F2Pt2-4

Question 1

Acct. for Completed Contract Method

Answer 1

• Applicable O/H & Direct costs should be charged to a construction in progress account (an asset).
• Losses should be recognized in full in the yr they are discovered.

Question 2

Completed Contract Method: Advantage

Answer 2

It is based on final results rather than on estimates.

Question 3

Completed Contract Method: Disadvantage

Answer 3

• It does not properly reflect the matching principle when the period of the contract extends over more than one accounting period.
• Under IFRS- Completed Contract Period is not permitted.

Question 4

Percentage-of Completion Method: Losses

Answer 4

-A provision for the loss on the entire contract should be made when current estimates of the total contract costs indicate a loss

Question 5

Percentage-of Completion Method: Advantages

Answer 5

• Better matching
• The accurate reporting of the status of an uncompleted contracts & periodic recognition of income currently (rather then irregularly) as contracts are completed.

Question 6

Percentage-of Completion Method: Disadvantages

Answer 6

• The necessity of relying on estimates of the ultimate costs

Question 7

Accounting for % of Completion Method

Answer 7

Gross Profit or Loss is recognized in each period by:
Step 1: Compute GP of Completed Contract

Step 2: Compute ‘% of completion’

Step 3: Compute GP earned (profit to date)

Step 4: Compute GP earned for current yr.

Question 8

Accounting for Installment Sales

Answer 8

Problem Solving Formulas:

• GP = Sale- COGS
• GP % = GP/Sales Price
• Earned GP= Cash Collections x GP %
• Deferred GP = Installment Rec. X GP %

Question 9

Installment Sales on B.S

Answer 9

A/R
Less: Deferred GP
= Balance

Question 10

Cost Recovery Method similar to Installment Sales:

Answer 10

• May only be used when Receivables are collected over extended period
• No reasonable basis for estimating their collectibility. .
• CRM is most conservative method of Revenue Recognition.

Question 11

Non-Monetary Exchanges has Commercial Substance If?

[GAAP]

Answer 11

• The future cash flows change as a result of the transaction.

Question 12

Exchanges LACKING Commercial Substance If?

Answer 12

• Projected cash flows after the exchange are not expected to change significantly.
• Losses should be recognized

Question 13

In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

Answer 13

No gain or loss is recognized on a non-monetary exchange as it lacks commercial substance.

The new asset is recorded at the book value of the asset given up.

The only gain that can be recognized is any boot (cash) received.

Question 14

In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

Answer 14

The transaction has commercial substance and a gain/loss is recorded on the exchange.

• The new asset is recorded at the FAIR VALUE of the assets given up
• Unless the asset acquired has a fair value that is easier to determine

Question 15

Exchanges LACKING Commercial Substance: Gains that NO Boot is RECEIVED

Answer 15

No Gain is Recognized

Question 16

Exchanges LACKING Commercial Substance: Gains when Boot is PAID

Answer 16

• No Gain is Recognized

Question 17

Exchanges LACKING Commercial Substance: Gains when Boot is RECEIVED

Answer 17

Recognize Proportional Gain (<25% Rule)

• (Total Boot Rec./ Total Consideration Received)

Question 18

Exchanges LACKING Commercial Substance: Gains when Boot is 25% or More of Total Consideration

Answer 18

• Both Parties consider the transaction as monetary exchange

- Gains/Losses are recogn. in their entirety