TOA.

M 1404

REVENUE RECOGNITION

MILTIPLE CHOICE

REVENUE RECOGNITION

1. The revenue recognition principle provides that revenue is recognized when

A. It is realized
B. It is realizable
C. It is realized or realizable and it is earned
D. It is collected
2. When goods or services are exchanged for cash or claims to cash (receivables), revenues
are
A. Earned
B. Realized
C. Recognized
D. Accrued
3. When the entity had substantially accomplished what it must do to be entitled to the
benefits represented by the revenues, revenues are
A. Earned
B. Realized
C. Recognized
D. Derecognized
4. Which of the following is not a reason why revenue is recognized at time of sale?
A. Realization has occurred
B. The sale is the critical event
C. Title legally passes from seller to buyer
D. All of these are reasons to recognize revenue at time of sale
5. A sale should not be recognized as revenue by the seller at the time of sale if
A. Payment was made by check
B. The selling price is less than the normal selling price
C. The buyer has a right to return the product and the amount of future returns
cannot be reasonably estimated
D. Only a promise to receive cash was obtained though the items have been
delivered
6. In selecting an accounting method for a newly contracted long-term construction project,
the principal factor to be considered should be
A. The terms of payment in the contract
B. The degree to which a reliable estimate of the costs to complete and extent of
progress toward completion is practicable
C. The method commonly used by the contractor to account for other long-term
construction contracts
D. The inherent nature of the contractors technical facilities used in construction
7. The percentage-of-completion method must be used when certain conditions exist. Which
of the following is not one of those necessary conditions?
A. Estimates of progress toward completion, revenues, and costs are reasonably
dependable
B. The contractor can be expected to perform the contractual obligation
C. The buyer can be expected to perform the obligation under the contract
D. The contract clearly specifies the enforceable rights of the parties, the
consideration to be exchanged, and the manner and terms of settlement
8. The work to be done and cost to be incurred on a long-term contract can be estimated
dependably, which of the following methods of revenue recognition is preferable?
A. Installment-sales method
B. Percentage-of-completion method
C. Completed-contract method
D. Realization method
9. How should the balances of progress billings and construction in process be shown at
reporting dated prior to the completion of a long-term contract?
A. Progress billings as deferred income, construction in progress as a deferred
expense
B. Progress billings as income, construction in progress as inventory
C. Net, as a current asset if debit balance and current liability if credit balance
D. Net, as income from construction if credit balance, and loss from construction if
debit balance
10. How should earned but unbilled revenues at the end of the reporting period on a long-
term construction contract be disclosed if the percentage-of-completion method of
revenue recognition is used?
A. As construction in process in the current asset section of the statement of financial
position
B. As construction in process in the noncurrent asset section of the statement of
financial position
C. As a receivable in the noncurrent asset section of the statement of financial
position
D. In a note to the financial statements until the customer is formally billed for the
portion of work completed
11. Under the completed-contract method
A. Revenue, cost, and gross profit are recognized during the production cycle
B. Revenue and cost are recognized during the production cycle, but gross profit
recognition deferred until the contract is completed
C. Revenue, cost, and gross profit are recognized at the time the contract is
completed
D. Revenue, cost, and gross profit are recognized in proportion to the collection
received
12. The principal disadvantage of using the percentage-of-completion method of recognizing
revenue from long-term contracts is that it
A. Is unacceptable for income tax purposes
 B. Gives results based upon estimates which may be subject to considerable
uncertainty
C. Is likely to assign a small amount of revenue to a period during which much
revenue was actually earned
D. Is very difficult to compute
13. Cost estimates on a long-term contract may indicate that a loss will result on completion
of the entire contract. In this case, the entire expected loss should be
A. Recognized in the current period, regardless of whether the percentage-of-
completion or completed-contract method is employed
B. Recognized in the current period under the percentage-of-completion method, but
the completed-contract method should defer recognition of the loss to the time
when the contract is completed
C. Recognized in the current period under the completed-contract method, but the
percentage-of-completion method should defer the loss until the contract is
completed
D. Deferred and recognized when the contract is completed, regardless of whether
the percentage-of-completion or completed-contract method is employed
14. Cost estimated at the end of the second year indicates a loss will result on completion of
the entire contract. Which of the following statements is correct?
