Revenue Recognition

Revenue Recognition - Chapter 18 Self-Study Quiz with...

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Self-Study Quiz with Answers ANALYSIS OF MULTIPLE-CHOICE TYPE QUESTIONS 1. (L.O. 1) The process of formally recording or incorporating an item in the financial statements of an entity is: a. allocation. b. articulation. c. realization. d. recognition. Approach and Explanation: Write down a brief definition of each term listed. Select the one that matches the description in the stem of the question. Allocation is the accounting process of assigning or distributing an amount according to a plan or formula. Allocation is a broad term and includes amortization, which is the accounting process of reducing an amount by periodic payments or writedowns. Articulation refers to the interrelation of elements of the financial statements. Realization means the process of converting noncash resources and rights into money (such as the sale of assets for cash or claims to cash). Recognition is defined in SFAC No. 6 as the process of formally recording or incorporating an item in the financial statements of an entity. (Solution = d.) 2. (L.O. 1) Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as: a. service revenue. b. deferred service revenue. c. a reduction in installment accounts receivable. d. a direct addition to retained earnings. Approach and Explanation: Recall the revenue recognition principle and think about how it would apply to this situation. Revenue is to be recognized when it is realized (or realizable) and earned. The service contract revenue is realized at the date the cash is received; however, it is earned over the three-year period to which the contract pertains. Therefore, at the point of collection, the cash should be recorded by a credit to a Deferred (Unearned) Service Revenue account. The revenue will be earned over the three-year period as the company performs the services it promises by the contract. (Solution = b.) 3. (L.O. 3) L. Mahoney Corporation sells equipment. On December 31, 2006, Mahoney sold a piece of equipment to C. Bailey for $30,000 with the following terms: 2% cash discount if paid within 30 days, I % discount if paid between 31 and 60 days of purchase, or payable in full within 90 days if not paid within a discount period. Bailey had the right to return this equipment to Mahoney if Bailey could not resell it before the end of the 90-day payment period, in which case Bailey would no longer be obligated to Mahoney. How much should be included in Mahoney’s net sales for 2006 because of the sale of this machine? a.
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This note was uploaded on 04/12/2011 for the course ACCT 2310 taught by Professor Santoshattar during the Fall '08 term at Cuyahoga CC.

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Revenue Recognition - Chapter 18 Self-Study Quiz with...

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