ACCT 301 Quiz 2 solutions complete answers

ACCT 301 Quiz 2 solutions complete answers 

 

On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc.



Suppose that the Formal Wear Division's assets had not been sold by December 31, 2021, but were considered held for sale. Assume that the fair value of these assets was $40 million at December 31, 2021. In the income statement for the year ended December 31, 2021, Tango Co. would report discontinued operations of:

 

On August 1, 2021, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2022. On January 31, 2022, Rocket's fiscal year-end, the following information relative to the discontinued division was accumulated: 

 

In its income statement for the year ended January 31, 2022, Rocket would report a before-tax loss on discontinued operations of:

 

Major Co. reported 2021 income of $311,000 from continuing operations before income taxes and a before-tax loss on discontinued operations of $69,000. All income is subject to a 25% tax rate. In the income statement for the year ended December 31, 2021, Major Co. would show the following line-item amounts for income tax expense and net income:

 

The Filzinger Corporation’s December 31, 2021 year-end trial balance contained the following income statement items: 


Calculate the company’s operating income for the year using a single-step income statement format.

 

ABC Company will issue $6,700,000 in 6%, 10-year bonds when the market rate of interest is 8%. Interest is paid semiannually. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

Determine how much cash ABC Company will realize from the bond issue. (Round your final answer to nearest whole dollar.)

 

Jimmy has $552,814 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place at the end of each year starting a year from now. How soon will the fund be exhausted if Jimmy withdraws $71,000 each year?

 

At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the (rounded) cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

 

Rosie's Florist borrows $350,000 to be paid off in three years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

 

Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in cash savings of $9,400 the first year, $15,400 for the next two years, and $18,400 for the next two years. Interest is at 11%. Assume cash flows occur at the end of the year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 
Calculate the total present value of the cash flows. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

 

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the first of the month, with interest of 12% on the unpaid balance. She should use a table for the:

 

Present and future value tables of $1 at 3% are presented below: 

N
FV $1
PV $1
FVA $1
PVA $1
FVAD $1
PVAD $1
1
1.03000
0.97087
1.0000
0.97087
1.0300
1.00000
2
1.06090
0.94260
2.0300
1.91347
2.0909
1.97087
3
1.09273
0.91514
3.0909
2.82861
3.1836
2.91347
4
1.12551
0.88849
4.1836
3.71710
4.3091
3.82861
5
1.15927
0.86261
5.3091
4.57971
5.4684
4.71710
6
1.19405
0.83748
6.4684
5.41719
6.6625
5.57971
7
1.22987
0.81309
7.6625
6.23028
7.8923
6.41719
8
1.26677
0.78941
8.8923
7.01969
9.1591
7.23028
9
1.30477
0.76642
10.1591
7.78611
10.4639
8.01969
10
1.34392
0.74409
11.4639
8.53020
11.8078
8.78611
11
1.38423
0.72242
12.8078
9.25262
13.1920
9.53020
12
1.42576
0.70138
14.1920
9.95400
14.6178
10.25262
13
1.46853
0.68095
15.6178
10.63496
16.0863
10.95400
14
1.51259
0.66112
17.0863
11.29607
17.5989
11.63496
15
1.55797
0.64186
18.5989
11.93794
19.1569
12.29607
16
1.60471
0.62317
20.1569
12.56110
20.7616
12.93794
Rosie's Florist borrows $300,000 to be paid off in six years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

 

A deferred annuity is one in which interest charges are deferred for a stated time period.

 

Minarski Electronics sells computers and provides hardware maintenance services. On April 1st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $822 and the one-year unlimited maintenance/repair service costs $378. How much revenue does Minarski Electronics recognize for the month ended April 30th, assuming that revenue is accrued monthly?

 

Arizona Desert Homes (ADH) constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below: 

 
 
 
 
 
Contract amount
 
$
2,955,000
 
Cost:
2020
 
1,190,000
 
 
2021
 
590,000
 
Gross profit:
2020
 
785,000
 
 
2021
 
390,000
 
Contract billings:
2020
 
1,477,500
 
 
2021
 
1,477,500
 
 
ADH recognizes revenue upon completion of the contract.
In its December 31, 2020, balance sheet, ADH would report:

 

Which one of the following is not one of the five steps for recognizing revenue?

 

Which of the following is not an indicator that the constraint on recognizing variable consideration should be applied?

 

Accounting for quality-assurance warranties includes a credit to warranty expense and a debit to contingent liability.

 

If a license is acquired to use intellectual property for a 5-year period, revenue always is recognized at the point in time the customer begins to benefit from the license.

 

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $32,750 was sold for $55,500 in 2020. Collections on this sale were $21,400 in 2020, $16,000 in 2021, and $18,100 in 2022.
In 2020, Reliable would recognize gross profit of:

 

Orange Inc. offers a discount on an extended warranty on its oPhone when the warranty is purchased at the time the oPhone is purchased. The warranty normally has a price of $144, but Orange offers it for $117 when purchased along with an oPhone. Orange anticipates a 80% chance that a customer will purchase the extended warranty along with the oPhone. Assume Orange sells to 1,000 oPhones with the extended warranty discount offer. What is the total stand-alone selling price that Orange would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 oPhone contracts?

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $660,000 that cost Lake $330,000. Lake collected $220,000 in 2020, $220,000 in 2021, and $220,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,350,000 that cost Lake $810,000. Lake collected $450,000 in 2021, $360,000 in 2022, and $360,000 in 2023 associated with those sales. In 2023, Lake also repossessed $180,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $67,500 at the time they were repossessed.
In its December 31, 2021, balance sheet, Lake would report:

 

Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:

 

 

Income from continuing operations sometimes includes gains from nonoperating activities.

 

Unlike the balance sheet, the income statement measures activity over a period of time.

 

The single-step format of the income statement first lists all the revenues and gains included in income from continuing operations.

 

The single-step format of the income statement does not separately report nonoperating gains in the revenues section of the income statement.

 

The multiple-step format of the income statement reports a series of intermediate subtotals such as gross profit, operating income, and income before taxes.

 

Revenues and expenses typically occur as a result of normal operating activity.

 

Gains and losses typically occur as a result of normal operating activity.

 

Income from continuing operations consists only of those items expected to be permanent components of earnings.

 

Interest expense typically is considered a temporary component of earnings.

 

One meaning of earnings quality is the ability of reported earnings to predict a company’s future earnings.

 

Managers’ income smoothing behavior results in reported earnings being manipulated higher in each year.

 

Classification shifting by managers leads to under-reporting of total expenses and over-statement of bottom-line net income.

 

Material restructuring costs are reported as an element of income from continuing operations.

 

Restructuring costs most often refer to costs associated with management’s plans to materially change the scope of business operations or the manner in which they are conducted.

 

Intraperiod tax allocation is the process of associating income tax effects with the income statement components that create those effects.

 

Gains, but not losses, from discontinued operations must be separately reported in an income statement.

 

A change in accounting principle that is implemented using the retrospective approach includes restating financial statements of all periods presented as if the new standard had been used in those periods.

 

A change in accounting principle that is implemented using the modified retrospective approach includes implementing the change in the current period only and not adjusting for the cumulative effects on prior periods.

 

Changes in estimates are accounted for using the prospective approach.

 

Material errors in prior periods’ income statements are corrected by making an adjustment to the beginning balance of the current period’s retained earnings.

 

Earnings per share disclosure is required only for income from continuing operations.

 

Comprehensive income reports an expanded version of income to include certain types of gains and losses not included in traditional income statements.

 

Comprehensive income is the total change in shareholders’ equity that occurred during the period.

 

The direct and indirect methods of reporting the statement of cash flows present different information for investing and financing activities.

 

Income statements prepared according to either U.S. GAAP or International Financial Reporting Standards (IFRS) require the separate reporting of discontinued operations.

 

International Financial Reporting Standards (IFRS) require a company to classify expenses in an income statement by function.

 

In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), interest received is most often classified as an operating cash flow.

 

In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), interest paid is most often classified as a financing cash flow.

 

A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection.

 

The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high.

 

A company could improve its return on assets by increasing its income or by increasing its total assets.

 

Return on equity is increased if a firm can maintain its return on assets but increase its leverage.

 

The difference between single-step and multiple-step income statements is primarily an issue of:

A) Consistency.
B) Presentation.
C) Measurement.
D) Valuation.
 

Most real-world income statements are presented using which format?

 

A primary advantage of the multiple-step format of the income statement over the single-step format is that the multiple-step format:

 

Which of the following profit amounts usually will be listed in both the single-step and multiple-step formats of the income statement?

