karoliukas

Walker Company received a letter in November 2003 indicating that Johnson, Inc. would purchase a specialty machine priced at $4,000,000. In February 2004, a binding contract was executed for the machine’s construction. Materials costing $2,000,000 were ordered in December 2003, arrived with an invoice in August 2004, and were used in the manufacturing process in the first quarter of 2005. Walker completed and delivered the machine in December 2006. Johnson received the first invoice in 2007 and paid the $4,000,000 purchase price in 2007. Walker Company uses the accrual method of accounting. Walker should record the materials used to construct the machine as expenses in the year:

A) 2007.

B) 2004.

C) 2006.

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Under the accrual concept, income is recognized when the earning activities are substantially completed, risk of ownership has transferred from buyer to seller, and payment is realizable and collectible. Under the matching principle, expenses incurred that directly relate to the sold item are expensed in the same period as the revenue is recognized.

karoliukas

Under the cost recovery method, profit is recognized:

A) at time of delivery.

B) as collection occurs.

C) after the amount of cost has been collected.

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The cost recovery method is used when the costs to provide goods or services are not known. Under this method, sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

karoliukas

Which of the following is NOT a requirement for revenue recognition to occur?

A) Cash must have been received.

B) Earning activities are substantially completed.

C) Transactions giving rise to revenue should be arms-length.

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Revenue from credit sales may be recognized when sales are on account.
Other conditions when revenues are also considered earned include when: revenue can be measured with reasonable accuracy, transactions are not subject to revocation, it is possible to measure the cost of provided goods (no significant contingent obligation), and there is assurance of payment (cash) or collectability.

karoliukas

Guidance from the U.S. Securities and Exchange Commission regarding the criteria for revenue recognition least likely specifies that there must be:

A) evidence of an arrangement between the buyer and the seller.

B) reasonable assurance that the product will be delivered or the service will be rendered.

C) a determined or determinable price.

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One of the SEC’s criteria for revenue recognition is that the product has been delivered or the service has been rendered. The other criteria are evidence of an arrangement between the buyer and seller; the price has been determined or is determinable; and the seller is reasonably assured of collecting money.

karoliukas

As a general rule, revenue is normally recognized when it is:

A) earned.

B) realizable and earned.

C) measurable.

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Under the accrual concept, revenue is recognized when the earnings process is completed (earned) and ultimate realization (cash receipt) is assured.

karoliukas

Under the general principles of accrual accounting, revenue is recognized when:

A) cash is received, and expenses are recognized when cash is paid.

B) the good or service is delivered or cash is received, whichever is earlier.

C) earned, and expenses are recognized when incurred.

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The principle of accrual accounting is that revenue is recognized when earned, and expenses are recognized when incurred.

karoliukas

When the cost of goods and services used are recognized as an expense in the same period that its generated revenue is recognized, which of the following principle(s) is (are) being described?

A) The matching and accrual principles.

B) The accrual and expense recognition principles.

C) The matching principle for revenue and expense recognition.

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The accrual concept states that revenue is recognized when the earnings process is completed and cash receipt is assured.

karoliukas

Under accrual accounting, revenues are recognized in the same period in which the associated:

A) cash is collected.

B) expenses are incurred.

C) invoices are billed.

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Accrual accounting is based on the matching principle, under which revenues are recognized in the same period that the expenses are incurred to generate those revenues.

karoliukas

In its first year of business, Digmore Corporation’s balance sheet shows gross fixed assets at $90 million and accumulated depreciation of $10 million. If the estimated salvage value of these assets is $10 million, and the original estimated useful life is 8 years, what method of depreciation did Digmore most likely use?

A) Units of production.

B) Straight Line.

C) Double-declining-balance.

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$90 − $10 million = $80 million; $80 million / 8 = $10 million depreciation per year under Straight Line depreciation.

karoliukas

A video rental store with a large inventory of newly released movies is attempting to determine an appropriate method of depreciation for its movies for rental. As well, it is trying to determine an appropriate method of determining the cost of its inventory of movies for sale. Which of the following treatments is most appropriate for the movies for rental and movies for sale?

Movies for rental

Movies for sale

A) Straight-line depreciation Last-in, first-out

B) Accelerated depreciation First-in, first-out

C) Accelerated depreciation Last-in, first-out

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With the movies for rental, a greater portion of the decrease in the value of newly released movies would reasonably be realized in the first year, given the rapid rate of obsolescence in view of the large number of movies available. Therefore, depreciating this pool of assets by a greater amount in the first year using an accelerated depreciation method better approximates economic depreciation than depreciating it straight line.
With the movies for sale, there are two methods available for accounting as inventory. FIFO is appropriate for inventory that has a limited shelf life and LIFO is appropriate for inventory that does not deteriorate with age. Because the movies have a very limited shelf life and will greatly deteriorate in value with age, especially after the first year, FIFO is the most appropriate method of accounting for the movies for sale.