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) a determined or determinable price.

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

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

A) realizable and earned.

B) earned.

C) measurable.

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

A) earned, and expenses are recognized when incurred.

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

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

If a reliable estimate of total costs of the contract does not exist, which of the following revenue recognition methods should be used?

A) Cost recovery method.

B) Completed contract method.

C) Percentage-of-completion method.

In accounting for long-term construction contracts, the percentage-of-completion method is preferable to the completed contract method when:

A) estimates of the costs to complete and the extent of progress toward completion are reasonably dependable.

B) the contracts are of a relatively short duration (less than one year).

C) lack of dependable cost estimates cause forecasts to be doubtful.

The Kammel 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, Kammel had costs of $30 million. Kammel’s reported profit for the first year of the contract, using the completed contract method, is:

A) $0.

B) $15 million.

C) $10 million.

Under the cost recovery method, profit is recognized:

A) at time of delivery.

B) after the amount of cost has been collected.

C) as collection occurs.

Walker Company received a letter on November 31, 2003 indicating that Johnson, Inc. would purchase a specialty machine priced at $4,000,000. On February 13, 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. After a labor dispute, Walker finally completed manufacture 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.

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) $720,000.

B) $960,000.

C) $1,200,000.

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.

Which of the following statements regarding the methods of revenue recognition is most accurate?

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

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

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

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) total costs incurred to total estimated cost.

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

C) costs incurred in year 3 to total billings.

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

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

B) in proportion to the cash collection.

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

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

Cost-Recovery Method

Installment Method

A) No Yes

B) Yes Yes

C) Yes No

CPP Corporation has a contract to build a custom test chamber for a client for $100,000. CPP Corporation uses the percentage-of-completion method for accounting and estimates the total costs for the project to be equal to $80,000. CPP Corporation has promised to complete the project within three years. At year-end the customer has paid $60,000, equaling the total amount billed for the year, and total costs incurred to date are $40,000. On the income statement, net income for the year-end will be:

A) $20,000.

B) -$10,000.

C) $10,000.

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 $0

B) ($20,000) $0

C) $0 ($20,000)

A) $22,500.

B) $20,000.

C) $(20,000).

Football Contractors, Inc. has contracted to build a stadium for the City of Washburn. The contract price is $100 million and costs are estimated at $60 million. Costs are not assured, however, because there is a material risk, which Football Contractors has assumed, that ground water problems might slow construction and increase costs by as much as $40 million. In 2004, the first year of the agreement, Football Contractors, Inc. billed $30 million, received a $20 million payment, and incurred $15 million in costs. For 2004 Football Contractors, Inc. should recognize revenue from the City of Washburn transaction in the amount of:

A) $30 million.

B) $0.

C) $20 million.

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.

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

A) Completed contract method.

B) Percentage-of-completion method.

C) Cost recovery method.

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) $10 million.

B) $0.

C) $20 million.

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) Neither statement is correct.

C) Both statements are correct.

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) Completed contract method.

C) Percentage-of-completion method.

Which revenue recognition method is used when the payment is assured and revenue is earned as costs are incurred?

A) Percentage-of-completion method.

B) Installment sales method.

C) Cost recovery method.

Jerry Krome, CFA, is an equity analyst. The head of research at Krome’s firm composes a memo that contains the following statements:

• To the extent that management has discretion over the firm’s revenue recognition, an analyst should consider policies that recognize revenue later to be more conservative than policies that recognize revenue sooner.
• When comparing the performance of companies, an analyst can use the information in the financial statement disclosures to adjust the financial statements for differences in revenue recognition policies.

With regard to the implications of revenue recognition policies for financial analysis, Krome should agree with:

A) both of these statements.

B) neither of these statements.

C) only one of these statements.

Information about a company’s revenue recognition policies is most likely disclosed in:

A) the standard auditor’s report.

B) the financial statement notes.

C) Management’s Discussion and Analysis.

When evaluating the differences between two revenue recognition policies, an analyst should view the policy as more conservative which:

A) recognizes revenue later.

B) results in less leverage on the balance sheet.

C) is more dependent on management estimates.