The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those 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 questions.

1. On October 1, 2013, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty thousand gallons were delivered on December 15, 2013, and the remaining 50,000 gallons were delivered on January 15, 2014. Payment terms were 50% due on October 1, 2013, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale during 2014?

a. $ 75,000

b. $150,000

c. $225,000

d. $300,000

CPA and CMA Review Questions

2. Since there is no reasonable basis for estimating the degree of collectibility, Astor Co. uses the installment sales method of revenue recognition for the following sales

What amount should Astor report as deferred gross profit in its December 31, 2014, balance sheet for the 2013 and 2014 sales?
a. $225,000
b. $150,000
c. $160,000
d. $250,000
3. Dolce Co., which began operations on January 1, 2013, appropriately uses the installment sales method of accounting to record revenues. The following information is available for the years ended December 31, 2013 and 2014:

What amount of installment accounts receivable should Dolce report in its December 31, 2014, balance sheet?
a. $1,700,000
b. $1,225,000
c. $1,300,000
d. $1,775,000

4. Which of the following statements regarding the percentage-of-completion method of accounting is FALSE? The construction-in-progress account:
a. is shown net of advance billings as a liability if the amount is less than the amount of advance billings.
b. is an asset.
c. is shown net of advance billings on the balance sheet.
d. does not include the cumulative effect of gross profit recognition.

5. The following data relates to a construction job started by Syl Co. during 2013:
Total contract price............$100,000
Actual costs during 2013......... 20,000
Estimated remaining costs........ 40,000
Billed to customer during 2013...... 30,000
Received from customer during 2013... 10,000
Under the percentage-of-completion method, how much should Syl recognize as gross profit for 2013?
a. $26,667
b. $0
c. $13,333
d. $33,333

6. Hansen Construction Inc. has consistently used the percentage-of-completion method of recognizing income.
During 2013, Hansen started work on a $3,000,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2013:
Costs incurred ...........$ 930,000
Estimated cost to complete .....2,170,000
Progress billings ..........1,100,000
Collections.......... ..700,000
How much loss should Hansen have recognized in 2013?
a. $180,000
b. $230,000
c. $30,000
d. $100,000 Beginning in 2011, International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS.

7. Which of the following is NOT a condition that must be satisfied under IFRS before revenue for a service can be recognized?
a. The stage of completion can be measured reliably.
b. It is probable that the economic benefits associated with the transaction will flow to the seller.
c. Cash collection is at least reasonably possible.
d. The amount of revenue and costs associated with the transaction can be measured reliably.

8. O'Hara Company recognizes revenue on long-term construction contracts under IFRS. It cannot estimate progress toward completion accurately, and so uses the cost recovery method (also called the "zero profit method") to estimate revenue. O'Hara writes a contract to deliver an automated assembly line to Easley Motors. Easley will pay $2,000,000 to O'Hara, and O'Hara estimates the line will cost $1,500,000 to construct. The job is estimated to take three years to complete. In the first year of its contract with Easley Motors, O'Hara incurs $1,000,000 of cost, which O'Hara believes will eventually be recovered in the contract.
How much revenue will O'Hara recognize in the first year of the contract?
a. $1,000,000
b. $0
c. $1,333,333
d. $666,667

9. Which of the following is NOT true about revenue recognition for multiple deliverable contracts under IFRS?
a. IAS No. 18 provides extensive guidance determining how contracts are to be separated into components for purposes of revenue recognition.
b. IFRS encourages focus on the economic substance of transactions, so some arrangements are likely to be accounted for differently than under U.S. GAAP.
c. Unlike U.S. GAAP, IFRS does not require VSOE for software contracts in order to separate contracts into multiple deliverables.
d. IFRS focuses on fair values to allocate total revenue to components.

10. Barrett Inc. paid $50,000 of property taxes in January that constitute the entire property tax bill for the year.
Which of the following is true concerning how Barrett would account for those taxes in interim periods?
a. Under IFRS, Barrett would expense the entire $50,000 in the last quarter of the year.
b. Under U.S. GAAP, Barrett would expense the entire $50,000 of property taxes when the tax was paid in the first quarter of the year.
c. Under U.S. GAAP, Barrett would finish the first quarter of the year with a prepaid property taxes asset of $30,000.
d. Unlike IFRS, Barrett would start the third quarter of the year with a prepaid property tax asset of $0.

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2013 $600,000 200,000 2014 $900,000 100,000 Sales Collections from: 2013 sales 2014 sales 300,000 Accounts written off 2013 sales 2014 sales 50,000 150,000 50,000 Gross profit percentage 30% 00% 2013 2014 Sales Gross profit realized on sales made in: $1,000,000 150,000 30% $2,000,000 2013 2014 90,000 200,000 40% Gross profit percentages