MULTIPLE CHOICE

1. Which of the following best describes the condition(s) that must be present for the recognition
of revenue?
a. The revenue must be earned, measurable, and collected.
b. The revenue must be earned and collectible.
c. The revenue must be earned, measurable, and collectible.
d. The revenue must be measurable and collectible.

2. An adjusting entry in which revenue is recognized and a receivable is established indicates

that revenue has been

Earned Collected
a. Yes No
b. Yes Yes
c. No Yes
d. No No

3. A company providing maintenance services on equipment for a fixed periodic fee would
recognize
a. an equal amount of service revenue for each act.
b. service revenue over the fixed period by the straight-line method.
c. service revenue in proportion to the direct costs to the provider of the services to perform
each act.
d. service revenue only when the fixed period has ended.

4. Which of the following types of service transactions is most likely to require the proportional
performance method of revenue recognition based on the seller's direct costs to perform each
act?
a. Processing of monthly mortgage payments by a mortgage banker
b. Providing lessons, examinations, and grading by a correspondence school
c. Providing maintenance services on equipment for a fixed periodic fee
d. Delivering freight (by a trucking firm)

5. Builder Construction Company's projects extend over several years and collection of
receivables is reasonably certain. Each project has a contract that specifies a price and the
rights and obligations of all parties. Both the contractor and the customer are expected to
fulfill their contractual obligations on each project. Reliable estimates can be made of the
extent of progress and cost to complete each project. The method that the company should use
to account for construction revenue is
a. installment sales.
b. percentage-of-completion.
c. completed-contract.
d. cost recovery.
 6. How should the balances of Progress Billings and Construction in Progress be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress Billings as income, Construction in Progress as inventory
b. Net, as income from construction if credit balance, and loss from construction if debit
balance
c. Progress Billings as deferred income, Construction in Progress as a current asset
d. Net, as a current asset if debit balance and current liability if credit balance

7. If the percentage-of-completion method is used, what is the basis for determining the gross
profit to be recognized in the second year of a three-year contract?
a. Cumulative actual costs and estimated costs to complete
b. Incremental cost for the second year only
c. Cumulative actual costs incurred only
d. No gross profit would be recognized in year 2

8. If the completed-contract method is used, what is the basis for determining the income to be
recognized in the second year of a three-year contract?
a. Cumulative actual costs incurred only
b. Incremental cost for the second year only
c. Latest available estimated costs
d. No income would be recognized in year 2

9. The installment method of recognizing revenue

a. should be used only in cases in which no reasonable basis exists for estimating the
collectibility of receivables.
b. is not a generally accepted accounting principle under any circumstances.
c. should be used for book purposes only if it is used for tax purposes.
d. is an acceptable alternative accounting principle for a firm that makes installment sales.

10. Which of the following would be used in the calculation of the gross profit recognized in the
third and final year of a construction contract that is accounted for using the percentage-of-
completion method?
Actual Income
Contract Total Previously
Price Costs Recognized
a.   Yes Yes No
b.   Yes Yes Yes
c.   Yes No Yes
d.   No Yes Yes

11. Assume the percentage-of-completion method of revenue recognition is used on a long-term

construction contract. Under this method, revenues that are earned but unbilled at the balance
sheet date should be disclosed
 a. as a long-term receivable in the noncurrent assets section of the balance sheet.
b. only as a footnote disclosure until the customer is billed for the percentage of work
completed.
c. as construction in progress in the current assets section of the balance sheet.
d. as construction in progress in the noncurrent assets section of the balance sheet.

12. When using the installment sales method,

a. total revenues and costs are recognized at the point of sale, but gross profit is
deferred in proportion to the cash that is uncollected from the sale.
b. gross profit is recognized only after the amount of cash collected exceeds the cost of the
item sold.
c. revenue, costs, and gross profit are recognized proportionally as the cash is received
from the sale of product.
d. gross profit is deferred until all cash is received, but revenues and costs are recognized in
proportion to the cash collected from the sale.

13. The completed-contract method of accounting for long-term construction-type contracts is

preferable when
a. a contractor is involved in numerous projects.
b. the contracts are of a relatively long duration.
c. estimates of costs to complete and extent of progress toward completion are reasonably
dependable.
d. there are inherent uncertainties in the contract beyond normal business risks.

14. Which of the following is NOT an element identified by the AICPA as being necessary in
order to use percentage-of-completion accounting?
a. The construction period can be reasonably estimated.
b. The buyer can be expected to satisfy obligations under the contract.
c. Dependable estimates can be made of the extent of progress toward completion.
d. Dependable estimates can be made of contract costs.

