An entity that owns a new professional basketball team sells season tickets to its team's games. The season lasts from November through April. with 10 games played each month. In Year 1. The entity collected US $3 million from season-ticket sales for the Year 1 - Year 2 season. Its fiscal year-end is December 31. Based on this information.The enterprise should
Answer(s): A
The collections represent a liabilitydeferred income). The income recognition criteria are not met with respect to the season ticket collections until the receipt of future economic benefits is sufficiently certain. Such certainty exists with respect to collections related to the games played as of the balance sheet date. Accordingly, the entity should recognize US $1 million as income in Year 1 [(US $3, 000, 000 - 6 months) x 2 months]. The remaining US $2 million should be reported as a liability.
The practice of recording advanced payments from customers as liabilities is an application of the
Answer(s): D
Since the amount received in cash has not yet been earned, it is appropriate to record the advance payment as a liability of the company This is an example of the revenue recognition principle. which states that revenue should not be recognized until it is earned.
A transfer of receivables. with recourse, in exchange for cash should
Answer(s): B
An entity derecognizes a financial assetor a part thereof) when it loses control of the contractual rights the asset represents. Control is lost when the entity realizes the rights to the benefits of the contract, the rights expire, or the entity surrenders the rights. Moreover. whether loss of control has occurred depends on the positions of both the transferor and the transferee. Control is not lost. for example, if the entity may reacquire the assetunless it is readily obtainable in the market or the price is fair value) or when the transferor is entitled and obligated to repurchase or redeem at a price giving the transferee a lender's return. Control ordinarily is lost when the transferee may obtain the benefits of the asset. for example, if the transferee may freely sell or pledge the full fair value of the asset. When the conditions above are met, the transfer of receivables with recourse is accounted for as a sale. with the proceeds of the sale reduced by the fair value of the recourse obligationa new financial liability).
An entity has appropriately used the installment method of accounting sit began operations at the beginning of the current year. The following information pertains to its operations for this year:The amount of gross profit deferred at the end of the current year should be
Answer(s): C
The gross profit on installment sales in US $360, 000$1.200.000 installment sales - $840, 000 cost of installment sales). Accordingly, the gross profit percentage is 30%US $360, 000 gross profit $1, 200, 000 installment sales), and the amount of gross profit deferred at the end of the current year is 1.11: r. $216.000 [($1 .200.000 installment sales 480, 000 collections x 30%]. General and administrative expense have no effect on the computation of realized gross profit or deferred gross profit. They are to be classified as operating expenses on the income statement in the period in which they are incurred.
The major distinction between the function-of-expense format for the income statement and the "condensed" format recognized under U.S. GAAP is the separation of
IRS 1 does not require a particular income statement format, although, at a minimum, certain line items must be presented. The nature-of-expense format for the income statement provides one grouping for income items and one for expense items, similar to the "single-step" format recognized under U.S. GAAP. The function-of-expense format, on the other hand, resembles the U.S. GRAP "condensed" format except in one crucial respect: Under U.S. GAAP, other income and expenses must be reported in a separate section after income from operations.
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