An entity sells a durable good to a customer on January 1, Year 1, and the customer is automatically given a 1-year warranty_ The customer also buys an extended warranty package extending the coverage for an additional 2 years to the end of Year 3. At the time of the original sale, the company expects warranty costs to be incurred evenly over the life of the warranty contracts. The customer has only one warranty claim durln2 the 3- year period, and the claim occurs during Year 2. The company will recognize income from the sale of the extended warranty
Answer(s): B
Because warranty costs are expected to be incurred evenly over the life of the warranty contracts, the income should be recognized on the straight-line basis over the life of the extended warranty contract.
An entity had cash receipts from sales of US $175, 000 during year 2, of which US $30, 000 was unearned at the end of Year 2. At the end of Year 1. the company had US $40, 000 of deferred revenue, all of which was earned in Year 2. The company's sales revenue for Year 2 would be
Answer(s): D
The sales revenue earned in Year 2 equals Year 2 cash receipts, minus any receipts in Year 2 for which the revenue was deferred, plus the revenue earned from cash receipts in Year 1. or US $185, 000$175, 000 - $30, 000 $40, 000).
ABC operates a catering service that specializes in business luncheons for large corporations. ABC requires customers to place their orders 2 weeks in advance of the scheduled events. ABC bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually. ABC should recognize revenue from its catering services at the date when a
Income, which includes revenue and gains, should not be recognized until an increase in future economic benefits related to an increase in an asset or a decrease in a liability is sufficiently certain and can be measured reliably. The most common time at which these two conditions are met is when the product or merchandise is delivered or services are rendered to customers. Thus, the entity has substantially accomplished what it must do to be entitled to future economic benefits when it serves the luncheon. It should then accrue a receivable and revenue.
If sales are accounted for using the installment method, which of the following is(are) only recognized in proportion to the cash collected on the sales during the period?
Under the installment method, the gross profit on salessales - cost of sales) is not recognized until cash is collected_ The proportion of cash collected on the sales during the accounting period determines the proportion of the gross profit on those sales that is recognized during the period. Hence. both sales and cost of sales are deferred.
Using the cost-recovery method of revenue re: :jniti on, profit on an installment sale is recognized
Answer(s): C
Under the cost-recovery method, no revenue is recognized until cash payments by the buyer exceed the seller's cost of the merchandise sold. This method is appropriate when collection of the revenue is very uncertain.
Post your Comments and Discuss IIA CIA exam prep with other Community members:
Our website is free, but we have to fight against AI bots and content theft. We're sorry for the inconvenience caused by these security measures. You can access the rest of the CIA content, but please register or login to continue.