ACTG 500 Practice Problems 4 Revenue and Expense Recognition

ACTG 500 Practice Problems 4 Revenue and Expense...

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1 University of Illinois at Chicago College of Business Administration ACTG 500: I NTRODUCTION TO F INANCIAL A CCOUNTING Fall 2009 Practice Problems 4: Revenue and Expense Recognition E5-23 Company Revenue recognition Real Money The recognition of revenue is dependent upon Real Money providing updates. Thus, the company should recognize revenue ratably over the period of time that customers can access its Website, not when the cash is received. Oracle The fee to purchase the right to use the software can be recorded as revenue when the software is installed. Service revenue can only be recognized ratably over the period of time covered by the service contract. Intuit Recognize revenue when the software is sent to customers. The company must estimate potential warranty claims and establish a reserve for them when revenue is recorded. Computer- game developer Recognize revenue after the 10-day right of return period expires. E5-26 a. FedEx reports income tax expense of $1,199 million in 2007, $1,093 million in 2006, and $864 million in 2005. b. We can calculate the percentage currently payable by dividing the current provision by total tax expense. This yields 90% ($1,075 million / $1,199 million) in 2007, 85% ($930 million / $1,093 million) in 2006, and 93% ($802 million / $864 million) in 2005. The amount of income tax currently payable fluctuates from 2005 to 2007. This is due to fluctuations in the amount of deferred taxes, from deferred tax of $62 million in 2005 , $163 million in 2006, and $124 million in 2007. These deferred taxes arise because the rules differ for computing financial reporting income versus taxable income. c. Deferred tax liabilities increase when taxable income is less than financial reporting income (that which is reported to shareholders). The most common reason this occurs is because companies use an accelerated depreciation method for tax purposes that results in a lower taxable income in the earlier years of the asset’s life vis-à-vis net income on the financial accounting books (that reflect straight-line depreciation for GAAP purposes).
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2 E5-27 The following items are considered to be operating items on the income statement: Net sales Cost of product sold Marketing, selling and administrative Advertising and product promotion Research and development Acquired in-process research & development Provision for restructuring Litigation expense Gain (loss) on sale of assets and businesses Equity in income of affiliates* Other expense** * Equity in net income of affiliates is generally considered to be operating provided that the investment is strategic in nature, which is typically the case. ** “Other expense” is assumed to be operating unless information is provided in the
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This note was uploaded on 03/06/2011 for the course ECON 435 taught by Professor Galven during the Spring '11 term at Ill. Chicago.

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ACTG 500 Practice Problems 4 Revenue and Expense...

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