Oromia state University

College of Finance and Management Studies Department of Accounting & Finance

REVENUERECOGNITION Intermediate Financial Accounting
MULTIPLECHOICE

1. Therevenuerecognitionprincipleprovidesthatrevenueisrecognizedwhen
A. It is realized.
B. It is realizable.
C. It is realized or realizable and it is earned.
D. None of these.
2. When goods or services are exchanged for cash or claims to cash (receivables), revenues are
A. earned.
B. realized.
C. recognized.
D. All of these.
3. Whentheentityhassubstantiallyaccomplishedwhatitmustdotobeentitledtothe benefits represented by
the revenues, revenues are
A. earned.
B. realized.
C. recognized.
D. All of these.
4. Which of the following is not an accurate representation concerning revenue recognition?
A. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the
date of delivery to customers.
B. Revenue from services rendered is recognized when cash is received or when services have been
performed.
C. Revenue from permitting others to use enterprise assets is recognized as time passes or as the
assets are used.
D. Revenuefromdisposingofassetsotherthanproductsisrecognizedatthedateof sale.
5. The process of formally recording or incorporating an item in the financial statements of an entity is
A. allocation. C. realization.
B. articulation. D. recognition.
6. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each
appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts
are cash sales at the time of purchase by the buyer. Collections received for service contracts should
be recorded as
A. Service revenue.
B. Deferred service revenue.
C. A reduction in installment accounts receivable.
D. A direct addition to retained earnings.
7. Whichofthefollowingisnotareasonwhyrevenueisrecognizedattimeofsale?
A. Realization has occurred.
B. The sale is the critical event.
C. Title legally passes from seller to buyer.
D. All of these are reasons to recognize revenue at time of sale.
8. An alternative available when the seller is exposed to continued risks of ownership through
return of the product is
A. Recording the sale, and accounting for returns as they occur in future periods.
B. Not recording a sale until all return privileges have expired.
C. Recording the sale, but reducing sales by an estimate of future returns.
D. All of these.
 9. A sale should not be recognized as revenue by the seller at the time of sale if
A. Payment was made by check.
B. The selling price is less than the normal selling price.
C. the buyer has a right to return the product and amount of future returns cannot be
reasonably estimated.
D. None of these.
10. The FASB concluded that if a company sells its product but gives the buyer the right to return the
product, revenue from the sales transaction shall be recognized at the time of sale only if all of six
conditions have been met. Which of the following is not one of these six conditions?
A. The amounts of future returns can be reasonably estimated.
B. The seller's price is substantially fixed or determinable at time of sale.
C. Thebuyer'sobligationtothesellerwouldnotbechangedintheeventoftheftor damage of the
product.
D. The buyer is obligated to pay the seller upon resale of the product.
11. In selecting an accounting method for a newly contracted long-term construction project, the principal
factor to be considered should be
A. The terms of payment in the contract.
B. thedegreetowhichareliableestimateofthecoststocompleteandextentofprogress toward
completion is practicable.
C. the method commonly used by the contractor to account for other long-term construction
contracts.
D. theinherentnatureofthecontractor'stechnicalfacilitiesusedinconstruction.
12. The percentage-of-completion method must be used when certain conditions exist. Which of the
following is not one of those necessary conditions?
A. Estimates of progress toward completion, revenues, and costs are reasonably
dependable.
B. The contractor can be expected to perform the contractual obligation.
C. The buyer can be expected to satisfy some of the obligations under the contract.
D. The contract clearly specifies the enforceable rights of the parties, the consideration to
be exchanged, and the manner and terms of settlement.
13. When work to be done and costs to be incurred on a long-term contract can be estimated dependably,
which of the following methods of revenue recognition is preferable?
A. Installment-sales method
B. Percentage-of-completion method
C. Completed-contract method
D. None of these
14. Howshouldthebalancesofprogressbillingsandconstructioninprocessbeshownat reporting dates
prior to the completion of a long-term contract?
A. Progress billings as deferred income, construction in progress as a deferred expense.
B. Progress billings as income, construction in process as inventory.
C. Net, as a current asset if debit balance, and current liability if credit balance.
D. Net, as income from construction if credit balance, and loss from construction if debit
balance.
15. In accounting for a long-term construction-type contract using the percentage-of- completion
method, the gross profit recognized during the first year would be the estimated total gross profit
from the contract, multiplied by the percentage of the costs incurred during the year to the
A. Total costs incurred to date.
B. Total estimated cost.
C. Unbilled portion of the contract price.
D. Total contract price.

