MODULE 28

The first step in the revenue recognition process is to

• A. determine the price.

• B. identify the contract.

• C. identify the obligations.

A contractor agrees to build a bridge for a total price of $10 million. The project is expected to take four years to complete, at a total cost of $6.5 million. After Year 1, costs of $2.5 million have been incurred, and a further $1 million in costs are incurred in Year 2. The client pays $2 million in each of the first two years. The amount of revenue the contractor should recognize in Year 2 is closest to:

• A. $1.54 million.

• B. $2.00 million

• C. $5.38 million

A realtor sells one of its client’s houses for $1.4 million, earning a commission of 3%. The costs to the realtor associated with the sale are $15,000. What is the realtor’s gross profit for this transaction

• A. $27,000

• B. $42,000.

• C. $1,385,000.

If a company purchases an asset with future economic benefits that are highly uncertain, the company should

• A. expense the purchase.

• B. use straight-line depreciation

• C. use an accelerated depreciation method

Red Company immediately expenses its development costs, while Black Company capitalizes its development costs. All else equal, Red Company will

• A. show smoother reported earnings than Black Company

• B. report higher operating cash flow than Black Company.

• C. report higher asset turnover than Black Company.

Changing an accounting estimate

• A. is reported prospectively

• B. requires restatement of all prior-period statements presented in the current financial statements.

• C. is reported by adjusting the beginning balance of retained earnings for the cumulative effect of the change

Which of the following transactions would most likely be reported below income from continuing operations, net of tax?

• A. Gain or loss from the sale of equipment used in a firm’s manufacturing operation.

• B. A change from the accelerated method of depreciation to the straight-line method

• C. The operating income of a physically and operationally distinct division that is currently for sale, but not yet sold

Which of the following statements about nonrecurring items is least accurate

• A. Discontinued operations are reported net of taxes, at the bottom of the income statement before net income.

• B. Unusual or infrequent items are reported before taxes, above net income from continuing operations.

• C. A change in accounting principle is reported in the income statement net of taxes, before net income

Hall Corp. had 100,000 shares of common stock outstanding at the beginning of the year. Hall issued 30,000 shares of common stock on May 1. On July 1, the company issued a 10% stock dividend. On September 1, Hall issued 1,000, 10% bonds, each convertible into 21 shares of common stock. What is the weighted average number of shares to be used in computing diluted EPS, assuming the convertible bonds are dilutive?

• A. 132,000

• B. 139,000.

• C. 146,000.

An analyst has gathered the following information about a company
300,000 shares outstanding
100,000 warrants exercisable at $50 per share
Average share price: $55
Year-end share price: $60
How many shares should be used in computing diluted EPS

• A. 9,091.

• B. 90,909.

• C. 309,091.