honeycfa

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.

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

honeycfa

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.

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Under the percentage-of-completion method, one-half of the total revenue is recognized because one-half of the costs have been incurred ($40,000 / $80,000). Therefore, revenue will be equal to $50,000, expenses are $40,000, and net income will be $10,000.

honeycfa

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)

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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) $22,500.

B) $20,000.

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

honeycfa

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.

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

honeycfa

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

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Recognition of income depends on cash collected under both methods.

honeycfa

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.

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(1,200 × $1,000 × 12/20) = $720,000

honeycfa

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

honeycfa

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.

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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.

honeycfa

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.

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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, minus revenue that has already been recognized.

honeycfa

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.

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Under the completed contract method, profit is only reported upon completion of the contract.