 

The relationship between revenue from selling inventory and the cost of that inventory is measured as:

 

The measure of profit reported on a multiple-step income statement that represents the primary-revenue generating activities of the company is:

 

Popson Inc. incurred a material loss that was unusual in character. This loss should be reported as:

 

Provincial Inc. reported the following before-tax income statement items:

 

Provincial would report the following amount of income tax expense as a separately stated line item in the income statement:

 

Freda’s Florist reported the following before-tax income statement items for the year ended December 31, 2021:

 

All income statement items are subject to a 25% income tax rate. In its 2021 income statement, Freda’s separately stated income tax expense and total income tax expense would be:

 

Earnings quality refers to:

 

Income smoothing refers to:

 

To accomplish income smoothing, managers could do which of the following?

 

Managers may engage in classification shifting by:

 

A likely method that managers use for classification shifting is to report certain operating expenses as:

 

Classification shifting by managers has the effects of increasing which level of profitability?

 

Financial statement users typically begin their assessment of permanent earnings with:

 

Temporary earnings are best characterized as:

 

Which of the following most likely would be classified as restructuring costs?

 

Restructuring costs typically can be defined as:

 

Non-GAAP earnings:

 

A common component of income excluded from the calculation of non-GAAP earnings is:

 

The distinction between operating and nonoperating income relates to:

 

A company reports the following amounts at the end of the current year:

 

Under normal circumstances (ignoring tax effects), permanent earnings would be computed as:

 

Which of the following is most likely to be classified as discontinued operations?

 

A company has decided to discontinue a component of its business and sells the component by the end of the year. The amount that the company would report as income from discontinued operations is (ignore tax effects):

 

A company has decided to discontinue a component of its business but, when the reporting period ends, the component has not yet been sold. The amount that the company would report as income from discontinued operations is (ignore tax effects):

 

The principal benefit of separately reporting discontinued operations is to enhance:

 

Which of the following best explains why the taxes on discontinued operations are reported separately from taxes on continuing operations?

 

Intraperiod income tax presentation is primarily a matter of:

 

The Claxton Company manufactures children’s toys and also has a division that makes automobile parts. Due to a change in its strategic focus, the company sold the automobile parts division. The division qualifies as a component of the entity according to GAAP. How should Claxton report the sale in its income statement?

 

On August 1, 2021, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2022. On January 31, 2022, Rocket’s fiscal year-end, the following information relative to the discontinued division was accumulated:

 

In its income statement for the year ended January 31, 2022, Rocket would report a before-tax loss on discontinued operations of:

 

On November 1, 2021, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by April 30, 2022. On December 31, 2021, the company’s year-end, the following information relative to the discontinued division was accumulated:

 

In its income statement for the year ended December 31, 2021, Jamison would report a before-tax loss on discontinued operations of:

 

On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company’s fiscal year. The division’s loss from operations for 2021 was $2,000,000.

 

The division’s book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively. What before-tax amount(s) should the company report as loss on discontinued operations in its 2021 income statement?

 

On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company’s fiscal year. The division’s loss from operations for 2021 was $2,000,000.

 

The division’s book value and fair value less cost to sell on December 31 were $3,000,000 and $3,500,000, respectively. What before-tax amount(s) should the company report as loss on discontinued operations in its 2021 income statement?

 

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2021.

 

The following additional facts pertain to the transaction:

 

In the income statement for the year ended December 31, 2021, Foxtrot Co. would report:

 

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2021.

 

The following additional facts pertain to the transaction:

 

In the income statement for the year ended December 31, 2021, Foxtrot Co. would report:

 

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2021.

 

The following additional facts pertain to the transaction:

 

In the income statement for the year ended December 31, 2021, Foxtrot Co. would report income from discontinued operations of:

 

On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc.

 

The following additional facts pertain to the transaction:

 

Suppose that the Formal Wear Division’s assets had not been sold by December 31, 2021, but were considered held for sale. Assume that the fair value of these assets was $40 million at December 31, 2021. In the income statement for the year ended December 31, 2021, Tango Co. would report discontinued operations of:

 

On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc.

 

The following additional facts pertain to the transaction:

 

Suppose that the Formal Wear Division’s assets had not been sold by December 31, 2021, but were considered held for sale. Assume that the fair value of these assets was $80 million at December 31, 2021. In the income statement for the year ended December 31, 2021, Tango Co., would report discontinued operations of a:

 

Major Co. reported 2021 income of $300,000 from continuing operations before income taxes and a before-tax loss on discontinued operations of $80,000. All income is subject to a 25% tax rate. In the income statement for the year ended December 31, 2021, Major Co. would show the following line-item amounts for income tax expense and net income:

 

Howard Co.’s 2021 income from continuing operations before income taxes was $280,000. Howard Co. reported before-tax income on discontinued operations of $60,000. All tax items are subject to a 25% tax rate. In its income statement for 2021, Howard Co. would show the following line-item amounts for income tax expense and net income:

 

Misty Company reported the following before-tax items during the current year:

 

What is Misty’s income from continuing operations?

 

Misty Company reported the following before-tax items during the current year:

 

What is Misty’s net income for the current year?

 

Cendant Corporation’s results for the year ended December 31, 2021, include the following material items:

 

Cendant Corporation’s income from continuing operations before income taxes for 2021 is:

 

A change in accounting principle that is implemented using the retrospective approach includes:

 

A change in accounting principle that is implemented using the modified retrospective approach includes:

 

Changes in estimates are accounted for using which approach?

 

When a material error is discovered in prior financial statements:

 

Which of the following is not true about EPS?

 

The Maytag Corporation’s income statement includes income from continuing operations and a loss on discontinued operations. Earnings per share information would be provided for:

 

Each of the following would be reported as items of other comprehensive income except:

 

Reporting comprehensive income can be accomplished by each of the following methods except:

 

During the year, a company’s investment in debt securities increases in fair value, resulting in an unrealized gain on the investment. The investment is not sold by the end of the year. The company is considering whether to report the unrealized gain as a component of net income or as a component of other comprehensive income. Under which reporting requirement would the company have a higher ending balance of total shareholders’ equity?

 

Consider the following two separate events for a company during the year:

 

The company reports the unrealized gain as a component of other comprehensive income. By how much would these two events increase net income and comprehensive income, ignoring tax effects?

 

The company reports the unrealized gain as a component of other comprehensive income. By how much would these two events affect net income and comprehensive income, ignoring tax effects?

 

The company reports the unrealized gain as a component of other comprehensive income. By how much would these two events affect the balance of retained earnings, ignoring tax effects?

 

Reporting comprehensive income according to International Financial Reporting Standards (IFRS) can be accomplished by each of the following methods except:

 

Comprehensive income is the change in equity from:

 

Financial statements that report changes over time include:

 

For the statement of cash flows, investments in Treasury bills with very short maturity period would normally be included as:

 

In comparing the direct method with the indirect method of preparing the statement of cash flows:

 

The statement of cash flows reports cash flows from the activities of:

 

Operating cash flows would not include:

 

Operating cash outflows would include:

 

Cash flows from investing do not include cash flows from:

 

Cash flows from financing activities include:

 

Cash flows from investing activities do not include:

 

The FASB’s stated preference for reporting operating cash flows is the:

 

In the operating activities section of the statement of cash flows, we start with net income:

 

Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?

 

Schneider Inc. had salaries payable of $60,000 and $90,000 at the end of 2020 and 2021, respectively. During 2021, Schneider recorded $620,000 in salaries expense in its income statement. Cash outflows for salaries in 2021 were:

 

Howard Inc. had prepaid rent of $75,000 and $80,000 at the end of 2020 and 2021, respectively. During 2021, Howard recorded $240,000 in rent expense in its income statement. Cash outflows for rent in 2021 were:

 

Martel Co. had supplies of $24,000 and $33,000 at the end of 2020 and 2021, respectively. During 2021, Howard paid $128,000 for supplies. Supplies expense in the 2021 income statement was:

 

Stinley Co. paid utilities of $134,000 during 2021. At the end of 2021, utilities payable equals $17,000 and utilities expense equals $145,000. What was the balance of utilities payable at the beginning of 2021?