A. Under the completed-contract method, the loss is not recognized until the year the
construction is completed
B. Under the percentage-of-completion method, the gross profit recognized in the
first year must not be changed
C. Under the completed-contract method, when the billings exceed the accumulated
costs, the amount of estimated loss is reported as a current liabilities
D. Under the completed-contract method, when the Construction in Process balance
exceeds the billings, the estimated loss is added to the accumulated costs
15. A construction company signed a contract to build a theater over a period of two years,
and with this contract also signed a maintenance contract for five years. Both the
contracts are negotiated as a single packaged and are closely interrelated to each other.
The two contracts should be
A. Combined and treated as a single contract
B. Segmented and considered two separate contracts
C. Recognized under the completed contracted method
D. Treated indifferently- the building contract under the completed contract method
and maintenance contract under the percentage of completion method
16. It is proper to recognized revenue prior to the sale of merchandise when
I. The revenue will be reported as an installment sale.
II. The revenue will be reported under the cost recovery method.
A. I only
B. II only
C. Both I and II
D. Neither I or II
17. The criteria for recognition of revenue at the completion of production of precious metals
and farm products include
I. An established market with quoted prices
II. Low additional costs of completion and selling
III. Units are interchangeable
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
18. In certain cases, revenue is recognized at the completion of production even though no
sale has been made. Which of the following statements is not true?
A. Examples involve precious metals of farm equipment
B. The products possess immediate marketability at quoted prices
C. No significant costs are involved in selling the product
D. The units are interchangeable
19. Deferred gross profit on installment sales is generally treated as a(n)
A. Deduction from installment accounts receivable
B. Deduction from installment sales
C. Unearned revenue and classified as a current liability
D. Deduction from gross profit on sales
20. The installment-sales method of recognizing profit for accounting purposes is acceptable
if
A. Collections in the year of sale do not exceed 30% of total sales price
B. An unrealized profit account is credited
C. Collection of the sales price is not reasonably assured
D. The method is consistently used for all sales of similar merchandise
21. The method most commonly used to report defaults and repossessions is:
A. Provide no basis for the possessed asset thereby recognizing a loss
B. Record the repossessed merchandise at fair value, recording a gain or loss if
appropriate
C. Record the repossessed merchandise at book value, recording no gain or loss
D. None of these
22. Under the installment-sales method,
A. Revenue, cost, and gross profit are recognized proportionate to the cash that is
received from the sale of the product
B. Gross profit is deferred proportionate to cash uncollected from sale of the product,
but total revenues and costs are recognized at the point of sale
C. Gross profit is not recognized until the amount of cash received exceeds the cost
of the item sold
D. Revenues and costs are recognized proportionate to the cash received from the
sale of the product, but gross profit is deferred until all cash is received
23. For financial statement purposes, the installment method of accounting may be used if the
A. Collection period extends over more than twelve months
B. Installments are due in different years
C. Ultimate amount collection is indeterminate
 D. Percentage-of-completion method is inappropriate
24. If the outcome of rendering services cannot be estimated reliably, PFRS requires the use
of which revenue recognition method?
A. Percentage-of-completion method
B. Completed contract method
C. Cost recovery method
D. Installment method
25. Wren Co. sells equipment on installment contracts. Which of the following statements
best justifies Wrens use of the cost recovery method of revenue recognition to account
for these installment sales?
A. The sales contract provides that title to the equipment only passes to the purchaser
when all payments have been made
B. No cash payments are due until one year from the date of sale
C. Sales are subject to a high rate of return
D. There is no reasonable basis for estimating collectability
26. In which of the following examples of real estate transaction would the seller not transfer
the usual risk and rewards of ownership?
I. The buyer can compel the seller to repurchase the property.
II. The seller guarantees the return of the buyers investment.
III. The seller is required to support operations of the buyer and will be reimbursed on
a cost plus 5% basis.
A. I
B. II
C. III
D. I and II
27. A seller is properly using the cost-recovery method for a sale. Interest will be earned on
the future payments, which of the following statements is not correct?
A. After all cost have been recovered, any additional cash collections included in
income
B. Interest revenue may be recognized before all cost have been recovered
C. The deferred gross profit is offset against the related receivables on the statement
of financial position.
D. Subsequent income statements report the gross profit as a separate line item of
revenue when it is recognized as earned.