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 16. How should earned but unbilled revenues at the balance sheet date on a long-term construction
contract be disclosed if the percentage-of-completion method of revenue recognition is used?
A. As construction in process in the current asset section of the balance sheet.
B. As construction in process in the noncurrent asset section of the balance sheet.
C. As a receivable in the noncurrent asset section of the balance sheet.
D. In a note to the financial statements until the customer is formally billed for the portion of work
completed.
17. The principal disadvantage of using the percentage-of-completion method of recognizing revenue
from long-term contracts is that it
A. Is unacceptable for income tax purposes.
B. givesresultsbaseduponestimateswhichmaybesubjecttoconsiderableuncertainty.
C. is likely to assign a small amount of revenue to a period during which much revenue was actually earned.
D. None of these.
18. One of the more popular input measures used to determine the progress toward completion in the
percentage-of-completion method is
A. revenue-percentage basis. D. cost-to-cost basis.
B. cost-percentage basis.
C. Progress completion basis.
19. The principal advantage of the completed-contract method is that
A. reportedrevenueisbasedonfinalresultsratherthanestimatesofunperformedwork.
B. it reflects current performance when the period of a contract extends into more than one
accounting period.
C. It is not necessary to recognize revenue at the point of sale.
D. a greater amount of gross profit and net income is reported than is the case when the percentage-of-
completion method is used.
20. Under the completed-contract method
A. revenue, cost, and gross profit are recognized during the production cycle.
B. Revenue and cost are recognized during the production cycle, but gross profit recognition is deferred
until the contract is completed.
C. revenue, cost, and gross profit are recognized at the time the contract is completed.
D. None of these.
21. Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire
contract. In this case, the entire expected loss should be
A. recognized in the current period, regardless of whether the percentage-of-completion or completed-
contract method is employed.
B. recognized in the current period under the percentage-of-completion method, but the completed-
contract method should defer recognition of the loss to the time when the contract is completed.
C. recognized in the current period under the completed-contract method, but the percentage-of-
completion method should defer the loss until the contract is completed.
D. deferred and recognized when the contract is completed, regardless of whether the percentage-
of-completion or completed-contract method is employed.
22. Cost estimates at the end of the second year indicate a loss will result on completion of the entire
contract. Which of the following statements is correct?
A. Under the completed-contract method, the loss is not recognized until they ear the construction is
completed.
B. Under the percentage-of-completion method, the gross profit recognized in the first year must not
be changed.
C. Under the completed-contract method, when the billings exceed the accumulated costs, the
amount of the estimated loss is reported as a current liability.
D. Under the completed-contract method, when the Construction in Process balance exceeds the
billings, the estimated loss is added to the accumulated costs.
23. The criteria for recognition of revenue at the completion of production of precious metals and farm
products include
A. An established market with quoted prices.
B. Low additional costs of completion and selling.
C. Units are inter changeable.
D. All of these.
24. In certain cases, revenue is recognized at the completion of production even though no sale has been
made. Which of the following statements is not true?
A. Examples involve precious metals or farm equipment.
B. The products possess immediate marketability at quoted prices.
C. No significant costs are involved in selling the product.
D. All of these statements are true.
25. For which of the following products is it appropriate to recognize revenue at the completion of
production even though no sale has been made?
A. Automobiles
B. Large appliances
C. Single family residential units
D. Precious metals
26. When there is a significant increase in the estimated total contract costs but the increase does not
eliminate all profit on the contract, which of the following is correct?
A. Under both the percentage-of-completion and the completed-contract methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
B. Under the percentage-of-completion method only, the estimated cost increase requires
a current period adjustment of excess gross profit recognized on the project in prior
periods.
C. Under the completed-contract method only, the estimated cost increase requires a
current period adjustment of excess gross profit recognized on the project in prior
periods.
D. No current period adjustment is required.
27. Deferred gross profit on installment sales is generally treated as a(n)
A. Deduction from installment accounts receivable.
B. Deduction from installment sales.
C. Unearned revenue and classified as a current liability.
D. Deduction from gross profit on sales.
28. The installment-sales method of recognizing profit for accounting purposes is acceptable if
A. Collections in the year of sale do not exceed 30% of the total sales price.
B. An unrealized profit account is credited.
C. Collection of the sales price is not reasonably assured.
D. The method is consistently used for all sales of similar merchandise.
29. The method most commonly used to report defaults and repossessions is
A. Provide no basis for the repossessed asset there by recognizing a loss.
B. Record there possessed merchandise at fair value, recording a gain or loss if appropriate.
C. Record there possessed merchandise at book value, recording no gain or loss.
D. None of these.

