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Exam 5: Income Measurement

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Question 61

Multiple Choice

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Hulkster's 2009 return on shareholder's equity is:

A) 17.1%.
B) 14.0%.
C) 12.6%.
D) 7.1%.

E) A) and B)
F) None of the above

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Question 62

Multiple Choice

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Which of the following was not a criterion for revenue recognition in SAB 101?

A) Cash has been collected.
B) Collectiblity is reasonably assured.
C) Persuasive evidence of an arrangement exists.
D) The seller's price to the buyer is fixed or determinable.

E) A) and B)
F) B) and D)

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Question 63

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The first disclosure note to the financial statements is typically the summary of significant accounting policies.

The rationale for adoption of the percentage-of-completion method is that:

Assume at March 15, 2008, the time of signing the contract, collectibility of the receivable was reasonably assured and there were no significant continuing obligations. The journal entry at signing would include a:

Dowling's 2009 average collection period is:

Imagine that the Ace Construction Company (ACC is going to switch from the percentage of completion method to the completed contract method. Assume that none of their construction projects are going to produce a loss. Is it possible that, in a particular year, ACC will show higher gross profit under the completed contract method than they would under the percentage-of-completion method? Explain.

Emu and You, a new fast food chain, sells exclusive franchises for $25,000. For this fee, franchisees receive training, assistance on site selection, assistance during the construction phase, and promotional considerations for the grand opening, including a visit by Ernie Emu. There is also a $500 per month continuation fee for institutional advertising and accounting services after the store is open for business. On March 20 of the current year, Emu and You sold a franchise to I.M. Stuck for the standard fee. The franchisor received a 20% down payment and a 10%, four-year note for the balance. On June 15, Stuck had his grand opening and Emu and You had met all requirements for substantial performance. On July 15, Emu and You received $500 for the continuing fee. Required: Prepare the appropriate journal entries for Emu and You at March 20, June 15, and July 15.

Assume that McCombs uses the completed contract method for revenue recognition. Required: Compute the amount of gross profit recognized by McCombs during 2008 and 2009.

When accounting for multiple-element software arrangements, the revenue for each element is based on the separate prices stated for each element in the software contract.

Initial franchise fees are always recognized on the date they are received.

When accounting for multiple-deliverable arrangements, EITF 00-21 indicates that sellers can separately record revenue for a part of an arrangement even if the part does not have value to the customer on a stand-alone basis.

The following information is provided in the 2008 annual report to shareholders of The BizStore: Required: Compute U-Z in the table above.

Briefly explain how revenue is recorded under the installment sales method. Include in your answer an explanation of when use of the method would be appropriate.

Under the percentage-of-completion method, amounts billed and the cash actually received affect income recognition.

Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy, and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:

In its December 31, 2009, balance sheet, Rigsby would report:

Dowling's average inventory balance for 2009 is:

EITF 00-21 covers revenue recognition for multiple-part arrangements, and requires that a seller recognize revenue for a particular part if:

Required: Compute the average collection period for 2008.