1. In preparing its Year 9 adjusting entries, the Singapore Company neglected to adjust rental fees received in advance for the amount of rental fees earned during Year 9. What is the effect of this error?

a. Net income is understated, retained earnings are understated, and liabilities are overstated.

b. Net income is overstated, retained earnings are overstated, and liabilities are unaffected.

c. Net income, retained earnings, and liabilities all are understated.

 

2. The Sutton Construction Company entered into a contract in early Year 8 to build a tunnel for the city at a price of $11 million. The company estimated total cost of the project at $10 million and three years to complete. Actual costs incurred (on budget) and billings to the city are as follows:

 

Â	Costs Incurred	Billings to City
Year 8	$2,500,000	$2,000,000
Year 9	4,000,000	3,500,000
Year 10	3,500,000	5,500,000

 

Using the percentage-of-completion method for revenue recognition, what does Sutton Construction report for

Revenues and profit for Year 9?

 

Revenues	Profit	Revenues	Profit
a. $4,000,000	$300,000	c. $3,850,000	$350,000
b. $4,400,000	$400,000	d. $3,500,000	$500,000

 

3. Using the percentage-of-completion method in accounting for long-term projects, a company can increase reported earnings by:

 

a. Accelerating recognition of project expenditures.	c. Switching to completed-contract accounting.
b. Delaying recognition of project expenditures.	d. Overestimating the total cost of the project.

 

4. Revenue can be recognized at the time of:

 

a. Production.	c. Collection.
b. Sale.	d. All of the above.

 

5. In October, a company shipped a new product to retailers. Which one of the following conditions would prohibit immediate recognition of revenue?

a. Terms of the sale require the company to provide extensive promotional materials to retailers before December 1.

b. Retailers are not obligated to pay the purchase price until February, after their holiday sales are collected.

c. On the basis of past performance, reliable estimates are that 20% of the product is returned.

d. The company is unable to enforce agreements concerning discounting of the retail sales of the product.

6. In accounting for long-term contracts, how does the percentage-of-completion method of revenue recognition differ from the completed contract method? (Choose one answer from a, b, c, or d below.)

i. Present value of income tax payments is minimized.

ii. Revenue for each period reflects more closely the results of construction activity during the period.

iii. Current status of uncompleted contracts is reported more accurately.

iv. Percentage-of-completion method relies less on estimates for both the degree of completion and the extent of future costs to be incurred.

 

a. i and ii.	c. ii and iii.
b. i and iii.	d. ii and iv.

 

7. R. Lott Corporation, which began business on January 1, Year 7, uses the installment sales method of accounting. The following data are available for December 31, Year 7 and Year 8:

 

 

Â	Year 7	Year 8
Balance of deferred gross profit on sales account	Â	Â
Year 7	$300,000	$120,000
Year 8	—	$440,000
Gross profit on sales	30%	40%

 

The installment accounts receivable balance at December 31, Year 8, is:

 

a. $1,000,000	c. $1,400,000
b. $1,100,000	d. $1,500,000