Question & Answer

Saprano Company, on January 2, 2014, entered into a contract with a manufacturing company to purchase room-size air conditioners and to sell the units on an installment plan with collections over approximately 30 months with no carrying charge. For income tax purposes, Saprano Company elected to report income from its sales of air conditioners according to the installment-sales method.

Purchases and sales of new units were as follows.

Units Purchased Units Sold

Year Quantity Price Each Quantity Price Each

2014 1,400 $130 1,100 $200

2015 1,200 112 1,500 170

2016 900 136 800 205

Collections on installment sales were as follows.

Collections Received

2014 2015 2016

2014 sales $42,000 $88,000 $ 80,000

2015 sales 51,000 110,000

2016 sales 34,600

In 2016, 50 units from the 2015 sales were repossessed and sold for $120 each on the installment plan.

At the time of repossession, $2,000 had been collected from the original purchasers, and the units had a fair value of $3,000.

General and administrative expenses for 2016 were $60,000. No charge has been made against current income for the applicable insurance expense from a 3-year policy expiring June 30, 2017, costing $7,200, and for an advance payment of $12,000 on a new contract to purchase air conditioners beginning January 2, 2017.

Instructions

Assuming that the weighted-average method is used for determining the inventory cost, including repossessed merchandise, prepare schedules computing for 2014, 2015, and 2016:

(a) (1) The cost of goods sold on installments.

(2) The average unit cost of goods sold on installments for each year.

(b) The gross profit percentages for 2014, 2015, and 2016.

(c) The gain or loss on repossessions in 2016.

(d) The net income from installment sales for 2016. (Ignore income taxes.)

Selected transactions of TV Land Company are presented below.

1. A television set costing $540 is sold to Jack Matre on November 1, 2014, for $900. Matre makes a down payment of $300 and agrees to pay $30 on the first of each month for 20 months thereafter.

2. Matre pays the $30 installment due December 1, 2014.

3. On December 31, 2014, the appropriate entries are made to record profit realized on the installment sales.

4. The first seven 2015 installments of $30 each are paid by Matre. (Make one entry.)

5. In August 2015, the set is repossessed after Matre fails to pay the August 1 installment and indicates that he will be unable to continue the payments. The estimated fair value of the repossessed set is $100.

Instructions

Prepare journal entries to record the transactions above on the books of TV Land Company. Closing entries should not be made.

Mantle Inc. sells merchandise for cash and also on the installment plan. Entries to record cost of goods sold are made at the end of each year.

Repossessions of merchandise (sold in 2014) were made in 2015 and were recorded correctly as follows.

Deferred Gross Profi t, 2014 7,200

Repossessed Merchandise 8,000

Loss on Repossession 2,800

Installment Accounts Receivable, 2014 18,000

Part of this repossessed merchandise was sold for cash during 2015, and the sale was recorded by a debit to Cash and a credit to Sales Revenue. The inventory of repossessed merchandise on hand December 31, 2015, is $4,000; of new merchandise, $127,400. There was no repossessed merchandise on hand January 1, 2015. Collections on accounts receivable during 2015 were:

Installment Accounts Receivable, 2014 $80,000

Installment Accounts Receivable, 2015 50,000

The cost of the merchandise sold under the installment plan during 2015 was $111,600. The rate of gross profit on 2014 and on 2015 installment sales can be computed from the information given.

MANTLE INC.

TRIAL BALANCE

DECEMBER 31, 2015

Dr. Cr.

Cash $118,400

Installment Accounts Receivable, 2014 80,000

Installment Accounts Receivable, 2015 130,000

Inventory, Jan. 1, 2015 120,000

Repossessed Merchandise 8,000

Accounts Payable $ 47,200

Deferred Gross Profi t, 2014 64,000

Common Stock 200,000

Retained Earnings 40,000

Sales Revenue 400,000

Installment Sales 180,000

Purchases 360,000

Loss on Repossession 2,800

Operating Expenses 112,000

$931,200 $931,200

Instructions

(a) From the trial balance and other information given above, prepare adjusting and closing entries as of December 31, 2015.

(b) Prepare an income statement for the year ended December 31, 2015. Include only the realized gross profit in the income statement.

The following summarized information relates to the installmentsales activity of Phillips Stores, Inc. for the year 2014.

Installment sales during 2014 $500,000

Cost of goods sold on installment basis 350,000

Collections from customers 180,000

Unpaid balances on merchandise repossessed 24,000

Estimated value of merchandise repossessed 11,200

Instructions

(a) Prepare journal entries at the end of 2014 to record on the books of Phillips Stores, Inc. the summarized data above.

