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Exam 5: Income Measurement

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Question 21

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A company is effectively leveraging when:

A) The return on assets exceeds the return on shareholders' equity.
B) The return on shareholders' equity exceeds the return on assets.
C) The return on shareholders' equity is increasing.
D) The return on assets is increasing.

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Question 22

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Explain briefly how a company who sells to distributors with a right of return might manage earnings if the company was falling short of profit projections. What sort of ethical problems could result from that earnings management?

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A company could ship extra product to di...

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Question 23

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Use of the installment sales method requires that firms track the gross-profit percentage associated with a particular sale.

The following footnote appeared in a recent annual report to stockholders of Dell Inc., the computer manufacturer: "Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. Dell allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative list price of each element. For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs. Product revenue is recognized, net of an allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended warranty and service contracts, for which Dell is not obligated to perform, is recognized on a net basis at the time of sale." Briefly explain why Dell Computer recognizes these three types of revenue at different points in time.

Required: Compute the return on shareholders' equity for 2008.

Firms have free choice as to whether they use the percentage-of-completion method or the completed contract method to account for a long-term contract.

Under EITF 00-21, if the revenue for a particular part of a multiple-part arrangement does not qualify for separate recognition, it is:

Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:

Many high tech companies sell products with opportunities for retailers to return the merchandise if it is unsold after a certain period of time to reduce the retailer's risk of inventory obsolescence Using an example, explain the implications of this kind of policy for revenue recognition.

Required: Compute the inventory turnover ratio for 2008.

Using the percentage-of-completion method, Indiana:

Dowling's return on equity for 2009 is:

Revenue from the sale of computer software is always recognized at the point of sale.

Identify and explain the criteria for recognition of revenue added by SAB 101.

Coronado Land Sales sold for $245,000 a parcel of land that cost $180,000. The cost recovery method was appropriately used. Collections on the sale were: $60,000 in 2008, $90,000 in 2009, and $95,000 in 2010. Required: Prepare journal entries to record the sale, cash collections, and recognition of gross profit (if appropriate) in 2008, 2009, and 2010.

Merchandise sold FOB destination indicates that:

Assume that Beavis uses the completed contract method for revenue recognition. Required: Prepare all journal entries to record costs, billings, collections, and profit recognition.

In 2010, Rigsby would recognize realized gross profit of:

In 2011, Lake would record a loss on repossession of:

Beck Construction Company began work on a new building project on January 1, 2008. The project is to be completed by December 31, 2010, for a fixed price of $108 million. The following are the actual costs incurred and estimates of remaining costs to complete the project that were made by Beck's accounting staff: Required: What amount of gross profit (or loss) would Beck record on this project in each year under the percentage-of-completion method? Place answers in the spaces provided below and show supporting computations.