CHAPTER 18

REVENUE RECOGNITION
IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual
Answer No. Description
F 1. Recognition of revenue.
T 2. Realization of revenue.
T 3. Delayed recognition of revenue.
F 4. Recognizing revenue when right of return exists.
T 5. Recognizing revenue prior to product completion.
F 6. Use of percentage-of-completion method.
T 7. Input measure for contract progress.
T 8. Reporting Construction in Process and Billings on Construction in Process.
F 9. Construction in Process account balance.
F 10. Recognition of revenue under completed-contract method.
T 11. Principal advantage of completed-contract method.
F 12. Recognizing loss on an unprofitable contract.
F 13. Recognizing current period loss on a profitable contract.
T 14. Recognizing revenue under completion-of-production basis.
F 15. Recording a loss on an unprofitable contract.
F 16. Deferring revenue under installment-sales method.
T 17. Deferring gross profit under installment-sales method.
T 18. Classification of deferred gross profit.
F 19. Recognizing revenue under cost-recovery method.
T 20. Recognizing profit under cost-recovery method.

MULTIPLE CHOICE—Conceptual
Answer No. Description
c 21. Revenue recognition principle.
b 22. Definition of "realized."
a 23. Definition of "earned."
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b 24. Revenue recognition representations.
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d 25. Definition of recognition.
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b 26. Revenue recognition principle.
d 27. Recognizing revenue at point of sale.
d 28. Recording sales when right of return exists.
c 29. Revenue recognition when right of return exists.
d 30. Revenue recognition when right of return exists.
b 31. Appropriate accounting method for long-term contracts.
c 32. Percentage-of-completion method.
b 33. Percentage-of-completion method.
c 34. Classification of progress billings and construction in process.
b 35. Calculation of gross profit using percentage-of-completion.
a 36. Disclosure of earned but unbilled revenues.
 b 37. Disadvantage of using percentage-of-completion.
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d 38. Percentage-of-completion input measures.
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
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a 39. Advantage of completed-contract method
c 40. Revenue, cost, and gross profit under the completed-contract method.
a 41. Loss recognition on a long-term contract.
c 42. Accounting for long-term contract losses.
d 43. Criteria for revenue recognition of completion of production.
a 44. Completion-of-production basis.
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d 45. Revenue recognition of completion of production.
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b 46. Treatment of estimated contract cost increase.
c 47. Presentation of deferred gross profit.
c 48. Appropriate use of the installment-sales method.
b 49. Valuing repossessed assets.
b 50. Gross profit deferred under the installment-sales method.
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c 51. Income realization on installment sales.
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d 52. Conservative revenue recognition method.
b 53. Income recognition under the cost-recovery method.
b 54. Income recognition under the cost-recovery method.
d 55. Cost recovery basis of revenue recognition.
b 56. Deposit method of revenue recognition.
d 57. Cost recovery method.
b *58. Types of franchising arrangements.
d *59. Accounting for consignment sales.
d *60. Allocation of initial franchise fee.
a *61. Recognition of continuing franchise fees.
b *62. Future bargain purchase option.
a *63. Option to purchase franchisee's business agreement.
d *64. Revenue recognition by the consignor.
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These questions also appear in the Problem-Solving Survival Guide.
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These questions also appear in the Study Guide.
*This topic is dealt with in an Appendix to the chapter.

