c18BExercises.qxd 3/14/13 1:43 PM Page B EXERCISES E18-1B (Revenue Recognition—Point of Sale) On January 1, Jenny Company sells goods that have a cost of $400,000 to Denny Inc for $550,000, with payment due in year The cash price for these goods is $450,000, with payment due in 30 days If Denny paid immediately upon delivery, it would receive a cash discount of $5,000 Instructions (a) Prepare the journal entry to record this transaction at the date of sale (b) How much revenue should Jenny report for the entire year? E18-2B (Revenue Recognition—Point of Sale) Sheena Company sells goods that cost $400,000 to Richie Company for $530,000 on January 2, 2014 The sales price includes an installation fee, which is valued at $50,000 The fair value of the goods is $480,000 The installation is expected to take months Instructions (a) Prepare the journal entry (if any) to record the sale on January 2, 2014 (b) Sheena prepares an income statement for the first quarter of 2014, ending on March 31, 2014 How much revenue should Sheena recognize related to its sale to Richie? E18-3B (Revenue Recognition—Point of Sale) Presented below are three revenue recognition situations (a) Gee sells goods to Pluto for $950,000, payment due at delivery (b) Gee sells goods on account to Goofy for $750,000, payment due in 45 days (c) Gee sells goods to Donald for $400,000, payment due in four installments: the first installment payable in months and subsequent payment due every six months thereafter Instructions Indicate how each of these transactions is reported E18-4B (Revenue Recognition—Point of Sale) Wilbur Company is involved in the design, manufacture, and installation of various types of products for large equestrain projects Wilbur recently completed a large contract for Mr Ed Inc., which consisted of building 78 different types of jumping fences for a new equestrain arena under construction The terms of the contract are that upon completion and installation of the fences, Mr Ed would pay $3,000,000 Unfortunately, due to the depressed economy, the completion of the new equestrain arena is now delayed Mr Ed has therefore asked Wilbur to hold the fences at its manufacturing plant until the arena is completed Mr Ed acknowledges in writing that it ordered the fences and that they now have ownership The time that Wilbur Company must hold the fences is totally dependent on when the arena is completed Because Wilbur has not received additional progress payments for the arena due to the delay, Mr Ed has provided a deposit of $400,000 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 Wilbur should make, assuming it signed a valid sales contract to sell the fences and received at the time of sale the $400,000 payment E18-5B (Right of Return) Gyro Company is presently testing a number of new weed control products that it recently developed 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 months Gyro sells these products on account for $2,000,000 on January 2, 2014 Companies are required to pay the full amount due by March 15, 2014 Instructions (a) Prepare the journal entry for Gyro at January 2, 2014, assuming Gyro estimates returns of 20% based on prior experience (Ignore cost of goods sold.) (b) Assume that one customer returns the product on March 1, 2014, due to unsatisfactory performance Prepare the journal entry to record this transaction, assuming this customer purchased $200,000 of product from Gyro (c) Briefly describe the accounting for these sales, if Gyro is unable to reliably estimate returns E18-6B (Revenue Recognition on Book Sales with High Returns) Chester Books Co publishes romance novels that are sold to bookstores on the following terms Each title has a fixed wholesale price, terms c18BExercises.qxd • 3/14/13 1:43 PM Page Chapter 18 Revenue Recognition f.o.b shipping point, and payment is due 90 days after shipment The retailer may return a maximum 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 textbook 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 E18-7B (Sales Recorded Both Gross and Net) On October 5, Veri-Wyn Company sold to Dunn & 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 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 from Sugarland Express for the freight cost The freight on the returned merchandise was $36, paid by Veri-Wyn Company on October 25 Finally, Veri-Wyn received a check for the balance due from Dunn & Brooks on November 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 E18-8B (Revenue Recognition on Annual Country Club Dues with Discounts) KimoCo Country Club 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 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, 2014, 900 memberships for 2015 were sold Members reserved and paid for 400 single-season memberships and for 150 2-year memberships The balance of the memberships was paid for on April 1, 2015 Instructions Prepare the appropriate journal entries for fiscal 2014 in connection with the advance payments for the 2015 season E18-9B (Consignment Computations) On August 15, 2014, 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, 2014, 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, 2014: (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 E18-10B (Multiple-Deliverable Arrangement) Apple Core is an experienced technology retailer Apple Core also offers a number of services together with the electronic items that it sells Assume that Apple Core sells home entertainment systems on a standalone basis Apple Core