JWCL163 ch18 01 06 qxd 8 3 09 8 10 PM Page 1 B EXERCISES L0 1 E18 1B Revenue Recognition on Book Sa

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JWCL163 ch18 01 06 qxd 8 3 09 8 10 PM Page 1 B EXERCISES L0 1 E18 1B Revenue Recognition on Book Sa Powered By Docstoc
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                                                                 B EXERCISES
             (L0 1,   E18-1B (Revenue Recognition on Book Sales with High Returns) Chester Books Co. publishes ro-
              2)      mance novels 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 90 days after shipment. The retailer may return a maxi-
                      mum of 20% 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 16%, and the average collection period is
                      97 days.

                      Instructions
                         (a) Identify alternative revenue recognition tests that Chester Books could employ concerning text-
                             book sales.
                         (b) Briefly discuss the reasoning for your answers in (a) above.
                         (c) In late October, Chester shipped books invoiced at $6,500,000. Prepare the journal entry to record
                             this event that best conforms to generally accepted accounting principles and your answer to
                             part (b).
                         (d) In January, $725,000 of the invoiced October sales were returned according to the return policy,
                             and the remaining amounts were paid. Prepare the entry recording the return and payment.

             (L0 1,   E18-2B (Sales Recorded Both Gross and Net) On October 5, Veri-Wyn Company sold to Dunn &
              2)      Brooks merchandise having a sale price of $23,000 with terms of 1/10, n/30, f.o.b. shipping point. Dunn
                      & Brooks received the goods on October 9 and promptly notified Veri-Wyn Company that merchandise
                      costing $2,400 contained flaws that rendered it worthless. The same day Veri-Wyn Company issued a
                      credit memo covering the worthless merchandise and asked that it be returned at company expense.
                      An invoice totaling $230, terms n/30, was received by Dunn & Brooks on October 8 from Sugarland
                      Express for the freight cost. The freight on the returned merchandise was $36, paid by Veri-Wyn Com-
                      pany on October 25. Finally, Veri-Wyn received a check for the balance due from Dunn & Brooks on
                      November 2.

                      Instructions
                         (a) Prepare journal entries on Veri-Wyn Company books 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 Dunn & Brooks remitted the payment on
                             October 14.

             (L0 1,   E18-3B (Revenue Recognition on Annual Country Club Dues with Discounts) KimoCo Country Club
              2)      is an exclusive country club located in North Dakota that offers a maximum of 1,000 annual memberships
                      that it sells for $16,000 per year. Payments must be made in full at the start of the golfing season, April
                      1. Memberships for the next season may be reserved if paid for by December 31. Under a new policy, if
                      payment is made by December 31, a 10% discount is allowed. The golfing season ends September 30, and
                      the country club has a December 31 year-end. To provide cash flow for construction of an indoor pool
                      and fitness center, the Board of Directors is also offering a 20% discount to members who pay for a 2-year
                      membership before December 31.
                          For the fiscal year ended December 31, 2010, 900 memberships for 2011 were sold. Members reserved
                      and paid for 400 single-season memberships and for 150 2-year memberships. The balance of the mem-
                      berships was paid for on April 1, 2011.

                      Instructions
                      Prepare the appropriate journal entries for fiscal 2010 in connection with the advance payments for the
                      2011 season.

             (L0 3,   E18-4B (Recognition of Profit on Long-Term Contracts) During 2010 AFCO started a construction
              4)      job with a contract price of $2,500,000. The job was completed in 2012. The following information is
                      available.

                                                                         2010          2011            2012
                                       Costs incurred to date        $ 600,000      $1,435,000       $2,100,000
                                       Estimated costs to complete    1,400,000        615,000          –0–
                                       Billings to date                 100,000        500,000        2,500,000
                                       Collections to date              100,000        300,000        2,000,000


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        2    •   Chapter 18 Revenue Recognition

                     Instructions
                        (a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-
                            completion method is used.
                        (b) Prepare all necessary journal entries for 2011.
                        (c) Compute the amount of gross profit to be recognized each year assuming the completed-contract
                            method is used.

            (L0 3)   E18-5B (Analysis of Percentage-of-Completion Financial Statements) In 2010, Landers Construction
                     Corp. began construction work under a 5-year contract. The contract price was $25,000,000. Landers 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, 2010, follow.

