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General Revenue Recognition

Bear Co., which began operations on January 2, 2005, appropriately uses the installment-sales method of accounting. The following information is available for 2005:
Installment sales $1.4mn

Realized gross profit on installment sales $240,000

Gross profit percentage on sales 40%

For the year ended December 31, 2005, what amounts should Bear report as accounts receivable and deferred gross profit?

Accounts receivable Deferred gross profit
$600,000 $320,000
$600,000 $360,000
$800,000 $320,000
$800,000 $560,000


Under the installment method of accounting, gross profit is recognized in proportion to cash collected on installment sales. Since this is the first year of operations for Bear Co., there is no beginning balance for accounts receivable and no previously deferred gross profit. The year-end balance in accounts receivable is determined by subtracting from total accounts receivable ($1.4mn) the amount collected during the period. Since the gross profit percentage of sales is 40%, the realized gross profit ($240,000) represents 40% of accounts receivable collected. Therefore:

.40 X (amount collected) = $240,000
X = $240,000/.40
X = $600,000 (total A/R collected)
The year-end balance in accounts receivable will be:

Sales on account $1,400,000
A/R collected (600,000)
A/R balance $800,000
The total deferred gross profit, less the amount realized during the period, will be the year-end deferred gross profit. The total deferred gross profit for the year is 40% of installment sales. Therefore:

Installment sales $1,400,000
Gross profit rate .40
Total deferred gross profit $ 560,000
Less: Amount realized 240,000
Year-end deferred gross profit $320,000


General Revenue Recognition
UVW Broadcast Co. entered into a contract to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, advertising commercials of $10,000 were used. However, travel and lodging services were not provided.
How should UVW account for advertising in its June 30 financial statements?

A. Revenue and expense are recognized when the agreement is completed.
B. An asset and revenue for $10,000 is recognized.
C. Both the revenue and expense of $10,000 are recognized.
D. Not reported.


UVW has a receivable and revenue for the $10,000 of advertising services provided to date. Without receipt of any travel and lodging services, the firm reports a receivable for the unpaid advertising services. These services will be "paid" in the form of travel and lodging.



General Revenue Recognition
Lane Co., which began operations on January 1, 2005, appropriately uses the installment method of accounting. The following information pertains to Lane's operations for 2005:
Installment sales $1,000,000
Regular sales 600,000
Cost of installment sales 500,000
Cost of regular sales 300,000
General and administrative expenses 100,000
Collections on installment sales 200,000
The deferred gross profit account in Lane's December 31, 2005 balance sheet should be

A. $150,000
B. $320,000
C. $400,000
D. $500,000

installment salesからcash colletion on installment salesを引くとinstallment salesの残りになる。
installmend Gp のときは%をかける

Deferred gross profit is the gross profit remaining on uncollected sales accounted for under the installment method. The gross profit percentage is 50% [($1mn - $500,000)/$1mn)] on these sales.

Uncollected installment sales = $800,000 = $1mn - $200,000. Deferred gross profit = $400,000 = .50($800,000)


Contract Accoutning

Falton Co. has the following first-year amounts related to its $9mn construction contract:
Actual costs incurred and paid $2mn
Estimated costs to complete $6mn
Progress billings $1.8mn
Cash collected $1.5mn
What amount should Falton recognize as a current liability at year end, using the percentage-of-completion method?

A. $0
B. $200,000
C. $250,000
D. $300,000

CIP Construction in process はConstruction cost + Gross Profit


The percentage of completion is ($2mn)/($2mn + $6mn) = 25%. This is the ratio of cost incurred to date, divided by the total project cost, which is the sum of cost to date and estimated remaining costs. Gross profit recognized is therefore .25($9mn - $2mn - $6mn) = $250,000. The contract price is $1mn more than the total estimated project cost. At 25% complete, the firm recognizes $250,000 of gross profit. The construction-in-progress balance is therefore $2mn + $250,000 = $2.25mn, the sum of cost to date, plus gross profit to date. With billings only $1.8mn so far, the firm reports a net asset equal to the difference between $2.25mn, the balance in construction in progress, and $1.8mn of billings. Billings are contra to construction in progress for reporting. This $450,000 difference is labeled "cost and profit in excess of billings on long-term contracts" in the balance sheet. No current liability is reported, because the asset balance (construction in progress) exceeds billings.