also sells installation services and maintenance services for the entertainment systems However, Apple Core does not offer installation or maintenance services to customers who buy entertainment systems from other vendors Pricing for one entertainment systems is as follows c18BExercises.qxd 3/14/13 1:43 PM Page B Exercises Entertainment Entertainment Entertainment Entertainment system system system system only with installation service with maintenance services with installation and maintenance services $ 2,000 2,150 2,225 2,300 In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $225 Additionally, the incremental amount charged by Apple Core for installation approximates the amount charged by independent third parties Entertainment systems are sold subject to a general right of return If a customer purchases an entertainment system with installation and/or maintenance services, in the event Apple Core does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $2,000 Instructions (a) Assume that a customer purchases an entertainment system with both installation and maintenance services for $2,300 Based on its experience, Apple Core 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 entertainment system, the installation, and to the maintenance contract E18-11B (Multiple-Deliverable Arrangement) On December 31, 2014, Gard Company sells production equipment to Wells Inc for $75,000 Gard 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 Gard estimates the prices to be $74,000 for the equipment and $1,000 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 E18-12B (Recognition of Profit on Long-Term Contracts) During 2014 AFCO started a construction job with a contract price of $2,500,000 The job was completed in 2016 The following information is available Costs incurred to date Estimated costs to complete Billings to date Collections to date 2014 2015 2016 $ 600,000 1,400,000 100,000 100,000 $1,435,000 615,000 500,000 300,000 $2,100,000 –0– 2,500,000 2,000,000 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 E18-13B (Analysis of Percentage-of-Completion Financial Statements) In 2014, 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, 2014, follow Balance Sheet Accounts receivable—construction contract billings Construction in progress Less: Contract billings $150,500 $650,000 260,000 Cost of uncompleted contract in excess of billings 390,000 Income Statement Income (before tax) on the contract recognized in 2014 $130,000 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? (AICPA adapted) • c18BExercises.qxd • 3/14/13 1:43 PM Page Chapter 18 Revenue Recognition E18-14B (Gross Profit on Uncompleted Contract) On July 1, 2014, Welton Inc entered into a costplus-fixed-fee contract to construct a prototype robotic assembly line for New Car Corporation At the contract date, Welton estimated that it would take 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 2014 Welton incurred costs of $1,600,000 related to the project The estimated cost at December 31, 2014, 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, 2014 Show supporting computations in good form (AICPA adapted) E18-15B (Recognition of Loss, Percentage-of-Completion) In 2014 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 Costs incurred to date Estimated costs yet to be incurred Customer billings to date Collection of billings to date 2014 2015 2016 $ 800,000 7,200,000 500,000 200,000 $4,050,000 4,950,000 4,000,000 3,200,000 $8,950,000 –0– 8,500,000 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 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 E18-16B (Recognition of Revenue on Long-Term Contract and Entries) Young Tree Construction Company uses the percentage-of-completion method of accounting In 2014, Young Tree began work under a contract with a contract price of $1,500,000 Other details follow: Costs incurred during the year Estimated costs to complete, as of December 31 Billings to date Collections to date 2014 2015 $980,000 420,000 800,000 250,000 $1,375,000 –0– 1,500,000 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 Young Tree 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 percentage-of-completion) E18-17B (Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts) Harman Construction Company began operations January 1, 2014 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 years to complete the facility, at a total cost of $7,500,000 The total contract price for construction 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, 2014, and the amount to be shown as “costs and unrecognized 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, 2014, under each of the following methods (a) Completed-contract method (b) Percentage-of-completion method Show supporting computations in good form (AICPA adapted) c18BExercises.qxd 3/14/13 1:43 PM Page B Exercises E18-18B (Long-Term Contract Reporting) Bearing 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 by the end of 2015 Billings through 12/31/14 Cash Collections through 12/31/14 Contract Costs Incurred through 12/31/14 Estimated Additional Costs to Complete Project Total Contract Price X Y Z $ 450,000 200,000 360,000 $ 80,000 200,000 210,000 $ 70,000 180,000 210,000 $115,000 191,000 79,000 $276,500 –0– 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 E18-19B (Installment-Sales Method Calculations, Entries) Mandarin Partners 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 Installment sales Cost of installment sales Cash collections on 2014 