1215

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) $300,000.

B) -$200,000.

C) -$450,000.

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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

1215

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

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

B) earned, and expenses are recognized when incurred.

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.

1215

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.

1215

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

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

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

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

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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.

1215

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.

1215

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.