Intermediate Accounting Test 2 Exam Questions With 100% Correct Answers

Intermediate Accounting Test 2 Exam Questions With 100% Correct Answers According to the FASB's conceptual framework, recognition is the process of formally incorporating an element into the financial statements of an entity. Recognition criteria include all of the following except: A. Measurability with sufficient reliability B. Definitions of elements of financial statements C. Decision usefulness D. Relevance - answerC According to the FASB conceptual framework, which of the following statements conforms to the realization concept? A. Equipment depreciation was assigned to a production department and then to product unit costs. B. Depreciated equipment was sold in exchange for a note receivable. C. Cash was collected on accounts receivable D. Product unit costs were assigned to cost of goods sold when the units were sold. - answerB (The term "realization" is used most precisely in accounting and financial reporting with regard to sales of assets for cash or claims to cash. The terms "realized" and "unrealized" identify revenues or gains and losses on assets sold and unsold, respectively. Thus, the sale of depreciated equipment results in realization.) Revenues of an entity are usually measured by the exchange values of the assets or liabilities involved. Recognition of revenue does not occur until: A. The revenue is realizable B. The revenue is realized and earned C. Products or services are exchanged for cash or claims to cash D. The entity has substantially accomplished what it has agreed to do - answerB (Revenues are realized when products, merchandise, or other assets are exchanged for cash or claims to cash. Revenues are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.) The Star Company is a service entity that requires customers to place their orders 2 weeks in advance. Star bills its customers on the 15th day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, Star should recognize revenue from its services at the date when A. A customer places an order B. The service is provided C. A billing is mailed D. A customer's payment is received - answerB (revenues should be recognized when they are realized or realizable and earned) For $50 a month, Rawl Co. visits its customers' premises and performs insect control services. If customers experience problems between regularly scheduled visits, Rawl makes service calls at no additional charge. Instead of paying monthly, customers may pay an annual fee of $540 in advance. For a customer who pays the annual fee in advance, Rawl should recognize the related revenue: A. When the cash is collected B. At the end of the fiscal year C. At the end of the contract year after all of the services have been performed D. Evenly over the contract year as the services are performed - answerD (Accural-based revenue should be recognized when realized or realizable and earned. These conditions are usually met when services are rendered.) The selling price for a product is reasonably assured, the units are interchangeable, and the costs of selling and distributing the product are insignificant. To recognize revenue from the product as early in the revenue cycle as is permitted by GAAP, the revenue recognition method that should be used is the A. Cash method B. Completion-of-production method C. Percentage-of-completion method D. Cost recovery method - answerB (For readily realizable products, revenues and some gains may be recognized when production is completed or when prices of the assets change.) Under a royalty agreement with another entity, a company will receive royalties from the assignment of a patent for 3 years. The royalties received should be reported as revenue A. At the date of the royalty agreement B. In the period earned C. In the period received D. Evenly over the life of the royalty agreement - answerB (Revenues should be recognized when they are realized or realizable and earned. D is incorrect because revenue is recognized evenly over the life of the royalty agreement only if earned evenly over that period.) Which of the following is not a theoretical basis for the allocation of expenses? A. systematic allocation B. Cause and effect C. Profit maximization D. Immediate recognition - answerC (The allocation of expenses on such a basis would subvert the purpose of GAAP to present fairly the results of operations and financial position because expenses would not be reported. B is incorrect because expenses should be recognized in a particular period if they have a direct association with that period or with specific revenues recognized in that period.) Some costs cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. An example of such a cost is