Reading 32: Understanding the Income Statement - LOS b, (Pa

答案和详解如下：

26.The Better Building Company has a contract to build a building for $100 million. The estimate of the cost of the project is $75 million. In the first year of the project, BB had costs of $30 million. The Better Building Company’s reported profit for the first year of the contract, using the percentage-of-completion method, is:

A)   $0.

B)   $15 million.

C)   $10 million.

D)   $20 million.

The correct answer was C)

Reported profit (in millions) = ($30/$75)($100-75) = $10.

27.Which of the following statements regarding the methods of revenue recognition is TRUE?

A)   The completed contract method, in comparison to the percentage-of-completion method, will generally result in higher net income.

B)   The percentage-of-completion method is primarily used in contracts that have short lives.

C)   The percentage-of-completion method generally results in lower retained earnings than the completed contract method.

D)   The completed contract method is used when the selling price or cost estimates are unreliable.

The correct answer was D)

The completed contract method compared to the percentage-of-completion method will result in lower net income since revenue is recognized later. Hence, retained earnings will also be lower than the percentage-of-completion method.

28.JME Construction always uses the percentage of completion method of recognizing revenue. During 2004 JME signs a contract in the amount of $10 million with the following data available:

How much gross profit should JME recognize for 2004?

A)   $300,000.

B)   -$450,000.

C)   -$200,000.

D)   $1,133,333.

The correct answer was A)

stage of completion = 25% (2.2/8.8)

revenue to be recognized = 0.25 × 10 million = 2.5 million

gross profit = 2.5 million - 2.2 million = 300,000

29.The JME Jumpers, a professional volleyball team, sells season tickets to all home games. The cost of a season ticket is $1,000 and the team plays 20 home games, which run from April through August. For the year ended June 30, 2005, JME sold 1,200 tickets, collected 80 percent of the amount owed, and played 12 home games. How much revenue should JME recognize?

A)   $0.

B)   $720,000.

C)   $960,000.

D)   $1,200,000.

The correct answer was B)

(1,200 × $1,000 × 12/20) = $720,000

30.Depending on certain circumstance, revenue may be recognized:

A)   when production is complete and as production occurs.

B)   at the time of sale and when production is complete.

C)   All of these choices are correct.

D)   at the time of sale and as production occurs.

The correct answer was C)

Revenue may be recorded as production occurs (% of completion), at completion of production, and at the time of sale.