                                                                         Balance Sheet
                                   Accounts receivable—construction contract billings                       $150,500
                                   Construction in progress                                     $650,000
                                   Less: Contract billings                                       260,000
                                   Cost of uncompleted contract in excess of billings                         390,000
                                                                    Income Statement
                                   Income (before tax) on the contract recognized in 2010                   $130,000

                     Instructions
                        (a) How much cash was collected in 2010 on this contract?
                        (b) What was the initial estimated total income before tax on this contract?
                                                                                                                     (AICPA adapted)

            (L0 3)   E18-6B (Gross Profit on Uncompleted Contract) On July 1, 2010, Welton Inc. entered into a cost-
                     plus-fixed-fee contract to construct a prototype robotic assembly line for New Car Corporation. At the
                     contract date, Welton estimated that it would take 2 years to complete the project at a cost of $4,200,000.
                     The fixed fee stipulated in the contract is $750,000. Welton appropriately accounts for this contract under
                     the percentage-of-completion method.
                        During 2010 Welton incurred costs of $1,600,000 related to the project. The estimated cost at Decem-
                     ber 31, 2010, to complete the contract is $2,400,000. New Car was billed $1,200,000 under the contract.

                     Instructions
                     Prepare a schedule to compute the amount of gross profit to be recognized by Welton under the contract
                     for the year ended December 31, 2010. Show supporting computations in good form.
                                                                                                                     (AICPA adapted)
            (L0 3)   E18-7B (Recognition of Loss, Percentage-of-Completion) In 2010 Norcraft Sisters Construction agreed
                     to construct a residence hall at University of the North at a price of $8,500,000. The information relating
                     to the costs and billings for this contract is shown below.

                                                                               2009           2010           2011
                                    Costs incurred to date                   $ 800,000      $4,050,000     $8,950,000
                                    Estimated costs yet to be incurred        7,200,000      4,950,000        –0–
                                    Customer billings to date                   500,000      4,000,000      8,500,000
                                    Collection of billings to date              200,000      3,200,000      8,000,000

                     Instructions
                        (a) Assuming that the percentage-of-completion method is used, (1) compute the amount of gross
                            profit to be recognized in 2010 and 2011, and (2) prepare journal entries for 2011.
                        (b) For 2011, show how the details related to this construction contract would be disclosed on the
                            balance sheet and on the income statement.

            (L0 3,   E18-8B (Recognition of Revenue on Long-Term Contract and Entries) Young Tree Construction Com-
             4)      pany uses the percentage-of-completion method of accounting. In 2010, Young Tree began work under a
                     contract with a contract price of $1,500,000. Other details follow:

                                                                                               2010           2011
                                   Costs incurred during the year                            $980,000      $1,375,000
                                   Estimated costs to complete, as of December 31             420,000          –0–
                                   Billings to date                                           800,000       1,500,000
                                   Collections to date                                        250,000       1,500,000
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                                                                                                                                    B Exercises   •   3

                      Instructions
                         (a) What portion of the total contract price would be recognized as revenue in 2010? In 2011?
                         (b) Assuming the same facts as those above except that Young Tree uses the completed-contract
                             method of accounting, what portion of the total contract price would be recognized as revenue
                             in 2011?
                         (c) Prepare a complete set of journal entries for 2010 (using percentage-of-completion).

             (L0 3,   E18-9B (Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts) Harman Con-
              4)      struction Company began operations January 1, 2010. During the year, Harman Construction entered into
                      a contract with Kardon Corp. to construct a retail showcase facility. At that time, Harman estimated that
                      it would take 2 years to complete the facility, at a total cost of $7,500,000. The total contract price for con-
                      struction of the facility is $9,000,000. During the year, Harman incurred $3,040,000 in construction costs
                      related to the construction project. The estimated cost to complete the contract is $4,560,000. Kardon Corp.
                      was billed and paid 20% of the contract price.

                      Instructions
                      Prepare schedules to compute the amount of gross profit to be recognized for the year ended December
                      31, 2010, and the amount to be shown as “costs and unrecognized profit on uncompleted contract in ex-
                      cess of related billings” or “billings on uncompleted contract in excess of related costs and recognized
                      profit” at December 31, 2010, under each of the following methods.
                         (a) Completed-contract method.
                         (b) Percentage-of-completion method.
                      Show supporting computations in good form.
                                                                                                              (AICPA adapted)

             (L0 4,   E18-10B (Long-Term Contract Reporting) Bearing Construction Company began operations in 2010.
              5)      Construction activity for the first year is shown below. All contracts are with different customers, and any
                      work remaining at December 31, 2010, is expected to be completed by the end of 2011.

