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INSTALLMENT SALES . To properly account for an installment sale, all of the following must be readily determinable
Installment Method except
Criteria A. The amount of gross profit to be deferred.
11. The installment method of recognizing revenue B. The total cash collected on each year's sales.
a. should be used only in cases in which no reasonable basis exists for estimating the C. The operating costs to be deferred.
collectibility of receivables. D. Costs associated with default and repossession. CMA 1292 2-20
b. is not a generally accepted accounting principle under any circumstances.
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c. should be used for book purposes only if it is used for tax purposes. S, S & S . If sales are accounted for using the installment method, which of the following is (are) only
d. is an acceptable alternative accounting principle for a firm that makes installment sales. recognized in proportion to the cash collected on the sales during the period?
A. Sales.
46. Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes B. Sales and cost of sales.
because its customers typically cannot qualify for a bank loan. Default rates tend to be high or C. Sales and cost of sales and selling expenses.
unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars D. Sales and cost of sales and administrative expenses. CIA 0595 IV-11
without loss. The revenue method Slick would use is the:
A. Installment sales method. C. Cost recovery method. Characteristics
B. Point of sales method. D. Completed contract method. S, S & T 13. When using the installment sales method,
a. gross profit is deferred until all cash is received, but revenues and costs are recognized in
21. The installment method of recognizing profit for accounting purposes is acceptable if proportion to the cash collected from the sale.
a. collections in the year of sale do not exceed 30% of the total sales price. b. gross profit is recognized only after the amount of cash collected exceeds the cost of the
b. an unrealized profit account is credited. item sold.
c. collection of the sales price is not reasonably assured. c. revenue, costs, and gross profit are recognized proportionally as the cash is received from
d. the method is consistently used for all sales of similar merchandise. K, W & W the sale of product.
d. total revenues and costs are recognized at the point of sale, but gross profit is deferred in
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. Cash collection is a critical event for income recognition in the proportion to the cash that is uncollected from the sale. S, S & S
AICPA 1193 T- 39 a. b. c. d.
Cost-recovery method No Yes No Yes Installment Receivable Balance
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Installment method No Yes Yes No . Pie Co. uses the installment sales method to recognize revenue. Customers pay the
installment notes in 24 equal monthly amounts, which include 12% interest. What is an
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. An acceptable method for recognizing profit when the collection of cash is in doubt is the installment note’s receivable balance six months after the sale?
a. Percentage-of-completion method. c. Completed-contract method. a. 75% of the original sales price.
b. Installment method. d. Consignment method. CMA 0685 4-35 b. Less than 75% of the original sales price. AICPA 1192T-9
c. The present value of the remaining monthly payments discounted at 12%.
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. For financial statement purposes, the installment method of accounting may be used if the d. Less than the present value of the remaining monthly payments discounted at 12%.
a. Collection period extends over more than 12 months.
b. Installments are due in different years. Deferred Revenue
c. Ultimate amount collectible is indeterminate. 65. Alton, Inc. is a retailer of home appliances and offers a service contract on each appliance
d. Percentage-of-completion method is inappropriate. AICPA 1191 T-6 sold. Alton sells appliances on installment contracts, but all service contracts must be paid in
full at the time of sale. Collections received for service contracts should be recorded as an
increase in a
a. deferred revenue account. 22. The method most commonly used to report defaults and repossessions is:
b. sales contracts receivable valuation account. a. provide no basis for the repossessed asset thereby recognizing a loss.
c. stockholders' valuation account. b. record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
d. service revenue account. K, W & W c. record the repossessed merchandise at book value, recording no gain or loss.
d. none of these. K, W & W
Deferred Gross Profit
23. Under the installment sales method, Cost Recovery Method
a. revenue, costs, and gross profit are recognized proportionate to the cash that is received Criteria
from the sale of the product. 8. Drew Co. produces expensive equipment for sale on installment contracts. When there is
b. gross profit is deferred proportionate to cash uncollected from sale of the product, but total doubt about eventual collectibility, the income recognition method least likely to overstate
revenues and costs are recognized at the point of sale. income is
c. gross profit is not recognized until the amount of cash received exceeds the cost of the a. at the time the equipment is completed. c. the cost recovery method.
item sold. b. the installment method. d. at the time of delivery. AICPA 0591T-8
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. K, W & W
Repossessions
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. When assets that have been sold and accounted for by the installment method are
subsequently repossessed and returned to inventory, they should be recorded on the books at
a. Selling price.
b. The amount of the installment receivable less associated deferred gross profit.
c. Net realizable value.
d. Net realizable value minus normal profit. Gleim
33. According to the cost recovery method of accounting, the gross profit on an installment sale is
21. The cost recovery method recognized in income:
a. is used only when circumstances surrounding a sale are so uncertain that earlier a. after cash collections equal to the cost of sales are received.
recognition is impossible. b. in proportion to cash collections.
b. is the most common method of accounting for real estate sales. c. on the date the final cash collection is received.
c. is similar to percentage-of-completion accounting. d. on the date of sale. RPCPA 0593
d. is never acceptable under generally accepted accounting principles. S, S & S
*. ABC Oil Co. is engaged in extensive exploration for oil in the Cagayan Valley. If upon
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. Wren Co. sells equipment on installment contracts. Which of the following statements best discovery of oil the company does not recognize any revenue from oil sales until the sales
justifies Wren’s use of the cost recovery method of revenue recognition to account for these exceed the costs of exploration, the basis of revenue recognition being employed is the
installment sales? a. production basis. c. sales (or accrual) basis. RPCPA 1082
a. The sales contract provides that title to the equipment only passes to the purchaser when b. cash (or collection) basis. d. sunk cost (or cost recovery) basis.
all payments have been made.