(b) Prepare the entry to record the gross profit realized during 2014.

Paul Dobson Stores sell appliances for cash and also on the installment plan. Entries to record cost of sales are made monthly.

PAUL DOBSON STORES

TRIAL BALANCE

DECEMBER 31, 2015

Dr. Cr.

Cash $153,000

Installment Accounts Receivable, 2014 56,000

Installment Accounts Receivable, 2015 91,000

Inventory—New Merchandise 123,200

Inventory—Repossessed Merchandise 24,000

Accounts Payable $ 98,500

Deferred Gross Profi t, 2014 45,600

Capital Stock 170,000

Retained Earnings 93,900

Sales Revenue 343,000

Installment Sales 200,000

Cost of Goods Sold 255,000

Cost of Installment Sales 120,000

Loss on Repossession 800

Operating Expenses 128,000

$951,000 $951,000

The accounting department has prepared the following analysis of cash receipts for the year.

Cash sales (including repossessed merchandise) $424,000

Installment accounts receivable, 2014 96,000

Installment accounts receivable, 2015 109,000

Other 36,000

Total $665,000

Repossessions recorded during the year are summarized as follows. 2014

Uncollected balance $8,000

Loss on repossession 800

Repossessed merchandise 4,800

Instructions

From the trial balance and accompanying information:

(a) Compute the rate of gross profit on installment sales for 2014 and 2015.

(b) Prepare closing entries as of December 31, 2015, under the installment-sales method of accounting.

(c) Prepare an income statement for the year ended December 31, 2015. Include only the realized gross profit in the income statement.

Chantal Stores sells merchandise on open account as well as on installment terms.

2014 2015 2016

Sales on account $385,000 $426,000 $525,000

Installment sales 320,000 275,000 380,000

Collections on installment sales

Made in 2014 100,000 90,000 40,000

Made in 2015 110,000 140,000

Made in 2016 125,000

Cost of sales

Sold on account 270,000 277,000 341,000

Sold on installment 214,400 176,000 228,000

Selling expenses 77,000 87,000 92,000

Administrative expenses 50,000 51,000 52,000

Instructions

From the data above, which cover the 3 years since Chantal Stores commenced operations, determine the net income for each year, applying the installment-sales method of accounting. (Ignore interest charges.)

Presented below is summarized information for Johnston Co., which sells merchandise on the installment basis. 2014 2015 2016 Sales (on installment plan) $250,000 $260,000 $280,000

Cost of sales 155,000 163,800 182,000

Gross profi t $ 95,000 $ 96,200 $ 98,000

Collections from customers on:

2014 installment sales $ 75,000 $100,000 $ 50,000

2015 installment sales 100,000 120,000

2016 installment sales 100,000

Instructions

(a) Compute the realized gross profit for each of the years 2014, 2015, and 2016.

(b) Prepare all entries required in 2016, applying the installment-sales method of accounting. (Ignore interest charges.)

On July 1, 2014, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1,

Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31,

2016, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2014, 2015, and 2016.

At At At

12/31/14 12/31/15 12/31/16

Contract costs incurred to date $ 300,000 $1,200,000 $2,100,000

Estimated costs to complete the contract 1,200,000 800,000 –0–

Billings to Gumbel 300,000 1,100,000 1,850,000

Instructions

(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.)

(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.)

On March 1, 2014, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by October 31, 2016. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2014, 2015, and 2016 are given below. 2014 2015 2016

Contract costs incurred during the year $2,880,000 $2,230,000 $2,190,000

Estimated costs to complete the contract at 12/31 3,520,000 2,190,000 –0–

Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000

Instructions

(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.)

(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore incomes taxes.)

Reynolds Custom Builders (RCB) was established in 1987 by Avery Conway and initially built high-quality customized homes under contract with specific buyers. In 2002, Conway’s two sons joined the company and expanded RCB’s activities into the high-rise apartment and industrial plant markets. Upon the retirement of RCB’s long-time financial manager, Conway’s sons recently hired Ed Borke as controller for RCB. Borke, a former college friend of Conway’s sons, has been associated with a public accounting firm for the last 6 years. Upon reviewing RCB’s accounting practices, Borke observed that RCB followed the completedcontract method of revenue recognition, a carryover from the years when individual home building was the majority of RCB’s operations. Several years ago, the predominant portion of RCB’s activities shifted to the high-rise and industrial building areas. From land acquisition to the completion of construction, most building contracts cover several years. Under the circumstances, Borke believes that RCB should follow the percentage-of-completion method of accounting. From a typical building contract, Borke developed the

 BLUESTEM TRACTOR PLANT

Contract price: $8,000,000

2014 2015 2016

Estimated costs $1,600,000 $2,880,000 $1,920,000

Progress billings 1,000,000 2,500,000 4,500,000

Cash collections 800,000 2,300,000 4,900,000

Instructions

(a) Explain the difference between completed-contract revenue recognition and percentage-of-completion revenue recognition.