 

Tropical Tours reported revenue of $400,000 for its year ended December 31, 2021. Accounts receivable at December 31, 2020 and 2021, were $35,000 and $32,000, respectively. Using the direct method for reporting cash flows from operating activities, Tropical Tours would report cash collected from customers of:

 

Shively Mfg. Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Shively would report:

 

Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:

 

Hong Kong Clothiers reported revenue of $5,000,000 for its year ended December 31, 2018. Accounts receivable at December 31, 2017 and 2018, were $320,000 and $355,000, respectively. Using the direct method for reporting cash flows from operating activities, Hong Kong Clothiers would report cash collected from customers of:

 

Lucia Ltd. reported net income of $135,000 for the year ended December 31, 2021. January 1 balances in accounts receivable and accounts payable were $29,000 and $26,000, respectively. Year-end balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Lucia’s cash flows from operating activities would be:

 

Shady Lane’s income tax payable account decreased from $14 million to $12 million during 2021. If its income tax expense was $80 million, what was shown as an operating cash flow under the direct method?

 

Bird Brain Co. reported net income of $45,000 for the year ended December 31, 2021. January 1 balances in accounts receivable and accounts payable were $23,000 and $26,000 respectively. Year-end balances in these accounts were $22,000 and $28,000, respectively. Assuming that all relevant information has been presented, Bird Brain’s cash flows from operating activities would be:

 

Nevada Boot Co. reported net income of $216,000 for its year ended December 31, 2021. Purchases totaled $152,000. Accounts payable balances at the beginning and end of the year were $36,000 and $33,000, respectively. Beginning and ending inventory balances were $44,000 and $46,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would report operating cash flows of:

 

Rowdy’s Restaurants Cash Flow ($ in millions)

 

Rowdy’s would report net cash inflows (outflows) from operating activities in the amount of:

 

Rowdy’s would report net cash inflows (outflows) from investing activities in the amount of:

 

Rowdy’s would report net cash inflows (outflows) from financing activities in the amount of:

 

Expenses in an income statement prepared under International Financial Reporting Standards (IFRS):

 

In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), each of the following items is typically classified as a financing cash flow except:

 

During its 2021 fiscal year, Jacobsen Corporation reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount:

 

Jacobsen Corporation prepares its financial statements applying U.S. GAAP. In its 2021 income statement, Jacobsen would report income from continuing operations of:

 

During its 2021 fiscal year, Jacobsen Corporation reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount:

 

Jacobsen Corporation prepares its financial statement applying International Financial Reporting Standards (IFRS). In its 2021 income statement, Jacobsen would report income from continuing operations of:

 

In the DuPont formula, return on assets equals:

 

Compound interest includes interest earned on interest.



When interest is compounded, the stated rate of interest exceeds the effective rate of interest.



The calculation of future value requires the removal of interest.



The company’s credit-adjusted risk-free rate of interest is used when computing present value applying the expected cash flow approach.



The calculation of present value eliminates interest from future cash flows.



With an ordinary annuity, a payment is made or received on the date the agreement begins.



In the future value of an ordinary annuity, the last cash payment will not earn any interest.



An annuity consists of level principal payments plus interest on the unpaid balance.



With an annuity due, a payment is made or received on the date the agreement begins.



An annuity is a series of equal periodic payments.



Given identical current amounts owed and identical interest rates, annual payments of an ordinary annuity will be greater than annual payments of an annuity due.



Other things being equal, the present value of an annuity due will be less than the present value of an ordinary annuity.



A deferred annuity is one in which interest charges are deferred for a stated time period.



Monetary assets include only cash and cash equivalents.



Most, but not all, liabilities are monetary liabilities.



Present and future value tables of $1 at 3% are presented below:



Today, Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD?



Carol wants to invest money in a 6% CD account that compounds semiannually. Carol would like the account to have a balance of $50,000 five years from now. How much must Carol deposit to accomplish her goal?



Shane wants to invest money in a 6% CD account that compounds semiannually. Shane would like the account to have a balance of $100,000 four years from now. How much must Shane deposit to accomplish his goal?



Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria’s gift worth today?



Monica wants to sell her share of an investment to Barney for $50,000 in three years. If money is worth 6% compounded semiannually, what would Monica accept today?



At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the (rounded) cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?



At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years?



Sondra deposits $2,000 in an IRA account on April 15, 2018. Assume the account will earn 3% annually. If she repeats this for the next nine years, how much will she have on deposit on April 14, 2028?



Shelley wants to cash in her winning lottery ticket. She can either receive ten $100,000 semiannual payments starting today, or she can receive a single-amount payment today based on a 6% annual interest rate. What is the single-amount payment she can receive today?



On January 1, 2018, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2020. You are eager to earn 3%. What is the present value of the investment on January 1, 2018?



On January 1, 2018, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2021. You are eager to earn 3%. What is the present value of the investment on January 1, 2018?



Rosie’s Florist borrows $300,000 to be paid off in six years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?



Jimmy has $255,906 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place at the end of each year starting a year from now. How soon will the fund be exhausted if Jimmy withdraws $30,000 each year?



Debbie has $368,882 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place annually starting today. How soon will the fund be exhausted if Debbie withdraws $30,000 each year?



Jose wants to cash in his winning lottery ticket. He can either receive five $5,000 annual payments starting today, or he can receive one lump-sum payment today based on a 3% annual interest rate. What would be the lump-sum payment?



Micro Brewery borrows $300,000 to be repaid in equal installments over a period of three years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?



A firm leases equipment under a long-term lease (analogous to an installment purchase) that calls for 12 semiannual payments of $39,014.40. The first payment is due at the inception of the lease. The annual rate on the lease is 6%. What is the value of the leased asset at inception of the lease?



Below are excerpts from time value of money tables for the 8% rate.



Column 1 is an interest table for the:



Column 2 is an interest table for the:



Column 3 is an interest table for the:



Column 4 is an interest table for the:



Column 5 is an interest table for the:



Column 6 is an interest table for the:



Reba wishes to know how much would be in her savings account if she deposits a given sum in an account and leaves it there at 6% interest for five years. She should use a table for the:

 

Present and future value tables of $1 at 9% are presented below.



Ajax Company purchased a five-year certificate of deposit for its building fund in the amount of $220,000. How much should the certificate of deposit be worth at the end of five years if interest is compounded at an annual rate of 9%?



How much must be invested now at 9% interest to accumulate to $10,000 in five years?



How much must be deposited at the beginning of each year to accumulate to $10,000 in four years if interest is at 9%?



Claudine Corporation will deposit $5,000 into a money market sinking fund at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the sinking fund earns 9% interest?



Mustard’s Inc. sold the rights to use one of its patented processes that will result in cash Chapter 6 Time Value of Money Concepts 6–15 receipts of $2,500 at the end of each of the next four years and a lump sum receipt of $4,000 at the end of the fifth year. The total present value of these payments if interest is at 9% is:



An investment product promises to pay $42,000 at the end of 10 years. If an investor feels this investment should produce a rate of return of 12%, compounded annually, what’s the most the investor should be willing to pay for the investment?



LeAnn wishes to know how much she should invest now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the:



Present and future value tables of $1 at 11% are presented below.



Spielberg Inc. signed a $200,000 noninterest-bearing note due in five years from a production company eager to do business. Comparable borrowings have carried an 11% interest rate. What is the value of this debt at its inception?



On October 1, 2018, Justine Company purchased equipment from Napa Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct 1, 2019. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at:



Titanic Corporation leased executive limousines under terms of $20,000 to be paid at the inception of the lease, and four equal annual payments of $30,000 to each be paid thereafter on the anniversary date of the lease. The interest rate implicit in the lease is 11%. The first year’s interest expense would be:



Polo Publishers purchased a multi-color offset press with terms of $50,000 to be paid at the date of purchase, and a noninterest-bearing note requiring payment of $20,000 at the end of each year for five years. The interest rate implicit in the purchase contract is 11%. Polo would record the asset at:



Mary Alice just won the lottery and is trying to decide between the options of receiving the annual cash flow payment option of $250,000 per year for 25 years beginning today, or receiving one lump-sum amount today. Mary Alice can earn 6% investing this money. At what lump-sum payment amount would she be indifferent between the two alternatives?



An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond?



Simpson Mining is obligated to restore leased land to its original condition after its excavation activities are completed in three years. The cash flow possibilities and probabilities for the restoration costs in three years are as follows:



The company’s credit-adjusted risk-free interest rate is 5%. The liability that Simpson must record at the beginning of the project for the restoration costs is:



A series of equal periodic payments that starts more than one period after the agreement is called:



A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:



Loan A has the same original principal, interest rate, and payment amount as Loan B. However, Loan A is structured as an annuity due, while Loan B is structured as an ordinary annuity. The maturity date of Loan A will be:



To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity:



Yamaha Inc. hires a new chief financial officer and promises to pay him a lump-sum bonus four years after he joins the company. The new CFO insists that the company invest an amount of money at the beginning of each year in a 7% fixed rate investment fund to insure the bonus will be available. To determine the amount that must be invested each year, a computation must be made using the formula for:



Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting five years after she joins the company. The liability for this bonus when the CEO is hired:



Which of the following must be known in order to compute the interest rate when financing an asset purchase with an annuity?