                                                                                    Cash               Contract          Estimated
                                                 Total            Billings        Collections        Costs Incurred      Additional
                                                Contract         through           through              through           Costs to
                               Project           Price           12/31/10          12/31/10            12/31/10          Complete
                                  X         $ 450,000             $ 80,000         $ 70,000            $115,000          $276,500
                                  Y           200,000              200,000          180,000             191,000            –0–
                                  Z           360,000              210,000          210,000              79,000           310,000
                                            $1,010,000            $490,000         $460,000            $385,000          $586,500


                      Instructions
                      Prepare a partial income statement and balance sheet to indicate how the above information would be
                      reported for financial statement purposes. Bearing Construction Company uses the completed-contract
                      method.
             (L0 6)   E18-11B (Installment-Sales Method Calculations, Entries) Mandarin Partners appropriately uses the
                      installment-sales method of accounting to recognize income in its financial statements. The following in-
                      formation is available for 2010 and 2011.

                                                                                          2010             2011
                                                 Installment sales                      $300,000          $750,000
                                                 Cost of installment sales               255,000           660,000
                                                 Cash collections on 2010 sales           70,000           201,000
                                                 Cash collections on 2011 sales           –0–              216,000

                      Instructions
                         (a) Compute the amount of realized gross profit recognized in each year.
                         (b) Prepare all journal entries required in 2011.
             (L0 6)   E18-12B (Analysis of Installment-Sales Accounts) Republic Distributors. appropriately uses the
                      installment-sales method of accounting. On December 31, 2010, the books show balances as follows.

                                                 Installment Receivables     Deferred Gross Profit   Gross Profit on Sales
                                         2008              $ 85,000                $56,800                   26%
                                         2009               140,000                 80,200                   22%
                                         2010                60,000                 45,000                   25%
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        4    •   Chapter 18 Revenue Recognition

                     Instructions
                        (a) Prepare the adjusting entry or entries required on December 31, 2010, to recognize 2010 realized
                            gross profit. (Installment receivables have already been credited for cash receipts during 2010.)
                        (b) Compute the amount of cash collected in 2010 on accounts receivable each year.
            (L0 6)   E18-13B (Gross Profit Calculations and Repossessed Merchandise) Duke Corporation appropriately
                     uses the installment-sales method of accounting. The following data were obtained for the years 2010 and
                     2011. Duke did not make any installment sales prior to 2010.
                                                                                     2010           2011
                                            Installment sales                      $600,000       $530,000
                                            Cost of installment sales               480,000        434,600
                                            General & administrative expenses        25,000         30,000
                                            Cash collections on sales of 2010       250,000        285,000
                                            Cash collections on sales of 2011        –0–           168,000

                     Instructions
                        (a) Compute the balance in the deferred gross profit accounts on December 31, 2010, and on
                            December 31, 2011.
                        (b) A 2010 sale resulted in default in 2012. At the date of default, the balance on the installment re-
                            ceivable was $12,000, and the repossessed merchandise had a fair value of $8,000. Prepare the en-
                            try to record the repossession.
                                                                                                             (AICPA adapted)
            (L0 6)   E18-14B (Interest Revenue from Installment Sale) Upper World Corporation sells tractor trailers on
                     the installment plan. On October 1, 2010, Upper World entered into an installment-sale contract with
                     Lower Sky Inc. for a 5-year period. Equal annual payments under the installment sale are $250,000 and
                     are due beginning October 1, 2010.
                     Additional information
                        1. The amount that would be realized on an outright sale of similar trailer is $965,000.
                        2. The cost of the trailer sold to Lower Sky Inc. is $786,000.
                        3. The finance charges relating to the installment period are $285,000 based on an effective interest
                           rate of 14.9%, 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 Upper World record for the year ended December 31,
                     2010, as a result of the transaction above?
                                                                                                       (AICPA adapted)
            (L0 6,   E18-15B (Installment-Sales Method and Cost Recovery Method) Eagle Flyer Corp. operates on a
             7)      calendar-year basis, and began making installment sales in 2009; the company usese the installment-sales
                     method of profit recognition in accounting. The following data were taken from the 2009 and 2010 records.
                                                                                     2009           2010
                                             Installment sales                     $750,000     $1,350,000
                                             Gross profit as a percent of costs      18%            20%
                                             Cash collections on sales of 2006     $340,000       $340,000
                                             Cash collections on sales of 2009       –0–          $580,000

                     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 2010 income statement, pre-
                            pared using the installment-sales method.
                        (b) State where the balance of Deferred Gross Profit would be reported on the financial statements
                            for 2010.
                        (c) Compute the amount of realized gross profit to be recognized on the 2010 income statement, pre-
                            pared using the cost-recovery method.
                                                                                                             (CIA adapted)
            (L0 6,   E18-16B (Installment-Sales Method and Cost-Recovery Method) On April 1, 2009, Joy Ltd. sold land
             7)      for $600,000. The note will be collected as follows: $100,000 in 2009, $200,000 in 2010, and $300,000 in 2011.
                     The property had cost Joy $122,000 when it was purchased in 1998.
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                                                                                                                            B Exercises   •   5