15. Which of the following is NOT a difference between the percentage-of completion and
completed-contract methods of accounting for long-term construction contracts?
a. They report different amounts for inventory during the construction period.
b. They report different amounts for progress billings during the construction period.
c. They cause a different cash inflow during the construction period.
d. They report different amounts for accounts receivable during the construction period.

16. The theoretical support for using the percentage-of-completion method of accounting for
long-term construction projects is that it
a. is more conservative than the completed-contract method.
b. produces a realistic matching of expenses with revenues.
c. more closely conforms to the cost principle.
d. reports a lower Net Income figure than the completed-contract method.
17. If a company uses the completed-contract method of accounting for long-term construction
contracts, then during the period of construction, financial information related to a long-term
contract will
a. appear on both the income statement and balance sheet during the construction period.
b. appear only on the income statement during the period of construction.
c. appear only on the balance sheet during the period of construction.
d. not appear on the financial statements.

18. When the percentage-of-completion method of accounting for long-term construction projects
is used, why is Construction in Progress increased by the annual recognized gross profit on
long-term construction contracts?
a. The cost of the contract has increased.
b. The project's value has increased above cost.
c. The economy experiences inflation over the construction period.
d. Construction in Progress is not increased by the annual recognized profit.

19. When comparing the percentage-of-completion and completed-contract methods of

accounting for long-term construction contracts, both methods will report the same
a. balances each period in the Progress Billings account.
b. expense for cost of construction each year.
c. amount of income in the year of completion.
d. inventory carrying value each year during the construction period.

20. The cost recovery method is

a. used only when circumstances surrounding a sale are so uncertain that earlier
recognition is impossible.
b. the most common method of accounting for real estate sales.
c. similar to percentage-of-completion accounting.
d. never acceptable under generally accepted accounting principles.

21. Franchise fees are properly recognized as revenue

a. when received in cash.
b. when a contractual agreement has been signed.
c. after the franchise business has begun operations.
d. after the franchiser has substantially performed its service.

22. Goods on consignment should be included in the inventory of

a. the consignor but not the consignee.
b. both the consignor and the consignee.
c. the consignee but not the consignor.
d. neither the consignor nor the consignee.
23. In accounting for sales on consignment, sales revenue and the related cost of goods sold
should be recognized by the
a. consignor when the goods are shipped to the consignee.
b. consignee when the goods are shipped to the third party.
c. consignor when notification is received the consignee has sold the goods.
d. consignee when cash is received from the customer.

24. A company uses the percentage-of-completion method to account for a four-year construction
contract. Progress billings sent in the second year that were collected in the third year would
a. be included in the calculation of the income recognized in the second year.
b. be included in the calculation of the income recognized in the third year.
c. be included in the calculation of the income recognized in the fourth year.
d. not be included in the calculation of the income recognized in any year.

25. In accounting for a long-term construction contract for which there is a projected profit, the
balance in the Construction in Progress account at the end of the first year of work using the
percentage-of-completion method would be
a. zero.
b. the same as the completed-contract method.
c. higher than the completed-contract method.
d. lower than the completed-contract method.

26. On May 1, 2014, Lavender Construction Company entered into a fixed-price contract to
construct an apartment building for $3,000,000. Lavender appropriately accounts for this
contract under the percentage-of-completion method. Information relating to the contract is as
follows:
2014 2015
At December 31:
Percentage of completion ........ 20% 60%
Estimated costs at completion ... $2,250,000 $2,400,000
Income recognized (cumulative) .. $ 150,000 $ 360,000

What is the amount of contract costs incurred during the year ended December 31, 2015?
a. $600,000
b. $960,000
c. $990,000
d. $1,440,000

27. F & R Construction, Inc. has consistently used the percentage-of-completion method of
recognizing revenue. Last year F & R started work on a $5,000,000 construction contract,
which was completed this year. The accounting records disclosed the following data for last
year:
Progress billings ..................................... $1,500,000
 Costs incurred ........................................ 1,350,000
Collections ........................................... 1,050,000
Estimated cost to complete ............................ 2,600,000

How much revenue should F & R have recognized on this contract last year?
a. $1,500,000
b. $1,700,000
c. $1,100,000
d. $400,000

28. Gunner Construction, Inc. has consistently used the percentage-of-completion method of
recognizing revenue. During 2014, Gunner started work on a $2,500,000 fixed-price
construction contract. The accounting records disclosed the following data for the year ended
December 31, 2014:

Costs incurred ........................................ $ 465,000

Estimated cost to complete ............................ 2,085,000
Progress billings ..................................... 550,000
Collections ........................................... 350,000

How much loss should Gunner have recognized in 2014?

a. $15,000
b. $35,000
c. $50,000
d. $315,000

29. Sailor Construction Company has consistently used the percentage-of- completion method.
On January 10, 2014, Sailor began work on a $3,000,000 construction contract. At the
inception date, the estimated cost of construction was $2,250,000. The following data relate to
the progress of the contract:

Gross profit recognized at December 31, $ 300,000

2014 ..........
Costs incurred Jan. 10, 2011, through Dec. 31, 1,800,000
2015 ...
Estimated cost to complete at December 31, 600,000
2015 .......

