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13 Dec 2019

Which of the following statements is false?

A.

Generally, subject to a few exceptions, taxpayers who perform long term construction contracts to construct real estate may choose between the completed contract-method of accounting or the percentage of completion method for tax accounting for long-term construction contracts.

B.

Generally, the tax code requires the use of the percentage of completion method of accounting and blocks the use of the completed contract method for construction contracts that cannot be completed within one year.

C.

The tax code allows the use of the completed-contract method of accounting for long-term construction contracts by taxpayers whose average annual gross receipts do not exceed $10 million. and where the contract is expected to be completed within two years from the commencement date.

D.

B & C are both false.

E.

A & C are both false.

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Casey Durgan
Casey DurganLv2
17 Dec 2019
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Related questions

I. True/False 2 points

Indicate whether the sentence or statement is true or false.

____ 1. Revenues and gains are generally recognized when they are realized or realizable and they have been earned through substantial completion of the activities involved in the earnings process.

____ 2. The proportional performance method has been developed to reflect revenue earned on service contracts under which many acts of service are to be performed before the contract is completed.

____ 3. Beginning with the Tax Reform Act of 1986, the tax laws eliminated the use of the completed-contract method.

____ 4. The most popular input measure under percentage-of-completion accounting is the cost-to-cost method.

____ 5. Estimates of architects and engineers of percentage-of-completion are not acceptable under generally accepted accounting principles.

____ 6. At the conclusion of a construction contract, the balance in Construction in Progress will be exactly equal to the amount in Progress Billings on Construction Contracts when using the percentage-of-completion method.

____ 7. If analysis of construction contracts indicates that there will be an overall loss on the contract, the loss should immediately be recognized in full under the completed-contract method and the percentage-of-completion method.

____ 8. Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts with all subsequent receipts reported as revenues.

____ 9. The cost recovery method is the most conservative revenue recognition method.

____ 10. If a company is heavily involved in installment sales, the operating cycle of the business is normally defined as the average period of the installment contracts.

True/False

Indicate whether the sentence or statement is true or false. 1 point for each question

____ 1. The completed-contract method was developed to relate recognition of revenue on long-term construction-type contracts to the activities of a firm in fulfilling these contracts.

____ 2. Estimates of architects and engineers of percentage-of-completion are not acceptable under generally accepted accounting principles.

____ 3. The use of the direct write-off method is acceptable under generally accepted accounting principles.

____4. The method of estimating uncollectible accounts expense based on the accounts receivable balance emphasizes the determination of the net realizable value of the receivables.

____5. The "list" sales price less any trade discount is the amount at which the receivable and the corresponding revenue should be recorded.

____6. In a bank reconciliation statement, an outstanding check must be subtracted from the bank statement balance in determining the correct cash balance.

____ 7. Accounting for installment sales using the deferred gross profit approach requires determining a gross profit rate for the sales of each year, and establishing an accounts receivable and a deferred revenue account identified by the year of the sale.

____ 8. The deferred gross profit accounts are reported as liabilities under the installment sale method.

____ 9. The cost recovery method is often used when the circumstances surrounding a sale are too uncertain to use the installment sale method.

____ 10. In a bank reconciliation statement, the amount of a not-sufficient-funds check must be added to the depositor's cash balance in determining the correct cash balance.

Allocate Transaction Price, Discounts, Time Value.

Master Grill Company sells outdoor grilling products, providinggas and charcoal grills, accessories, and installation services forcustom patio grilling stations. Instructions Respond to therequirements related to the following independent revenuearrangements for Master Grill products and services.

(a) Master Grill offers contract MG100 which is comprised of afree-standing gas grill for small patio use plus installation to acustomer’s gas line for a total price $700. On a standalone basis,the grill sells for $600 (cost $350), and Master Grill estimatesthat the fair value of the installation service (based on cost-plusestimation) is $150. Master Grill signed 15 MG100 contracts on May30, 2014, and customers paid the contract price in cash. The grillswere delivered and installed on June 15, 2014. Prepare journalentries for Master Grill for MG100 in May and June 2014.

(b) Master Grill sells its specialty combination gas/wood-firedgrills to local restaurants. Each grill is sold for $900 (cost$500) on credit with terms 2/20, net/60. Prepare the journalentries for the sale of 20 grills on August 1, 2014, and uponpayment, assuming the customer paid on (1) August 20, 2014, and (2)September 29, 2014. Assume the company records sales net.

