Multiple Choice: - Conceptual

MULTIPLE CHOICE—Conceptual
21. The revenue recognition principle provides that revenue is recognized when
a. it is realized.
b. it is realizable.
c. it is realized or realizable and it is earned.
d. none of these.
22. When goods or services are exchanged for cash or claims to cash (receivables),
revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.
23. When the entity has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues, revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.
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24. Which of the following is not an accurate representation concerning revenue
recognition?
a. Revenue from selling products is recognized at the date of sale, usually interpreted
to mean the date of delivery to customers.
b. Revenue from services rendered is recognized when cash is received or when
services have been performed.
c. Revenue from permitting others to use enterprise assets is recognized as time
passes or as the assets are used.
d. Revenue from disposing of assets other than products is recognized at the date of
sale.
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25. The process of formally recording or incorporating an item in the financial statements of
an entity is
a. allocation.
b. articulation.
c. realization.
d. recognition.
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26. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract
on each appliance sold. Although Dot Point sells the appliances on an installment basis,
all service contracts are cash sales at the time of purchase by the buyer. Collections
received for service contracts should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.
27. Which of the following is not a reason why revenue is recognized at time of sale?
a. Realization has occurred.
b. The sale is the critical event.
c. Title legally passes from seller to buyer.
d. All of these are reasons to recognize revenue at time of sale.
28. An alternative available when the seller is exposed to continued risks of ownership
through return of the product is
a. recording the sale, and accounting for returns as they occur in future periods.
b. not recording a sale until all return privileges have expired.
c. recording the sale, but reducing sales by an estimate of future returns.
d. all of these.
29. A sale should not be recognized as revenue by the seller at the time of sale if
a. payment was made by check.
b. the selling price is less than the normal selling price.
c. the buyer has a right to return the product and the amount of future returns cannot
be reasonably estimated.
d. none of these.
30. The FASB concluded that if a company sells its product but gives the buyer the right to
return the product, revenue from the sales transaction shall be recognized at the time of
sale only if all of six conditions have been met. Which of the following is not one of these
six conditions?
a. The amount of future returns can be reasonably estimated.
b. The seller's price is substantially fixed or determinable at time of sale.
c. The buyer's obligation to the seller would not be changed in the event of theft or
damage of the product.
d. The buyer is obligated to pay the seller upon resale of the product.
31. In selecting an accounting method for a newly contracted long-term construction project,
the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of
progress toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term
construc-tion contracts.
d. the inherent nature of the contractor's technical facilities used in construction.
32. The percentage-of-completion method must be used when certain conditions exist.
Which of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably
dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration
to be exchanged, and the manner and terms of settlement.
33. When work to be done and costs to be incurred on a long-term contract can be
estimated dependably, which of the following methods of revenue recognition is
preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these
34. How should the balances of progress billings and construction in process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred
expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit
balance.
35. In accounting for a long-term construction-type contract using the percentage-of-

completion method, the gross profit recognized during the first year would be the
estimated total gross profit from the contract, multiplied by the percentage of the costs
incurred during the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.
36. How should earned but unbilled revenues at the balance sheet date on a long-term
construction contract be disclosed if the percentage-of-completion method of revenue
recognition is used?
a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for the
portion of work completed.
37. The principal disadvantage of using the percentage-of-completion method of recognizing

revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable
uncertainty.
c. is likely to assign a small amount of revenue to a period during which much revenue
was actually earned.
d. none of these.
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38. One of the more popular input measures used to determine the progress toward
completion in the percentage-of-completion method is
a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.
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39. The principal advantage of the completed-contract method is that
a. reported revenue is based on final results rather than estimates of unperformed
work.
b. it reflects current performance when the period of a contract extends into more than
one accounting period.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case when
the percentage-of-completion method is used.
40. Under the completed-contract method

a. revenue, cost, and gross profit are recognized during the production cycle.
b. revenue and cost are recognized during the production cycle, but gross profit
recognition is deferred until the contract is completed.
c. revenue, cost, and gross profit are recognized at the time the contract is completed.
d. none of these.
41. Cost estimates on a long-term contract may indicate that a loss will result on completion
of the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion
or completed-contract method is employed.
b. recognized in the current period under the percentage-of-completion method, but the
completed-contract method should defer recognition of the loss to the time when the
contract is completed.
c. recognized in the current period under the completed-contract method, but the
percentage-of-completion method should defer the loss until the contract is
completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or completed-contract method is employed.

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MULTIPLE CHOICE—Conceptual

35. In accounting for a long-term construction-type contract using the percentage-of-

37. The principal disadvantage of using the percentage-of-completion method of recognizing

40. Under the completed-contract method

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