MULTIPLE CHOICE—Computational
Answer No. Description
c 65. Computation of total revenue and accounts receivable.
d 66. Computation of total construction expenses.
b 67. Computation of costs and profits in excess of billings balance.
c 68. Computation of total revenue and construction expenses.
b 69. Gross profit recognized under percentage-of-completion.
c 70. Computation of construction in process amount.
c 71. Percentage-of-completion method.
c 72. Percentage-of-completion method.
b 73. Determine cash collected on long-term construction contract.
d 74. Determine gross profit using percentage-of-completion.
c 75. Gross profit to be recognized using percentage-of-completion.
 b 76. Gross profit to be recognized using percentage-of-completion.
c 77. Profit to be recognized using completed-contract method.
a 78. Gross profit to be recognized using percentage-of-completion.
MULTIPLE CHOICE—Computational (cont.)
Answer No. Description
b 79. Profit to be recognized using completed-contract method.
a 80. Gross profit to be recognized using percentage-of-completion.
c 81. Gross profit to be recognized using completed-contract method.
b 82. Computation of construction costs incurred.
c 83. Gross profit recognized under percentage-of-completion.
a 84. Computation of construction in process amount.
b 85. Loss recognized using completed-contract method.
c 86. Revenue recognition using completed-contract method.
c 87. Reporting a current liability with completed-contract-method.
a 88. Reporting inventory under completed-contract method.
d 89. Gain recognized on repossession—installment sale.
b 90. Calculate loss on repossessed merchandise.
a 91. Calculate loss on repossessed merchandise.
b 92. Interest recognized on installment sales.
b 93. Calculation of deferred gross profit amount.
b 94. Computation of realized gross profit amount.
d 95. Computation of loss on repossession.
d 96. Calculation of gross profit rate.
a 97. Computation of net income from installment sales.
d 98. Computation of realized and deferred gross profit.
a 99. Calculation of gross profit rate.
d 100. Computation of net income from installment sales.
a 101. Computation of realized and deferred gross profit.
c 102. Computation of realized gross profit amount.
b 103. Computation of realized gross profit-cost recovery method.
a 104. Revenue recognized under the cost-recovery method.
d *105. Cancellation of franchise agreement.
c *106. Accounting for initial and annual continuing franchise fees.
b *107. Franchise fee with a bargain purchase option.
d *108. Sales on consignment.
a *109. Reporting inventory on consignment.

MULTIPLE CHOICE—CPA Adapted

Answer No. Description
a 110. FASB's definition of "recognition."
b 111. Determine contract costs incurred during year.
d 112. Gross profit to be recognized using percentage-of-completion.
d 113. Profit to be recognized using completed-contract method.
c 114. Revenue recognized under completed-production method.
b 115. Determine balance of installment accounts receivable.
c 116. Calculate deferred gross profit—installment sales.
c 117. Calculate deferred gross profit—installment sales.
c 118. Balance of deferred gross profit—installment sales.
 c 119. Reporting deferred gross profit—installment sales.
a 120. Effect of collections received on service contracts.

EXERCISES
Item Description
E18-121 Revenue recognition (essay).
E18-122 Revenue recognition (essay).
E18-123 Long-term contracts (essay).
E18-124 Journal entries—percentage-of-completion.
E18-125 Percentage-of-completion method.
E18-126 Percentage-of-completion method.
E18-127 Percentage-of-completion and completed-contract methods.
E18-128 Installment sales.
E18-129 Installment sales.
E18-130 Installment sales.
*E18-131 Franchises.
PROBLEMS
Item Description
P18-132 Long-term construction project accounting.
P18-133 Accounting for long-term construction contracts.
P18-134 Long-term contract accounting—completed-contract.
P18-135 Installment sales.

CHAPTER LEARNING OBJECTIVES

1. Apply the revenue recognition principle.

2. Describe accounting issues for revenue recognition at point of sale.

3. Apply the percentage-of-completion method for long-term contracts.

4. Apply the completed-contract method for long-term contracts.

5. Identify the proper accounting for losses on long-term contracts.

6. Describe the installment-sales method of accounting.

7. Explain the cost-recovery method of accounting.

*8. Explain revenue recognition for franchises and consignment sales.

 SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
S P
1. TF 3. TF 22. MC 24. MC 26. MC 121. E
P
2. TF 21. MC 23. MC 25. MC 110. MC 122. E
Learning Objective 2
4. TF 6. TF 28. MC 30. MC
5. TF 27. MC 29. MC 122. E
Learning Objective 3
7. TF 34. MC 66. MC 72. MC 80. MC 123. E 133. P
8. TF 35. MC 67. MC 73. MC 82. MC 124. E
9. TF 36. MC 68. MC 74. MC 83. MC 125. E
31. MC 37. MC 69. MC 75. MC 84. MC 126. E
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32. MC 38. MC 70. MC 76. MC 111. MC 127. E
33. MC 65. MC 71. MC 78. MC 112. MC 132. P
Learning Objective 4
10. TF 40. MC 81. MC 87. MC 123. E 134. P
11. TF 77. MC 85. MC 88. MC 127. E
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39. MC 79. MC 86. MC 113. MC 133. P
Learning Objective 5
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12. TF 14. TF 41. MC 43. MC 45. MC 114. MC 133. P
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13. TF 15. TF 42. MC 44. MC 46. MC 132. P
Learning Objective 6
16. TF 49. MC 91. MC 96. MC 101. MC 118. MC 130. E
17. TF 50. MC 92. MC 97. MC 102. MC 119. MC 135. P
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18. TF 51. MC 93. MC 98. MC 115. MC 120. MC
47. MC 89. MC 94. MC 99. MC 116. MC 128. E
48. MC 90. MC 95. MC 100. MC 117. MC 129. E
Learning Objective 7
P
19. TF 52. MC 54. MC 56. MC 103. MC
20. TF 53. MC 55. MC 57. MC 104. MC
Learning Objective 8*
58. MC 60. MC 62. MC 64. MC 106. MC 108. MC 131. E
59. MC 61. MC 63. MC 105. MC 107. MC 109. MC
Note: TF = True-False
MC = Multiple Choice
E = Exercise
P = Problem
 TRUE-FALSE—Conceptual
1. Companies should recognize revenue when it is realized and when cash is received.

2. Revenues are realized when a company exchanges goods and services for cash or
claims to cash.

3. Delayed recognition of revenue is appropriate if the sale does not represent substantial
completion of the earnings process.

4. If a company sells its product but gives the buyer the right to return it, the company
should not recognize revenue until the sale is collected.

5. Companies can recognize revenue prior to completion and delivery of the product under
certain circumstances.

6. Companies must use the percentage-of-completion method when estimates of progress

toward completion are reasonably dependable.

7. The most popular input measure used to determine the progress toward completion is
the cost-to-cost basis.

8. If the difference between the Construction in Process and the Billings on Construction in
Process account balances is a debit, the difference is reported as a current asset.

9. The Construction in Process account includes only construction costs under the
percentage-of-completion method.

10. Under the completed-contract method, companies recognize revenue and costs only
when the contract is completed.

11. The principal advantage of the completed-contract method is that reported revenue
reflects final results rather than estimates.

12. Companies must recognize a loss on an unprofitable contract under the percentage-of-
completion method but not the completed-contract method.

13. A loss in the current period on a profitable contract must be recognized under both the
percentage-of-completion and completed-contract method.

14. Under the completion-of-production basis, companies recognize revenue when agricul-
tural crops are harvested since the sales price is reasonably assured and no significant
costs are involved in product distribution.

15. The provision for a loss on an unprofitable contract may be combined with the
Construction in Process account balance under percentage-of-completion but not
completed-contract.

16. Under the installment-sales method, companies defer revenue and income recognition
until the period of cash collection.
17. The installment-sales method defers only the gross profit instead of both the sales price
and cost of goods sold.

18. Deferred gross profit is generally treated as an unearned revenue and classified as a
current liability.

19. Under the cost-recovery method, a company recognizes no revenue or profit until cash
payments by the buyer exceed the cost of the merchandise sold.

20. Companies recognize profit under the cost-recovery method only when cash collections
exceed the total cost of the goods sold.

True-False Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. F 11. T 16. F
2. T 7. T 12. F 17. T
3. T 8. T 13. F 18. T
4. F 9. F 14. T 19. F
5. T 10. F 15. F 20. T