28. Under the cost-recovery method of revenue recognition,
A. Income is recognized in a proportionate basis as the cash is received on the sale of
the product.
B. Income recognized when the cash received from the sale of the product is greater
than the cost of the product
C. Income is recognized immediately
D. Income is recognized when the entity obtains a right to receive cash
29. Winser, Inc. is engaged in extensive exploration for water is one of unexplored areas of
the Philippines. If, upon discovery of water, Winser does not recognize any revenue from
 water sales until the sales exceed the cost of exploration, the basis of revenue recognition
being employed is the
A. Production basis
B. Cash ( or collection) basis
C. Sales (or accrual) basis
D. Cost recovery method
30. Esker Inc. specializes in real estate transactions other than retail land sales. On January 1,
2011, Esker consummated as sale of property to Kame Ltd. The amount of profit on the
sale is determinable and Esker is not obliged to perform any additional activities to earn
the profit. Kames initial and continuing investments were adequate to demonstrate a
commitment to pay for the property. However, Eskers receivable may be subject to
future subordination. Esker should account for the sale using the
A. Deposit method
B. Reduced recovery method
C. Cost recovery method
D. Full accrual method
31. Continuing franchise fees should be recorded by the franchisor
A. As revenue when earned and receivable from the franchisee
B. As revenue when received
C. In accordance with the accounting procedures specified in the franchise
agreement
D. As revenue only after the balance of the initial franchise fee has been collected
32. Occasionally a franchise agreement grants the franchise the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the
franchisor should
A. Increase revenue recognized from the initial franchise fee by the amount of the
expected future purchases
B. Record a portion of the initial franchise fee as unearned revenue which will
increased the selling price when the franchisee subsequently makes the bargain
purchases
C. Defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made
D. Ignore the grant to make the future bargain purchases of equipment
33. A franchise agreement grants the franchisor an option to purchase the franchisees
business. It is probable that the option will be exercised. When recoding the initial
franchise fee, the franchisor should
A. Record the initial franchise fee as a deferred credit which will reduced the
franchisors investment in the purchased outlet when the option is exercised
B. Record the initial franchise fee as unearned revenue which will reduced the
amount of cash paid when the option is exercised
C. Record the portion of the initial franchise fee which is attributable to the bargain
purchase option as a reduction of the future receivable from the franchisee
D. Ignore the option and treat all the initial franchise fee as income
34. In which of the following cases will the seller recognize sales revenue?
 A. A half-depreciated equipment previously used by the management was sold and
delivered and full payment was received
B. Inventories are sold and delivered (in-transit) under FOB Buyer terms
C. Inventories are sold under FOB Shipping point terms, payment was already
received, though the goods were still in the shipping room as of year-end
D. Inventories are sold by the consignee
35. Revenue is recognized by the consignor when the
A. Goods are shipped to the consignee
B. Consignee receives the goods
C. Consignor receives an advance from the consignee
D. Consignor receives an account sales from the consignee
36. X Ltd., a large manufacturer of cosmetics, sells merchandise to Y Ltd., a retailer, which in
turn sells the goods to the public at large through its chain of retail outlets. Y Ltd.
puchases merchandise from X Ltd. under a consignment contract. When should revenue
from the sale of merchandise to Y Ltd. be recognized by X Ltd.?
A. When goods are delivered to X Ltd.
B. When goods are sold by Y Ltd
C. It will depend on the terms of the delivery of the merchandise by X Ltd. to Y Ltd.
(i.e., CIF [cost, insurance, and freight] or FOB)
D. It will depend on the terms of payment between Y Ltd. and X Ltd. (i.e., cash or
credit)
37. Bill and hold sales, in which delivery is delayed at the buyers request but the buyer
assumes title and accepts invoicing, should be recognized when
A. The buyer makes an order.
B. The seller starts manufacturing the goods.
C. The title has been transferred but the goods are kept on the sellers premises.
D. It is probable that the delivery will be made, payment terms have been
established, and the buyer has acknowledged the delivery instructions.
