Question & Answer

Yanmei Construction Company began operations January 1, 2014. During the year, Yanmei Construction entered into a contract with Lundquist Corp. to construct a manufacturing facility. At that time, Yanmei estimated that it would take 5 years to complete the facility at a total cost of $4,500,000. The total contract price for construction of the facility is $6,000,000. During the year, Yanmei incurred $1,185,800 in construction costs related to the construction project. The estimated cost to complete the contract is $4,204,200. Lundquist Corp. was billed and paid 25% of the contract price.

Instructions

Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2014, and the amount to be shown as “costs and recognized profit in excess of billings” or “billings in excess of costs and recognized profit” at December 31, 2014, under each of the following methods.

(a) Completed-contract method.

(b) Percentage-of-completion method. Show supporting computations in good form.

Hamilton Construction Company uses the percentage-of-completion method of accounting. In 2014, Hamilton began work under contract #E2-D2, which provided for a contract price of $2,200,000. Other details follow: 2014 2015

Costs incurred during the year $640,000 $1,425,000

Estimated costs to complete, as of December 31 960,000 –0–

Billings during the year 420,000 1,680,000

Collections during the year 350,000 1,500,000

Instructions

(a) What portion of the total contract price would be recognized as revenue in 2014? In 2015?

(b) Assuming the same facts as those above except that Hamilton uses the completed-contract method of accounting, what portion of the total contract price would be recognized as revenue in 2015?

(c) Prepare a complete set of journal entries for 2014 (using the percentage-of-completion method).

In 2014, Gurney Construction Company agreed to construct an apartment building at a price of $1,200,000. The information relating to the costs and billings for this contract is shown below.

2014 2015 2016

Costs incurred to date $280,000 $600,000 $ 785,000

Estimated costs yet to be incurred 520,000 200,000 –0–

Customer billings to date 150,000 500,000 1,200,000

Collection of billings to date 120,000 320,000 940,000

Instructions

(a) Assuming that the percentage-of-completion method is used, (1) compute the amount of gross profit to be recognized in 2014 and 2015, and (2) prepare journal entries for 2015.

(b) For 2015, show how the details related to this construction contract would be disclosed on the balance sheet and on the income statement.

On April 1, 2014, Dougherty Inc. entered into a costplus- fixed-fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of $2,000,000. The fixed fee stipulated in the contract is $450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2014, Dougherty incurred costs of $800,000 related to the project. The estimated cost at

December 31, 2014, to complete the contract is $1,200,000. Altom was billed $600,000 under the contract.

Instructions

Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the contract for the year ended December 31, 2014. Show supporting computations in good form.

In 2014, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2014, are shown below.

Balance Sheet

Accounts receivable $18,000

Construction in process $65,000

Less: Billings 61,500

Costs and recognized profi t in excess of billings 3,500

Income Statement

Income (before tax) on the contract recognized in 2014 $19,500

Instructions

(a) How much cash was collected in 2014 on this contract?

(b) What was the initial estimated total income before tax on this contract?

During 2014, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2016. The following information is available.

2014 2015 2016

Costs incurred to date $400,000 $825,000 $1,070,000

Estimated costs to complete 600,000 275,000 –0–

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

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 2015.

(c) Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.

On December 31, 2014, Grando Company sells production equipment to Fargo Inc. for $50,000. Grando includes a 1-year warranty service with the sale of all its equipment. The customer receives and pays for the equipment on December 31, 2014. Grando estimates the prices to be $48,800 for the equipment and $1,200 for the warranty.

Instructions

(a) Prepare the journal entry to record this transaction on December 31, 2014.

(b) Indicate how much (if any) revenue should be recognized on January 31, 2015, and for the year 2015.

Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services together with the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only $ 800

Oven with installation service 850

Oven with maintenance services 975

Oven with installation and maintenance services 1,000

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $800.

Instructions

(a) Assume that a customer purchases an oven with both installation and maintenance services for $1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately. Explain whether the conditions for a multiple-deliverable arrangement exist in this situation.

