288 SECTION 1 The Role of Accounting as an Information System 2. Elmo Painting Service signed a contract charging a customer $3,000 to paint the customer’s house. The contract includes all paint and all painting labor. Elmo would charge $1,200 for the paint if sold separately, and $2,800 for the labor if done using the customer’s paint. How much of the transaction price would Elmo allocate to its performance obligation to provide paint to the customer? a. $0 b. $900 c. $1,200 d. $3,000 3. Triangle Travel offers their normal Bahama Get-Away travel package for $2,000, and offers their special Bahama Elite package (with additional guided tours) for $2,500. Triangle hasn’t offered the Elite package previously, and is unsure what it would charge for the additional guided tours absent the basic Bahama Get-Away package. How much of the Elite transaction price should Triangle assign to the basic Bahama Get-Away portion of the Elite package? a. $2,500 b. $2,000 c. $1,250 d. $0 4. Perkins Appliances offers a contract in which customers receive the following: • A new Perkins Pro washing machine, • a warranty that protects against product defects for the first six months of use, • an option to purchase a Perkins Pro dryer for a 30% discount (Perkins typically discounts that brand of dryer 10%), and • a coupon to purchase an extended warranty for $150 (extended warranties regularly sell for $150). How many performance obligations are included in the contract? a. 4 b. 3 c. 2 d. 1 5. Mowry Maintenance signs a one-year contract to provide janitorial services for a new amusement park. The contract will pay Mowry $10,000 per month as a base fee, and will pay an additional bonus of $60,000 if attendance at the park for the year exceeds a specified threshold. Mowry believes it has a 75% chance of meeting the threshold, and uses an expected value estimate to account for variable consideration. After eight months of the contract, how much revenue will Mowry have recognized? a. $0 b. $80,000 c. $110,000 d. $120,000 6. Which of the following statements is FALSE regarding recognizing revenue over time on long-term contracts? The construction-in-progress account: a. is shown net of billings as a liability if the amount is less than the amount of billings. b. is an asset. c. is shown net of billings in the balance sheet. d. does not include the cumulative effect of gross profit recognition. 7. The following data relates to a construction job started by Syl Co. during 2016: ● LO5–4 ● LO5–4 ● LO5–5 ● LO5–7 ● LO5–8 ● LO5–8 Total contract price $100,000 Actual costs incurred during 2016 20,000 Estimated remaining costs 40,000 Billed to customer during 2016 30,000 Received from customer during 2016 10,000 Assuming that Syl recognizes revenue over time according to percentage of completion, how much should Syl recognize as gross profit for 2016? a. $26,667 b. $0 c. $13,333 d. $33,333
Spiceland_Inter_Accounting8e_Ch05
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