(b) Using the data provided for the Bluestem Tractor Plant and assuming the percentage-of-completion method of revenue recognition is used, calculate RCB’s revenue and gross profit for 2014, 2015, and 2016, under each of the following circumstances.

(1) Assume that all costs are incurred, all billings to customers are made, and all collections from customers are received within 30 days of billing, as planned.

(2) Further assume that, as a result of unforeseen local ordinances and the fact that the building site was in a wetlands area, RCB experienced cost overruns of $800,000 in 2014 to bring the site into compliance with the ordinances and to overcome wetlands barriers to construction.

(3) Further assume that, in addition to the cost overruns of $800,000 for this contract incurred under part (b)(2), inflationary factors over and above those anticipated in the development of the original contract cost have caused an additional cost overrun of $850,000 in 2015. It is not anticipated that any cost overruns will occur in 2016.

On February 1, 2014, Hewitt Construction Company obtained a contract to build an athletic stadium. The stadium (for a local high school) was to be built at a total cost of $5,400,000 and was scheduled for completion by September 1, 2016. One clause of the contract stated that Hewitt was to deduct $15,000 from the $6,600,000 billing price for each week that completion was delayed. Completion was delayed 6 weeks, which resulted in a $90,000 penalty. Below are the data pertaining to the construction period.

2014 2015 2016 Costs to date $1,620,000 $3,850,000 $5,500,000

Estimated costs to complete 3,780,000 1,650,000 –0–

Progress billings to date 1,200,000 3,300,000 6,510,000

Cash collected to date 1,000,000 2,800,000 6,510,000

Instructions

(a) Using the percentage-of-completion method, compute the estimated gross profit recognized in the years 2014–2016.

(b) Prepare a partial balance sheet for December 31, 2015, showing the balances in the receivables and inventory accounts.

On March 1, 2014, Chance Company entered into a contract to build an apartment building. It is estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract price was $3,000,000. The following information pertains to the construction period.

2014 2015 2016

Costs to date $ 600,000 $1,560,000 $2,100,000

Estimated costs to complete 1,400,000 520,000 –0–

Progress billings to date 1,050,000 2,000,000 3,000,000

Cash collected to date 950,000 1,950,000 2,850,000

Instructions

(a) Compute the amount of gross profit to be recognized each year, assuming the percentage ofcompletion method is used.

(b) Prepare all necessary journal entries for 2016.

(c) Prepare a partial balance sheet for December 31, 2015, showing the balances in the receivables and inventory accounts.

Shanahan Construction Company has entered into a contract beginning January 1, 2014, to build a parking complex. It has been estimated that the complex will cost $600,000 and will take 3 years to construct. The complex will be billed to the purchasing company at $900,000. The following data pertain to the construction period. 2014 2015 2016

Costs to date $270,000 $450,000 $610,000

Estimated costs to complete 330,000 150,000 –0–

Progress billings to date 270,000 550,000 900,000

Cash collected to date 240,000 500,000 900,000

Instructions

(a) Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year of the construction period.

(b) Using the completed-contract method, compute the estimated gross profit that would be recognized during each year of the construction period.

Van Hatten Industries has three operating divisions—Depp Construction Division, DeMent Publishing Division, and Ankiel Securities Division. Each division maintains its own accounting system and method of revenue recognition.

Depp Construction Division

During the fiscal year ended November 30, 2014, Depp Construction Division had one construction project in process. A $30,000,000 contract for construction of a civic center was granted on June 19, 2014, and construction began on August 1, 2014. Estimated costs of completion at the contract date were $25,000,000 over a 2-year time period from the date of the contract. On November 30, 2014, construction costs of $7,200,000 had been incurred and progress billings of $9,500,000 had been made. The construction costs to complete the remainder of the project were reviewed on November 30, 2014, and were estimated to amount to only $16,800,000 because of an expected decline in raw materials costs. Revenue recognition is based upon a percentage-of-completion method.