(b) Indicate the amount of revenues that should be allocated to the oven, the installation, and to the maintenance contract.

On May 3, 2014, Eisler Company consigned 80 freezers, costing $500 each, to Remmers Company. The cost of shipping the freezers amounted to $840 and was paid by Eisler Company. On December 30, 2014, a report was received from the consignee, indicating that 40 freezers had been sold for $750 each. Remittance was made by the consignee for the amount due, after deducting a commission of 6%, advertising of $200, and total installation costs of $320 on the freezers sold.

Instructions

(a) Compute the inventory value of the units unsold in the hands of the consignee.

(b) Compute the profit for the consignor for the units sold.

(c) Compute the amount of cash that will be remitted by the consignee.

Taylor Marina has 300 available slips that rent for $800 per season. Payments must be made in full at the start of the boating season, April 1, 2015. Slips for the next season may be reserved if paid for by December 31, 2014. Under a new policy, if payment is made by December 31, 2014, a 5% discount is allowed. The boating season ends October 31, and the marina has a December 31 year-end. To provide cash flow for major dock repairs, the marina operator is also offering a 20% discount to slip renters who pay for the 2016 season. For the fiscal year ended December 31, 2014, all 300 slips were rented at full price. Two hundred slips were reserved and paid for the 2015 boating season, and 60 slips for the 2016 boating season were reserved and paid for.

Instructions

(a) Prepare the appropriate journal entries for fiscal 2014.

(b) Assume the marina operator is unsophisticated in business. Explain the managerial significance of the accounting above to this person.

On June 3, Hunt Company sold to Ann Mount merchandise having a sales price of $8,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $120, terms n/30, was received by Mount on June 8 from the Olympic Transport Service for the freight cost. Upon receipt of the goods, June 5, Mount notified Hunt Company that merchandise costing $600 contained flaws that rendered it worthless. The same day, Hunt Company issued a credit memo covering the worthless merchandise and asked that it be returned at company expense. The freight on the returned merchandise was $24, paid by Hunt Company on June 7. On June 12, the company received a check for the balance due from Mount.

Instructions

(a) Prepare journal entries for Hunt Company to record all the events noted above under each of the following bases.

(1) Sales and receivables are entered at gross selling price.

(2) Sales and receivables are entered net of cash discounts.

(b) Prepare the journal entry under basis (2), assuming that Ann Mount did not remit payment until August 5.

Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer’s expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%, and the average collection period is 72 days.

Instructions

(a) Identify alternative revenue recognition criteria that Uddin could employ concerning textbook sales.

(b) Briefly discuss the reasoning for your answers in (a) above.

(c) In late July, Uddin shipped books invoiced at $15,000,000. Prepare the journal entry to record this event that best conforms to GAAP and your answer to part (b).

(d) In October, $2 million of the invoiced July sales were returned according to the return policy, and the remaining $13 million was paid. Prepare the entries for the return and payment.

Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth sells these seeds on account for $1,500,000 on January 2, 2014. Companies are required to pay the full amount due by March 15, 2014.

Instructions

(a) Prepare the journal entry for Organic Growth at January 2, 2014, assuming Organic Growth estimates returns of 20% based on prior experience. (Ignore cost of goods sold.)

(b) Assume that one customer returns the seeds on March 1, 2014, due to unsatisfactory performance.

Prepare the journal entry to record this transaction, assuming this customer purchased $100,000 of seeds from Organic Growth.

(c) Briefly describe the accounting for these sales, if Organic Growth is unable to reliably estimate returns.

Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay $2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the arena due to the delay, Stadium has provided a deposit of $300,000.

Instructions

(a) Explain this type of revenue recognition transaction.

(b) What factors should be considered in determining when to recognize revenue in this transaction?

(c) Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time of sale the $300,000 payment.

Presented below are three revenue recognition situations.