Contract Accounting
A contractor recognized $42,000 of gross profit on a contract at the end of year one of the contract under the percentage-of-completion method. At the end of year two, total estimated project cost exceeded the contract price by $100,000. What amount of loss is to be recognized for year two alone under the percentage-of-completion method (PC), and also under the completed-contract method (CC), had that method been used?

-$142,000 -100,000
-$142,000 0
-100,000 0
-$42,000 -$100,000


The overall loss on this contract is $100,000—the excess of total estimated cost and contract price, as given in the problem. Under PC, the previously recognized gross profit (year one) must be removed. The $142,000 loss recognized in year two yields a $100,000 combined loss for both years—the amount of the overall loss. For CC, the overall loss is recognized immediately. There is no year-one gross profit to remove, because CC recognizes no gross profit until completion of the contract.


cost to expenses
On May 1, 2004, Marno County issued property tax assessments for the fiscal year ended June 30, 2005.
The first of two equal installments was due on November 1, 2004. On September 1, 2004, Dyur Co. purchased a 4-year old factory in Marno subject to an allowance for accrued taxes.
Dyur did not record the entire year's property tax obligation, but instead records tax expenses at the end of each month by adjusting prepaid property taxes or property taxes payable, as appropriate.

The recording of the November 1, 2004 payment by Dyur should have been allocated between an increase in prepaid property taxes and a decrease in property taxes payable in which of the following percentages?

Percentage allocated to Increase in prepaid property taxes Percentage allocated to Decrease in property taxes payable
66 2/3% 33 1/3 %
0% 100%
50% 50%
33 1/3% 66 2/3 %


When the property was purchased on September 1 the firm received an allowance for property taxes for the period July 1 - September 1, a period of two months. This is the portion of the fiscal year the firm did not own the factory. However, the firm will be responsible for the taxes for these two months.

The allowance at purchase reduced the total amount paid for the property by the tax for these two months. The firm recorded property taxes payable for two months (equal to the allowance amount). Then at the end of September and October, the firm accrued another month of property taxes payable. Now the firm has recorded a total of 4 months of property taxes payable. When it pays the first installment on November 1 (for 6 months), the property taxes payable is decreased to zero and prepaid property taxes is debited for 2 months worth of property tax.

Thus, the payment increases prepaid property taxes 2 months, and decreases property taxes payable 4 months, or 1/3 and 2/3 of the payment amount, respectively.


Question #3 (AICPA.931132FAR-P1-FA)
Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes for National's mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee's account and used to reduce future escrow payments.
Additional information follows:
Escrow accounts liability, 1 January, 2004
Escrow payments received during 2004
Real estate taxes paid during
Interest on escrow funds during 2004
What amount should Kent report as escrow accounts liability in its December 31, 2004 balance sheet?

A. $510,000
B. $515,000
C. $605,000

The following equation is used to explain the changes in the escrow liability and the ending balance (31 December, 2004):
Beginning + Payments - Real estate + Interest - 10% (interest) = Ending
Balance Received Tax Payments Balance

$700,000 + $1.58mn - $1.72mn + $50,000 - $5,000 = $605,000

The interest increases the liability, because it is an amount owed to the mortgagee. This debt is extinguished by crediting the receivable from the mortgagee. The 10% fee reduces the portion of the liability owing to interest.

D. $610,000
Incorrect, but close. This answer fails to reduce the liability to the mortgagee (for interest earned) by the 10% fee. This is an amount borne by the mortgagee.



In year two, Ajax, Inc. reported taxable income of $400,000 and pre-tax financial-statement income of $300,000. The difference resulted from $60,000 of non-deductible premiums on Ajax's officers' life insurance and $40,000 of rental income received in advance. Rental income is taxable when received. Ajax's effective tax rate is 30%. In its year-two income statement, what amount should Ajax report as income tax expense (current portion)?
A. $90,000
B. $102,000
C. $108,000
D. $120,000


This response is the total income tax expense for the period. The advance created a $12,000 deferred tax asset ($40,000 x .30). The tax liability (current portion of income tax expense) is $120,000 (.30 x $400,000). The derived income tax expense amount is $108,000. The question is asking for the current portion of income tax expense ($120,000).