2) Long-term construction project accounting. DobsonConstruction specializes in the construction of commercial andindustrial buildings. The contractor is experienced in biddinglong-term construction projects of this type, with the typicalproject lasting fifteen to twenty-four months. The contractor usesthe percentage-of-completion method of revenue recognition since,given the characteristics of the contractor's business andcontracts, it is the most appropriate method. Progress towardcompletion is measured on a costto-cost basis. Dobson began work ona lump-sum contract at the beginning of 2015. As bid, thestatistics were as follows:

Lump-sum price (contract price) $4,000,000

Estimated costs

Labor $850,000

Materials andsubcontractor 1,750,000

Indirect costs 400,000 3,000,000

$1,000,000

At the end of the first year, the following was the status ofthe contract:

Billings to date $2,250,000

Costs incurred to date

Labor $464,000

Materials andsubcontractor 648,000

Indirect costs 193,000 1,305,000

Latest forecast total cost 3,000,000

It should be noted that included in the above costs incurred todate were standard electrical and mechanical materials stored onthe job site, but not yet installed, costing $105,000. These costsshould not be considered in the costs incurred to date.

Instructions

(a) Compute the percentage of completion on the contract at theend of 2015.

(b) Indicate the amount of gross profit that would be reportedon this contract at the end of 2015.

(c) Make the journal entry to record the income (loss) for 2015on Dobson's books.

(d) Indicate the account(s) and the amount(s) that would beshown on the balance sheet of Dobson Construction at the end of2015 related to its construction accounts. Also indicate wherethese items would be classified on the balance sheet. Billingscollected during the year amounted to $1,900,000.

(e) Assume the latest forecast on total costs at the end of 2015was $4,060,000. How much income (loss) would Dobson report for theyear 2015?

Accounting for long-term construction contracts.

The board of directors of Ogle Construction Company is meetingto choose between the completed-contract method and thepercentage-of-completion method of accounting for long-termcontracts in the company's financial statements. You have beenengaged to assist Ogle's controller in the preparation of apresentation to be given at the board meeting. The controllerprovides you with the following information:

1. Ogle commenced doing business on January 1, 2015.

2. Construction activities for the year ended December 31, 2015,were as follows:

Total Contract Billings Through CashCollections

Project Price 12/31/15 Through12/31/15

A $500,000 $ 340,000 $310,000

B 720,000 210,000 210,000

C 475,000 475,000 390,000

D 200,000 100,000 65,000

E 450,000 400,000 400,000

$2,345,000 $1,525,000 $1,375,000

ContractCosts EstimatedIncurred

Through AdditionalCosts to

Project 12/31/15 Complete Contracts

A $424,000 $101,000

B 195,000 455,000

C 350,000 -0-

D 123,000 97,000

E 320,000 80,000

$1,412,000 $733,000

3. Each contract is with a different customer.

4. Any work remaining to be done on the contracts is expected tobe completed in 2016.

Instructions

(a) Prepare a schedule by project, computing the amount ofincome (or loss) before selling, general, and administrativeexpenses for the year ended December 31, 2015, which would bereported under:

(1) Thecompleted-contract method.

(2) Thepercentage-of-completion method (based on estimated costs).

(b) Prepare the general journal entry(is) to record revenue andgross profit on project B (second project) for 2015, assuming thatthe percentage-of-completion method is used.

(c) Indicate the balances that would appear in the balance sheetat December 31, 2015 for the following accounts for Project D(fourth project), assuming that the percentage-of completion methodis used.

Accounts Receivable

Billings on Construction in Process

Construction in Process

(d) How would the balances in the accounts discussed in part (c)change (if at all) for Project D (fourth project), if thecompleted-contract method is used?

Computation of taxable income.

The records for Bosch Co. show this data for 2015:

Gross profit on installment sales recorded on the books was$420,000. Gross profit from collections of installment receivableswas $280,000.

Life insurance on officers was $3,800.

Machinery was acquired in January for $300,000. Straight-linedepreciation over a ten-year life (no salvage value) is used. Fortax purposes, MACRS depreciation is used and Bosch may deduct 14%for 2015.

Interest received on tax exempt Iowa State bonds was $9,000.

·The estimated warranty liability related to 2015 sales was $21,600.Repair costs under warrantiesduring 2015 were $13,600. The remainder will be incurred in2016.

· Pretax financial income is $600,000. The tax rate is 30%.

Instructions

(a) Prepare a schedule starting with pretax financial income andcompute taxable income.

(b) Prepare the journal entry to record income taxes for2015.

Deferred income taxes.

Pole Co. at the end of 2015, its first year of operations,prepared a reconciliation between pretax financial income andtaxable income as follows:

Pretax financialincome $ 420,000

Extra depreciation taken for tax purposes (1,050,000)

Estimated expenses deductible for taxes when paid 890,000

Taxable income $260,000

Use of the depreciable assets will result in taxable amounts of$350,000 in each of the next three years. The estimated litigationexpenses of $890,000 will be deductible in 2018 when settlement isexpected.

(a) Prepare a schedule of future taxable and deductibleamounts.

(b) Prepare the journal entry to record income tax expense,deferred taxes, and income taxes payable for 2015, assuming a taxrate of 40% for all years.

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