(a) Grupo sells goods to MTN for $1,000,000, payment due at delivery.

(b) Grupo sells goods on account to Grifols for $800,000, payment due in 30 days.

(c) Grupo sells goods to Magnus for $500,000, payment due in two installments: the first installment payable in 6 months and the second payment due 3 months later.

Instructions

Indicate how each of these transactions is reported.

Shaw Company sells goods that cost $300,000 to Ricard

Company for $410,000 on January 2, 2014. The sales price includes an installation fee, which is valued at $40,000. The fair value of the goods is $370,000. The installation is expected to take 6 months.

Instructions

(a) Prepare the journal entry (if any) to record the sale on January 2, 2014.

(b) Shaw prepares an income statement for the first quarter of 2014, ending on March 31, 2014. How much revenue should Shaw recognize related to its sale to Ricard?

Jupiter Company sells goods on January 1 that have a cost of $500,000 to Danone Inc. for $700,000, with payment due in 1 year. The cash price for these goods is $610,000, with payment due in 30 days. If Danone paid immediately upon delivery, it would receive a cash discount of $10,000.

Instructions

(a) Prepare the journal entry to record this transaction at the date of sale.

(b) How much revenue should Jupiter report for the entire year?

Frozen Delight, Inc. charges an initial franchise fee of $75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, $25,000 is collected immediately. The remainder is collected in 4 equal annual installments of $12,500 each. These installments have a present value of $41,402. There is reasonable expectation that the down payment may be refunded and substantial future services be performed by Frozen Delight, Inc. Prepare the journal entry required by Frozen Delight to record the franchise fee.

Schuss Corporation sold equipment to Potsdam Company for $20,000. The equipment is on Schuss’s books at a net amount of $13,000. Schuss collected $10,000 in 2014, $5,000 in 2015, and $5,000 in 2016. If Schuss uses the cost-recovery method, what amount of gross profit will be recognized in each year?

At December 31, 2014, Grinkov Corporation had the following account balances.

Installment Accounts Receivable, 2013 $ 65,000

Installment Accounts Receivable, 2014 110,000

Deferred Gross Profi t, 2013 23,400

Deferred Gross Profi t, 2014 41,800

Most of Grinkov’s sales are made on a 2-year installment basis. Indicate how these accounts would be reported in Grinkov’s December 31, 2014, balance sheet. The 2013 accounts are collectible in 2015, and the 2014 accounts are collectible in 2016.

Lazaro Inc. sells goods on the installment basis and uses the installment-sales method. Due to a customer default, Lazaro repossessed merchandise that was originally sold for $800, resulting in a gross profit rate of 40%. At the time of repossession, the uncollected balance is $520, and the fair value of the repossessed merchandise is $275. Prepare Lazaro’s entry to record the repossession.

Gordeeva Corporation began selling goods on the installment basis on January 1, 2014. During 2014, Gordeeva had installment sales of $150,000; cash collections of $54,000; cost of installment sales of $102,000. Prepare the company’s entries to record installment sales, cash collected, cost of installment sales, deferral of gross profit, and gross profit recognized, using the installment-sales method.

Archer Construction Company began work on a $420,000 construction contract in 2014. During

2014, Archer incurred costs of $278,000, billed its customer for $215,000, and collected $175,000. At December 31, 2014, the estimated future costs to complete the project total $162,000. Prepare Archer’s journal entry to record profit or loss using (a) the percentage-of-completion method and (b) the completed-contract method, if any.

Guillen, Inc. began work on a $7,000,000 contract in 2014 to construct an office building. Guillen uses the completed-contract method. At December 31, 2014, the balances in certain accounts were Construction in Process $1,715,000; Accounts Receivable $240,000; and Billings on Construction in Process $1,000,000. Indicate how these accounts would be reported in Guillen’s December 31, 2014, balance sheet.

Use the information from BE18-7, but assume Turner uses the completed-contract method. Prepare the company’s 2014 journal entries.