Question

1.   Tony signed up and paid $1200 for a 6-month painting course on June 1 with Master Piece Painting (MPP). As of August 1, MPP's accounting records would indicate

    A. $400 of revenue, $800 of deferred revenue

   B. $1,200 of revenue, $1,200 of cash

   C. $400 of revenue, $800 of accounts receivable

   D. $800 of revenue, $400 of accounts receivable

2. On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2016, and the calibration service commenced on that date. Assume that the scales, software, and calibration service are all separate performance obligations. How much revenue will Ortiz recognize in 2016 for this contract?

   A. $74,250

   B. $90,000

C. $63,000

   D. $0

3.   On June 1, Lucy & Bros. received an order for 500 cupcakes. Lucy delivered the cupcakes to the client on June 25. A $50 deposit was received on June 5 and the remaining $450 was paid on June 30. Lucy likely would recognize revenue on

  A. June 1.

   B. June 30.

   C. June 5.

   D. June 25.

4.   In 2015, Solid Construction Co. (SCC) began work on a two-year fixed-price contract project. SCC uses the percentage-of-completion method to account for such projects and provides you with the following information (dollars in millions):

Accounts receivable (from construction progress billings)               $37.5

Actual construction costs incurred in 2015            $135

Cash collected on project during 2015     $105

Construction in progress, 12/31/15          $207

Estimated percentage of completion during 2015              60%

What's the amount of gross profit on the project recognized by SCC during 2015?

   A. $160 million

   B. $48 million

   C. The answer can't be determined from the given information.

   D. $72 million

5. On October 1, 2015, Justice Company purchased equipment from Naples Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning October 1, 2016. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at

A. $1,847,950.

   B. $2,225,000.

   C. $2,115,270.

   D. $2,500,000.

6.   Gimme Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, Gimme would

     A. multiply $10,500 by the present value of an ordinary annuity of 1.

   B. divide $10,500 by the future value of an ordinary annuity of 1.

   C. multiply $10,500 by the present value of 1.

   D. divide $10,500 by the present value of an annuity due of 1.

Answer 1

Answer 1: (a) $400 of revenue, $800 of deferred revenue

Let us understand why:

when Tony signed up for a six month course on June 1, the amount he paid was $1200, if we divide $1200 by 6 months, so for each month of course he is paying $200 per month.

As on August 1, he has used the services from MPP for 2 months i.e. he has used the services for $200 x 2 months = $400. Hence $400 is the revenue that MPP has realised for the services it has given to Tony, the remaining $800 ($1200-$400) will be realised each and every month as $200. Hence the $800 is the deferred revenue for received in advance for MPP services which have not yet been to Tony.

Now lets see why other options are not correct.

B. $1,200 of revenue, $1,200 of cash

This is incorrect because it states that $1200 is the revenue, however services for $800 are yet to be given to Tony and hence cant be considered as revenue till Tony is provided with these services by MPP.

   C. $400 of revenue, $800 of accounts receivable

This is incorrect because, $800 is not accounts receivable, accounts receivable means money owed to MPP by its Tony, however, Tony has already paid for the services in advance. Hence, Tony is not a debtor to the company.

   D. $800 of revenue, $400 of accounts receivable

Incorrect because as stated in Part B, $800 can not be the revenue, services for $800 are yet to be given to Tony and hence cant be considered as revenue till Tony is provided with these services by MPP.