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I am not understanding this question. FAR. Becker ch.2 online practice question!

Matching Rev & Ex.

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#1 bella.dreamer

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Posted 09 July 2013 - 02:12 AM

Anyone can explain this to me? Thanks!!

My question is why do we have to consider July 1 as the average date? I thought year one earned rev should be 40% (600,000) because 40% of the repairs incurred during year 1 and on December 31 year  the Earned Rev should be 240,000 and deferred rev should be [600,000-240,000] = 360,000.  d but the answer is b.

 

 

Dunne Co. sells equipment service contracts that cover a two-year period. The sales price of each contract is $600. Dunne's past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout the current year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue?

a.$300,000
b.$480,000
c.$540,000
d.$360,000
 

 

Choice "b" is correct. When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly (July 1 is average date), only ½ of the 40% of repairs will be in the current year.

   
 
Current year deferral ($600 x 1,000) 600,000
 
Earned in the current year (600,000 x 40% x 1/2) (120,000)
 
Deferral 12-31 480,000

Choice "c" is incorrect. When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly, (July 1 is average date) only ½ of the 40% of repairs will be in the current year.

Choice "d" is incorrect. Since repairs are incurred evenly during the first year (July 1 is average date) only ½ of 40% will be earned in the current year.

Choice "a" is incorrect. Revenue is recognized, and deferral reduced, as the service is performed.



#2 Tyson

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Posted 10 July 2013 - 05:11 AM

Bella,

The "evenly throughout the year" phrase made me look at this question a little deeper. The way it makes sense to me is to break it down a little more.

Dunne sells these contracts at around 83-84 per month (1000/12). The 40% of repairs is for the "contract year" not calendar year. So a contract sold in November will see 40% of repairs on the contract by November of the next year, not by 12/31 of this year.

That, to me is what this question is asking. I have noticed that many of the questions have a tiny fact inserted that completely change the answer. Here they use 7/1as the average date simply because it is the exact middle of the year. You could skip that and just divide the $240 in half.

I noticed several "timing" related tricks in the depreciation chapter as well.

For me, I don't care about the why. If I see the term "earned evenly throughout the year" on the exam I will apply the 50% to whatever applicable variable. I am studying to pass this exam not earn a doctorate in accounting and this looks like a trick that the sadistic fools that create this exam love to throw at us!

#3 bella.dreamer

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Posted 10 July 2013 - 08:36 PM

Hey Tyson,

 

Oh now it makes a bit more sense. This is absolutely ridiculous the way they are asking the question. Thanks a lot for clarifying it for me.



#4 wiamad

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Posted 17 July 2013 - 02:27 AM

Folks am not understanding these 2 questions and i dnt know where to post them so people can help me (thnx)

Haft Construction Co. has consistently used the 
percentage-of-completion method. On January 10, 1991, 
Haft began work on a $3,000,000 construction contract. At 
the inception date, the estimated cost of 
construction was $2,250,000. The following data relate to 
the progress of the contract: 
Income recognized at 12/31/91 $ 300,000 
Costs incurred 1/10/91 through 12/31/92 1,800,000 
Estimated cost to complete at 12/31/92 600,000 
In its income statement for the year ended December 31, 
1992, what amount of gross profit should Haft 
report? 
a. $450,000 
b. $300,000 
c. $262,500 
d. $150,000 

Choice "d" is correct.
Plz someone tell me why we didn't used the estimated cost of construction ($2.25M) 

 

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#2

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kell corp $95000 US GAAP net income for the quarter ended sept. 30 y1 included following after tax items:
- $ 60000 extraordinary gain realized april 30 y1 was allocated equally to the 2nd 3rd and 4th quarters y1
- $ 16000 cumulative effect loss resulting from a change in inventory valuation method was recognized on aug.2 y1

in addition kell paid $48000 on feb 1 y1 for calender year property taxes. of this amount $12000 was allocated to the 3rd quarter of y1
For the quarter ended sep. 30 y1 kell should report NI of:
      - 91000
      - 103000
      - 111000
      - 115000
the answer is 91000 but y?
i am totally confused, they didn't used the property taxes also they've explained it as such:
               95000 - 20000(60000/3) + 16000 = 91000
y they've substracted the extraordinary and they allocated the cumulative loss?

plzz someone help
thx



#5 bella.dreamer

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Posted 24 August 2013 - 07:28 PM

wiamad..have you figured out the answer for your question? If not, give me the page # and chapter for this question because it would be easier for me to figure out and I think I can help explain this to you if you still need help.

'Bella



#6 astone

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Posted 27 August 2013 - 01:26 AM

Question 1

 

Y1 Profit %:                   3,000,000        

                                          (2,250,000)    

Profit                                750,000       25%

                             

Y1 Income:                    300,000            

Y1 Expense                   1,200,000 =300,000/.25

                             

Y2 Profit %:                   3,000,000        

                                          (2,400,000)       =1,800,000+600,000

                                             600,000             20%

                             

Y2 Expenses Total      75%    =2,400,000/1,800,000

Y2 Income Total          450,000             =600,000*.75

Less: Y1 Income          (300,000)        

Y2 Income                     150,000

 

 

Question 2

 95,000               Property tax treatment is ok so no adjustments need to be made.

 (20,000)          Extraordinary gains should be recognized in the interim period in which they occur (period 2).

 16,000               Cumulative effect loss resulting from a change in inventory valuation method should be an adjustment to beginning balance retained earnings. 

 91,000             

 

 

 

 

 

 



#7 CPAattheBeach

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Posted 02 September 2013 - 05:55 AM

Bella that question had me stumped too with the way Becker wrote that question, thanks for bringing it up!

 

 



#8 rukiddenmeh

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Posted 04 September 2013 - 01:53 AM

For me, I don't care about the why. If I see the term "earned evenly throughout the year" on the exam I will apply the 50% to whatever applicable variable.

Ha-ha, I'll take note of this. Thanks!