revenue

Question 1

Ace Corp. entered into a troubled debt restructuring agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in payment and cancellation of a note (from Ace) with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain in its income statement?

Answer 1

In computing gain or loss, assets conveyed in a troubled debt restructuring should be valued at their fair value. Therefore:

Carrying amount of note $150,000
Less fair value of land 100,000
——-
Gain $ 50,000

Note: Be careful if troubled debt restructuring is a note payable or a note receivable

Question 2

Upon the death of an officer, Jung Co. received the proceeds of a life insurance policy held by Jung on the officer. The proceeds were not taxable. The policy’s cash surrender value had been recorded on Jung’s books at the time of payment. What amount of revenue should Jung report in its statements?

Answer 2

The cash surrender value of the policy was carried in Jung Co.’s accounts as an asset. The proceeds received less the carrying amount (i.e., the cash surrender value) should be reported by Jung as a gain (revenue).

Question 3

What is formula for % of completion

Answer 3

step 1: Costs incurred to date/Total construction costs
(actual+estimated to complete)
step 2: Percentage of completion(ABOVE)x Total Profit
Step 3: Minus Profit recognized in previous years= Profit
recognized this year.

Question 4

What is formula for PROBABLE loss on purchase committment

Answer 4

Loss on PROBABLE purchase commitment for all future years mentioned minus any recovery

Question 5

What is liquidating dividend

Answer 5

•The liquidating dividend from King Co. is not income, but rather a return of investment to owners.

Question 6

Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as a franchisee of one of Baker’s restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year. Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee, which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker. What amount should Baker report as franchise revenue during the current year?

Answer 6

Baker has earned the initial franchise fee and there is no indication that collectibility of the receivable is not reasonably assured. Therefore, Baker should recognize all the revenue for the initial franchise fee. The amount to be recognized is the cash received ($25,000) plus the present value of the future payments ($34,000). The difference between the $40,000 of future payments and their present value will be recognized as interest revenue over the 4-year period.

Question 7

When does a sale of a division get recognized?

Answer 7

The sale of a division would be a discontinued operation since its disposition represents a strategic shift. The discontinued operation would be recorded in the year the sale occurred.

Question 8

What is a comphrensive basis of accounting other then GAAP.

Answer 8

(1. ) basis of accounting that the reporting entity uses to comply with the requirements or financial reporting provisions of a governmental regulatory agency to whose jurisdiction the entity is subject. An example is a basis of accounting insurance companies use pursuant to the rules of a state insurance commission.
(2. )a basis of accounting that the reporting entity uses or expects to use to file its income tax return for the period covered by the financial statements.
(3. )the cash receipts and disbursements basis of accounting, and modifications of the cash basis having substantial support, such as recording depreciation on fixed assets or accruing income taxes.
(4. )a definite set of criteria having substantial support that is applied to all material items appearing in financial statements, such as the price-level basis of accounting.

Question 9

Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as:

Answer 9

The sale and purchase should be recorded separately. The gain on the sale is reported as other income and is a component of income from continuing operations.

Note the excess should be reported as gain, but report seperatly

Question 10

NO MORE EXTRAORDINARY ITEMS!!!!!!!!!

Answer 10

NO MORE EXTRAORDINARY ITEMS!!!!!!!!!

Question 11

Lang Co. uses the installment method of revenue recognition. The following data pertain to Lang’s installment sales for the years ending December 31, 20X1 and 20X2:

                                                    20X1         20X2
                                                    -------      ------- Installment receivables at   year-end on 20X1 sales          $60,000      $30,000 Installment receivables at   year-end on 20X2 sales                -          69,000 Installment sales                       80,000       90,000 Cost of sales                             40,000       60,000 What amount should Lang report as deferred gross profit in its December 31, 20X2, balance sheet?

Answer 11

Gross profit rates:

20X1 = ($80,000 - $40,000) / $80,000 = 50%
20X2 = ($90,000 - $60,000) / $90,000 = 33.33%

Deferred gross profit on December 31, 20X2:

On 20X1 sales = 50% x $30,000 = $15,000
On 20X2 sales = 33.33% x $69,000 = $23,000
——-
Total deferred gross profit $38,000

HINT: BE CAREFUL IF IY SAYS DEFERRED GP% of certain years sales or if it says total deferred on B/S

Question 12

What is formula for Gross Profit recognized in installment method?