Davenport Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $30,000 at the date of employment and another $50,000 two years later. Assuming the employee’s time value of money is 8% annually, what single sum at the employment date would make her indifferent between the two options?



Quaker State Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee’s time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options?



Garland Inc. offers a new employee a single-sum signing bonus at the date of employment, June 1, 2018. Alternatively, the employee can receive $39,000 at the date of employment plus $10,000 each June 1 for five years, beginning in 2022. Assuming the employee’s time value of money is 9% annually, what single amount at the employment date would make the options equally desirable?



On January 1, 2018, Glanville Company sold goods to Otter Corporation. Otter signed an installment note requiring payment of $15,000 annually for six years. The Chapter 6 Time Value of Money Concepts 6–23 first payment was made on January 1, 2018. The prevailing rate of interest for this type of note at date of issuance was 8%. Glanville should record sales revenue in January 2018 of:



Loan C has the same principal amount, payment amount, and maturity date as Loan D. However, Loan C is structured as an annuity due, while Loan D is structured as an ordinary annuity. Loan C’s interest rate is:



Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the first of the month, with interest of 12% on the unpaid balance. She should use a table for the:



George Jones is planning on a cruise for his 70th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the:



Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:



First Financial 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, First Financial would:



Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. in exchange for a building that now has a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?



Kunkle Company wishes to earn 20% annually on its investments. If Kunkle makes an investment that equals or exceeds that rate, it considers it a success. Assume that Kunkle invests $2 million and gets $500,000 in return at the end of each year for X years. What is the minimum value of X (number of years) for which Kunkle will consider the investment a success? Assume that Kunkle can’t invest for fractional parts of a year.



Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, each to be paid one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.

 

You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18% interest annually. The first payment is due one month from today. What is the amount of each monthly payment?



Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to fund a savings account at the beginning of each year during that period for which it expects to earn 8% annually. At the end of the five years, there will be enough money in the account to pay off the bonds. What amount does Fenland need to invest each year?



The note about debt included in the financial statements of Healdsburg Company for the year ended December 31, 2017 disclosed the following:



 

Debt. The following table summarizes the long-term debt of the Company at December 31, 2017. All of the notes were originally issued at their face (maturity) value and have been gradually repaid over time so that these amounts are the remaining balances at this date.

 

Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years, compute the following:



The total cash interest payments in 2018 for these notes.



Suppose that Healdsburg wants to pay off the 7.75% notes on December 31, 2018, (i.e., five years early) when the going interest rate is 6%, thereby retiring the $345,154,000 in debt. How much would Healdsburg have to pay for the notes (principal only) on this date in order to satisfy the noteholders?



Suppose that Healdsburg renegotiates the 8% notes on December 31, 2023, when the going interest rate is 8%. Healdsburg agrees to make 12 equal annual installments, commencing on December 31, 2024, rather than pay the annual interest payments and the $225 million in a single amount at maturity. What would the annual payments be?



 

Suppose that Healdsburg enters into a sales contract with an auto manufacturer on January 1, 2018, to provide tires that cost Healdsburg $18 million to produce. The buyer offers Healdsburg $6 million in cash and agrees to take over only the principal payment on Healdsburg’s 6.55% debt notes. Assume that the going market interest is 7% at the time. What would Healdsburg’s gross profit be on the sale?



Compute the future value of the following invested amounts at the specified periods and interest rates.
Invested Interest Number of
Item Amount Rate Periods
a. $20,000 8% 10
b. $30,000 4% 8
c. $10,000 12% 15



Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.
Invested Interest Number of
Item Amount Rate Periods
a. $40,000 7% 20
b. $20,000 6% 25
c. $50,000 11% 10



DON Corp. is contemplating the purchase of a machine that will produce cash savings of $20,000 per year for five years. At the end of five years, the machine can be sold to realize cash flows of $5,000. Interest is 12%. Assume the cash flows occur at the end of each year. Required: Calculate the total present value of the cash savings.



Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year. Required: Calculate the total present value of the cash flows.



Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in cash savings of $9,000 the first year, $15,000 for the next two years, and $18,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year. Required: Calculate the total present value of the cash flows.



Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for 10 years and can be sold at the end of 10 years for $10,000. Interest is at 10%. Assume the machine purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Required: Determine whether Baird should purchase the machine.



Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. Interest is at 12%. Assume the equipment purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Required: Determine whether Dobson should purchase the machine.



Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. Interest is at 8%. Ignore income taxes. Required: Determine which option should be chosen based on present value considerations.



Bison Mfg. is considering two options for purchasing comparable machinery. Machine 1 will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years. Machine 2 will cost $25,000 with maintenance being an add-on charge. The estimated cost of maintenance is $1,000 the first year, $3,000 the second year, and $4,000 the third year and the fourth year. Assume the purchase cost is paid the same day as buying the machinery, but that maintenance is paid for at the end of each year. Interest is at 10%. Ignore income taxes and residual values. Required: Determine which machine should be chosen based on present value considerations.



On May 1, 2018, Bo Smith, proud father of newborn son Bobo, purchased $200,000 in zero-coupon bonds that mature on May 1, 2038. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds annually. Required: Calculate the price Bo paid for the bonds.



On February 1, 2018, Lynda Brown, proud mother of newborn daughter Goldie, purchased $600,000 in zero-coupon bonds that mature on February 1, 2038. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 12%. Required: Calculate the price Lynda paid for the bonds.



On the last day of its fiscal year ending December 31, 2018, the Boatright Ship Builders completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations.
1. Boatright issued 6% stated rate bonds with a face amount of $200 million. The bonds mature on December 31, 2038 (20 years). The market rate of interest for similar bond issues was 8% (4% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on June 30, 2019.
2. The company leased two manufacturing facilities. Lease A requires 10 annual lease payments of $50,000 beginning on January 1, 2019. Lease B also is for 10 years, beginning January 1, 2019. Terms of the lease require seven annual lease payments of $60,000 beginning on January 1, 2022. Accounting standards require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an 8% interest rate properly reflects the time value of money for the lease obligations.
Required: What amounts will appear in Boatright’s December 31, 2018, balance sheet for the bonds and for the leases?



White & Decker Corporation’s 2018 financial statements included the following information in the long-term debt disclosure note: ($ in millions) 2018
Zero-coupon subordinated debentures, due 2033: $275
The disclosure note stated the debenture bonds were issued late in 2013 and have a maturity value of $500 million. The maturity value indicates the amount that White & Decker will pay bondholders in 2033. Each individual bond has a maturity value (face amount) of $1,000. Zero-coupon bonds pay no cash interest during the term to maturity. The company is “accreting” (gradually increasing) the issue price to maturity value using the bonds’ effective interest rate computed on an annual basis.
Required:
1. Determine the effective interest rate on the bonds.
2. Determine the issue price in late 2013 of a single, $1,000 maturity-value bond.



Santa Cruz Oil is obligated to the State of Nevada to restore leased land to its original condition after its oil drilling activities are completed in four years. The cash flow possibilities are probabilities for the restoration costs in four years are as follows:
Cash Outflow Probability
$20 million 20%
30 million 40%
40 million 30%
50 million 10%
The company’s risk-free interest rate is 6%.
Required: Calculate the liability that Santa Cruz must record at the beginning of the project for the restoration costs.



Jackpot Mining is obligated to the State of California to restore leased land to its original condition after its mining activities are completed in six years. The cash flow possibilities and probabilities for the restoration costs in six years are as follows:
Cash Outflow Probability
$ 5 million 10%
10 million 30%
12 million 40%
15 million 20%
The company’s risk-free interest rate is 4%.
Required:
Calculate the liability that Jackpot must record at the beginning of the project for the restoration costs.



Incognito Company is contemplating the purchase of a machine that provides it with cash savings of $80,000 per year for five years. Interest is 8%. Assume the cash savings occur at the end of each year.
Required: Calculate the present value of the cash savings.



Samson Inc. is contemplating the purchase of a machine that will provide it with cash savings of $100,000 per year for eight years. Interest is 10%. Assume the cash savings occur at the end Chapter 6 Time Value of Money Concepts 6–47 of each year.
Required: Calculate the present value of the cash savings.