38. ABC Company placed an order with Arte Trading for new specialized machinery. The
order was non-cancelable once signed and ABC agreed to pay for the machinery at the
time the order was signed on February 1, 2013. Arte held the machinery to ABCs order
from June 1, 2013, the date on which it was completed. ABC commenced using the
machinery on August 1, 2013 when Arte completed the installation process. Arte had staff
on standby to deal with any operating problems until the warranty period ended on
November 1, 2013. Arte shall recognize the revenue from the sale of this specialized
machinery on
A. February
B. June
C. August
D. November
39. Which of the following describes proper revenue recognition?
A. Goods shipped subject to installation and inspection are recognized as revenue
only when the buyer accepts delivery, and only when the inspection is complete.
 B. Goods under bill and hold sales are recognized as revenue when there is an
intention to acquire or manufacture the goods in time for delivery.
C. Goods sold on approval when the buyer has negotiated a limited right of return
are recognized as revenue when the shipment has been formally accepted by the
buyer of the goods have been delivered, even if the time period for rejection has
elapsed.
D. In lay away sales under which the goods are delivered only when the buyer makes
the final payment in a series of installments, revenue is recognized when the
goods are delivered.
40. Examples of situations in which the entity may retain significant risks and rewards of
ownership are (choose the exception)
A. When the buyer has the right to rescind the purchase for a reason specified in the
sales contract and the entity is uncertain about the probability of return
B. When the goods are shipped subject to installation and the installation is a
significant part of the contract which has not yet been completed by the entity
C. When the receipt of the revenue from a particular sale is contingent on the
derivation of revenue by the buyer from its sale of the goods
D. When the entity retains an obligation for unsatisfactory performance but it is
covered by normal warranty provisions
41. M Ltd, a new company manufacturing and selling consumable products, has come out
with an offer to refund the cost of purchase within one month of sale if the customer is
not satisfied with the product. When should M Ltd. recognize the revenue?
A. When goods are sold to the customers
B. After one month of sale
C. Only if goods are not returned by the customers after the period of one months
D. At the time of sale along with an offset to revenue of the liability of the same
amount for the possibility of the return
42. ABC Inc. is a large manufacturer of machines. XYZ Ltd., a major customer of ABC Inc.,
has placed an order for a special machine for which it has given a deposit of 112,500 to
ABC Inc. The parties have agreed on a price for the machine of 150,000. As per the terms
of the sales agreement, it is an FOB (free on board) contract and the title passes to the
buyer when the goods are loaded onto the ship at the port. When should the revenue be
recognized by ABC Inc.?
A. When the customer orders the machine
B. When the deposit is received
C. When the machine is loaded on the port
D. When the machine has been received by the customer
43. In lay away sales, when can the seller recognize revenue prior to the delivery of the
products?
A. Its not possible to recognize sale prior to delivery
B. When collections received from the buyer are already in excess of the cost of the
products
 C. When experience indicates that most such sales are consummated, and a
significant deposit is received, whether the goods are on hand or not
D. When experience indicates that most such sales are consummated, and a
significant deposit is received, provided the goods are on hand, identified and
ready for delivery to the buyer
44. In orders when payment (or partial payment) is received in advance of delivery for goods
not presently held in inventory, for example, the goods are still to be manufactured or will
be delivered directly to the customers from a third party, revenue is recognized when
A. The orders are received and approved
B. The goods ordered are manufactured
C. The goods are delivered to the buyer
D. The goods are delivered to the buyer and the buyer has paid in full the price
45. An entity receives subscriptions to its publications and publications involved vary in
value from period to period. In this case, revenue is recognized
A. On a straight-line basis over the period in which the items are despatched
B. On the basis of the sales value of the item despatched in relation to the total
estimated sales value of all items covered by the subscription
C. Equal to the cash received
D. When the entity has collected in full the subscription prices
46. Installation fees not incidental to the sale of a product are recognized as revenue
A. By reference to the stage of completion of the installation
B. When the goods are sold
C. On a straight-line basis
D. When fees are collected in full
47. On rendering of services, which of the following is a correct revenue recognition point?
A. Services fees included in the price of the product is recognized separately as
revenue when the products are sold
B. Production commissions are recognized when the commissions are receive
C. Revenue from tuition fees is income upon admission of students.
D. Media commissions are recognized when the related advertisements or
commercial appears before the public
48. Revenue from an artistic performance is recognized once
A. The audience register for the event online
B. The tickets for the concert are sold
C. Cash has been received from the ticket sales
D. The event takes place