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30. Under the installment-sales method,
A. revenue, costs, and gross profit are recognized proportionate to the cash that is received
from the sale of the product.
B. gross profit is deferred proportionate to cash uncollected from sale of the product, but
total revenues and costs are recognized at the point of sale.
C. Gross profit is not recognized until the amount of cash received exceeds the cost of the
item sold.
D. Revenues and costs are recognized proportionate to the cash received from the sale of
the product, but gross profit is deferred until all cash is received.
31. The realization of income on installment sales transactions involves
A. recognition of the difference between the cash collected on installment sales and the
cash expenses incurred.
B. Deferring the net income related to installment sales and recognizing the income as
cash is collected.
C. deferring gross profit while recognizing operating or financial expenses in the period
incurred.
D. Deferring gross profit and all additional expenses related to installment sales until cash
is ultimately collected.
32. A manufacturer of large equipment sells on an installment basis to customers with questionable credit
ratings. Which of the following methods of revenue recognition is least likely to overstate the amount
of gross profit reported?
A. At the time of completion of the equipment (completion of production method)
B. At the date of delivery (sales method)
C. The installment-sales method
D. The cost–recovery method
33. A seller is properly using the cost-recovery method for a sale. Interest will be earned on the future
payments. Which of the following statements is not correct?
A. After all costs have been recovered, any additional cash collections are included in
income.
B. Interest revenue may be recognized before all costs have been recovered.
C. The deferred gross profit is off set against the related receivable on the balance sheet.
D. Subsequent income statements report the gross profit as a separate item of revenue
when it is recognized as earned.
34. Under the cost-recovery method of revenue recognition,
A. income is recognized on a proportionate basis as the cash is received on the sale of the
product.
B. income is recognized when the cash received from the sale of the product is greater
than the cost of the product.
C. Income is recognized immediately.
D. None of these.
35. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of water,
Winser does not recognize any revenue from water sales until the sales exceed the costs of
exploration, the basis of revenue recognition being employed is the
A. Production basis.
B. Cash (or collection) basis.
C. Sales (or accrual) basis.
D. Cost recovery basis.
 36. Some of the initial franchise fee may be allocated to
A. Continuing franchise fees.
B. Interest revenue on the future installments.
C. Options to purchase the franchisee's business.
D. All of these may reduce the amount of the initial franchise fee that is recognized as
revenue.
37. Continuing franchise fees should be recorded by the franchisor
A. As revenue when earned and receivable from the franchisee.
B. As revenue when received.
C. In accordance with the accounting procedures specified in the franchise agreement.
D. As revenue only after the balance of the initial franchise fee has been collected.
38. Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of
equipment or supplies. When recording the initial franchise fee, the franchisor should
A. Increase revenue recognized from the initial franchise fee by the amount of the
expected future purchases.
B. recordaportionoftheinitialfranchisefeeasunearnedrevenuewhichwillincrease the selling
price when the franchisee subsequently makes the bargain purchases.
C. Defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made.
D. None of these.
39. A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is
probable that the option will be exercised. When recording the initial franchise fee, the franchisor
should
A. Record the entire initial franchise fee as a deferred credit which will reduce the
franchisor's investment in the purchased outlet when the option is exercised.
B. Record the entire initial franchise fee as unearned revenue which will reduce the
amount of cash paid when the option is exercised.
C. Record the portion of the initial franchise fee which is attributable to the bargain
purchase option as a reduction of the future amounts’ receivable from the franchisee.
D. None of these.
40. Revenue is recognized by the consignor when the
A. Goods are shipped to the consignee.
B. Consignee receives the goods.
C. Consignor receives an advance from the consignee.
D. Consignor receives an account sale from the consignee.
41. Reese Construction Corporation contracted to construct a building for $1,500,000. Construction began
in 2007 and was completed in 2008. Data relating to the contract are summarized below:
Year ended
December31,
2007 2008
Costs incurred $600,000 $450,000
Estimated costs to complete 400,000 —
Reese uses the percentage-of-completion method as the basis for income recognition. For the years ended
December 31, 2007, and 2008, respectively, Reese should report gross profit of
A. $270,000 and $180,000.
B. $900,000 and $600,000.
C. $300,000 and $150,000.
D. $0 and $ 450,000.