Under the MLB deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Sosa has had $5,000 deposited at the end of each year for 40 years, and that the long-term interest rate has been 7%.
Required:
a. How much has accumulated in Sosa’s deferred compensation account?
b. How much will Sosa be able to withdraw at the beginning of each year if he elects to receive payments for 20 years?
c. For how many years will Sosa be able to receive payments if he chooses to receive $115,000 per year at the beginning of each year?



Under the NBA deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Hardaway has had $6,000 deposited at the end of each year for 30 years, and that the long-term interest rate has been 8%.
Required:
a. How much has accumulated in Hardaway’s deferred compensation account?
b. How much will Hardaway be able to withdraw at the beginning of each year if he elects to receive payments for 15 years?
c. How many years will Hardaway be able to receive payments if he chooses to receive $65,000 per year at the beginning of each year?



ABC Company will issue $5,000,000 in 6%, 10-year bonds when the market rate of interest is 8%. Interest is paid semiannually.

Required: Determine how much cash ABC Company will realize from the bond issue.



DEF Company will issue $2,000,000 in 10%, 10-year bonds when the market rate of interest is 12%. Interest is paid semiannually.
Required: Determine how much cash DEF Company should realize from the bond issue.



GHI Company will issue $2,000,000 in 8%, 10-year bonds when the market rate of interest is 6%. Interest is paid semiannually.
Required: Determine how much cash GHI Company should realize from the bond issue.

 

JKL Company will issue $2,000,000 in 12%, 10-year bonds when the market rate of interest is 10%. Interest is paid semiannually.
Required: Determine how much cash JKL Company should realize from the bond issue.



MBI Company’s largest computer has a cash selling price of $200,000. A customer wishes to buy the computer on a lease purchase plan over five years, with the first payment to be made at the inception of the lease. Interest is at 10%.
Required:
a. Compute the amount of the annual lease payment and the gross amount due (total payments) under the lease.
b. Compute the amount of interest income earned by MBI for the first year of the lease.



Taylor’s tractor-trailer rigs sell for $150,000. A customer wishes to buy a rig on a lease purchase plan over seven years, with the first payment to be made at the inception of the lease. Interest is at 12%.
Required:
a. Compute the amount of the annual lease payment and the gross amount (total payments) due under the lease.
b. Compute the amount of interest income earned by Taylor’s for the first year of the lease. 



Titan Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay her $30,000 annually for life starting with the first $30,000 payment on the day she retires at the age of 65. The employee has just reached the age of 45. Titan consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%.
Required:
a. What will be the present value of the pension obligation at the time of the employee’s retirement?
b. What is the present value of the pension obligation at the current time?



King Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay him $40,000 annually for life starting with the first payment of $40,000 on the day he retires at the age of 65. The employee has just reached the age of 50. King consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%.
Required:
a. What will be the present value of the pension obligation at the time of the employee’s retirement?
b. What is the present value of the pension obligation at the current time?



On September 30, 2018, Truckee Garbage leased equipment from a supplier and agreed to pay $125,000 annually for 15 years beginning September 30, 2019. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Truckee recorded a $1,214,031 lease liability
Required: Determine the interest rate implicit in the lease agreement.



On June 30, 2018, Gunderson Electronics issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on June 30, 2038 (20 years). The market rate of interest for similar bond issues was 10% (5% semiannual rate). Interest is paid semiannually (4%) on June 30 and December 31, beginning on December 31, 2018.
Required:
a. Determine the price of the bonds on June 30, 2018.
b. Calculate the interest expense Gunderson reports in 2018 for these bonds.



Determine the price of a $200,000 bond issue under each of the following independent assumptions:
Maturity Interest Paid Stated Rate Effective Rate
1. 10 years annually 10% 12%
2. 10 years semiannually 10% 12%
3. 20 years semiannually 12% 12%



Determine the price of a $500,000 bond issue under each of the following independent assumptions:
Maturity Interest Paid Stated Rate Effective Rate
1. 10 years annually 10% 12%
2. 10 years semiannually 10% 12%
3. 20 years semiannually 12% 10%



On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required: Determine the price of the bonds at January 1, 2018.



On January 1, 2018, Mania Enterprises issued 12% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.
Required: Determine the price of the bonds at January 1, 2018.



On January 1, 2018, Shirley Corporation purchased 10% bonds dated January 1, 2018, with a face amount of $10 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required: Determine the price of the bonds at January 1, 2018.



On January 1, 2018, Rare Bird Ltd. purchased 12% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.
Required: Determine the price of the bonds at January 1, 2018.



Pockets lent $20,000 to Lego Construction on January 1, 2018. Lego signed a threeyear, 5% installment note to be paid in three equal payments at the end of each year.
Required: Calculate the amount of one installment payment.



Adam Baum Company borrowed $48,000 from B. A. Ware on January 1, 2018, and signed a three-year, 6% installment note to be paid in three equal payments at the end of each year. The present value of an ordinary annuity of $1 for 3 periods at 6% is 2.67301.
Required: Calculate the amount of one installment payment.



Each of the independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit interest rate.
Situation
1 2
Lease term 10 yrs 20 yrs
Lessor’s desired
rate of return 10% 12%
Lessee’s incremental
borrowing rate 12% 10%
Fair value of asset $600,000 $400,000
For convenience, here are some table values:
Periods; int. rate PV, ordinary annuity PV, annuity due
10 periods, 10% 6.1446 6.7590
10 periods, 12% 5.6502 6.3283
20 periods, 10% 8.5136 9.3649
20 periods, 12% 7.4694 8.3658
Required:
For each situation determine the amount of the annual lease payment, as calculated by the lessor.



Diablo Company leased a machine from Juniper Corporation on January 1, 2018. The machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. The appropriate interest rate for this lease is 10%.
Other information:
PV of an ordinary annuity @10% for 4 periods: 3.16987
PV of an annuity due @ 10% for 4 periods: 3.48685
Required: Determine the amount of each lease payment.



Each of the independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit interest rate.
Situation
1 2
Lease term 10 yrs 20 yrs
Lessor’s desired rate of return 10% 12%
For convenience, here are some table values:
Periods; int. rate PV, ordinary annuity PV, annuity due
10 periods, 10% 6.1446 6.7590
10 periods, 12% 5.6502 6.3283
20 periods, 10% 8.5136 9.3649
20 periods, 12% 7.4694 8.3658
Required:
For each situation determine the amount recorded as a liability by the lessee at the beginning of the lease.



 

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.

 

Companies always recognize revenue when goods or services are transferred to customers for the amount the company expects to receive in exchange for those goods or services.

 

"Determine whether it is probable the seller will collect the consideration it is entitled to receive" is one of the five steps to applying the core revenue recognition principle.

 

Staff Accounting Bulletin No. 101 was issued by the FASB to clarify its guidelines on revenue recognition.

 

A transfer of goods or services is complete when the customer has control over the goods or services.

 

Revenue always is recognized once the buyer has physical possession of goods.

 

Sellers should recognize revenue over time for a long term contract in which the seller is receiving periodic payments for progress to date but may need to refund those payments in the event the contract is cancelled.

 

A common output method used to measure progress towards completion is to compare cost incurred to date to total costs estimated to complete the job.

 

Revenue should be recognized over time for the construction of an annex to a building that the customer owns, even if the seller will not receive payment until the annex is completed.

 

A common output method used to measure progress towards completion is to determine the proportion of promised goods and services that have been transferred to date.

 

No allocation of contract price is required if the transaction involves a performance obligation to be satisfied over time.

 

The transaction price should be allocated to the contract's performance obligations in proportion to the stand-alone selling prices of the performance obligations.

 

No allocation of contract price is required if the transaction involves multiple performance obligations that are satisfied at different points in time.

 

If the contract contains multiple performance obligations, revenue must be recognized in an amount equal to the fair value of each of the separate performance obligations.

 

The transaction price is only allocated to goods and services that are both capable of being distinct and that are separately identifiable.

 

Goods and services are distinct if they are either capable of being distinct or are separately identifiable.

 

A contract between a seller and a buyer need not be in writing to be enforceable.

 

If the contract is not in writing, revenue cannot be recognized, even though goods have been transferred and payment is expected to be received in exchange.

 

The probability that the customer will pay the seller does not affect whether a contract exists for purposes of revenue recognition.

 

A contract exists for purposes of revenue recognition if either the seller or customer has performed an obligation specified by the contract.

 

An option for a customer to purchase additional goods at a discount from list price is only a performance obligation if the discount is a material right that the customer would not receive otherwise.

