Distinguish between the percentage-of-completion and completed contract methods of accounting for long-term contracts with respect to income recognition. Under what circumstances should a company use
When percentage-of-completion accounting is not appropriate, U.S. GAAP requires the use of the completed contract method, while IFRS requires the use of the cost recovery method. Explain how the two
Periodic billings to the customer for a long-term construction contract are recorded as billings on construction contract. How is this account reported in the balance sheet?
Briefly describe the guidelines for recognizing revenue from the sale of software and other multiple-deliverable arrangements.
Briefly describe how IFRS guidelines for recognizing revenue from multiple-deliverable arrangements differ from U.S. GAAP guidelines.
Briefly describe the guidelines provided by GAAP for the recognition of revenue by a franchisor for an initial franchise fee.
Show the calculation of the following activity ratios: (1) The receivables turnover ratio, (2) The inventory turnover ratio, and (3) The asset turnover ratio. What information about a company do
Show the calculation of the following profitability ratios: (1) The profit margin on sales, (2) The return on assets, and (3) The return on shareholders' equity.What information about a company do
Show the DuPont framework's calculation of the three components of return on shareholders' equity. What information about a company do these ratios offer?
Interim reports are issued for periods of less than a year, typically as quarterly financial statements. Should these interim periods be viewed as separate periods or integral parts of the annual
On July 1, 2011, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000. The book value of the land on Apache's books was $1,200,000. Terms of the sale required a
Refer to the situation described in BE 5-1. How much gross profit will Apache recognize in both 2011 and 2012 applying the installment sales method?In BE 5-1, On July 1, 2011, Apache Company
Refer to the situation described in BE 5-1. How much gross profit will Apache recognize in both 2011 and 2012 applying the cost recovery method?In BE 5-1, On July 1, 2011, Apache Company sold a
Refer to the situation described in BE 5-1. What should be the balance in the deferred gross profit account at the end of 2012 applying the installment sales method?In BE 5-1, On July 1, 2011,
Meyer Furniture sells office furniture mainly to corporate clients. Customers who return merchandise within 90 days for any reason receive a full refund. Discuss the issues Meyer must consider in
A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to
Refer to the situation described in BE 5-6. During the first year the company billed its customer $7 million of which $5 million was collected before year-end. What would appear in the year-end
Refer to the situation described in BE 5-6. The building was completed during the second year. Construction costs incurred during the second year were $10 million. How much gross profit will the
Refer to the situation described in BE 5-8. How much revenue, cost, and gross profit will the company recognize in the first and second year of the contract applying the cost recovery method that is
Franklin Construction entered into a fixed-price contract to build a freeway-connecting ramp for $30 million. Construction costs incurred in the first year were $16 million and estimated costs to
Orange, Inc., sells a LearnIt-Plus software package that consists of their normal LearnIt math tutorial program along with a one-year subscription to the on-line LearnIt Office Hours virtual
Refer to the situation described in BE 5-11. How would your answer change if Orange reported under IFRS?In BE 5-11, Orange, Inc., sells a LearnIt-Plus software package that consists of their normal
Collins, Inc., entered into a 10-year franchise agreement with an individual. For an initial franchise fee of $40,000, Collins agrees to assist in design and construction of the franchise location
Universal Calendar Company began the year with accounts receivable and inventory balances of $100,000 and $80,000, respectively. Year-end balances for these accounts were $120,000 and $60,000,
The 2011 income statement for Anderson TV and Appliance reported sales revenue of $420,000 and net income of $65,000. Average total assets for 2011 was $800,000. Shareholders' equity at the beginning
Refer to the facts described in BE 5-15. Show the DuPont framework's calculation of the three components of the 2011 return on shareholders' equity for Anderson TV and Appliance.In BE 5-15, the 2011
During 2011, Rogue Corporation reported sales revenue of $600,000. Inventory at both the beginning and end of the year totaled $75,000. The inventory turnover ratio for the year was 6.0. What amount
Alpine West, Inc. operates a downhill ski area near Lake Tahoe, California. An all-day, adult ticket can be purchased for $55. Adult customers also can purchase a season pass that entitles the pass
Charter Corporation, which began business in 2011, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales made during 2011
Charter Corporation, which began business in 2011, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales during 2011 and
On July 1, 2011, the Foster Company sold inventory to the Slate Corporation for $300,000. Terms of the sale called for a down payment of $75,000 and three annual installments of $75,000 due on each
On July 1, 2011, the Foster Company sold inventory to the Slate Corporation for $300,000. Terms of the sale called for a down payment of $75,000 and three annual installments of $75,000 due on each
Wolf Computer Company began operations in 2011. The company allows customers to pay in installments for many of its products. Installment sales for 2011 were $1,000,000. If revenue is recognized at
Sanchez Development Company uses the installment sales method to account for some of its installment sales. On October 1, 2011, Sanchez sold a parcel of land to the Kreuze Corporation for $4 million.