Answer 12

Cash collected x GP%= Profit Recognized

Question 13

What is formula for Deferred Gross Profit in installment method?

Answer 13

Receivable balance x GP%= Deferred GP(B/S)

Question 14

On October 1, Year 1, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty-thousand (50,000) gallons were delivered on December 15, Year 1, and the remaining 50,000 gallons were delivered on January 15, Year 2. Payment terms were 50% due on October 1, Year 1, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recog­nize from this sale during Year 1?

Answer 14

Revenue is recognized when the earnings process is complete and the exchange has taken place. Only 50,000 gallons have been “exchanged” by delivery. Therefore, revenue would be:
•50,000 gallons × $3/per gallon = $150,000

Question 15

On December 30, Devlin Co. sold goods to Jensen Co. for $10,000, under an arrangement in which (1) Jensen has an unlimited right of return and (2) Jensen’s obligation to pay Devlin is contingent upon Jensen’s reselling the goods. Past experience has shown that Jensen ordinarily resells 60% of goods and returns the other 40%. What amount should Devlin include in sales revenue for this transaction on its December 31 income statement?

Answer 15

This arrangement is not substantially different from a consignment. Devlin does not meet the requirements for a sale until Jensen has sold the goods.

Question 16

How do you recognize revenue from completed contracts?

Answer 16

revenue is always deferred until the contract is complete. Costs and progress billings are accounted for (maintained), but no revenue is recognized until the contract is complete.

Note: This is a more conservative version of % of completion.

Question 17

How do you get cash basis revenue?

Answer 17

You take cash collected from cash sales and cash collected from credit sales.

HINT: DO A T ACCOUNT FOR CASH COLLECTED FROM CREDIT SALES!!

Question 18

When would a company use the installment sales method of revenue recognition?

Answer 18

The rationale underlying the method is that the length of the installment contract and the nature of the contract itself impose uncertainty concerning collection such that dependable estimates of uncollectibles are not possible.

Question 19

Transfer of Assets

In a transfer of assets to satisfy debt in a TDR, proper accounting by the debtor and the creditor is as follows:

Answer 19

Debtor
(1.) Recognize gain/loss on transfer of assets (FV vs CV of asset)
(2.) Recognize gain/loss on restructuring of debt(equal to difference between FV of asset & CV of debt)
Creditor
Recognize gain/loss for Asset received at FV to difference of receivable

HINT: WATCH OUT IF QUESTION ASKS FOR GAIN/LOSS ON DEBT OR ON ASSET

Question 20

During January of the current year, Haze Corp. won a litigation award for $15,000 which was tripled to $45,000 to include punitive damages. The defendant, who is financially stable, has appealed only the $30,000 punitive damages. Haze was awarded $50,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals. In its current year financial statements, Haze should report what amount of pretax gain?

Answer 20

However, the $15,000 award that has not been appealed can be taken now as pretax gain

HINT: FOR A GAIN IN A LAWSUIT ONLY TAKE GAIN IF CASE IS SETTLED AND NO APPEALED HAS BEEN MADE

Question 21

what is formula for rate of return on assets?

Answer 21

Rate of Return on Assets = Net income / Average assets

Question 22

What is cost recovery method?

Answer 22

The most extreme deferral of profit is under the cost recovery method, where all cash collections are considered to be return of costs, until all of the seller’s costs for the year’s sales are recovered, and only then are future cash collections on that year’s sales considered profits.

Question 23

Town, Inc., is preparing its financial statements for the year ending December 31, 20X1. On December 1, 20X1, Town was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received in January 20X2, prior to the issuance of the financial statements. What is the reporting requirement?

Answer 23

Town, Inc., has a legally enforceable right to the settlement from the lawsuit on December 1, 20X1, so it would be reported in 20X1. The circumstances of the accrual of the gain should be disclosed in the interest of full disclosure.

Question 24

what is JE for troubled debt restructuring?

Answer 24

Dr. Cr.
Note payable $150,000
Loss - of real estate 10,000
Real estate: $100,000
Gain - restructure of debt 60,000

Question 25

In accounting for a long-term construction contract using the percentage-of-completion method, the pro­gress billings on contracts account is a:

Answer 25

The current asset account maintaining an inventory value for the costs and profits recognized so far on the contract has a contra account of progress billings, lowering its carrying value. If the billings exceed the construction in process, then a current liability can exist instead.
Current Asset