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Exam 5: Income Measurement

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Question 41

True/False

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Use of the percentage-of-completion method is dependent on a firm's ability to make dependable forecasts of future costs.

A) True
B) False

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Question 42

Multiple Choice

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Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS can recognize revenue associated with the $50,000

A) when Steffi signs the agreement, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.
B) as soon as they have assisted Steffi in setting up the store, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.
C) Gradually as they provide advertising and administration services.
D) When they receive installment payments from Steffi, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.Substantial performance has occurred, and can estimate bad debts.

E) C) and D)
F) A) and D)

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Question 43

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Assume ID cannot estimate uncollectible accounts accurately and recognizes revenue using the cost recovery method. Required: Prepare journal entries to record the sale, cash collections, and recognition of gross profit (if appropriate) in 2008 and 2009.

Hulkster's 2009 receivables turnover is:

Hulkster's 2009 inventory turnover is:

In 2009, Reliable would recognize gross profit of:

Estimated losses on long-term contracts are recognized ratably over the contract term regardless of the revenue recognition method used.

In 2009, KP Building Inc. began work on a four-year construction project (called "Cincy One"). The contract price is $300 million. KP uses the percentage-of-completion method of accounting. At the end of 2009, the following financial statement information indicate the results to date for Cincy One: Required: Compute the following, placing your answer in the spaces provided and showing supporting computations below:

In 2010, Reliable would recognize gross profit of:

Assuming BCC uses the percentage-of-completion method of revenue recognition, the gross profit recognized in 2008 would be (rounded to the nearest thousand) :

What is the amount of gross profit on the project recognized by CCC during 2009?

Assume that McCombs uses the percentage-of-completion method for revenue recognition. Required: Compute the amount of gross profit recognized during 2008 and 2009.

What are CCC's estimated remaining construction costs on the project at the end of 2009?

In the DuPont formula, return on assets equals:

Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy, and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing gross profit associated with one of these sales?

Hulkster's 2009 asset turnover is:

The following footnote appeared in a recent annual report to stockholders of Starbucks Corporation: "Initial nonrefundable development fees required under licensing agreements are recognized upon substantial performance of services for new market business development activities, such as initial business, real estate and store development planning, as well as providing operational materials and functional training courses for opening new licensed retail markets. Additional store licensing fees are recognized when new licensed stores are opened." Briefly explain why Starbucks recognizes this type of revenue as it does.

Its average days in inventory for 2009.

Suppose that, in 2010, Indiana incurred costs of $63.75 million and estimated an additional $42.75 million in costs to complete the project. Using the percentage-of-completion method, Indiana:

The following footnote appeared in a recent annual report to stockholders of Sprint Corporation: "Certain Wireless activation fees associated with unbundled sales continue to be deferred and amortized over the average life of the subscriber. Certain Local installation fees are deferred and amortized over the average life of the customer." Briefly explain why Sprint recognizes this type of revenue as it does.