 

A warranty that the customer can purchase separately and that covers a long period of time after the purchase date is likely to be a quality-assurance warranty.

 

If an option to purchase an extended warranty at a special discount is included with a product when the product is purchased, a portion of the contract price needs to be allocated to the option.

 

A fee for recording a new customer in the seller's information system should be treated as a separate performance obligation and should be recognized upon payment.

 

An option for a customer to purchase additional goods at a discount from list price is always a performance obligation, because it confers a material right.

 

Accounting for quality-assurance warranties includes a credit to warranty expense and a debit to contingent liability.

 

When a contract includes variable consideration, the probability-weighted amount must be used when there are different probabilities of occurrence.

 

To account for variable consideration using the most likely amount, the probability of each possible amount is multiplied by the possible amount to get an expected contract price.

 

If the estimate of a transaction price is revised, the price change is allocated entirely to the remaining performance obligations that are yet to be satisfied.

 

The amount of variable consideration that can be recognized is limited to the amount for which it is probable that there won't be a significant reversal of revenue recognized to date when uncertainty resolves in the future.

 

The right of return is a separate performance obligation, and a portion of the transaction price needs to be allocated to it for revenue recognition.

 

When the right of return exists, revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns.

 

If the seller is a principal, the seller has primary responsibility for delivering a product or service.

 

If the seller is a principal, the seller typically is not vulnerable to risks associated with delivering the product or service.

 

If the seller is a principal, the seller typically is vulnerable to risks associated with collecting payment from the customer.

 

If the seller is a principal, the seller should recognize gross revenue and cost of sales associated with the transaction.

 

If the seller is an agent, the seller typically is vulnerable to risk associated with delivering the product or service.

 

If the seller is an agent, the seller typically recognizes cost associated with the sale on its own line in the income statement.

 

The transaction price should be adjusted to reflect the time value of money for interest payable, but not for interest receivable.

 

Sellers are only required to adjust the transaction price to reflect the time value of money when the contract has a significant financing component.

 

If a seller makes payments to a customer to purchase goods and services, and those payments are equal to the stand-alone selling prices of those goods and services, part of those payments are a refund to the customer.

 

The adjusted market assessment approach can be used to estimate the stand-alone selling price of a good or service.

 

The residual approach to estimate stand-alone selling prices is often used for goods or services that are sold separately and that have stable prices.

 

Revenue typically should not be recognized when payment is received but the goods are warehoused at the seller's facility.

 

In a bill-and-hold arrangement, revenue only can be recognized after the sale of the goods to the end user.

 

In franchise arrangements, the franchisor's performance obligations are not separately identifiable, so revenue must be recognized over time.

 

The same revenue recognition requirements always apply to franchise arrangements that apply to other selling arrangements.

 

In a consignment arrangement, revenue typically should not be recognized until sale to a third party occurs, even though there has been a physical transfer of goods to the consignee, because the consignor still retains legal title to the goods.

 

Sellers recognize revenue for gift cards at the point in time control of the gift card is transferred to the customer.

 

If a license is acquired to use intellectual property for a 5-year period, revenue always is recognized at the point in time the customer begins to benefit from the license.

 

If a licensee benefits from the seller's activity over the license period with respect to the licensed intellectual property, revenue should be recognized over time.

 

Contract liability, deferred revenue and unearned revenue are all ways to describe a liability that the seller recognizes with respect to unsatisfied performance obligations for which the seller has already been paid.

 

An account receivable is recognized if the seller has a conditional right to receive payment.

 

Disclosure notes to the financial statements regarding significant revenue recognition policies are only required when they will not reveal important information to competitors, suppliers or customers.

 

When recognizing revenue over time on a long-term contract, amounts billed and the cash actually received affect income recognition.

 

When recognizing revenue over time on a long-term contract, the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete.

 

Firms have free choice as to whether to recognize revenue over time or at a point in time to account for a long-term contract.

 

When revenue is recognized over time versus upon completion of the contract, different amounts of total profit or loss are recognized for a particular contract.

 

Estimated losses on long-term contracts are recognized as ratable over the contract term regardless of whether revenue is recognized over time or upon contract completion.

 

When a long-term contract does not qualify for revenue recognition over time, all gross profit and loss recognition occurs when the contract is completed.

 

A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection.

 

The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high.

 

A company could improve its return on assets by increasing its income or by increasing its total assets.

 

Return on shareholders' equity is increased if a firm can maintain its return on assets but increase its leverage.

 

Revenue is not recognized under the realization principle unless the earnings process is complete or virtually complete and there is reasonable certainty about the expected collection of the asset received.

 

Under IFRS, one of the conditions for revenue from product sales to be recognized is when the risks and rewards of ownership have been transferred to the customer.

 

Use of the installment sales method requires that firms track the gross profit percentage associated with a particular sale.

 

When the expected collection of accounts receivable is difficult to estimate, companies must use the cost recovery method.

 

Use of the installment sales method indicates little uncertainty about collection of the receivable.

 

Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment sales method and the cost recovery method.

 

When the right of return exists and a seller cannot make reliable estimates of future returns, the installment sales method can be used.

 

Under IFRS, firms have free choice as to whether they use the percentage-of-completion method or the cost recovery method to account for a long-term construction contract.

 

For long-term construction contracts, the cost recovery method under IFRS requires recognizing equal amounts of revenue and cost until all costs are recovered.

 

When the cost recovery method is used to account for a long-term construction contract under IFRS, an equal amount of cost and revenue is typically recognized during the early life of the contract, such that high initial gross profit is recognized in net income.

 

Under IFRS, firms typically use the cost recovery method if they conclude that the percentage-of completion method is not appropriate to account for a long-term construction contract.

 

Revenue from the sale of computer software is always recognized at the point of sale.

 

Revenue on a multiple-element contract typically is allocated to independent parts of the contract based on their relative selling prices.

 

Vendor-specific objective evidence of separate sales prices is required for multiple-element software contracts, but estimated selling prices can be used for other multiple-element contracts under U.S. GAAP.

 

Recognition of franchise fee revenue is dependent on judgments of both substantial performance and expected collection of fees.

 

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

 

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.

 

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

 

IFRS provides detailed guidance concerning accounting for revenue with respect to multiple-element contracts.

 

Companies recognize revenue only when

 

Which of the following is one of the steps for recognizing revenue?

 

Which of the following is not one of the five steps for recognizing revenue?

 

Which of the following is not one of the five steps for recognizing revenue?

 

For a typical manufacturing company, the most common critical point for recognizing revenue is the date:

 

Stayman Associates has sold a good to a buyer and wants to recognize revenue. Which of the following is an indicator that control of a good has passed from Stayman to the buyer?

 

Which of the following is not an indicator that the customer is likely to have control over a good?

 

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

 

The core revenue principle states that

 

Consider the following three scenarios:

I. ABC Lawncare performed lawn maintenance services for Drake Inc. on June 1st, and received payment of $500 for those services.

II. On June 1st, Melly Corp. received payment for 100 pounds of raw material to be delivered to Drake Inc. in 6 months

III. Lodo, LLC collected cash on June 1st for services rendered on May 1st.

Given these scenarios, revenue can not be recognized on June 1st for

 

Which of the following is not an indicator that revenue can be recognized over time?

 

Revenue likely is recognized over time for all of the following arrangements except for

 

On November 1, 2016, Taylor signed a one-year contract to provide handyman services on an asneeded basis to King Associates, with the contract to start immediately. King agreed to pay Taylor $4,800 for the one-year period. Taylor is confident that King will pay that amount, but payment is not scheduled to occur until 2017. Taylor should recognize revenue in 2016 in the amount of

 

Mary signed up and paid $1200 for a 6 month ceramics course on June 1st with Choplet Ceramics. As of August 1st, Choplet's accounting records would indicate:

 

On February 1st, H&B Bank originated a loan for $50,000 at an interest rate of 7.2%. On March 15th, an interest payment of $300 was received. Which of the following best describes when interest revenue should be recognized?

 

Rothbart Manufacturing agrees to manufacture bumper cars for 12 Banners Amusement Parks. Under the terms of the contract, 12 Banners will pay Rothbart a total of $60,000, and 12 Banners can cancel the contract if it so chooses but must pay Rothbart for work completed. Rothbart believes that, if 12 Banners cancelled the contract, Rothbart could sell the bumper cars to another amusement park and still make a profit. The manufacturing contract is expected to last six months, and as of December 31, 2016, the job is 80% complete. How much revenue should Rothbart recognize in 2016 for this contract?

 

Which of the following is not a characteristic of a distinct good or service?