sales Cash collections on 2015 sales $300,000 255,000 70,000 –0– 2015 $750,000 660,000 201,000 216,000 Instructions (a) Compute the amount of realized gross profit recognized in each year (b) Prepare all journal entries required in 2015 E18-20B (Analysis of Installment-Sales Accounts) Republic Distributors appropriately uses the installment-sales method of accounting On December 31, 2014, the books show balances as follows Installment Receivables 2012 2013 2014 $ 85,000 140,000 60,000 Deferred Gross Profit Gross Profit on Sales $56,800 80,200 45,000 26% 22% 25% Instructions (a) Prepare the adjusting entry or entries required on December 31, 2014, to recognize 2014 realized gross profit (Installment receivables have already been credited for cash receipts during 2014.) (b) Compute the amount of cash collected in 2014 on accounts receivable each year E18-21B (Gross Profit Calculations and Repossessed Merchandise) Duke Corporation appropriately uses the installment-sales method of accounting The following data were obtained for the years 2014 and 2015 Duke did not make any installment sales prior to 2014 Installment sales Cost of installment sales General & administrative expenses Cash collections on sales of 2014 Cash collections on sales of 2015 2014 2015 $600,000 480,000 25,000 250,000 –0– $530,000 434,600 30,000 285,000 168,000 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 (AICPA adapted) • c18BExercises.qxd • 3/14/13 1:43 PM Page Chapter 18 Revenue Recognition E18-22B (Interest Revenue from Installment Sale) Upper World Corporation sells tractor trailers on the installment plan On October 1, 2014, 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, 2014 Additional information The amount that would be realized on an outright sale of similar trailer is $965,000 The cost of the trailer sold to Lower Sky Inc is $786,000 The finance charges relating to the installment period are $285,000 based on an effective interest rate of 14.9%, which is appropriate 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, 2014, as a result of the transaction above? (AICPA adapted) E18-23B (Installment-Sales Method and Cost Recovery Method) Eagle Flyer Corp operates on a calendar-year basis, and began making installment sales in 2014; the company usese the installment-sales method of profit recognition in accounting The following data were taken from the 2014 and 2015 records 2014 Installment sales Gross profit as a percent of costs Cash collections on sales of 2014 Cash collections on sales of 2015 $750,000 18% $340,000 –0– 2015 $1,350,000 20% $340,000 $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 2014 income statement, prepared using the installment-sales method (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 2015 income statement, prepared using the cost-recovery method (CIA adapted) E18-24B (Installment-Sales Method and Cost-Recovery Method) On April 1, 2014, Joy Ltd sold land for $600,000 The note will be collected as follows: $100,000 in 2014, $200,000 in 2015, and $300,000 in 2016 The property had cost Joy $122,000 when it was purchased in 2001 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 E18-25B (Installment Sales—Default and Repossession) Green Acres Ltd was involved in two default and repossession cases during the year: 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 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 repossessed, 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.) E18-26B (Installment Sales—Default and Repossession) X-Run Inc uses the installment-sales method in accounting for its installment sales On January 1, 2014, X-Run had an installment account receivable from Herman Pringle with a balance of $3,900 During 2014, $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% c18BExercises.qxd 3/14/13 1:43 PM Page B Exercises Instructions Prepare the entries on the books of X-Run, Inc to record all transactions related to Pringle during 2014 (Ignore interest charges.) *E18-27B (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 not refundable, and the collection 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 *E18-28B (Franchise Fee, Initial Down Payment) On January 1, 2014, Shaw & Shaw signed an agreement 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, 2015 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 indicates 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, 2014? At what amount should Shaw & Shaw record the acquisition cost of the franchise on January 1, 2014? (b) What entry would be made by World Premiere Salons on January 1, 2014, 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 January 1, 2014, under the following conditions? (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 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 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 • c18BExercises.qxd 3/14/13 1:43 PM Page ... systems from other vendors Pricing for one entertainment systems is as follows c18BExercises.qxd 3/14/13 1:43 PM Page B Exercises Entertainment Entertainment Entertainment Entertainment system system... Percentage-of-completion method Show supporting computations in good form (AICPA adapted) c18BExercises.qxd 3/14/13 1:43 PM Page B Exercises E18-18B (Long-Term Contract Reporting) Bearing Construction Company... merchandise The merchandise was originally sold with a gross profit rate of 20% c18BExercises.qxd 3/14/13 1:43 PM Page B Exercises Instructions Prepare the entries on the books of X-Run, Inc to record