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42. Winsor Construction Company uses the percentage-of-completion method of accounting. In
2007, Winsor began work on a contract it had received which provided for a contract price of
$15,000,000. Other details follow:
2007
Costs incurred during the year $7,200,000
Estimated costs to complete as of December 31 4,800,000
Billings during the year 6,600,000
Collections during the year 3,900,000
Whatshouldbethegrossprofitrecognizedin2007?
A. $600,000
B. $7,800,000
C. $1,800,000
D. $3,000,000
Use the following information for questions 43 and 44.
In 2007, Crane Corporation began construction work under a three-year contract. The contract price is
$2,400,000. Crane uses 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 statement presentations relating to this contract at December
31, 2007, follow:
Balance Sheet
Accounts receivable—construction contract billings $100,000
Construction in progress $300,000
Less contract billings 240,000
Costs and recognized profit in excess of billings 60,000
Income Statement
Income (before tax) on the contract recognized in 2007 $60,000
43. How much cash was collected in 2007on this contract?
A. $100,000
B. $140,000
C. $20,000
D. $240,000
44. What was the initial estimated total income before tax on this contract?
A. $300,000
B. $320,000
C. $400,000
D. $480,000
45. Eaton Construction Co. uses the percentage-of-completion method. In 2007, Eaton began work
on a contract for $3,300,000 and it was completed in 2008. Data on the costs are:
Year Ended December 31
2007 2008
Costs incurred $1,170,000 $840,000
Estimated costs to complete 780,000 —
For the years 2007 and 2 008, Eaton should recognize gross profit of
2007 2008
A. $0 $1,290,000
B. $774,000 $516,000
C. $810,000 $480,000
D. $810,000 $1,290,000
 Use the following information for questions 46 and 47.
Ramos, Inc. began workin2007on contract# 3814, which provided for a contract price of $7,200,000. Other details
follow:
2007 2008
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
46. Assume that Ramos uses the percentage-of-completion method of accounting. The portion of the total
gross profit to be recognized as income in 2007 is
A. $450,000.
B. $600,000.
C. $1,800,000.
D. $2,400,000.
47. Assume that Ramos uses the completed-contract method of accounting. The portion of the total gross
profit to be recognized as income in 2008 is
A. $900,000.
B. $1,350,000.
C. $2,325,000.
D. $7,200,000.
Use the following information for questions 48 and 49.
Miley, Inc. began work in 2007 on a contract for $ 8,400,000. Other data are as follows:
2007 2008
Costs incurred to date $3,600,000 $5,600,000
Estimated costs to complete 2,400,000 —
Billings to date 2,800,000 8,400,000
Collections to date 2,000,000 7,200,000
48. If Miley uses the percentage-of-completion method, the gross profit to be recognized in 2007 is
A. $1,440,000.
B. $1,600,000.
C. $2,160,000.
D. $2,400,000.
49. If Miley uses the completed-contract method, the gross profit to be recognized in 2008 is
A. $1,360,000.
B. $2,800,000.
C. $1,400,000.
D. $5,600,000.
Use the following information for questions 50 and 51.
50. Parker Construction Co. uses the percentage-of-completion method. In 2007, Parker began work on
a contract for $5,500,000; it was completed in 2008. The following cost data pertain to this contract:
Year Ended December 31
2007 2008
Cost incurred during the year $1,950,000 $1,400,000
Estimated costs to complete at the end of year 1,300,000 —
The amount of gross profit to be recognized on the income statement for the year ended December 31, 2008 is
A. $800,000.
B. $860,000.
C. $900,000.
D. $2,150,000.

