31. Cowden Properties
Cowden Properties sold a condominium to Ms. Roberts for $90,000. Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000. The contract for sale required Ms. Roberts to pay the $90,000 as follows:
Year 1 - $ 5,000
Year 2 - $10,000
Year 3 - $30,000
Year 4 - $45,000
Refer to the Cowden Properties example. If Cowden uses the cost-recovery-first method, how much profit is recognized in year 4?
A. $45,000
B. $40,000
C. $30,000
D. $20,000
E. $15,000
32. Fassino’s Wholesale Corporation
Fassino Wholesale Corporation (“Fassino’s”) operates discount retail stores. To shop in a Fassino’s store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card. A customer purchases an annual membership from Fassino’s for $120, a 20-pack of paper towels for $10.99, and four new tires for $480. The tire purchase includes mounting and aligning by a Fassino’s tire technician at the time of initial installation and alignment and tire rotation services for three years afterward. The customer pays with an American Express card.
Using the Fassino’s Wholesale Corporation example, when should Fassino’s recognize the $120 membership fee as revenue?
A. Fassino’s should recognize all of the membership fee ($120.00) at the time that the annual membership fee is sold to the customer because it is nonrefundable.
B. Fassino’s should recognize all of the membership fee ($120.00) one year from the time that the annual membership fee is sold to the customer because the membership fee has been fully earned.
C. Fassino’s should recognize 1/12th of the membership fee, or $10.00, each month during the annual membership period.
D. Fassino’s should recognize two-thirds of the membership fee, or $90.00, at the time that the annual membership fee is sold to the customer because it is nonrefundable, and the other one-third of the membership fee, or $30.00, at the end of the annual membership period.
E. Fassino’s should recognize one-quarter of the membership fee, or $30.00, at the time that the annual membership fee is sold to the customer because it is nonrefundable, and the other three-quarters of the membership fee, or $90.00, at the end of the annual membership period.
33. Fassino’s Wholesale Corporation
Fassino Wholesale Corporation (“Fassino’s”) operates discount retail stores. To shop in a Fassino’s store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card. A customer purchases an annual membership from Fassino’s for $120, a 20-pack of paper towels for $10.99, and four new tires for $480. The tire purchase includes mounting and aligning by a Fassino’s tire technician at the time of initial installation and alignment and tire rotation services for three years afterward. The customer pays with an American Express card.
When should Fassino’s recognize revenue from selling the tires plus mounting, alignment, and rotation services?
A. At the time of initial installation, Fassino’s performs its obligation to provide both tires and initial mounting and alignment services. Pete’s should recognize revenue for the portion of the $480 selling price applicable to the sale of tires and installation services at the time of installation.
B. Fassino’s should delay recognition of revenue for the portion of the $480 selling price applicable to the subsequent alignment and rotation services until it performs the required services.
C. Fassino’s should delay recognition of revenue from selling the tires plus mounting, alignment, and rotation services until it performs all of the required services at the end of the three year period.
D. At the time of initial installation, Fassino’s should recognize revenue for all of the $480 selling price applicable to the tires plus mounting, alignment, and rotation services.
E. Both choices a and b are correct.
34. Fassino’s Wholesale Corporation
Fassino Wholesale Corporation (“Fassino’s”) operates discount retail stores. To shop in a Fassino’s store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card. A customer purchases an annual membership from Fassino’s for $120, a 20-pack of paper towels for $10.99, and four new tires for $480. The tire purchase includes mounting and aligning by a Fassino’s tire technician at the time of initial installation and alignment and tire rotation services for three years afterward. The customer pays with an American Express card.
When should Fassino’s recognize revenue from selling the paper towels?
A. Fassino’s will recognize $10.99 in revenue at the time it pays the paper towel vendor the wholesale price of the paper towels.
B. Fassino’s will recognize $10.99 in revenue at the end of the month of sale.
C. Fassino’s will recognize $10.99 in revenue at the end of the quarter of sale.
D. Fassino’s will recognize $10.99 in revenue at the time of sale.
E. Fassino’s will recognize $10.99 in revenue at the end of the year of sale.
35. The SRI company provides substantial services after the time of product sale and this condition introduces uncertainty. Which of the following is true?
A. Under some circumstances the firm recognizes revenue sometime after the sale.
B. Under some circumstances this uncertainty is sufficient to preclude the firm’s recognizing revenue at the time of sale.
C. The firm always recognizes revenue at the time of sale.
D. Both choices a and b are true.
E. None of the above is true.
36. The percentage-of-completion method
A. is affected by the actual schedule of cash collection.
B. cannot be used if the contract specifies that the contractor will receive the entire contract price only on completing construction.
C. measures the proportion of total work carried out during the accounting period either from engineers' estimates of the degree of completion or from the ratio of costs incurred to date to the total costs expected for the entire contract.
D. is not a method allowed by U.S. GAAP.
E. none of the above.
37. The method of revenue recognition where the seller has substantial uncertainty about the amount of cash it will collect and matches the costs of generating revenues dollar for dollar with cash receipts until the seller recovers all such costs is called the
A. cash basis method.
B. percentage-of-payment method.
C. installment method.
D. cost-recovery-first method.
E. cost-recovery-last method.
38. U.S. GAAP requires that the completed contract method be used
A. when uncertainty obscures the total costs the contractor will incur in carrying out the project.
B. in situations when a firm has not found a specific buyer while construction progresses.
C. always to recognize income during construction projects.
D. in both circumstances a and b.
E. in none of the above situations.
39. When a firm's construction activities meet the criteria for revenue recognition as construction progresses, the firm usually recognizes revenue during the construction period using the
A. completed contract method.
B. cost recovery first method.
C. percentage-of-completion method.
D. installment method.
E. cost recovery last method.
40. The method of revenue recognition where the seller collects parts of the selling price in cash and at the same time recognizes as expenses each period the same portion of the cost of goods or services sold as the portion of total revenues recognized is called the
A. completed contract method.
B. direct payment method.
C. installment method.
D. cost-recovery-first method.
E. cost-recovery-last method.