Stephenson Company Is Trying to Decide Which One of Two

question 104

Multiple Choice

Stephenson Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below: $$\begin{array} { | l | r | r | } \hline & \text { Contract X } & \text { Contract Z } \\\hline \text { Contract Revenue } & \$ 200,000 & \$ 260,000 \\\hline \text { Materials } & 10,000 & 10,000 \\\hline \text { Labor } & 88,000 & 120,000 \\\hline \text { Depreciation on Equipment } & 8,000 & 10,000 \\\hline \text { Cost Incurred for Consulting Advice } & 1,500 & 1,500 \\\hline \text { Allocated Portion of Overhead } & 5,000 & 3,000 \\\hline\end{array}$$ The equipment was purchased last year and has no resale value. Which of these amounts is relevant for the selection of one contract over another?

• A) Contract revenue and labor costs
• B) Materials, consulting advice and allocated overhead
• C) Cost of consulting advice and allocated overhead
• D) Contract revenue, labor costs and depreciation on equipment

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Definitions:

Straight-line Amortization

An accounting method of incrementally reducing the cost value of an intangible asset over its useful life.

Interest Payment

The payment a borrower makes to a lender as compensation for the use of borrowed money.

Journal Entry

A journal entry is a record of a financial transaction in the accounting records, showing the accounts and amounts to be debited and credited.

Discount on Bonds Payable

The difference between the face value of a bond and the price for which it sells when the bond's market value is lower than its face value.