18 33 test bank for intermediate accounting

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Test Bank for Intermediate Accounting, Thirteenth Edition DERIVATIONS — CPA Adapted (cont.) No. Answer Derivation 117. c $300,000 + $50,000 = $350,000 $350,000 – $245,000 = $105,000 gross profit (30% gross profit rate) ($300,000 – $100,000) × 30% = $60,000. 118. c $1,800,000 – $1,080,000 = $720,000 (40% gross profit rate) $720,000 – ($825,000 × 40%) = $390,000. 119. c Conceptual. 120. a Conceptual. EXERCISES Ex. 18-121 — Revenue recognition (essay). The revenue recognition principle provides that revenue is recognized when (1) it is realized or realizable and (2) it is earned. Instructions Explain when revenues are (a) realized, (b) realizable, and (c) earned. Solution 18-121 (a) Revenues are realized when goods or services are exchanged for cash or claims to cash (receivables). (b) Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. (c) Revenues are earned when the earnings process is complete or virtually complete. Ex. 18-122 —Revenue recognition (essay). The earning of revenue by a business is recognized for accounting purposes when the transaction is recorded. Revenue is often recognized at time of sale. Instructions At what times, other than at time of sale, may it be appropriate to recognize revenue? Explain and justify each of these times. 18 - 34
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Revenue Recognition Solution 18-122 Revenue is also recognized (1) during production, (2) at completion, and (3) at collection. (1) During production. The most common situation is the use of the percentage-of-completion method for long-term construction contracts. The point of sale is much less significant than production activity. If the contractor can expect to perform the contractual obligation, the revenue is assured by the contract. To defer recognition until completion of the entire contract misrepresents the efforts (costs) and accomplishments (revenues) of the interim periods. If progress toward completion can be estimated with reasonable accuracy, the percentage-of- completion method should be used. (2) At completion. Examples of revenue recognition at completion of production involve precious metals and agricultural products with quoted prices. These sales prices are reasonably assured, there are low additional costs of distribution, and unit costs cannot be determined because of joint costs. (3) At collection. When collection is highly uncertain and there is no reasonably objective basis for estimating the degree of collectibility, revenue should not be recognized until cash is received. In addition, if collection costs and bad debts are expected to be high and their amount cannot be reasonably estimated, revenue recognition should be deferred. Ex. 18-123 —Long-term construction contracts (essay). In accounting for long-term construction contracts (those taking longer than one year to complete), the two methods commonly followed are percentage-of-completion and completed-contract.
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