DeMent Publishing Division

The DeMent Publishing Division sells large volumes of novels to a few book distributors, which in turn sell to several national chains of bookstores. DeMent allows distributors to return up to 30% of sales, and distributors give the same terms to bookstores. While returns from individual titles fluctuate greatly, the returns from distributors have averaged 20% in each of the past 5 years. A total of $7,000,000 of paperback novel sales were made to distributors during fiscal 2014. On November 30, 2014 (the end of the fiscal year), $1,500,000 of fiscal 2014 sales were still subject to return privileges over the next 6 months. The remaining $5,500,000 of fiscal 2014 sales had actual returns of 21%. Sales from fiscal 2013 totaling $2,000,000 were collected in fiscal 2014 less 18% returns. This division records revenue according to the method referred to as revenue recognition when the right of return exists.

Ankiel Securities Division

Ankiel Securities Division works through manufacturers’ agents in various cities. Orders for alarm systems and down payments are forwarded from agents, and the division ships the goods f.o.b. factory directly to customers (usually police departments and security guard companies). Customers are billed directly for the balance due plus actual shipping costs. The company received orders for $6,000,000 of goods during the fiscal year ended November 30, 2014. Down payments of $600,000 were received, and $5,200,000 of goods were billed and shipped. Actual freight costs of $100,000 were also billed. Commissions of 10% on product price are paid to manufacturing agents after goods are shipped to customers. Such goods are warranted for 90 days after shipment, and warranty returns have been about 1% of sales. Revenue is recognized at the point of sale by this division.

Instructions

(a) There are a variety of methods of revenue recognition. Define and describe each of the following methods of revenue recognition, and indicate whether each is in accordance with generally accepted accounting principles.

(1) Point of sale.

(2) Completion-of-production.

(3) Percentage-of-completion.

(4) Installment-sales.

(b) Compute the revenue to be recognized in fiscal year 2014 for each of the three operating divisions of Van Hatten Industries in accordance with generally accepted accounting principles.

On January 1, 2014, Lesley Benjamin signed an agreement to operate as a franchisee of Campbell Inc. for an initial franchise fee of $50,000. The amount of $10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each,  beginning January 1, 2015. The agreement provides that the down payment is not refundable and that no future services are required of the franchisor. Lesley Benjamin’s credit rating indicates that she can borrow money at 11% for a loan of this type.

Instructions

(a) How much should Campbell record as revenue from franchise fees on January 1, 2014? At what amount should Benjamin record the acquisition cost of the franchise on January 1, 2014?

(b) What entry would be made by Campbell on January 1, 2014, if the down payment is refundable and substantial future services remain to be performed by Campbell?

(c) How much revenue from franchise fees would be recorded by Campbell on January 1, 2014, if:

(1) The initial down payment is not refundable, it represents a fair measure of the services already provided, a significant amount of services is still to be performed by Campbell in future periods, and collectibility of the note is reasonably assured?

(2) The initial down payment is not refundable and no future services are required by the franchisor, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted?

(3) The initial down payment has not been earned and collection of the note is so uncertain that recognition of the note as an asset is unwarranted?

Pacific Crossburgers Inc. charges an initial franchise fee of $70,000. Upon the signing of the agreement, a payment of $28,000 is due. Thereafter, three annual payments of $14,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow money.

Instructions

Prepare the entries to record the initial franchise fee on the books of the franchisor under the following assumptions. (Round to the nearest dollar.)

(a) The down payment is not refundable, no future services are required by the franchisor, and collection of the note is reasonably assured.

(b) The franchisor has substantial services to perform, the down payment is refundable, and the collection of the note is very uncertain.

(c) The down payment is not refundable, collection of the note is reasonably certain, the franchisor has yet to perform a substantial amount of services, and the down payment represents a fair measure of the services already performed.

Seaver Company uses the installment-sales method in accounting for its installment sales. On January 1, 2014, Seaver Company had an installment account receivable from Jan Noble with a balance of $1,800. During 2014, $500 was collected from Noble. When no further collection could be made, the merchandise sold to Noble was repossessed. The merchandise had a fair value of $650 after the company spent $60 for reconditioning of the merchandise. The merchandise was originally sold with a gross profit rate of 30%.

Instructions

Prepare the entries on the books of Seaver Company to record all transactions related to Noble during 2014. (Ignore interest charges.)

Crawford Imports Inc. was involved in two default and repossession cases during the year:

1. A refrigerator was sold to Cindy McClary for $1,800, including a 30% markup on selling price. McClary made a down payment of 20%, four of the remaining 16 equal payments, and then defaulted on further payments. The refrigerator was repossessed, at which time the fair value was determined to be $800.

2. An oven that cost $1,200 was sold to Travis Longman for $1,500 on the installment basis. Longman made a down payment of $240 and paid $80 a month for six months, after which he defaulted. The oven was repossessed and the estimated fair value at time of repossession was determined to be $750.