Tag Question
Tax Accrual Entry
As a result of differences between depreciation for financial-reporting purposes and tax purposes, the financial-reporting basis of Noor Co.'s sole depreciable asset, acquired in 2005, exceeded its tax basis by $250,000 at December 31, 2005. This difference will reverse in future years. The enacted tax rate is 30% for 2005, and 40% for future years. Noor has no other temporary differences.
In its December 31, 2005 balance sheet, how should Noor report the deferred tax effect of this difference?

A. As an asset of $75,000.
B. As an asset of $100,000.
C. As a liability of $75,000.
D. As a liability of $100,000.


Future tax rates are used to measure the future tax consequences (balances in deferred tax accounts) of transactions through the balance sheet date.
This firm faces a 40% tax rate in the future and therefore measures the deferred tax account as $250,000(.40) = $100,000. The future difference of $250,000 is taxable, because the financial-reporting basis exceeds the tax basis at the balance sheet date. This means that the firm has recognized more depreciation for tax purposes as of December 31, 2005, than it has for financial reporting.

Therefore, in the future, more depreciation will be recognized for financial reporting than for tax reporting, causing future taxable income to exceed pre-tax financial income. Hence, a deferred tax liability is recognized at December 31, 2005.

This liability is recognized now, at the end of 2005, because it resulted from transactions through this date. When the difference reverses in the future, the deferred tax liability will be reduced, causing taxes payable to increase.


Tax Accrual Entry

Shear, Inc. began operations in 2005. Included in Shear's 2005 financial statements were bad debt expenses of $1,400 and profit from an installment sale of $2,600.
For tax purposes, the bad debts will be deducted and the profit from the installment sale will be recognized in 2007. The enacted tax rates are 30% in 2005 and 25% in 2007.

Shear elected early application of FASB Statement No. 109, Accounting for Income Taxes. In its 2005 income statement, what amount should Shear report as deferred income tax expense?

A. $300
B. $360
C. $650
D. $780



This answer does not apply the correct tax rate to the correct future difference amounts. The future 2007 tax deduction for bad debt expense will cause 2007 taxable income to decrease relative to pre-tax accounting income (a deductible difference). Therefore, a deferred tax asset is recorded for $350 ($1,400 x .25) in 2005.
The future 2007 installment revenue will be taxable then and cause taxable income to increase relative to pre-tax accounting income (a taxable difference). Therefore, a deferred tax liability is recorded for $650 ($2,600 x .25) in 2005.

The net of the deferred tax asset and liability at the end of 2005 is $300 ($650 - $350). This is the amount by which total income tax expense exceeds income tax liability (current income tax expense) and therefore equals the deferred income tax expense.



Deferred income tax is the net change in the deferred tax accounts for the year. Given that this is the first year of operations, the change equals the ending deferred tax balance. Deferred tax accounts are measured using the future enacted tax rates applicable in the period of reversal.
The future 2007 tax deduction for bad debt expense will cause 2007 taxable income to decrease relative to pre-tax accounting income (a deductible difference). Therefore, a deferred tax asset is recorded for $350 ($1,400 x .25) in 2005.

The future 2007 installment revenue will be taxable then and cause taxable income to increase relative to pre-tax accounting income (a taxable difference). Therefore, a deferred tax liability is recorded for $650 ($2,600 x .25) in 2005.

The net of the deferred tax asset and liability at the end of 2005 is $300 ($650 - $350). This is the amount by which total income tax expense exceeds income tax liability (current income tax expense) and therefore equals the deferred income tax expense.


ARO - musui
Finch Co. reported a total asset retirement obligation of $257,000 in last year's financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year's balance sheet?
A. $238,000
B. $264,000
C. $280,000
D. $306,000


The ending balance of the ARO should be the beginning balance plus the discounted cash flow estimate of the new asset plus accretion expense less the amount paid.
The T-account shows the components of the ending balance

Asset Retirement Obligation

Cash paid toward settlement $87,000 -$257,000 Beginning balance
-68,000 Discounted cash flow estimate of the new asset

-26,000 Accretion expense

=$264,000 Ending Balance



In which of the following legal forms of business combination are two or more entities combined into one new entity?

Merger Consolidation Acquisition
Yes Yes Yes
Yes Yes No
No Yes No
No No Yes


Only a legal consolidation results from the combination of two or more existing entities into one new entity. In a merger, one preexisting entity is combined into another preexisting entity; no new entity is formed. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities; no new entity is formed.