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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.

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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.

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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.

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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.

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LOS b, (Part 2): Demonstrate specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, and gross and net reporting of revenue).

 

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.

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The cost recovery method is used when future cash collections are not assured even after receipt of partial payments. Gross profit is not recognized until all of the cost of goods sold is collected.

The percentage-of-completion method is used when ultimate payment is assured and revenue is earned as costs are incurred. Profit is recognized corresponding to the percentage of costs incurred to the total estimated.

 

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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.

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In accounting for long-term construction contracts, the percentage-of-completion method is preferable to the completed contract method when estimates of the costs to complete and the extent of progress toward completion are reasonably dependable.

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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.

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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.

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

A) realizable and earned.

B) 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.

honeycfa

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.

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