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51. If the completed-contract method of accounting was used, the amount of gross profit to be recognized
for years 2007 and 2008 would be

2007 2008
a.$2,250,000. $0.
b.$2,150,000. $(100,000).
c.$0. $2,150,000.
d.$0. $2,250,000.
52. Willingham Construction Company uses the percentage-of-completion method. During 2007, the
company entered into a fixed-price contract to construct a building for Richman Company for
$30,000,000. The following details pertain to the contract:

At December 31,2007 At December 31,2008

Percentage of completion 25% 60%
Estimated total cost of contract $22,500,000 $25,000,000
Gross profit recognized to date 1,875,000 3,000,000
Theamountofconstructioncostsincurredduring2008was
A. $15,000,000.
B. $9,375,000.
C. $5,625,000.
D. $2,500,000.
Use the following information for questions 53 and 54.
Carter Construction Company had a contract starting April 2008, to construct a $15,000,000 building
that is expected to be completed in September 2009, at an estimated cost of $13,750,000. At the end of
2008, the costs to date were $6,325,000 and the estimated total costs to complete had not changed. The
progress billings during 2008 were $3,000,000 and the cash collected during 2008 was $2,000,000.
Carter uses the percentage-of-completion method.
53. For the year ended December 31,2008, Carter would recognize gross profit on the building of
A. $0.
B. $527,083.
C. $575,000.
D. $675,000.
54. At December31,2008, Carter would report Construction in Process in the amount of
A. $6,900,000.
B. $6,325,000.
C. $5,900,000.
D. $575,000.
55. Kirby Builders, Inc. is using the completed-contract method for a $5,600,000 contract that will take two
years to complete. Data at December 31, 2007, the end of the first year, are as follows:

Costs incurred to date $2,560,000

Estimated costs to complete 3,280,000
Billings to date 2,400,000
Collections to date 2,000,000
The gross profit or loss that should be recognized for 2007 is
A. $0.
B. $240,000 loss.
C. $120,000 loss.
D. $105,600 loss.
 Use the following information for questions 56 through 58.
Melton Construction Co. began operations in 2007.Construction activity for 2007 is shown below. Melton
uses the completed-contract method.

Contract Billings Collections Costs to Estimated

Through Through Costs to
Contract Price 12/31/07 12/31/07 12/31/07 Complete
1 $3,200,000 $3,150,000 $2,600,000 $2,150,000 —
2 3,600,000 1,500,000 1,000,000 820,000 $1,880,000
3 3,300,000 1,900,000 1,800,000 2,250,000 1,200,000

56. Which of the following should be shown on the income statement for 2007 related to Contract 1?
A. Gross profit, $450,000
B. Gross profit, $1,000,000
C. Gross profit, $1,050,000
D. Gross profit, $600,000
57. Which of the following should be shown on the balance sheet at December 31,2007 related to
Contract 2?
A. Inventory, $680,000
B. Inventory, $820,000
C. Current liability, $680,000
D. Current liability, $1,500,000
58. Which of the following should be shown on the balance sheet at December 31,2007 related to
Contract 3?
A. Inventory, $200,000
B. Inventory, $350,000
C. Inventory, $2,100,000
D. Inventory, $2,250,000
59. Harber Co. uses the installment-sales method. When an account had a balance of $8,400, no further
collections could be made and the dining room set was repossessed. At that time, it was estimated that
the dining room set could be sold for $2,400 as repossessed, or for $3,000 if the company spent $300
reconditioning it. The gross profit rate on this sale was 70%. The gain or loss on repossession was a
A. $5,880 loss. C. $600 gain.
B. $6,000 loss. D. $180 gain.
60. Yarbow Corporation has a normal gross profit on installment sales of 30%. A 2006 sale resulted in a
default early in 2008. At the date of default, the balance of the installment receivable was $24,000,
and the repossessed merchandise had a fair value of $13,500. Assuming the repossessed merchandise
is to be recorded at fair value, the gain or loss on repossession should be
A. $0. C. $3,300gain.
B. $3,300loss. D. $7,500loss.
61. Seeman Furniture uses the installment-sales method. No further collections could be made on an
account with a balance of $18,000. It was estimated that the repossessed furniture could be sold as is
for $5,400, or for $6,300 if $300 were spent reconditioning it.
The gross profit rate on the original sale was 40%. The loss on repossession was
A. $4,800.
B. $4,500.
C. $12,000.
D. $12,600.