On April 1, 2011, the Apex Corporation sold a parcel of underdeveloped land to the Applegate Construction Company for $2,400,000. The book value of the land on Apex's books was $480,000. Terms of the
AssumeÂ Nortel NetworksÂ contracted to provide a customer with Internet infrastructure for $2,000,000. The project began in 2011 and was completed in 2012. Data relating to the contract
On June 15, 2011, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington D.C. for $220 million. The expected completion date is April 1 of
On February 1, 2011, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2011, costs of $2,000,000 were incurred with
On February 1, 2011, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2011, costs of $2,000,000 were incurred with
Brady Construction Company contracted to build an apartment complex for a price of $5,000,000. Construction began in 2011 and was completed in 2013. The following are a series of independent
In 2011, Long Construction Corporation began construction work under a three-year contract. The contract price is $1,600,000. Long uses the percentage-of-completion method for financial reporting
Easywrite Software Company shipped software to a customer on July 1, 2011. The arrangement with the customer also requires the company to provide technical support over the next 12 months and to ship
Richardson Systems sells integrated bottling manufacturing systems that involve a conveyer, a labeler, a filler, and a capper. All of this equipment is sold separately by other vendors, and the fair
Assume the same facts as in E 5-16, but that Richardson Systems reports under IFRS. How would your answers change?In E 5-16, Richardson Systems sells integrated bottling manufacturing systems that
On October 1, 2011, the Submarine Sandwich Company entered into a franchise agreement with an individual. In exchange for an initial franchise fee of $300,000, Submarine will provide initial services
Listed below are several terms and phrases associated with revenue recognition and profitability analysis. Pair each item from List A (by letter) with the item from List B that is most appropriately
The following is a portion of the condensed income statement for Rowan, Inc., a manufacturer of plastic containers:Required:1. Determine Rowan's inventory turnover.2. What information does this
The 2011 income statement of Anderson Medical Supply Company reported net sales of $8 million, cost of goods sold of $4.8 million, and net income of $800,000. The following table shows the company's
The following condensed information was reported by Peabody Toys, Inc., for 2011 and 2010:Required:1. Determine the following ratios for 2011:a. Profit margin on salesb. Return on assetsc. Return on
This exercise is based on the Peabody Toys, Inc., data from Exercise 5-22.Required:1. Determine the following components of the DuPont framework for 2011:a. Profit margin on sales.b. Asset
Joplin Laminating Corporation reported income before income taxes during the first three quarters and management's estimates of the annual effective tax rate at the end of each quarter as shown
Security-Rand Corporation determines executive incentive compensation at the end of its fiscal year. At the end of the first quarter, management estimated that the amount will be $300 million.