b. No cash payments are due until one year from the date of sale. 31. A sells on the installment basis, with service contracts paid in full at the date of sale. The
c. Sales are subject to a high rate of return. collections from service contracts should be recorded as an increase in
d. There is no reasonable basis for estimating collectibility. AICPA 0594 F-41 a. Deferred revenue account. c. Valuation account of stockholders’ equity.
b. Sales receivable valuation account. d. Service revenue account. RPCPA 0593
*. FGH Machinery, Inc. is engaged in the business of selling tractors on installment basis. Under
which of the following circumstances should you recommend to FGH the use of the cost Application
recovery method of revenue recognition to account for the installment sales? 26. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of water,
a. Where there is no reasonable basis for estimating collectibility. Winser does not recognize any revenue from water sales until the sales exceed the costs of
b. Where the sales are subject to a high rate of return. exploration, the basis of revenue recognition being employed is the
c. Where no cash payments are due until one year from date of sale. a. production basis. c. sales (or accrual) basis.
d. Where the sale contract provides that title to the equipment only passes to the buyer b. cash (or collection) basis. d. cost recovery basis. K, W & W
when all payments have been made. RPCPA 1096
Gross Profit
47. Bert's Meat Market sells quarters and sides of beef on the installment basis. Losses on 75. According to the cost recovery method of accounting, gross profit on an installment sale is
receivables are very difficult to predict, and meat products cannot be repossessed. The recognized in income (E)
revenue recognition method used by Bert would be: A. After cash collections equal to the cost of sales have been received
A. Point of sale. C. Cost recovery. B. In proportion to the cash collections
B. Installment sales. D. Completed contract. S, S & T C. On the date the final cash collection is received
D. On the date of sale CPAR
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. Using the cost-recovery method of revenue recognition, profit on an installment sale is
recognized Income recognition
A. On the date of the installment sale. 25. Under the cost recovery method of revenue recognition,
B. In proportion to the cash collections. a. income is recognized on a proportionate basis as the cash is received on the sale of the
C. After cash collections equal to the cost of goods sold have been received. product.
D. On the date the final cash collection is received. CIA 0597 IV-10 b. income is 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. Consignee when cash is received from the customer. CIA 0589 IV-27
d. none of these. K, W & W
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. DEF is the consignee for 1,000 units of product X for ABC Company. ABC should recognize
24. A seller is properly using the cost recovery method for a sale. Interest will be earned on the the revenue from these 1,000 units when
future payments. Which of the following statements is not correct? A. The agreement between DEF and ABC is signed.
a. After all costs have been recovered, any additional cash collections are included in B. ABC ships the goods to DEF.
income. C. DEF receives the goods from ABC.
b. Interest revenue may be recognized before all costs have been recovered. D. DEF sells the goods and informs ABC of the sale. CIA 0590 IV-31
c. The deferred gross profit is offset against the related receivable on the balance sheet.
d. Subsequent income statements report the gross profit as a separate item of revenue *. When goods are consigned out, profits should be recognized by the consignor when the
when it is recognized as earned. K, W & W a. Goods are sold by the consignee.
b. Goods are received by the consignee.
CONSIGNMENT ACCOUNTING c. Consignee agrees to the terms of the consignment.
Ownership of Consigned Inventories d. Goods are shipped by the consignor. RPCPA 0577
23. Goods on consignment should be included in the inventory of S, S & S
a. the consignor but not the consignee. c. the consignee but not the consignor. Prepaid Freight
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b. both the consignor and the consignee. d. neither the consignor nor the consignee. . Jel Co., a consignee, paid the freight costs for goods shipped from Dale Co., a consignor.
These freight costs are to be deducted from Jel’s payment to Dale when the consignment
Inventoriable Costs goods are sold. Until Jel sells the goods, the freight costs should be included in Jel’s
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. Consignor Co. paid the in-transit insurance premium for consignment goods shipped to a. Cost of goods sold. c. Selling expenses.
Consignee Co. In addition, Consignor advanced part of the commissions that will be due b. Freight-out costs. d. Accounts receivable. AICPA 1192 T-12
when Consignee sells the goods. Should Consignor include the in-transit insurance premium,
and the advanced commissions in inventory costs? Journal Entries
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AICPA 0592 T-23 a. b. c. d. . ABC Manufacturing Company ships merchandise costing $40,000 on consignment to XYZ
Insurance Premium Yes No Yes No Stores. ABC pays $3,000 of freight costs to a transport company, and XYZ pays $2,000 for
Advanced Commissions Yes No No Yes local advertising costs that are reimbursable from ABC. By the end of the period, three fourths
of the consigned merchandise has been sold for $50,000 cash. XYZ notifies ABC of the sales,
Revenue/Cost Recognition retains a 10% commission and the paid advertising costs, and remits the cash due ABC.
31. Revenue is recognized by the consignor when the Select the journal entry that appropriately records the notification of sale and the receipt of
a. goods are shipped to the consignee. cash by ABC. CIA 1193 IV-37
b. consignee receives the goods. A. Cash $40,000
c. consignor receives an advance from the consignee. Advertising expense 2,000
d. consignor receives an account sales from the consignee. K, W & W Commission expense 5,000
Freight expense 3,000
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. In accounting for sales on consignment, sales revenue and the related cost of goods sold Revenue from consignment sales $50,000
should be recognized by the B. Cash $43,000
a. Consignor when the goods are shipped to the consignee. Advertising expense 2,000
b. Consignee when the goods are shipped to the third party. Commission expense 5,000
c. Consignor when notification is received that the consignee has sold the goods. Revenue from consignment sales $50,000
C. Cash $50,000
Revenue from consignment sales $50,000
D. Cash $45,000
Commission expense 5,000
Revenue from consignment sales $50,000