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Exam 5: Income Measurement and Profitability Analysis

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Question 21

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

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Question 22

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The first disclosure note to the financial statements is typically the summary of significant accounting policies.

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Question 23

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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 contract.

In its December 31, 2012, balance sheet, ADH would report:

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:

Hulkster's 2013 return on assets is (rounded) :

SAB 101 was issued by the FASB to clarify its guidelines on revenue recognition.

Dowling's 2013 average collection period is (rounded) :

In its December 31, 2013, balance sheet, Lake would report:

Octagon Co. appropriately uses the installment sales method of accounting for its installment sales. During 2013, Octagon made installment sales of $400,000 and received payments of $250,000 on those sales. Octagon's gross profit margin is 40%. Required: Prepare journal entries to record the sale, collection, and recognition of gross profit.

Dowling's return on equity for 2013 is (rounded) :

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

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

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:

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

Assume that McCombs uses the completed contract method for revenue recognition. Required: Compute the amount of gross profit recognized by McCombs during 2012 and 2013.

When the cost recovery method is used to account for a long-term 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.

In 2012, Reliable would recognize gross profit of:

Big Bear Company deals in distressed properties and makes high-risk sales. In 2012, the company sold for $250,000 a piece of property that cost $150,000. The cost recovery method was appropriately used. Collections on the sale were: $80,000 in 2012, $120,000 in 2013, and $50,000 in 2014. Required: Prepare journal entries to record the sale, cash collections, and recognition of gross profit (if appropriate) in 2012, 2013, and 2014.

Required: Compute the return on assets for 2013.