Instructions

Prepare journal entries to record each of these repossessions using a fair value approach. (Ignore interest charges.)

On January 1, 2014, Wetzel Company sold property for $250,000. The note will be collected as follows: $120,000 in 2014, $90,000 in 2015, and $40,000 in 2016. The property had cost Wetzel $150,000 when it was purchased in 2012.

Instructions

(a) Compute the amount of gross profit realized each year, assuming Wetzel uses the cost-recovery method.

(b) Compute the amount of gross profit realized each year, assuming Wetzel uses the installment-sales method.

Swift Corp., a capital goods manufacturing business that started on January 4, 2014, and operates on a calendar-year basis, uses the installmentsales method of profit recognition in accounting for all its sales. The following data were taken from the 2014 and 2015 records. 2014 2015

Installment sales $480,000 $620,000

Gross profi t as a percent of costs 25% 28%

Cash collections on sales of 2014 $130,000 $240,000

Cash collections on sales of 2015 –0– $160,000

The amounts given for cash collections exclude amounts collected for interest charges.

Instructions

(a) Compute the amount of realized gross profit to be recognized on the 2015 income statement, prepared using the installment-sales method. (Round percentages to three decimal places.)

(b) State where the balance of Deferred Gross Profit would be reported on the financial statements for 2015.

(c) Compute the amount of realized gross profit to be recognized on the income statement, prepared using the cost-recovery method.

Becker Corporation sells farm machinery on the installment plan. On July 1, 2014, Becker entered into an installment-sales contract with Valente Inc. for an 8-year period. Equal annual payments under the installment sale are $100,000 and are due on July 1. The first payment was made on July 1, 2014.

Additional information:

1. The amount that would be realized on an outright sale of similar farm machinery is $586,842.

2. The cost of the farm machinery sold to Valente Inc. is $425,000.

3. The finance charges relating to the installment period are based on a stated interest rate of 10%, which is appropriate.

4. Circumstances are such that the collection of the installments due under the contract is reasonably assured.

Instructions

What income or loss before income taxes should Becker record for the year ended December 31, 2014, as a result of the transaction above?

Basler Corporation, which began business on January 1, 2014, appropriately uses the installment-sales method of accounting. The following data were obtained for the years 2014 and 2015.

2014 2015 Installment sales $750,000 $840,000

Cost of installment sales 510,000 588,000

General & administrative expenses 70,000 84,000

Cash collections on sales of 2014 310,000 300,000

Cash collections on sales of 2015 –0– 400,000

Instructions

(a) Compute the balance in the deferred gross profit accounts on December 31, 2014, and on December 31, 2015.

(b) A 2014 sale resulted in default in 2016. At the date of default, the balance on the installment receivable was $12,000, and the repossessed merchandise had a fair value of $8,000. Prepare the entry to record the repossession.

Samuels Co. appropriately uses the installment-sales method of accounting. On December 31, 2016, the books show balances as follows. Installment Receivables Deferred Gross Profit Gross Profit on Sales

2014 $12,000 2014 $ 7,000 2014 35%

2015 40,000 2015 26,000 2015 33%

2016 80,000 2016 95,000 2016 32%

Instructions

(a) Prepare the adjusting entry or entries required on December 31, 2016 to recognize 2016 realized gross profit. (Installment receivables have already been credited for cash receipts during 2016.)

(b) Compute the amount of cash collected in 2016 on accounts receivable from each year.

Coffin Corporation appropriately uses the installment-sales method of accounting to recognize income in its financial statements. The following information is available for 2014 and 2015.

2014 2015 Installment sales $900,000 $1,000,000

Cost of installment sales 594,000 680,000

Cash collections on 2014 sales 370,000 350,000

Cash collections on 2015 sales –0– 450,000

Instructions

(a) Compute the amount of realized gross profit recognized in each year.

(b) Prepare all journal entries required in 2015.

Berstler Construction Company began operations in 2014. Construction activity for the first year is shown below. All contracts are with different customers, and any work remaining at December 31, 2014, is expected to be completed in 2015.

Cash Contract Estimated

Total Billings Collections Costs Incurred Additional

Contract through through through Costs to

Project Price 12/31/14 12/31/14 12/31/14 Complete

1 $ 560,000 $ 360,000 $340,000 $450,000 $130,000

2 670,000 220,000 210,000 126,000 504,000

3 520,000 500,000 440,000 330,000 –0–

$1,750,000 $1,080,000 $990,000 $906,000 $634,000

Instructions

Prepare a partial income statement and balance sheet to indicate how the above information would be reported for financial statement purposes. Berstler Construction Company uses the completed-contract method.