                       Instructions
                          (a) Compute the amount of gross profit realized each year, assuming Joy uses the cost-recovery method.
                          (b) Compute the amount of gross profit realized each year, assuming Joy uses the installment-sales
                              method.
             (L0 6)    E18-17B (Installment Sales—Default and Repossession) Green Acres Ltd. was involved in two de-
                       fault and repossession cases during the year:
                          1. A home theatre system was sold to Jonathan Quick for $2,400, including a 40% markup on selling
                             price. Quick made a down payment of 10% plus four of the remaining 24 equal payments of $90,
                             and then defaulted on further payments. The home theatre system was repossessed, at which time
                             the fair value was determined to be $475.
                          2. A TV that cost $1,500 was sold to Haji Jari for $3,180 on the installment basis. Jari made a down
                             payment of $300 and paid $160 a month for 10 months, after which he defaulted. The TV was re-
                             possessed, and the estimated value at time of repossession was determined to be $850.
                       Instructions
                       Prepare journal entries to record each of these repossessions. (Ignore interest charges.)
             (L0 6)    E18-18B (Installment Sales—Default and Repossession) X-Run Inc. uses the installment-sales method
                       in accounting for its installment sales. On January 1, 2010, X-Run had an installment account receivable
                       from Herman Pringle with a balance of $3,900. During 2010, $700 was collected from Pringle. When no
                       further collection could be made, the merchandise sold to Pringle was repossessed. The merchandise had
                       a fair market value of $2,150 after the company spent $110 for reconditioning of the merchandise. The
                       merchandise was originally sold with a gross profit rate of 20%.
                       Instructions
                       Prepare the entries on the books of X-Run, Inc. to record all transactions related to Pringle during 2010.
                       (Ignore interest charges.)
             (L0 8)   *E18-19B (Franchise Entries) Burger Universe charges an initial franchise fee of $225,000. Upon the sign-
                       ing of the agreement, a payment of $25,000 is due. Thereafter, five annual payments of $40,000 are required.
                       The credit rating of the franchisee is such that it would have to pay interest at 12% to borrow money.
                       Instructions
                       Prepare the entries to record the initial franchise fee on the books of the franchisor under the following
                       assumptions.
                          (a) The franchisor has minimal services to perform, the down payment is refundable, and the collec-
                              tion of the note is certain.
                          (b) The down payment is not refundable, substantial future services are required by the franchisor,
                              and collection of the note is reasonably certain.
                          (c) The down payment is not refundable, collection of the note is reasonably certain; the franchisor
                              has performed approximately one-half of the required services.
             (L0 8)   *E18-20B (Franchise Fee, Initial Down Payment) On January 1, 2010, Shaw & Shaw signed an agree-
                       ment to operate as a franchisee of World Premiere Salons for an initial franchise fee of $130,000. The
                       amount of $20,000 was paid when the agreement was signed, and the balance is payable in four annual
                       payments of $27,500 each, beginning January 1, 2011. The agreement provides that the down payment is
                       not refundable and that no future services are required of the franchisor. Shaw & Shaw’s credit rating in-
                       dicates that the company can borrow money at 10% for a loan of this type.
                       Instructions
                          (a) How much should World Premiere Salons record as revenue from franchise fees on January 1,
                              2010? At what amount should Shaw & Shaw record the acquisition cost of the franchise on Jan-
                              uary 1, 2010?
                          (b) What entry would be made by World Premiere Salons on January 1, 2010, if the down payment
                              is refundable and substantial future services remain to be performed by World Premiere Salons?
                          (c) How much revenue from franchise fees would be recorded by World Premiere Salons on Janu-
                              ary 1, 2010, under the following conditions?
                              (1) The initial down payment is not refundable, it represents a fair measure of the services al-
                                    ready provided, a significant amount of services is still to be performed by World Premiere
                                    Salons 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 fran-
                                    chisor, but collection of the note is so uncertain that recognition of the note as an asset is un-
                                    warranted.
                              (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.
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        6    •   Chapter 18 Revenue Recognition

            (L0 8)   *E18-21B (Consignment Computations) On August 15, 2010, Japan Ideas consigned 500 electronic play
                     systems, costing $100 each, to YoYo Toys Company. The cost of shipping the play systems amounted to
                     $1,250 and was paid by Japan Ideas. On December 31, 2010, an account sales summary was received from
                     the consignee, reporting that 420 play systems had been sold for $160 each. Remittance was made by the
                     consignee for the amount due, after deducting a commission of 20% commission.

                     Instructions
                     Compute the following at December 31, 2010:
                        (a) The inventory value of the units unsold in the hands of the consignee.
                        (b) The profit for the consignor for the units sold.
                        (c) The amount of cash that will be remitted by the consignee.

				
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