1. The principal advantage of the completed-contract method is that
   1. reported revenue is based on final results rather than estimates of unperformed work.
   2. it reflects current performance when the period of a contract extends into more than one accounting period.
   3. it is not necessary to recognize revenue at the point of sale.
   4. a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is use

2. The cost-recovery method of recognizing profit for accounting purposes is permitted if
   1. collections in the year of sale do not exceed 30% of the total sales price.
   2. an unrealized profit account is credited.
   3. there is no reasonable basis for estimating collectibility.
   4. the method is consistently used for all sales of similar merchandise.

Use the following information for questions 3 and 4.

Gomez, Inc. began work in 2010 on contract #3814, which provided for a contract price of $7,200,000. Other details follow:

2010 2011 Costs incurred during the year $1,200,000 $3,675,000 Estimated costs to complete, as of December 31 3,600,000 0 Billings during the year 1,350,000 5,400,000 Collections during the year 900,000 5,850,000

3. Assume that Gomez uses the percentage-of-completion method of accounting. The

portion of the total gross profit to be recognized as income in 2010 is a.$450,000.

2. $600,000.
3. $1,800,000.
4. $2,400,000.

4. Assume that Gomez uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2011 is

a. $900,000.

2. $1,350,000.
3. $2,325,000.
4. $7,200,000.

5. At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2011, a future taxable amount will occur and
   1. pretax financial income will exceed taxable income in 2011.
   2. Unruh will record a decrease in a deferred tax liability in 2011.
   3. total income tax expense for 2011 will exceed current tax expense for 2011.
   4. Unruh will record an increase in a deferred tax asset in 2011.

6. Taxable income of a corporation differs from pretax financial income because of

Permanent Temporary Differences Differences

1. No No
2. No Yes
3. Yes Yes
4. Yes No

7. Which of the following will not result in a temporary difference?
   1. Product warranty liabilities
   2. Advance rental receipts
   3. Installment sales
   4. All of these will result in a temporary difference.

At the beginning of 2010, Pitman Co. purchased an asset for $600,000 with an estimated useful life of 5 years and an estimated salvage value of $50,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-decliningbalance method is being used. Pitman Co.s tax rate is 40% for 2010 and all future years.

8. At the end of 2010, what is the book basis and the tax basis of the asset?

Book basis Tax basis

a. $440,000 $310,000

2. $490,000 $310,000
3. $490,000 $360,000
4. $440,000 $360,000

9. At the end of 2010, which of the following deferred tax accounts and balances is reported on Pitmans balance sheet? Account _ Balance a. Deferred tax asset $52,000
   2. Deferred tax liability $52,000
   3. Deferred tax asset $78,000
   4. Deferred tax liability $78,000