McGraw-Hill Education 500 Financial Accounting and Reporting Questions for the CPA Exam by Frimette Kass-Shraibman

Author:Frimette Kass-Shraibman
Language: eng
Format: epub
Publisher: McGraw Hill LLC
Published: 2015-01-15T00:00:00+00:00

Chapter 2: Revenue and Expense Recognition

41. (B) I is correct. For revenue to be recognized under US GAAP, persuasive evidence of an arrangement or contract must exist. II is correct. For revenue to be recognized under US GAAP, goods must have been delivered or services must have been performed.

42. (C) I is correct. Under normal GAAP rules, revenue is not recognized until the earnings process is substantially complete. However, in a multiple deliverable arrangement, the company can recognize the revenue from each element if the delivered item has a value on a stand-alone basis. If the hardware and software installation has a value on a stand-alone basis, the revenue from the installation can be recognized upon delivery without having to wait until the contract is substantially complete. Although the customer support element of this contract carries over into Year 3 and is not complete until December 31 of Year 3, it is reasonable to believe that management of Advantage would want to recognize revenue at each deliverable element. Therefore, if the installation of the hardware and software and the training of the customer staff have a value on a stand-alone basis, Advantage would recognize that portion of revenue in Year 2 since that part of the contract has been completed. II is correct. Under normal GAAP rules, revenue is not recognized until the earnings process is substantially complete. However, in a multiple deliverable arrangement, the company can recognize the revenue from each element if the delivered item can be sold separately. If the hardware and software and the training of the staff can be sold separately, Advantage can recognize those elements of the multiple deliverable arrangement as they are completed.

43. (C) I is correct. A deferral of revenues will occur when cash is received but is not recognizable for financial statement purposes because it has not been earned. II is correct. Deferral typically results in the recognition of a liability when cash is received before the revenue is earned. A deferral results in a prepaid expense when cash is paid before the expense is incurred, such as prepaid insurance or prepaid rent.

44. (D) I is incorrect. A deferral includes cash collected in advance of services being rendered. The original journal entry includes a debit to cash and a credit to unearned revenue, a liability. At year end, an adjustment is needed to pick up the revenue earned since the time that the cash was collected up to the end of the year. The adjustment includes a debit to unearned revenue and a credit to earned revenue. II is incorrect. Cash paid up front for a 1-year insurance policy is a deferral of expense. The original entry is a debit to prepaid insurance and a credit to cash. The adjustment at year end includes a debit to insurance expense and a credit to prepaid insurance.

45. (A) A 1-year insurance policy with a cost of $3,000 expires at a rate of $250 per month. For Year 10, 5 months expired and need to be expensed: $250 × 5 months = $1,250 that has expired.

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