Chapter 18 M.C.

practice

1. A contract

a. must be in writing to be an enforceable contract.

b. is an agreement that creates enforceable rights and obligations.
c. is enforceable if each party can unilaterally terminate the contract.
d. does not need to have commercial substance.
Ans: B

2. Revenue from a contract with a customer

a. is recognized when the customer receive the rights to receive consideration.

b. is recognized even if the contract is still wholly unperformed.
c. can be recognized even when a contract is still pending.
d. cannot be recognized until a contract exists.
Ans: D

3. On January 15, 2014, Bella Vista Company enters into a contract to build custom equipment for
ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not
delivered until March 31. The contract required full payment of $75,000 30 days after delivery.
This contract should be

a. recorded on January 15, 2014.

b. recorded on March 1, 2014.
c. recorded on March 31, 2014.
d. recorded on April 30, 2014.

Ans: C

4. When multiple performance obligations exists in a contract, they should be accounted for as a
single performance obligation when

a. each service is interdependent and interrelated.

b. both performance obligations are distinct but interdependent.
c. the product is distinct within the contract.
d. determination cannot be made.

Ans: A

5. Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-
type warranty for the first 90 days. Entertainment Tonight also offers an optional extended
coverage plan under which it will repair or replace any defective part for 2 years beyond the
expiration of the assurance-type warranty. The total transaction price for the sale of the stereo
system and the extended warranty is $3,000. The standalone price of each is $2,300 and $800,
 respectively. The estimated cost of the assurance-warranty is $350. The accounting for warranty
will include a

a. debit to Warranty Expense, $800.

b. debit to Warranty Liability, $350
c. credit to Warranty Liability, $800
d. credit to Unearned Warranty Revenue, $800
Ans: D

6. On July 31, O’Malley Company contracted to have two products built by Taylor Manufacturing
for a total of $185,000. The contract specifies that payment will only occur after both products
have been transferred to O’Malley Company. O’Malley determines that the standalone prices
are $100,000 for Product 1 and $85,000 for Product 2. On August 1, when Product 1 has been
transferred, the journal entry to record this event include a

a. debit to Accounts Receivable for $100,000.

b. debit to Accounts Receivable for $85,000.
c. debit to Contract Assets for $85,000.
d. debit to Contract Assets for $100,000.
Ans: D

7. 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.
Ans: B

8. 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 defers 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 defers 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.

Ans: A
9. When there is a significant increase in the estimated total contract costs but the increase does
not eliminate all profit on the contract, which of the following is correct?

a. Under both the percentage-of-completion and the completed-contract methods, the

estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase
requires a current period adjustment of excess gross profit recognized on the project
in prior periods.
c. Under the completed-contract method only, the estimated cost increase requires a
current period adjustment of excess gross profit recognized on the project in prior
periods.
d. No current period adjustment is required.

Ans: B

10. Marle Construction enters into a contract with a customer to build a warehouse for $850,000 on
March 30, 2014 with a performance bonus of $50,000 if the building is completed by July 31,
2014. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly
includes these completion bonuses in its contracts and, based on prior experience, estimates
the following completion outcomes:

Completed by Probability
July 31, 2014 65%
August 7, 2014 25%
August 14, 2014 5%
August 21, 2014 5%

The transaction price for this transaction is

a. $895,000
b. $850,000
c. $552,500
d. $585,000

Ans: A

11. Meyer & Smith is a full-service technology company. They provide equipment, installation
services as well as training. Customers can purchase any product or service separately or as a
bundled package. Container Corporation purchased computer equipment, installation and
training for a total cost of $120,000 on March 15, 2014. Estimated standalone fair values of the
 equipment, installation, and training are $75,000, $50,000, and $25,000 respectively. The
transaction price allocated to equipment, installation and training is

a. $75,000, $50,000, $25,000 respectively

b. $40,000, $40,000, $40,000 respectively
c. $120,000 for the entire bundle.
d. $60,000, $40,000 and $20,000 respectively.

Ans: D

12. On August 5, 2014, Famous Furniture shipped 20 dining sets on consignment to Furniture
Outlet, Inc. The cost of each dining set was $350 each. The cost of shipping the dining sets
amounted to $1,800 and was paid for by Famous Furniture. On December 30, 2014, the
consignee reported the sale of 15 dining sets at $850 each. The consignee remitted payment for
the amount due after deducting a 6% commission, advertising expense of $300, and installation
and setup costs of $390. The total profit on units sold for the consignor is

a. $11,295
b. $4,695
c. $6,045
d. $9,945

Ans: B

Use the following information for questions 13-16:

Seasons Construction is constructing an office building under contract for Cannon Company. The
contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is
$14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the building will
take 3 years to complete, and commences construction on January 2, 2014.

*13. At December 31, 2014, Seasons estimates that it is 30% complete with the construction, based
on costs incurred. What is the total amount of Revenue from Long-Term Contracts recognized
for 2014 and what is the balance in the Accounts Receivable account assuming Cannon
Company has not yet made its last quarterly payment?

Revenue Accounts Receivable

a. $4,960,000 $4,960,000
b. $4,260,000 $ 1,240,000
c. $4,464,000 $ 1,240,000
d. $4,260,000 $4,960,000

Ans: C
*14. At December 31, 2015, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $14,400,000 due to
unanticipated price increases. What is the total amount of Construction Expenses that Seasons
will recognize for the year ended December 31, 2015?

a. $10,800,000
b. $6,300,000
c. $6,390,000
d. $6,540,000

Ans: D

*15. At December 31, 2015, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $14,400,000 due to
unanticipated price increases. What is reported in the balance sheet at December 31, 2015 for
Seasons as the difference between the Construction in Process and the Billings on Construction
in Process accounts, and is it a debit or a credit?

Difference between the accounts Debit/Credit

a. $3,380,000 Credit
b. $1,240,000 Debit
c. $880,000 Debit
d. $1,240,000 Credit

Ans: B

*16. Seasons Construction completes the remaining 25% of the building construction on December
31, 2016, as scheduled. At that time the total costs of construction are $15,000,000. What is the
total amount of Revenue from Long-Term Contracts and Construction Expenses that Seasons
will recognize for the year ended December 31, 2016?

Revenue Expenses
a. $14,880,000 $15,000,000
b. $3,720,000 $ 3,750,000
c. $3,720,000 $ 4,200,000
d. $3,750,000 $ 3,750,000

Ans: C
The following information relates to questions 17 and 18.

Cooper Construction Company had a contract starting April 2015, to construct a $18,000,000 building
that is expected to be completed in September 2017, at an estimated cost of $16,500,000. At the end of
2015, the costs to date were $7,590,000 and the estimated total costs to complete had not changed.
The progress billings during 2015 were $3,600,000 and the cash collected during 2015 was 2,400,000.

*17. For the year ended December 31, 2015, Cooper would recognize gross profit on the building of:

a. $632,500
b. $690,000
c. $810,000
d. $0

Ans: B

*18. At December 31, 2015 Cooper would report Construction in Process in the amount of:

a. $690,000
b. $7,590,000
c. $8,280,000
d. $7,080,000

Ans: C

19. Hayes Construction Corporation contracted to construct a building for $4,500,000. Construction
began in 2014 and was completed in 2015. Data relating to the contract are summarized below:

Year ended

December 31,

2014 2015

Costs incurred $1,800,000 $1,350,000

Estimated costs to complete 1,200,000 —

Hayes uses the percentage-of-completion method as the basis for income recognition. For the
years ended December 31, 2014, and 2015, respectively, Hayes should report gross profit of

a. $810,000 and $540,000.

b. $2,700,000 and $1,800,000.
c. $900,000 and $450,000.
 d. $0 and $1,350,000.

Ans: C

Use the following information for questions 20 and 21.

In 2015, Fargo Corporation began construction work under a three-year contract. The contract price is
$4,800,000. Fargo uses the percentage-of-completion method for financial accounting purposes. The
income to be recognized each year is based on the proportion of costs incurred to total estimated costs
for completing the contract. The financial statement presentations relating to this contract at December
31, 2015, follow:

Balance Sheet

Accounts receivable—construction contract billings $200,000

Construction in progress $600,000

Less contract billings 480,000

Costs and recognized profit in excess of billings 120,000

Income Statement

Income (before tax) on the contract recognized in 2015 $120,000

*20. How much cash was collected in 2015 on this contract?

a. $200,000
b. $280,000
c. $40,000
d. $480,000

Ans: B

*21. What was the initial estimated total income before tax on this contract?

a. $600,000
b. $640,000
c. $800,000
d. $960,000
Ans: D