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.
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Ans: D
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3. On January 15, 2014, Bella Vista Company enters into a contract to build custom
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equipment for ABC Carpet Company. The contract specified a delivery date of March 1.
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The equipment was not delivered until March 31. The contract required full payment of
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$75,000 30 days after delivery. This contract should be
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a. recorded on January 15, 2014.
b. recorded on March 1, 2014.
c. recorded on March 31, 2014.
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d. recorded on April 30, 2014.
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Ans: C
4. When multiple performance obligations exists in a contract, they should be accounted for
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as a single performance obligation when
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a. each service is interdependent and interrelated.
b. both performance obligations are distinct but interdependent.
c. the product is distinct within the contract.
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d. determination cannot be made.
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Ans: A
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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
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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
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a. debit to Accounts Receivable for $100,000.
b. debit to Accounts Receivable for $85,000.
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c. debit to Contract Assets for $85,000.
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d. debit to Contract Assets for $100,000.
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Ans: D
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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
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incurred during the year to the
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a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.
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Ans: B
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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
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a. recognized in the current period, regardless of whether the percentage-of-completion
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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.
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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
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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
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10. Marle Construction enters into a contract with a customer to build a warehouse for
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$850,000 on March 30, 2014 with a performance bonus of $50,000 if the building is
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completed by July 31, 2014. The bonus is reduced by $10,000 each week that
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completion is delayed. Marle commonly includes these completion bonuses in its
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contracts and, based on prior experience, estimates the following completion outcomes:
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Completed by Probability
July 31, 2014 65%
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August 7, 2014 25%
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August 14, 2014 5%
August 21, 2014 5%
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The transaction price for this transaction is
a. $895,000
b. $850,000
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c. $552,500
d. $585,000
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Ans: A
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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,
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$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,
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advertising expense of $300, and installation and setup costs of $390. The total profit on
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units sold for the consignor is
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a. $11,295
b. $4,695
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c. $6,045
d. $9,945 rs e
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Ans: B
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Use the following information for questions 13-16:
Seasons Construction is constructing an office building under contract for Cannon Company.
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The contract calls for progress billings and payments of $1,240,000 each quarter. The total
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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.
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* 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
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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
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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
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*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
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building; however, the estimate of total costs to be incurred has risen to $14,400,000 due
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to unanticipated price increases. What is reported in the balance sheet at December 31,
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2015 for Seasons as the difference between the Construction in Process and the Billings
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on Construction in Process accounts, and is it a debit or a credit?
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Difference between the accounts Debit/Credit
a.
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$3,380,000 Credit
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b. $1,240,000 Debit
c. $880,000 Debit
d. $1,240,000 Credit
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Ans: B
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*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
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$15,000,000. What is the total amount of Revenue from Long-Term Contracts and
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Construction Expenses that Seasons will recognize for the year ended December 31,
2016?
Revenue Expenses
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a. $14,880,000 $15,000,000
b. $3,720,000 $ 3,750,000
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c. $3,720,000 $ 4,200,000
d. $3,750,000 $ 3,750,000
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Ans: C
The following information relates to questions 17 and 18.
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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
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Ans: B
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*18.
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At December 31, 2015 Cooper would report Construction in Process in the amount of:
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a. $690,000
b. $7,590,000
c. $8,280,000
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d. $7,080,000
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Ans: C
19. Hayes Construction Corporation contracted to construct a building for $4,500,000.
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Construction began in 2014 and was completed in 2015. Data relating to the contract are
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summarized below:
Year ended
December 31,
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2014 2015
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Costs incurred $1,800,000 $1,350,000
Estimated costs to complete 1,200,000 —
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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.
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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:
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Balance Sheet
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Accounts receivable—construction contract billings $200,000
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Construction in progress $600,000
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Less contract billings 480,000
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Costs and recognized profit in excess of billings 120,000
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Income Statement
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Income (before tax) on the contract recognized in 2015 $120,000
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*20. How much cash was collected in 2015 on this contract?
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a. $200,000
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b. $280,000
c. $40,000
d. $480,000
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Ans: B
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*21. What was the initial estimated total income before tax on this contract?
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a. $600,000
b. $640,000
c. $800,000
d. $960,000
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Ans: D
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