Question

1. On November 1, 2018, Taylor signed a one-year contract to provide handyman services on an as-needed basis to King Associates, with the contract to start immediately. King agreed to pay Taylor $5,400 for the one-year period. Taylor is confident that King will pay that amount, but payment is not scheduled to occur until 2019. Taylor should recognize revenue in 2018 in the amount of

Multiple Choice

a. $900

b. $2,700

c. $0

d. $5,400

2.

Mary signed up and paid $1,140 for a 6 month ceramics course on June 1^st with Choplet Ceramics. As of August 1^st, Choplet’s accounting records would indicate:

Multiple Choice

a. $380 of revenue, $760 of accounts receivable

b. $380 of revenue, $760 of deferred revenue

c. $1,140 of revenue, $1,140 of cash

d. $760 of revenue, $380 of accounts receivable

3.

JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,395,000. JRE2 recognizes revenue upon contract completion.

	Cost incurred			Estimated Cost to Complete
2017	$	276,000		$	1,680,000
2018		1,730,000			630,000
2019		580,000			0

In 2018, JRE2 would report gross profit (loss) of:

Multiple Choice

a. $0.

b. $(432,000).

c. $(241,000).

d. $(291,000).

4.

JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,305,000. JRE2 recognizes revenue upon contract completion.

	Cost incurred			Estimated Cost to Complete
2017	$	264,000		$	1,620,000
2018		1,670,000			577,000
2019		520,000			0

In 2019, JRE2 would report gross profit (loss) of:

Multiple Choice

a. $(149,000).

b. $108,000.

c. $19,000.

d. $57,000.

5.

Indiana Co. began a construction project in 2018 with a contract price of $161 million to be received when the project is completed in 2020. During 2018, Indiana incurred $40 million of costs and estimates an additional $89 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.

Indiana:

Multiple Choice

a. Recognized $40.00 million loss on the project in 2018.

b. Recognized no gross profit or loss on the project in 2018.

c. Recognized $72.00 million loss on the project in 2018.

d. Recognized $9.92 million gross profit on the project in 2018.

6.

Indiana Co. began a construction project in 2018 with a contract price of $164 million to be received when the project is completed in 2020. During 2018, Indiana incurred $35 million of costs and estimates an additional $88 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.

In 2019, Indiana incurred additional costs of $52 million and estimated an additional $37 million in costs to complete the project. Indiana (Do not round your percentage calculated):

Multiple Choice

a. Recognized $40.00 million gross profit on the project in 2019.

b. Recognized $4.00 million gross profit on the project in 2019.

c. Recognized $16.40 million gross profit on the project in 2019.

d. Recognized $38.50 million gross profit on the project in 2019.

7.

Indiana Co. began a construction project in 2018 with a contract price of $163 million to be received when the project is completed in 2020. During 2018, Indiana incurred $36 million of costs and estimates an additional $87 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.

Suppose that, in 2019, Indiana incurred additional costs of $66 million and estimated an additional $53 million in costs to complete the project. Indiana (Do not round your percentage calculated):

Multiple Choice

a. Recognized $6.44 million gross profit on the project in 2019.

b. Recognized $6.44 million loss on the project in 2019.

c. Recognized $9.44 million gross profit on the project in 2019.

d. Recognized $3.00 million loss on the project in 2019.

Answer 1

1) C - Revenue will be zero since services are not yet delivered revenue can be recognised once service is provided

2) B - 380 of revenue and 760 of deferred revenue.. Since it is 6 months contract we will recognize revenue once services is completed so as of 1st Aug 2 month of service is provided hence we will recognize 380 as revenue and balance will be deferred revenue

3) C - Loss of 241000 need to be recognised since total cost estimate for 2018 is (276,000+1,730,000+630000) = 2,636,000 and revenue is only 2,395,000. We need to recognize loss of 241,000

4) A - Loss of 149,000 need to be recognized.. Cost is 264000+1,670,000+520,000 = 2,454,000 and revenue is 2,305,000 so net loss is 149,000

5) D - Recognized $9.92 million gross profit on the project in 2018.Total cost at completion is 40+89 = 129.. Work completed 40/129 = 31.0077% so total revenue to be recognised for contract of $161M would be 49.922 and hence profit would be revenue - cost which is $9.92m

6) C - Recognize profit of 16.4m

in 2018 - Cost estimate is 35+88 = 123m against revenue of 164m so work completed is 28.455% so revenue to be recognized 46.67m so profit in 2018 is 11.67m

In 2019 - Cost Estimate is 35+52+37 - 124m against revenue of 164m so work completed is 70.16% so revenue to be recognized 115.07m so profit in 2019 is 16.4m (i.e. 28.07m - 11.67m)

7) B - Recognize loss of 6.44m

in 2018 - Cost estimate is 36+87 = 123m against revenue of 163m so work completed is 29.268% so revenue to be recognized 47.71m so profit in 2018 is 11.71m

In 2019 - Cost Estimate is 36+66+53 - 155m against revenue of 163m so work completed is 65.806% so revenue to be recognized 107.26m so total profit till 2019 is 5.26m we have already recognised profit of 11.70m so in 2019 it is loss of 6.44m(5.26m -11.70m)