Q16. If Hengel used the percentage-of-completion method, what amount of gross profit (loss) would Hengel report in its 2002

   income statement?

A)   $22,500.

B)   $20,000.

C)   $(20,000).

Q17. 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)   $0.

B)   $30 million.

C)   $20 million.

Q18. 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)     Cost recovery method.

B)     Installment sales method.

C)     Percentage-of-completion method.

Q19. 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.

Q20. 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.

答案和详解如下：

Q16. If Hengel used the percentage-of-completion method, what amount of gross profit (loss) would Hengel report in its 2002

   income statement?

A)   $22,500.

B)   $20,000.

C)   $(20,000).

Correct answer is B)         

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

Q17. 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)   $0.

B)   $30 million.

C)   $20 million.

Correct answer is A)

The completed contract method is used when a reliable estimate of the total costs cannot be determined until the contract is finished. Because of the significant uncertainty surrounding the ground water costs, the completed contract method should be used in this transaction, and no revenue should be recognized in 2004 or any later year until the contract is completed or the cost uncertainty is resolved.

Q18. 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)     Cost recovery method.

B)     Installment sales method.

C)     Percentage-of-completion method.

Correct answer is C)

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.

Q19. 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.

Correct answer is A)

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.

Q20. 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.

Correct answer is A)

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

thanks

re

thx