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18.15. EXERCISES

E18-1 (Revenue Recognition on Book Sales with High Returns) 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

  1. Identify alternative revenue recognition criteria that Uddin could employ concerning textbook sales.

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

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

  4. 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 recording the return and payment.

E18-2 (Sales Recorded Both Gross and Net) On June 3, Hunt Company sold to Ann Mount merchandise having a sale 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

  1. Prepare journal entries on Hunt 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.

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

E18-3 (Revenue Recognition on Marina Sales with Discounts) 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, 2011. Slips for the next season may be reserved if paid for by December 31, 2010. Under a new policy, if payment is made by December 31, 2010 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 2012 season.

For the fiscal year ended December 31, 2010, all 300 slips were rented at full price. Two hundred slips were reserved and paid for for the 2011 boating season, and 60 slips were reserved and paid for for the 2012 boating season.

Instructions

  1. Prepare the appropriate journal entries for fiscal 2010.

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

E18-4 (Recognition of Profit on Long-Term Contracts) During 2010 Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2012. The following information is available.



Instructions

  1. Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.

  2. Prepare all necessary journal entries for 2011.

  3. Compute the amount of gross profit to be recognized each year assuming the completed-contract method is used.

E18-5 (Analysis of Percentage-of-Completion Financial Statements) In 2010, 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, 2010, follow.



Instructions

  1. How much cash was collected in 2010 on this contract?

  2. What was the initial estimated total income before tax on this contract?

    (AICPA adapted)

E18-6 (Gross Profit on Uncompleted Contract) On April 1, 2010, Dougherty Inc. entered into a cost-plus-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 2010 Dougherty incurred costs of $800,000 related to the project. The estimated cost at December 31, 2010, 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, 2010. Show supporting computations in good form.

(AICPA adapted)

E18-7 (Recognition of Profit, Percentage-of-Completion) In 2010 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.



Instructions

  1. 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.

  2. For 2011, show how the details related to this construction contract would be disclosed on the balance sheet and on the income statement.

E18-8 (Recognition of Revenue on Long-Term Contract and Entries) Hamilton Construction Company uses the percentage-of-completion method of accounting. In 2010, Hamilton began work under contract #E2-D2, which provided for a contract price of $2,200,000. Other details follow:



Instructions

  1. What portion of the total contract price would be recognized as revenue in 2010? In 2011?

  2. 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 2011?

  3. Prepare a complete set of journal entries for 2010 (using the percentage-of-completion method).

E18-9 (Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts) Yanmei Construction Company began operations January 1, 2010. 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, 2010, and the amount to be shown as "costs and recognized profit on uncompleted contract in excess 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.

  1. Completed-contract method.

  2. Percentage-of-completion method.

Show supporting computations in good form.

(AICPA adapted)

E18-10 (Long-Term Contract Reporting) Berstler Construction Company began operations in 2010. 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 in 2011.



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.

E18-11 (Installment-Sales Method Calculations, Entries) Coffin Corporation appropriately uses the installment-sales method of accounting to recognize income in its financial statements. The following information is available for 2010 and 2011.



Instructions

  1. Compute the amount of realized gross profit recognized in each year.

  2. Prepare all journal entries required in 2011.

E18-12 (Analysis of Installment-Sales Accounts) Samuels Co. appropriately uses the installment-sales method of accounting. On December 31, 2012, the books show balances as follows.



Instructions

  1. Prepare the adjusting entry or entries required on December 31, 2012 to recognize 2012 realized gross profit. (Installment receivables have already been credited for cash receipts during 2012.)

  2. Compute the amount of cash collected in 2012 on accounts receivable each year.

E18-13 (Gross Profit Calculations and Repossessed Merchandise) Basler Corporation, which began business on January 1, 2010, appropriately uses the installment-sales method of accounting. The following data were obtained for the years 2010 and 2011.



Instructions

  1. Compute the balance in the deferred gross profit accounts on December 31, 2010, and on December 31, 2011.

  2. A 2010 sale resulted in default in 2012. 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.

(AICPA adapted)

E18-14 (Interest Revenue from Installment Sale) Becker Corporation sells farm machinery on the installment plan. On July 1, 2010, Becker entered into an installment-sale contract with Valente Inc. for a 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, 2010.

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, 2010, as a result of the transaction above?

(AICPA adapted)

E18-15 (Installment-Sales Method and Cost-Recovery Method) Swift Corp., a capital goods manufacturing business that started on January 4, 2010, and operates on a calendar-year basis, uses the installment-sales method of profit recognition in accounting for all its sales. The following data were taken from the 2010 and 2011 records.



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

Instructions

  1. Compute the amount of realized gross profit to be recognized on the 2011 income statement, prepared using the installment-sales method.

  2. State where the balance of Deferred Gross Profit would be reported on the financial statements for 2011.

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

(CIA adapted)

E18-16 (Installment-Sales Method and Cost-Recovery Method) On January 1, 2010, Wetzel Company sold property for $250,000. The note will be collected as follows: $120,000 in 2010, $90,000 in 2011, and $40,000 in 2012. The property had cost Wetzel $150,000 when it was purchased in 2008.

Instructions

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

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

E18-17 (Installment Sales—Default and Repossession) 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.)

E18-18 (Installment Sales—Default and Repossession) Seaver Company uses the installment-sales method in accounting for its installment sales. On January 1, 2010, Seaver Company had an installment account receivable from Jan Noble with a balance of $1,800. During 2010, $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 2010. (Ignore interest charges.)

*E18-19 (Franchise Entries) 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.

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

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

  3. 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.

*E18-20 (Franchise Fee, Initial Down Payment) On January 1, 2010, 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, 2011. 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

  1. How much should Campbell record as revenue from franchise fees on January 1, 2010? At what amount should Benjamin record the acquisition cost of the franchise on January 1, 2010?

  2. What entry would be made by Campbell on January 1, 2010, if the down payment is refundable and substantial future services remain to be performed by Campbell?

  3. How much revenue from franchise fees would be recorded by Campbell on January 1, 2010, 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 fran-chisor, 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?

*E18-21 (Consignment Computations) On May 3, 2010, 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, 2010, 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

  1. Compute the inventory value of the units unsold in the hands of the consignee.

  2. Compute the profit for the consignor for the units sold.

  3. Compute the amount of cash that will be remitted by the consignee.

See the book's companion website, www.wiley.com/college/kieso, for a set of B Exercises.


  

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