10 | P a g e C o m p i l e d b y S i n t a y e h u K .
 62. Wagner Company sold some machinery to Granger Company on January 1, 2007. The cash selling
price would have been $568,620. Granger entered into an installment sales contract which required
annual payments of $150,000, including interest at 10%, over five years. The first payment was due
on December 31,2007. What amount of interest income should be included in Wagner's 2008 income
statement (the second year of the contract)?
A. $15,000 C. $30,000
B. $47,548 D. $41,862
63. Lamberson Company has used the installment method of accounting since it began operations at the
beginning of 2008.The following information pertains to its operations for 2008:
Installment sales $ 1,400,000
Cost of installment sales 980,000
Collections of installment sales 560,000
General and administrative expenses 140,000
The amount to be reported on the December 31, 2008 balance sheet as Deferred Gross Profit should be
A. $168,000. D. $840,000
B. $252,000.
C. $336,000.
64. Maris, Inc. appropriately used the installment method of accounting to recognize income in its
financial statement. Some pertinent data relating to this method of accounting include:
2007 2008
Installment sales $750,000 $900,000
Cost of sales 450,000 630,000
Gross profit $300,000 $270,000

Collections during year:

On2007sales 250,000 250,000
On2008sales 300,000
What amount to be realized gross profit should be reported on Maris’s income statement for 2008?
A. $165,000 D. $270,000
B. $190,000
C. $220,000
65. Singer Company sells plasma-screen televisions on an installment basis and appropriately uses the
installment-sales method of accounting. A customer with an account balance of $5,600 refuses to make
any more payments and the merchandise is repossessed. The gross profit rate on the original sale is
40%. Singer estimates that the television can be sold as is for $1,750, or for $2,100 if $140 is spent to
refurbish it the loss on repossession is
A. $3,850. C. $1,610.
B. $2,240. D. $1,400.
Use the following information for questions 66-68.
During 2008, Steele Corporation sold merchandise costing $1,500,000 on an installment basis for $2,000,000.
The cash receipts related to these sales were collected as follows: 2008, $800,000; 2009, $700,000; 2010,
$500,000.
66. What is the rate of gross profit on the installment sales made by Steele Corporation during
2008?
A. 75%
B. 60%
C. 40%
D. 25%
67. If expenses, other than the cost of the merchandise sold, related to the 2008 installment sales
amounted to $90,000, by what amount would Steele’s net income for 2008 increase as a result of
installment sales?
A. $110,000
B. $177,500
C. $200,000
D. $710,000
68. What amount would be shown in the December 31, 2009 financial statement for realized gross profit
on 2008 installment sales, and deferred gross profit on 2008 installment sales, respectively?
A. $175,000 and $375,000
B. $325,000 and $175,000
C. $375,000 and $125,000
D. $175,000 and 125,000
69. On January 1, 2007, Dole Co. sold land that cost $210,000 for $280,000, receiving a note bearing
interest at 10%. The note will be paid in three annual installments of $112,595 starting on December
31, 2007. Because collection of the note is very uncertain, Dole will use the cost-recovery method.
How much revenue from this sale should Dole recognize in 2007?
A. $0
B. $21,000
C. $28,000
D. $70,000
70. On April 1, 2007 Reagan, Inc. entered into a franchise agreement with a local business- man. The
franchisee paid $240,000 and gave a $160,000, 8%, 3-year note payable with interest due annually on
March 31. Reagan recorded the $400,000 initial franchise fee as revenue on April 1, 2007. On
December 30, 2007, the franchisee decided not to open an outlet under Reagan's name. Reagan
canceled the franchisee's note and refunded $128,000, less accrued interest on the note, of the $240,000
paid on April 1. What entry should Reagan make on December 30, 2007?
A. Losson Repossessed Franchise.........................................128,000 128,000
Cash.........................................................................
B. Losson Repossessed Franchise.........................................118,400
Cash......................................................................... 118,400
C. Losson Repossessed Franchise.........................................278,400
Cash......................................................................... 118,400
Note Receivable....................................................... 160,000
D. Revenue from Franchise Fees............................................. 400,000
Interest Income......................................................... 9,600
Cash......................................................................... 118,400
Note Receivable....................................................... 160,000
Revenue from Repossessed Franchise.................. 112,000

