karoliukas

An oil exploration company has been contracted to dig 100 exploratory holes for $200,000. The cost to complete this job is estimated to be $150,000, but the company doesn’t recognize any of the $50,000 profit until the job is completed. Which revenue recognition method is being used?

A) Cost recovery method.

B) Percentage-of-completion method.

C) Completed contract method.

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The completed contract method doesn't recognize revenue and expense until the contract is completed. The percentage-of-completion method would have recognized a portion of the $50,000 profit prior to completion.

karoliukas

Which, if any, of the following statements about the installment sales method and cost recovery method is correct? Statement 1: The cost recovery method recognizes revenue and associated costs of goods sold only when cash is received, based on gross profit margin. Statement 2: The installment sales method recognizes sales when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

A) Only one of these statements is correct.

B) Both statements are correct.

C) Neither statement is correct.

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Neither statement is correct because the definitions are reversed.

karoliukas

When a reliable estimate of costs exists, ultimate payment is assured, and revenue is earned as costs are incurred, which of the following revenue recognition methods should be used?

A) Percentage-of-completion method.

B) Cost recovery method.

C) Installment sales method.

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The installment sales method recognizes revenue and associated cost of goods sold only when cash is received. Gross profit (sales – cost of goods sold) reflects the proportion of cash received.
The cost recovery method is similar to the installment sales method but is more conservative. Sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

karoliukas

When an unreliable estimate of costs exists and ultimate payment is assured, which of the following revenue recognition methods should be used?

A) Percentage-of-completion method.

B) Completed contract method.

C) Cost recovery method.

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The key word is "unreliable." The completed contract method is used when cost estimates are unreliable. The percentage-of-completion method recognizes profit corresponding to the percentage of cost incurred to total estimated costs associated with long-term construction contracts. Percent-of-completion is used where contracts and cost estimates are reliable.
The cost recovery method is similar to the installment sales method but is more conservative. Sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

karoliukas

Cash collection is a critical event for income recognition under the:

Cost-Recovery Method

Installment Method

A) Yes Yes

B) No Yes

C) Yes No

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Recognition of income depends on cash collected under both methods.

karoliukas

According to the installment method of accounting, gross profit on an installment sale is recognized:

A) in proportion to the cash collection.

B) after cash collections equal to the cost of sales have been received.

C) on the date the final cash collection is received.

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The installment sales method recognizes sales and COGS in proportion to cash collections.

karoliukas

An analyst has gathered the following data pertaining to Hegel Company’s construction projects, which began during 2002:

	Project 1	Project 2
Contract price	$420,000	$300,000
Costs incurred in 2002	240,000	280,000
Estimated costs to complete	120,000	40,000
Billed to customers during 2002	150,000	270,000
Received from customers during 2002	90,000	250,000

If Hengel used the completed contract method, what amount of gross profit (loss) would Hengel report in its 2002 income statement for:

Project 1

Project 2

A) $0 ($20,000)

B) $0 $0

C) ($20,000) $0

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No profit is recognized until the completion of the project, however losses are recognized. Project 2 has an expected loss of $20,000.

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If Hengel used the percentage-of-completion method, what amount of gross profit (loss) would Hengel report in its 2002 income statement?

A) $20,000.

B) $22,500.

C) $(20,000).

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Under the percentage of completion method, $40,000 of profit is recognized for project 1. 120,000 + 240,000 = 360,000 total costs; 240,000 / 360,000 × 60,000 estimated profit = $40,000 profit.
Project 2 is running at a $20,000 loss. If the loss can be estimated the loss must be recognized at the time it is estimated. Total revenue for project 2 = 300,000 contract price − 320,000 total costs = -$20,000 estimated loss
40,000 (project 1) − 20,000 (project 2) = $20,000 gross profit in 2002

karoliukas

The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of:

A) costs incurred in year 3 to total estimated costs.

B) costs incurred in year 3 to total billings.

C) total costs incurred to total estimated cost.

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The percentage of completion method recognizes revenues in proportion to the proportion of expenses incurred. Using only the current year's costs produces an incorrect result if the estimated total cost has changed. Revenue recognized in any given year is costs to date divided by total estimated costs, times total estimated revenue for the project, minus revenue that has already been recognized.

karoliukas

Which of the following statements regarding the methods of revenue recognition is most accurate? In the first year of a long-term contract:

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

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

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

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The completed contract method compared to the percentage-of-completion method will result in lower net income in the first year because revenue and profit are recognized later. Hence, retained earnings will also be lower than the percentage-of-completion method.

karoliukas

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:

Costs incurred to date	$2,200,000
Billings to date	$2,000,000
Cash collected	$1,750,000
Total cost of project	$8,800,000

How much gross profit should JME recognize for 2004?

A) -$200,000.

B) -$450,000.

C) $300,000.

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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