Shields Company is preparing its interim report for the second quarter ending June 30. The following payments were made during the first two quarters:Required:For each expenditure indicate the amount
The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles.Required:1. Obtain the relevant authoritative literature on
Access the FASB's Codification Research System at the FASB website (www.fasb.org).Required:Determine the specific citation for accounting for each of the following items:1. When a provision for
The following questions are used in the Kaplan CPA Review Course to study revenue recognition while preparing for the CPA examination. Determine the response that best completes the statements or
The following questions dealing with income measurement are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the
Reagan Corporation computed income from continuing operations before income taxes of $4,200,000 for 2011.The following material items have not yet been considered in the computation of income:1. The
Ajax Company appropriately accounts for certain sales using the installment sales method. The perpetual inventory system is used. Information related to installment sales for 2011 and 2012 is as
On August 31, 2011, the Silva Company sold merchandise to the Bendix Corporation for $500,000. Terms of the sale called for a down payment of $100,000 and four annual installments of $100,000 due on
Mulcahey Builders (MB) remodels office buildings in low-income urban areas that are undergoing economic revitalization. MB typically accepts a 25% down payment when they complete a job and a note,
In 2011, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2013. Information related to the contract is
This is a variation of Problem 5-5 modified to focus on the completed contract method.In problem 5-5, In 2011, the Westgate Construction Company entered into a contract to construct a road for Santa
This is a variation of the Problem 5-5 modified to focus on IFRS.In problem 5-5, In 2011, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for
Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2011, to construct a four-story office building. At that time, Curtiss estimated that it
Citation Builders, Inc. builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging
Olive Branch Restaurant Corporation sells franchises throughout the western states. On January 30, 2011, the company entered into the following franchise agreement with Jim and Tammy Masters:1. The
Financial statements for Askew Industries for 2011 are shown below:Required:Calculate the following ratios for 2011.1. Inventory turnover ratio2. Average days in inventory3. Receivables turnover
Presented below are condensed financial statements adapted from those of two actual companies competing in the pharmaceutical industry—Johnson and Johnson (J&J) and Pfizer, Inc. ($ in
Cadux Candy Company's income statement for the year ended December 31, 2011, reported interest expense of $2 million and income tax expense of $12 million. Current assets listed in its balance sheet
Presented below are condensed financial statements adapted from those of two actual companies competing as the primary players in a specialty area of the food manufacturing and distribution
Branson Electronics Company is a small, publicly traded company preparing its first quarter interim report to be mailed to shareholders. The following information for the quarter has been
n May 2001, the Securities and Exchange Commission sued the former top executives at Sunbeam, charging the group with financial reporting fraud that allegedly cost investors billions in losses.
Revenue earned by a business enterprise is recognized for accounting purposes at different times, according to the circumstances. In some situations, revenue is recognized approximately, as it is
Mega Fitness, Inc., operates fitness centers throughout the Western states. Members pay a nonrefundable, initial fee of $100, as well as a monthly fee of $40. As an option, a member could reduce the
Apex Computer Company manufactures and sells large, mainframe computers. The computers range in price from $1 to $3 million and gross profit averages 40% of sales price. The company has a liberal
An article published in Accounting Horizons describes the current accounting practices and disclosures for long-term contracts for the Fortune 500 companies.Required:In your library or from some
An article published in Accounting Horizons describes various techniques that companies use to manage their earnings.Required:In your library or from some other source, locate the article “How Are
Horizon Corporation manufactures personal computers. The company began operations in 2002 and reported profits for the years 2004 through 2009. Due primarily to increased competition and price
On October 1, 2011, the Marshall Company sold a large piece of machinery to the Hammond Construction Company for $80,000. The cost of the machine was $40,000. Hammond made a down payment of $10,000
As part of its crackdown on earnings management, the SEC issued Staff Accounting Bulletin No. 101 to provide additional guidance on when revenue should be recognized. Consider the following
Many companies sell products allowing their customers the right to return merchandise if they are not satisfied. Because the return of merchandise can retroactively negate the benefits of having made
The birth of the Internet in the 1990s led to the creation of a new industry of online retailers such as Amazon, Overstock.com, and PC Mall, Inc. Many of these companies often act as intermediaries
Each of the following situations concerns revenue recognition for services.1. Delta Airlines books a reservation for a roundtrip flight to Orlando for Ming Tsai on April 12. Delta charges the $425 to
Two accounting students were discussing the alternative methods of accounting for long-term construction contracts. The discussion focused on which method was most like the typical revenue
Willingham Construction is in the business of building high-priced, custom, single-family homes. The company, headquartered in Anaheim, California, operates throughout the Southern California area.
Vodafone Group, Plc, headquartered in the United Kingdom, is one of the world's largest telecommunications companies. Excerpts from the revenue recognition disclosure included in its 2009 annual
ThyssenKrupp AG, headquartered in Germany, is one of the world's biggest technology companies, with more than 199,000 employee’s worldwide and primary segments in steel, technology, and capital
EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, and forwarding of submissions by companies and others who are required by
Performance and profitability of a company often are evaluated using the financial information provided by a firm's annual report in comparison with other firms in the same industry. Ratios are
You are a part-time financial advisor. A client is considering an investment in common stock of a waste recycling firm. One motivation is a rumor the client heard that the company made huge
You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recall from your auditing class that CPAs often use ratios to test the reasonableness of

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