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71. On January1,2007 Tasty Delight, Inc. entered into a franchise agreement with a company allowing the
company to do business under Tasty Delight's name. Tasty Delight had performed substantially all
required services by January 1, 2007, and the franchisee paid the initial franchise fee of $560,000 in
full on that date. The franchise agreement specifies that the franchisee must pay a continuing
franchise fee of $48,000 annually, of which 20% must be spent on advertising by Tasty Delight. What
entry should Tasty
Delight makes on January 1,2007 to record receipt of the initial franchise Fee and the
continuing franchise fee for 2007?
A. Cash ............................................................................................ 608,000 560,000
Franchise Fee Revenue...........................................
Revenue from Continuing Franchise Fees............... 48,000
B. Cash ............................................................................................ 608,000
Unearned Franchise Fees........................................ 608,000
C. Cash ............................................................................................ 608,000
Franchise Fee Revenue........................................... 560,000
Revenue from Continuing Franchise Fees............... 38,400
Unearned Franchise Fees........................................ 9,600
D. Prepaid Advertising.............................................................. 9,600
Cash ............................................................................................ 608,000
Franchise Fee Revenue........................................... 560,000
Revenue from Continuing Franchise Fees............... 48,000
Unearned Franchise Fees........................................ 9,600
72. Yount Inc. charges an initial franchise fee of $920,000, with $200,000 paid when the agreement is
signed and the balance in five annual payments. The present value of the future payments, discounted
at 10%, is $545,872. The franchisee has the option to purchase $120,000 of equipment for $96,000.
Yount has substantially provided all initial services required and collectability of the payments is
reasonably assured. The amount of revenue from franchise fees is
A. $200,000.
B. $721,872.
C. $745,872.
D. $920,000.
Use the following information for questions 73 and 74.
On May 1, 2007, TV Inc. consigned 80 TVs to Al's TV. The TVs cost $270. Freight on the shipment paid
by Al’s TV was $600. On July 10, TV Inc. received an account sale and $12,900 from Al's TV. Thirty
TVs had been sold and the following expenses were deducted:
Freight $600
Commission (20% of sales price) ?
Advertising 390
Delivery 210
73. The total sales price of the TVs sold by AL's TV was
A. $15,375.
B. $16,125.
C. $16,388.
D. $17,625.
74. The inventory of TVs will be reported on whose balance sheet and at what amount?

Balance Sheet of Amount of Inventory

A. TV Inc. $13,875
B. TV Inc. $13,500
C. Al's TV $13,875
D. Al's TV $13,500
75. According to the FASB's conceptual framework, the process of reporting an item in the financial
statements of an entity is
A. recognition.
B. realization.
C. allocation.
D. matching.
76. Flynn Construction Co. has consistently used the percentage-of-completion method of recognizing
revenue. During 2007, Flynn entered into a fixed-price contract to construct an office building for
$12,000,000. Information relating to the contract is as follows:
At December 31
2007 2008
Percentage of completion 15% 45%
Estimated total cost at completion $9,000,000 $9,600,000
Gross profit recognized (cumulative) 600,000 1,440,000
Contract costs incurred during 2008 were
A. $2,880,000.
B. $2,970,000.
C. $3,150,000.
D. $4,320,00

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77. Noland Constructors, Inc. has consistently used the percentage-of-completion method of recognizing
income. In 2007, Noland started work on a $35,000,000 construction contract that was completed in
2008. The following information was taken from Noland's 2007 accounting records:

Progress billings $11,000,000

Costs incurred 10,500,000
Collections 7,000,000
Estimated costs to complete 21,000,000
What amount of gross profit should No land have recognized in 2007 on this contract?
A. $3,500,000
B. $2,333,334
C. $1,750,000
D. $1,166,667
78. During 2007, Eaton Corp. started a construction job with a total contract price of
$ 3, 500, 000.The job was completed on December 15, 2008. Additional data are as follows:

2007 2008
Actual costs incurred $1,350,000 $1,525,000
Estimated remaining costs 1,350,000 —
Billed to customer 1,200,000 2,300,000
Received from customer 1,000,000 2,400,000
Under the completed-contract method, what amount should Eaton recognize as gross profit for
2008?
A. $225,000
B. $312,500
C. $475,000
D. $625,000
79. Penny Farms produced 800,000 pounds of cotton during the 2007 season. Penny sells all of its cotton
to ByeCo., which has agreed to purchase Penny's entire production at the prevailing market price.
Recent legislation assures that the market price will not fall below $.70 per pound during the next two
years. Penny's costs of selling and distributing the cotton are immaterial and can be reasonably
estimated. Penny reports its inventory at expected exit value. During 2007, Penny sold and delivered
to Bye 600,000 pounds at the market price of $.70. Pennys old the remaining 200,000 pounds during
2008 at the market price of $.72. What amount of revenue should Penny recognize in 2007?
A. $420,000
B. $432,000
C. $560,000
D. $576,000
 80. Klugg, Inc. appropriately uses the installment-sales method of accounting to recognize income in
its financial statements. Some pertinent data relating to this method of accounting include:
2007 2008
Installment sales $750,000 $720,000
Cost of installment sales 570,000 504,000
Gross profit $180,000 $216,000
Rate of gross profit 24% 30%

Balance of deferred gross profit at year end:

2007 $108,000 $36,000
2008 198,000
Total $108,000 $234,000
What amount of installment accounts receivable should be presented in Klugg's December 31, 2008
balance sheet?
A. $720,000
B. $810,000
C. $780,000
D. $866,666
81. Neber Co., which began operations on January 1, 2007, appropriately uses the installment-sales
method of accounting. The following information pertains to Neber's operations for the year 2007:
Installment sales $1,200,000
Regular sales 480,000
Cost of installment sales 720,000
Cost of regular sales 288,000
General and administrative expenses 96,000
Collections on installment sales 288,000
The deferred gross profit account in Neber's December 31, 2007 balance sheet should be
A. $115,200.
B. $192,000.
C. $364,800.
D. $480,000.
82. On January 1, 2007, Stein Co. sold a used machine to Mays, Inc. for $350,000. On this date, the
machine had a depreciated cost of $245,000. Mays paid $50,000 cash on January 1, 2007 and signed a
$300,000 note bearing interest at 10%. The note was payable in three annual installments of $100,000
beginning January 1, 2008. Stein appropriately accounted for the sale under the installment method.
Mays made a timely payment of the first installment on January 1, 2008 of $130,000, which included
interest of $30,000 to date of payment. At December 31,2008, Stein has deferred gross profit of
A. $70,000.
B. $66,000.
C. $60,000.
D. $51,000.

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83. Grant Co. began operations on January 1, 2007 and appropriately uses the installment method of
accounting. The following information pertains to Grant's operations for 2007:

Installment sales 1,800,000

Cost of installment sales 1,080,000
General and administrative expenses 180,000
Collections on installment sales 825,000
The balance in the deferred gross profit account at December 31,2007 should be
A. $330,000.
B. $495,000.
C. $390,000.
D. $720,000.
84. Lott Co. records all sales using the installment method of accounting. Installment sales contracts call
for 36 equal monthly cash payments. According to the FASB's conceptual framework, the amount of
deferred gross profit relating to collections 12 months beyond the balance sheet date should be
reported in the
A. Current liabilities section as a deferred revenue.
B. Noncurrent liabilities section as a deferred revenue.
C. Current assets section as a contra account.
D. Noncurrent assets section as a contra account.
85. Alton, Inc.is a retailer of home appliances and offers a service contract on each appliance sold.
Alton sells appliances on installment contracts, but all service contracts must be paid in full at
the time of sale. Collections received for service contracts should be recorded as an increase in a
A. Deferred revenue account.
B. Sales contracts receivable valuation account.
C. stockholders' valuation account.
D. Service revenue account.