 

For contracts that include more than one separate performance obligation:

 

Binz Company provides cleaning services and sells garbage bins to office clients. On June 1st, Binz delivered 100 garbage bins to a client, and also entered into a 5-year contract for Binz to provide cleaning services to that client. Which of the following is most likely to be true?

 

Goods and services are capable of being distinct if:

 

Minarski Electronics sells computers and provides hardware maintenance services. On April 1st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $840 and the one-year unlimited maintenance/repair service costs $360. How much revenue does Minarski Electronics recognize for the month ended April 30th, assuming that revenue is accrued monthly?

 

On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredientweighing 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 and 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. How many performance obligations exist in this contract?

 

On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredientweighing 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 and 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?

 

On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredientweighing 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 and 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 viewed as one performance obligation. How much revenue will Ortiz recognize in 2016 for this contract?

 

A contract does not exist for purposes of applying the revenue recognition principle in all of the following cases except for when:

 

Which of the following is a characteristic of a contract for purposes of revenue recognition?

 

Waldman Associates received a written, approved contract to deliver economic consulting services, with service and payment commencing in one month. The contract specifies the services that Waldman is to perform, and the payment terms. Waldman and the customer both can cancel the contract without penalty prior to commencing service. Does Waldman have a contract for purposes of revenue recognition on the day the contract is received?

 

What is the effect of bad debts on revenue recognition?

 

Which of the following is considered a performance obligation?

 

Which of the following is not a performance obligation?

 

Which of the following is an example of an extended warranty?

 

Orange Inc. offers a discount on an extended warranty on its oPhone when the warranty is purchased at the time the oPhone is purchased. The warranty normally has a price of $150, but Orange offers it for $120 when purchased along with an oPhone. Orange anticipates a 75% chance that a customer will purchase the extended warranty along with the oPhone. Assume Orange sells to 1,000 oPhones with the extended warranty discount offer. What is the total stand-alone selling price that Orange would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 oPhone contracts?

 

In which of the following is the option described not a performance obligation?

 

Which of the following statement is most true?

 

Which of the following is an example of a variable consideration?

 

Which of the following is correct about changes in estimated variable consideration?

 

On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%.

What is the expected transaction price with variable consideration estimated as the expected value?

 

On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%.

What is the expected transaction price with variable consideration estimated as the most likely amount?

 

Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.

Assume Sanjeev estimates variable consideration as the most likely amount. What is the amount of revenue Sanjeev would recognize for the first month of the contract?

 

Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.

Assume Sanjeev estimates variable consideration as the expected value. What is the amount of revenue Sanjeev would recognize for the first month of the contract?

 

Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.

Assume that Sanjeev estimates variable consideration as the most likely amount. After Sanjeev has recognized revenue for two months of the contract, he changes his assessment of the chance the contract will pay him $3,000 to 70%. What adjustment to revenue should Sanjeev recognize to account for that change in estimate?

 

On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.

Assume Emmet estimates variable consideration as the expected value. How much revenue should Emmet recognize on this contract in 2016?

 

On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.

Assume Emmet estimates variable consideration as the most likely amount. How much revenue should Emmet recognize on this contract in 2016?

 

On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.

Assume that Emmet accrues revenue each month, and estimates variable consideration as the most likely amount. On November 1, Emmet revises its estimate of the chance the building will exceed the 90% occupancy threshold to a 70% chance. What is the total amount of revenue Emmet should recognize on this contract in November of 2016?

 

Which of the following is not an indicator that the constraint on recognizing variable consideration should be applied?

 

On January 1, 2016, Elite Advertising was contracted to run a marketing campaign for Pharm King's new dieting pills. In addition to getting a base fee of $150,000 for the 3-year campaign, Elite also may get an additional 5% of the base fee as a bonus if a targeted sales level is reached at the end of three years. Elite currently lacks sufficient information to make an estimate of the likelihood of the expected bonus, with the marketing director indicating that "If you forced me to make an estimate, I'd say we have a 50/50 chance. But don't quote me on that - it's really too early to tell." Elite concludes this contract qualifies for revenue recognition over time, and estimates variable consideration using the most likely amount. How much revenue should Elite recognize as of December 31, 2016?

 

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:

 

Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing revenue associated with one of these sales?

 

Under which of the following circumstances is it most appropriate to use the residual method to estimate stand-alone selling prices?

 

Which of the following is not an approach for estimating stand-alone selling prices?

 

Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.

Estimate the stand-alone selling price of the software using the adjusted market assessment approach.

 

Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.

Estimate the stand-alone selling price of the software using the expected cost plus margin approach.

 

Estimate the stand-alone selling price of the software using the residual approach.

 

Which of the following does not apply to a seller who is a principal?

 

Which of the following applies to a seller who is an agent?

 

Explodia.com sells fireworks over the Internet. Customers access Explodia's website and select particular products, and Explodia refers the customer order to a fireworks manufacturer who fulfills the order, ships to the customer, and pays Explodia a 20% commission. Which of the following is true about Explodia?

 

Jing Statistical Services operates a website that links experienced statisticians with businesses that need data analyzed. Statisticians post their rates, qualifications, and references on the website, and Jing receives 25% of the fee paid to the statisticians in exchange for identifying potential customers. VetMed Associates contacts Jing and arranges to pay a consultant $1,500 in exchange for analyzing some data. Jing's income statement would include the following with respect to this transaction:

 

Assume a contract for the sale of goods specifies that payment is to be made four months after delivery of a product. The seller is likely to do which of the following, with respect to the time value of money over the life of the contract?

 

Assume a contract for the sale of goods specifies that payment is to be made 15 months prior to delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?

 

Johnson sells $100,000 of product to Robbins, and also purchases $10,000 of advertising services from Robbins. The advertising services have a fair value of $8,000. Johnson should record revenue on its sale of product to Robbins of:

 

Which of the following is not true?

 

Maas LLP developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectiveness of irrigation. Sunny Dale paid a licensing fee of $20,000 for a copy of the software. Although Sunny Dale can use the software as long as it wants, Maas expects that Sunny Dale will use the software for approximately 5 years. Maas does not anticipate any further interaction with Sunny Dale following transfer of the license. How much revenue should Maas recognize in the first year of the contract?

 

The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years. How much of the $1 million initial license fee should the UFL recognize as revenue in the first year of the contract?

 

The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years. Assume that the UFL anticipates that, in addition to receiving the $1 million license fee, it will receive a bonus of $2 million in year 1 of the contract and a bonus of $3 million in years 2-4 of the contract based on Tank-Skin's sales. Also assume that the UFL is convinced that it is probable there will not be a significant reversal of any revenue recognized with respect to the bonus in subsequent periods. At the inception of the contract, what is the amount of transaction price that the UFL would estimate with respect to this license arrangement?

 

Which of the following is not true about accounting for revenue from franchise arrangements?

 

Pita Pal sells fast-food franchises. Pita Pal receives $75,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of $75,000. Pita Pal also receives $36,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 2016, and on May 1, 2016 Rachel had completed training and was open for business. How much revenue in 2016 will Pita Pal recognize for its arrangement with Rachel?

 

Which of the following is typically true for a bill-and-hold arrangement?

 

On June 1st, Joseph & Company received a $500 deposit for 80 cases of wine. On June 10th the customer identified specific vintages that are included in Joseph's inventory, and asked that Joseph not ship the wine until June 20 so the customer could ready space to store the wine, so Joseph set those wines aside for the customer, boxed and ready for shipment to the customer. On June 20th the wine was shipped and delivered to the customer. Joseph likely would recognize revenue on

 

Which of the following is most true regarding consignment arrangements?

 

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.

Sweeney most likely should recognize revenue when:

 

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.

After Sweeney has transferred a painting to a barbershop, the painting:

 

Bull'sEye sells gift cards redeemable for Bull'sEye products either in-store or online. During 2016, Bull'sEye sold $2,000,000 of gift cards, and $1,800,000 of the gift cards were redeemed for products. As of December 31, 2016, $150,000 of the remaining gift cards had passed the date at which Bull'sEye concludes that the cards will never be redeemed. How much gift card revenue should Bull'sEye recognize in 2016?

 

Which of the following is not true about contract assets?

 

Which of the following is not true about contract liabilities?

 

Gupta Industries received a $300,000 prepayment from Packard Associates for the sale of new equipment. Gupta will bill Packard an additional $100,000 upon delivery of the equipment. Upon receipt of the $300,000 prepayment, how much should Holt recognize for a contract asset, a contract liability, and accounts receivable?