How much gross profit should Sailor recognize for the year ended December 31, 2015?
a. $150,000
b. $262,500
c. $300,000
d. $450,000
30. For a construction firm using the completed-contract method, if costs exceed billings on some
contracts by $1,000,000 and billings exceed costs by $800,000 on others, the contracts should
ordinarily be reported as a
a. current asset of $200,000.
b. current liability of $200,000.
c. current asset of $1,000,000 less a contra-current asset of $800,000.
d. current asset of $1,000,000 and a current liability of $800,000.

31. Sunfish Construction Company uses the percentage-of-completion method of accounting. In

2014, Sunfish began work on a project which had a contract price of $1,600,000 and
estimated costs of $1,200,000. Additional information is as follows:

2014 2015
Costs incurred during the $240,000 $1,060,000
year ............
Estimated costs to complete, as of 960,000

12/31/14 ................................
Billings during the 290,000 1,310,000
year ..................
Collections during the 250,000 1,200,000
year ...............

The amount of gross profit Sunfish should recognize on this contract during 2014 is
a. $40,000.
b. $80,000.
c. $100,000.
d. $200,000.

32. Astor Construction Company uses the percentage-of-completion method for long-term
construction contracts. A specific job was begun in 2014 and completed in 2016. The contract
price was $1,400,000 and cost information as of each year-end is given below:

2014 2015 2016

End of year estimated cost to
complete ...................... $400,000 $200,000 $ 0 
Annual cost incurred ............ 400,000 400,000 120,000

Assuming Astor correctly recorded gross profit in 2014, how much gross profit should the
company record in 2015?
a. $0
b. $20,000
c. $300,000
d. $320,000
 The following data relate to a construction job started by Harrington Co. during 2014:
Total contract price .................................. $300,000
Actual costs incurred during 2014 ..................... 60,000
Estimated remaining costs ............................. 120,000
Billed to customer during 2014 ........................ 90,000
Received from customer during 2015 .................... 30,000

33. See Harrington Co. information above. Under the completed-contract method, how much
should Harrington recognize as gross profit for 2014?
a. $0
b. $30,000
c. $40,000
d. $90,000

34. See Harrington Co. information above. Under the percentage-of-completion method, how
much should Harrington recognize as gross profit for 2014?
a. $0
b. $40,000
c. $80,000
d. $100,000

35. Golden Construction Company uses the percentage-of-completion method for long-term
construction contracts. The company started a project with a contract price of $2,750 in 2014.
Given the following data, what is the balance in Construction in Progress for this contract at
the end of 2014?

2014 2015
Costs incurred this year .................. $ 400 $ 500
Total estimated costs remaining at end of 1,600 1,000
year ..

a. $150
b. $400
c. $550
d. $1,750

36. Steinman Construction Company uses the percentage-of-completion method for long-term
construction contracts. The company has a project with a contract price of $7,000 on which
$600 of gross profit has been recognized in prior years. Information for the current year is as
follows:
 Total cost incurred through current year ............... $5,000
Estimated costs remaining at end of current year ....... 2,800

What is the loss that Steinman should recognize in the current year?
a. $600
b. $800
c. $1,400
d. No loss should be recognized.

37. Samuels Company began operations on January 1, 2014, and uses the installment sales
method of accounting. The company has the following information available for 2014 and
2015:

2014 2015
Installment $4,500,000 $5,400,000
sales .........................
Gross profit on 30% 40%
sales .....................
Cash collections on 2014 1,500,000 3,600,000
sales ............
Cash collections on 2015 4,200,000
sales ............

The realized gross profit for 2015 would be

a. $1,680,000.
b. $2,760,000.
c. $3,120,000.
d. $4,320,000.

38. Sonnet Construction Company uses the completed-contract method for long-term
construction contracts. The information for a specific contract as of January 1, 2014, is shown
below.

Costs incurred to $ 700,000

date ................................
Contract 2,000,000
price ........................................
Estimated remaining cost to 800,000
complete ..................

$600,000 of cost was incurred during 2014 and on December 31, 2014, the estimated
remaining cost to complete was still $800,000. The correct balance for the Construction in
Progress at December 31, 2014 is
a. $600,000.
 b. $700,000.
c. $1,200,000.
d. $1,300,000.

39. In 2011, Huxley Corp. began construction work under a three-year contract. The contract
price is $800,000. Huxley used 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 presentations relating to this
contract at December 31, 2014, appear below.

Balance Sheet
Accounts receivable--construction contract
billings .................................. $15,000
Construction in progress .................... $50,000 
Less contract billings ...................... (47,000)
Cost of uncompleted contract in excess of
billings .................................. 3,000

Income Statement
Income (before tax) on the contract
recognized in year 1 ...................... $10,000

How much cash was collected in 2014 on this contract?

a. $32,000
b. $35,000
c. $47,000
d. $50,000

40. Chantal Company began operations on January 2, 2014, and appropriately used the
installment sales method of accounting. The following data are available for 2014 and 2015:

2014 2015
Installment $3,000,000 $3,600,000
sales ......................
Gross profit on 30% 40%
sales ..................
Cash collections from:
  2014 $1,000,000 $1,200,000
sales ...........................
  2015 -- $1,400,000
sales ...........................
 The realized gross profit for 2015 is
a. $1,440,000.
b. $1,040,000.
c. $920,000.
d. $780,000.

41. Warthog Enterprises, which began operations on January 1, appropriately uses the installment
method of accounting. The following information is available for its first year:

Gross profit on sales ................................. 40%

Deferred gross profit at December 31 .................. $120,000
Cash collected, including down payments ............... $225,000

What is the total amount of Warthog’s installment sales for the first year?
a. $300,000
b. $345,000
c. $425,000
d. $525,000

42. Carson Distributing, which began operating on January 1, appropriately uses the installment
method of accounting. The following information pertains to Carson's operations for the first
year:

Installment $1,000,000
sales ......................................
Cost of installment 600,000
sales ..............................
General and administrative 100,000
expenses ....................
Collections on installment 200,000
sales .......................

The balance in the deferred gross profit account at December 31 should be

a. $400,000.
b. $320,000.
c. $240,000.
d. $200,000.
43. On January 3, 2014, Continental Services, Inc., signed an agreement authorizing Peen
Company to operate as a franchisee over a 20-year period for an initial franchise fee of
$200,000 received when the agreement was signed. Peen commenced operations on July 1,
2014, at which date all of the initial services required of Continental had been performed. The
agreement also provides that Peen must pay a continuing franchise fee equal to 6% of the
revenue from the franchise annually to Continental. Peen's franchise revenue for 2014 was
$900,000. For the year ended December 31, 2014, how much should Continental record as
revenue from franchise fees from the Peen franchise?
a. $100,000
b. $106,000
c. $254,000
d. $266,000

44. Assume the Abokair Corporation sold $30,000 worth of merchandise on the installment basis.
The cost of the merchandise was $24,000, and collectibility of the receivable is uncertain.
Collection in the current year on the account is $8,000. How much gross profit should be
reported as realized?
a. $1,600
b. $2,000
c. $6,000
d. $8,000

45. On November 30, Monet Company consigned 90 freezers to Vangogh Company for sale at
$1,600 each and paid $1,200 in transportation costs. A report of sales was received on
December 30 from Vangogh reporting the sale of 20 freezers, together with a remittance of
the $27,200 balance due. The remittance was net of the agreed 15% commission. How much,
and in what month, should Monet recognize as consignment sales revenue?

November December
a. $0 $32,000
b. $0 $27,200
c. $144,000 $0
d. $142,800 $0

46. Antoine Construction Company has consistently used the percentage-of completion method
of recognizing income. During 2014, Antoine entered into a fixed-price contract to construct
an office building for $10,000,000. Information relating to the contract is as follows:

December 31
2014 2015
Percentage of 20% 60%
completion ..............
Estimated total cost at $7,500,000 $8,000,000
completion ....
 Income recognized 500,000 1,200,000
(cumulative) ........

Contract costs incurred during 2015 were

a. $3,200,000.
b. $3,300,000.
c. $3,500,000.
d. $4,800,000.

47. Tussle Company began operations on January 1, 2014, and appropriately uses the installment
method of accounting. The following data are available for 2014 and 2015:

2014 2015
Installment $1,200,000 $1,500,000
sales .....................
Cash collections from:
  2014 400,000 500,000
sales ..........................
  2015 -- 600,000
sales ..........................
Gross profit on 30% 40%
sales .................

The realized gross profit for 2015 is

a. $440,000.
b. $240,000.
c. $390,000.
d. $600,000.

48. Marshland, Inc. had the following consignment transactions during December:
Inventory shipped on consignment to Connor $18,000
Company........
Freight paid by 900
Marshland ................................
Inventory received on consignment from Leshner 12,000
Company....
Freight paid by 500
Leshner...................................

No sales of consigned goods were made through December 31. Marshland's December 31
balance sheet should include consigned inventory at
a. $18,900.
b. $18,000.
c. $12,500.
 d. $12,000.

49. A construction company uses the percentage-of-completion method for long-term

construction contracts. A particular job was begun in 2014 and completed in 2015. During
2014, it appeared that the project would cost 25 percent more than originally expected. Data
at the end of each year are given below:

2013 2014 2015

End-of-year estimated cost remaining $ 200,000 $ 100,000 $ -
Annual cost incurred 200,000 200,000 60,000

The contract price was $700,000. Assuming the company properly recorded income in 2013,
how much income should be recorded in 2014?
a. $10,000
b. $42,000
c. $160,000
d. $192,000

50. Cantor Company sold $400,000 to customers on account during 2014, and collected $200,000
during the year. The company properly uses the installment sales method of revenue
recognition due to the uncertainty of collection of these installment receivables. The company
has determined that cost of sales for the $400,000 of sales was $340,000.
What is the correct balance of the company’s Deferred Gross Profit account at the end of
2014, after the recognition of revenue for that year?
a. $0
b. $30,000
c. $60,000
d. $140,000

51. Hussong, Inc., appropriately uses the installment sales method of revenue recognition. The
company sold $1,500,000 on installment accounts during 2014. The cost of items sold was
$900,000. At December 31, 2014, Hussong reported a balance of $100,000 in the Deferred
Gross Profit account. How much cash did Hussong collect on installment contracts during
2014?
a. $600,000
b. $500,000
c. $250,000
d. $1,250,000

52. Johann Builders has a fixed -price contract providing $120,000 of revenue. Construction on
the contract was begun in 2013 and was completed in 2014. Information relating to the
contract is as follows:
2013 2014
Cumulative cost incurred to the end of the year $ 40,000 $ 105,000
 Expected costs to complete 60,000 -
Billings to the end of the year 38,000 120,000
Collections to the end of the year 46,000 120,000

What amount of income should Johann recognize in 2014 assuming that the company
appropriately uses the percentage-of-completion method of income recognition?
a. $9,286
b. $15,000
c. $17,000
d. $7,000

53. When a contractor determines that a contract will result in an overall loss, when should that
loss be recognized within the completed-contract and percentage-of-completion methods?
Completed-Contract Percentage-of-Completion
a. Immediately Over the remainder of the contract
b. At the completion of the contract At the completion of the contract
c. At the completion of the contract Immediately
d. Immediately Immediately

54. The completed-contract method (as opposed to the percentage-of-completion method) of

accounting for revenue from long-term construction contracts should be used in which of the
following circumstances?
a. The contractor has been in business for many years and has completed many contracts in
the past.
b. Reasonably accurate estimates of the degree of completion cannot be made due to
the lack of experience with similar types of contracts.
c. Reasonable accurate estimates of the degree of completion can be made based on past
experience.
d. The contracts are of a relatively long duration.

55. Under which of the following circumstances is the installment sales method appropriate for
the recognition of revenue in the income statement?
a. For any sales where collection is spread over a reasonable long period of time.
b. In any situation where management wishes to delay the recognition of revenue in order
to smooth its income.
c. For sales where collection is spread over a reasonable long period of time and
significant doubt exists about the ultimate collection of the receivables.
d. For sales where collection is spread over a reasonable long period of time and no
significant doubt exists concerning ultimate collection of the receivables.

56. When Progress Billings are made by a contractor on a long-term contract, what account is
credited?
a. Contract Billings, a contra-asset account
b. Contract Revenue, a revenue account
 c. Contract Receivable, an asset account
d. Contract Billings, a contra-revenue account

57. Santos Company allows a liberal return privilege on its normal sales. Products purchased by
customers may be returned within 90 days of purchase if in resalable condition, for a full
refund. The following information relates to 2014:
Average gross profit percentage 25%
Total sales (including actual returns) $100,000
Actual returns $ 15,000
Historical ratio of actual returns to sales 20%
Sales whose return privilege has expired at
the end of 2014 (does not include actual returns) $ 40,000
Assuming that all criteria of SFAS No. 48, “Revenue Recognition When Right of Return
Exists,” are not met, what is the gross margin to be reported by the company in 2014?
a. $4,000
b. $10,000
c. $40,000
d. $2,000