Multiple Choice

11. At December 31, 2017, Bren Co. has the following deferred income tax items:

A deferred income tax liability of $15,000 related to a non-current asset

A deferred income tax asset of $3,000 related to a non-current liability

A deferred income tax asset of $8,000 related to a current liability

Which of the following should Bren report in the non-current section of its December 31, 2017 balance sheet?

a. A non-current liability of $4,000.

b. A non-current liability of $12,000.

c. A non-current asset of $3,000 and a non-current liability of $15,000.

d. A non-current asset of $11,000 and a non-current liability of $15,000.

12. A company accounts for a contract modification as a new contract if

a. the company has the right to receive an amount of consideration that reflects the standalone selling price

of the promised goods or services.

b. the promised goods and services are distinct.

c. the promised goods and services are distinct and the company has the right to receive an amount of

consideration that reflects the standalone selling price of the promised goods or services.

d. the prospective approach is used.

13. A loss in the current period on a contract expected to be profitable upon completion in a later year is:

a. recognized only under the completed-contract method.

b. recognized under both the completed-contract method and the percentage-of-completion method.

c. not recognized under either the completed-contract method or the percentage-of-completion method.

d. recognized only under the percentage-of-completion method.

14. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2018, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

a. Overstate, understate, understate

b. Overstate, overstate, overstate

c. Understate, overstate, overstate

d. Understate, understate, understate

15. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are

a. available-for-sale debt securities.

b. held-to-maturity debt securities.

c. trading debt securities.

d. never-sell debt securities.

16. An example of a permanent difference is

a. proceeds from life insurance on officers.

b. insurance expense for a life insurance policy on officers.

c. interest expense on money borrowed to invest in municipal bonds.

d. all of these answers are correct as they are all examples of permanent differences.

17. Kinnamont Company manufactures farming equipment that includes navigational systems as part of the standard equipment package and offers optional training on any navigational systems for an additional fee. Smith Company enters into a contract with Kinnamont that includes a combine, a navigational system, and training.

Identify the performance obligations to which Smith should allocate the transaction price:

a. The combine including the navigational system and the training as two separate performance obligations.

b. The combine, the navigational system, and the training as three separate performance obligations.

c. The combine, the navigational system, and the training account for one performance obligation because

they are all part of the same contract.

d. No performance obligations exist because the work on the contract, including the training has not begun.

18. FASB ASC 606, commonly referred to as the revenue recognition standard, includes all of the following in its five step process to recognize revenue except:

a. Identify the performance obligations in the contract.

b. Allocate the transaction price to the performance obligations in the contract.

c. Identify the contract with the customer.

d. Recognize revenue when (or as) the entity is paid for a performance obligation.

19. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?

Fair Value Method Equity Method

a. Decrease No Effect

b. Increase Decrease

c. No Effect No Effect

d. No Effect Decrease

20. Improper revenue recognition is the most common form of fraudulent financial reporting and is the most prevalent reason for accounting restatements for all of the following reasons except:

a. Management faces pressure to meet revenue expectations.

b. Revenue recognition is a complex process.

c. Identification of performance obligations may require judgment.

d. Revenue recognition is not prone to error because of management's focus on

proper revenue recognition.

21. In a bill-and-hold arrangement, which of the following is not one of the criteria which must be met for the customer to have obtained control of the product?

a. The product currently must be ready for physical transfer to the customer.

b. The reason for the bill-and-hold arrangement must be substantive.

c. The product must be physically located in the seller's warehouse.

d. The seller cannot have the ability to use the product or to direct it to another customer.

22. Festi Corp. is evaluating if revenue may be recognized for two of their contracts. The customer in Contract A has indicated that they are ready to accept the transfer of the products associated with the contract, but delivery has not yet occurred. The customer in Contract B has received legal title to the products, but has asked Festi to store the products for them until they open the new stores for which the product has been ordered. Festi has clearly labeled and set aside the products in the warehouse for the customer in Contract

B, but delivery has not yet occurred.

Should revenue be recognized for:

Contract A? Contract B?

a. No Yes

b. No No

c. Yes No

d. Yes Yes

23. Under the completed contract method, the Construction in Process account balance will consist of

a. gross profit only.

b. construction costs only.

c. construction costs and gross profit.

d. construction costs and billings.

24. Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet?

I. A revenue is deferred for financial reporting purposes but not for tax purposes.

II. A revenue is deferred for tax purposes but not for financial reporting purposes.

III. An expense is deferred for financial reporting purposes but not for tax purposes.

IV. An expense is deferred for tax purposes but not for financial reporting purposes.

a. items I and IV only.

b. items II and III only.

c. item II only.

d. items I and II only.

25. Minarski Electronics sells computers and provides hardware maintenance services. On April 1st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $840 and the one-year unlimited maintenance/repair service costs $360. How much revenue does Minarski Electronics recognize for the month ended April 30th, assuming that revenue is accrued monthly?

a. $1,000

b. $870

c. $30

d. $725