 

Which of the following is not something that revenue recognition disclosures typically should help investors to understand?

 

Which of the following is not true about revenue recognition with respect to long-term construction contracts?

 

Which of the following is least likely to be a reason why a long-term construction contract would qualify for revenue recognition over time?

 

Which of the following is true about accounting for long-term construction contracts?

 

Which of the following is not true about accounting for long-term construction contracts?

 

A rationale for recognizing revenue over the life of a contract rather than at a single point in time is that:

 

Revenue on a long-term contract should not be recognized according to the proportion of the performance obligation that has been completed if:

 

With respect to delaying revenue recognition until completion of a long-term contract, it is the case that:

 

When accounting for revenue over time for a long-term contract, the percentage of completion used to recognize revenue in the first year usually is determined by measuring:

 

ADH recognizes revenue over time with respect to these contracts.

 

What would be the journal entry made in 2015 to record revenue?

 

In its December 31, 2015, balance sheet, ADH would report:

 

For 2016, what is the journal entry to record revenue?

 

Arizona Desert Homes (ADH) constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:

 

ADH recognizes revenue upon completion of the contract.

 

For 2015, what is the journal entry to record revenue?

 

What is the journal entry in 2016 to record revenue?

 

In 2015, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:

 

In 2016, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:

 

In 2017, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:

 

JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.

 

Indiana Co. began a construction project in 2016 with a contract price of $150 million to be received when the project is completed in 2018. During 2016, Indiana incurred $36 million of costs and estimates an additional $84 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 2017, Indiana incurred additional costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Indiana:

 

Suppose that, in 2017, Indiana incurred additional costs of $63.75 million and estimated an additional $42.75 million in costs to complete the project. Indiana:

 

What is the amount of gross profit on the project recognized by CCC during 2016?

 

What are CCC's estimated remaining construction costs on the project at the end of 2016?

 

What is the fixed contract price for CCC's project?

 

What were the construction billings by CCC during 2016?

 

How much cash remains to be collected by CCC on the project?

 

In 2016, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):

 

Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2015 would be (rounded to the nearest thousand):

Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2016, are presented below:

 

Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2016 would be (rounded to the nearest thousand):

Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2016, are presented below:

 

Assuming BCC recognizes revenue upon project completion, what would gross profit have been in 2015 and 2016 (rounded to the nearest thousand)?

 

Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2016, are presented below:

 

In the DuPont formula, return on assets equals:

 

A company is effectively leveraging when:

 

Dowling's 2016 profit margin is (rounded):

 

Excerpts from Dowling Company's December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):

 

Dowling's 2016 average collection period is (rounded):

 

Excerpts from Dowling Company's December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):

 

Dowling's return on equity for 2016 is (rounded):

 

Excerpts from Dowling Company's December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):

 

Dowling's average total assets for 2016 is (rounded):

 

Excerpts from Dowling Company's December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):

 

Dowling's average inventory balance for 2016 is (rounded):

 

Excerpts from Dowling Company's December 31, 2016 and 2015, financial statements and key ratios are presented below (all numbers are in millions):

 

Hulkster's 2016 receivables turnover is:

 

Excerpts from Hulkster Company's December 31, 2016 and 2015, financial statements are presented below:

 

Hulkster's 2016 inventory turnover is (rounded):

 

Hulkster's 2016 asset turnover is (rounded):

 

Average collection period = 365/5.0 = 73 days

 

Hulkster's 2016 average collection period is:

 

Average days in inventory = 365/3.62 = 100.8 days = 101 days rounded.

 

Hulkster's 2016 average days in inventory is (rounded):

 

Hulkster's 2016 profit margin is (rounded):

 

Hulkster's 2016 return on assets is (rounded):

 

Hulkster's 2016 return on shareholders' equity is (rounded):

 

Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and:

 

Under IFRS, which of the following is not a condition for recognizing revenue?

 

Under IFRS, revenue for a product sale should occur when:

 

Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:

 

Bert's Meat Market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:

 

On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 yearend. In 2016, Rigsby would recognize realized gross profit of:

 

On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 yearend. In 2017, Rigsby would recognize realized gross profit of:

 

Balance sheet:

 

On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 yearend. In its December 31, 2016, balance sheet, Rigsby would report:

 

Realized gross profit of $400,000 would be reported in the income statement.

Balance sheet:

Deferred gross profit: $800,000 - 400,000 = $400,000

On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 yearend. At December 31, 2017, Rigsby would report in its balance sheet:

 

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017.

In 2015, Reliable would recognize gross profit of:

 

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017. In 2016, Reliable would recognize gross profit of:

 

The entire $20,000 payment received in 2017 is recognized as gross profit.

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017. In 2017, Reliable would recognize gross profit of:

 

Balance sheet:

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017. In its 2015 year-end balance sheet, Reliable would report installment receivables (net) of:

 

Balance sheet:

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2015. Collections on this sale were $20,000 in 2015, $15,000 in 2016, and $20,000 in 2017. In its 2016 year-end balance sheet, Reliable would report installment receivables (net) of:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay onethird of the sales price of a jet ski when they initially purchase the ski, and then pay another onethird each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed. Total cash collections on installment sales during 2016 would be:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay onethird of the sales price of a jet ski when they initially purchase the ski, and then pay another onethird each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed. In 2015, Lake would recognize realized gross profit of:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay onethird of the sales price of a jet ski when they initially purchase the ski, and then pay another onethird each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed. In 2017, Lake would recognize realized gross profit of:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay onethird of the sales price of a jet ski when they initially purchase the ski, and then pay another onethird each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed. In its December 31, 2016, balance sheet, Lake would report:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay onethird of the sales price of a jet ski when they initially purchase the ski, and then pay another onethird each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed. In 2018, Lake would record a loss on repossession of:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed. In 2015, Lake would recognize realized gross profit of:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed. In 2017, Lake would recognize realized gross profit of:

 

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2015, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2015, $300,000 in 2016, and $300,000 in 2017 associated with those sales. In 2016, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2016, $400,000 in 2017, and $400,000 in 2018 associated with those sales. In 2018, Lake also repossessed $200,000 of jet skis that were sold in 2016. Those jet skis had a fair value of $75,000 at the time they were repossessed.

In its December 31, 2016, balance sheet, Lake would report:

 

When using the cost recovery method of accounting for long-term construction contracts under IFRS:

 

When using the cost recovery method of accounting for long-term construction contracts under IFRS, early in the life of the contract it is typically the case that:

 

The cost recovery method of accounting for long-term construction contracts under IFRS is sometimes referred to as the:

 

The percentage-of-completion method violates the general rule for revenue recognition that:

 

SDH uses the cost recovery method under IFRS to recognize revenue.

 

What is the journal entry in 2015 to record revenue?

 

Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2015 and 2016 under contract with Cactus Development Co. Relevant data are summarized below:

 

In its December 31, 2015, balance sheet, SDH would report:

 

What is SDH's journal entry to record revenue in 2016?

 

Assuming BCC used the cost recovery method to recognize revenue under IFRS, what would gross profit have been in 2015 and 2016 (rounded to the nearest thousand)?

 

Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2016, are presented below:

 

Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.

Assuming that the initial services to be performed by Flapper Jack's subsequent to the signing are substantial and that collection of the receivable is reasonably assured, the journal entry required at signing would include a credit to:

 

Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.

Assume that at the time of signing the contract, collection of the receivable was assured and that service obligations were substantial. However, by October 20, 2015, substantially all continuing obligations had been met. The journal entry required at October 20, 2015 would include a:

 

Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.

Assume at March 15, 2015, the time of signing the contract, collection of the receivable was reasonably assured and there were no significant continuing obligations. The journal entry at signing would include a:

 

The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.

Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS can recognize revenue associated with the $50,000:

 

The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.

Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS can recognize revenue associated with the $50,000:

 

The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.

Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS has no experience estimating uncollectible accounts associated with these sorts of notes. RS can recognize:

 

Sullivan Software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75.

Sullivan should recognize revenue for the two parts of the arrangement as follows:

 

Sullivan Software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75. The amount of revenue that GAAP, regarding software revenue recognition, would require Sullivan to attribute to the software program (as opposed to the technical support) is (rounded):

 

GAAP that covers revenue recognition for multiple-element arrangements requires that a seller recognize revenue for a particular part if:

 

Under GAAP, with respect to multiple-element arrangements, if the revenue for a particular part of a multiple-element arrangement does not qualify for separate recognition, it is:

 

"VSOE" stands for:

 

"VSOE" is necessary to separately recognize revenue in multiple-element contracts for: