Quiz 5 Problems

On December 31, 2017, State Construction Inc.
signs a contract with the state of West Virginia

Department of Transportation to manufacture a bridge over the New River. State Construction
anticipates the construction will take three years. The company's accountants provide the
following contract details relating to the project:
Contract price $780
million
Estimated construction $600
costs million
Estimated total profit $180
million
During the three-year construction period, State Construction incurred costs as follows:
2018 $ 60 million
2019 $360 million
2020 $180 million
State Construction uses the cost-to-cost method to recognize revenue.
Which of the following represent the revenue recognized in 2018, 2019, and 2020?
D) $78 million, $468 million, $234 million

Explanation:
Using the cost method we have following revenue in each year :
Year-1 Year-2 Year-3
Contract Price 780 780 780
Cost to date -60 -420 -600
Futher Cost -540 -180 0
Total Profit 180 180 180

Percetage of completion on cost to cost
Cost incured to Date / Total Cost
Yr-1 Yr-2 yr-3
60/600 420/600 600/600
% Completed 10% 70% 100%

For the Year Ended Revenue
% completed*total contracr price

Revenue 78 546 780
Revenue already recorded 0 78 546
Revenue for the year 78 468 234
Thomas Company receives information that requires the company to increase its expectations of
uncollectible accounts receivable.
Bad Debts Expense is increased
Heller Company offers an unconditional return policy to its customers. During the current
period, the company records total sales of $850,000, with a cost of merchandise to Heller of
$340,000. Based on past experience, Heller Company expects 4% of sales to be returned.
$489,000
Bed Bath and Beyond has a return policy which states that the customer “may return a purchase
for a refund, merchandise credit, or exchange to any of our stores nationwide or to our returns
processing center”. The company can report revenue on the full amount as soon as the
merchandise is sold.
Revenue will be recognized as soon as the merchandise is sold but only for the portion that the
company estimates will not be returned. The estimated returns are netted against sales and set up
as a liability (reserve).
The correct answer is 'False'.
On its 2016 income statement, Abbott Laboratories reported research and development expense
of $1,422,000,000.
B. Research and development expense reduced Abbott Laboratories 2016 net income by
$1,422,000,000.
The 2016 income statements of Leggett & Platt, Inc. reports net sales of $3,749.9 million. The
balance sheet reports accounts receivable, net of $486.6 million at December 31, 2016 and
$520.2 million at December 31, 2015.
DSO = Avg. AR/Sales X 365
DSO = 503.5/3,749.9 x 365
DSO = 49.01 days
A seller, acting as an agent for another company by selling the company’s goods on
consignment, recognizes the gross amount of the sale as revenue.
FALSE
Ticketmaster contracts with the producer of Blue Man Group to sell tickets online. Ticketmaster
charges each customer a fee of $9 per ticket and receives $22 per ticket from the producer.
Ticketmaster does not take control of the ticket inventory. Average ticket price for the event is
$105.
How much revenue should Ticketmaster recognize for each Blue Man Group ticket sold?
C $31 because both the fee from the customer and the Blue Man Group producer are earned
The 2017 Form 10-K of Oracle Corporation, for the May 31, 2017 year-end, included the
following information relating to their allowance for doubtful accounts: Balance in allowance at
the beginning of the year $327 million, accounts written off during the year of $137 million,
balance in allowance at the end of the year $319 million.
What did Oracle Corporation report as bad debt expense for the year?
$129m
In order to report accounts receivable, net, companies estimate the amount they do not expect
to collect from their credit customers.
TRUE
Revenue from a foreign subsidiary will be smaller in U.S. dollars when the dollar strengthens
relative to the foreign currency.
TRUE
The financial statement effects for uncollectible accounts occur when the company writes off the
account because that is when all the uncertainty is resolved.
FALSE
Revenue from a foreign subsidiary will be smaller in U.S. dollars when the dollar strengthens
relative to the foreign currency.
TRUE
Which of the following items creates complications related to revenue recognition?

ALL OF THE ABOVE
The 2016 annual report of Leahy Enterprises included the following disclosure:
During fiscal 2016, the U.S. dollar strengthened relative to the other principal currencies
in which we transact business with the exception of the Indian rupee.

What effect did these currency fluctuations have on Leahy Enterprises’ 2016
consolidated income statement?
Net profit of the Indian subsidiary will be higher
Costco Wholesale Corporation collects annual non-refundable membership fees from

customers.
When should Costco recognize revenue for these membership fees?
Costco should record membership fees evenly over the year

even if the fee is nonrefundable because Sam's has an
obligation to stay open for business for a year to honor the
customer's membership.
The correct answer is: Evenly over the membership year
At what amount will accounts receivable be reported on the balance sheet if the gross
receivable balance is $50,000 and the allowance for uncollectible accounts is estimated at 16%
of gross receivables?
$42,000
According to GAAP revenue recognition criteria, in order for revenue to be recognized on the
income statement, it must be earned and realized (realizable).
According to GAAP revenue recognition criteria, revenue must

be both realized (realizable) and earned, to be recognized on
the income statement. The issue of when the revenue is earned
is subject to professional judgment.
The correct answer is 'True'.
The 2016 financial statements of Leggett & Platt, Inc. include the following information
in a footnote.
(in millions) 2016 2015
Allowance for doubtful accounts $7.2 $9.3
Total accounts and other
receivables, net $486.6 $520.2
What are the company’s current gross accounts and other receivables at the end of
2016?
??? NOT $493.8 million
McKinnon Enterprises owns a professional ice hockey team, the Rockford Penguins. The
company sells season tickets for its upcoming season and receives $960,000 cash. The season
starts January 1, 2018, with five home games occurring monthly over the next six months.
What is the balance in the company’s deferred revenue account at the end of April 2018?
(Assume the deferred revenue account had a zero balance on January 1, 2018.
?? (NOT 640,000)
Intel Corporation reported the following in its 2016 financial statements (in millions):
December 31, 2016 2015
Total assets $113,327 $101,459
Revenues 59,387 55,355
Research and development 12,740 12,128
expenses
Net income 10,316 11,420
What is the common-size amount for Intel Corporation’s research and development
expense for 2016?
21.5%

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Quiz 5 Problems

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On December 31, 2017, State Construction Inc.

signs a contract with the state of West Virginia

State Construction uses the cost-to-cost method to recognize revenue.

D) $78 million, $468 million, $234 million

Which of the following items creates complications related to revenue recognition?

Costco Wholesale Corporation collects annual non-refundable membership fees from

When should Costco recognize revenue for these membership fees?

Costco should record membership fees evenly over the year

According to GAAP revenue recognition criteria, revenue must

??? NOT $493.8 million

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