Accounting Chapter 18 HW

Cooper Construction Company had a contract starting April 2018, to construct a $24,000,000 building that is expected to be completed in September 2020, at an estimated cost of $22,000,000. At the end of 2018, the costs to date were $10,120,000 and the estimated total costs to complete had not changed. The progress billings during 2018 were $4,800,000 and the cash collected during 2018 was 3,200,000. Cooper uses the percentage-of-completion method. For the year ended December 31, 2018, Cooper would recognize gross profit on the building of:

$10,120,000/22,000,000=0.46 ($24,000,000x46%)-10,120,000=$920,000

The following data pertain to Pell's Co.'s construction job, which commenced during Year 2. Project 1 Project 2 Contract Price $420,000 $300,000 Costs incurred during Year 2 240,000 280,000 Estimated costs to complete 120,000 40,000 Billed to customers during Year 2 150,000 270,000 Received from customers during Year 2 90,000 250,000 If Pell used the percentage-of-completion method, what amount of gross profit (loss) would Pell report in its Year 2 income statement?

$240,000/(240,000+120,000)=66.67% ($420,000x66.67%)-240,000=$40,000 $40,000-20,000=$20,000 gross

The following data pertain to Pell's Co.'s construction job, which commenced during Year 2. Project 1 Project 2 Contract Price $420,000 $300,000 Costs incurred during Year 2 240,000 280,000 Estimated costs to complete 120,000 40,000 Billed to customers during Year 2 150,000 270,000 Received from customers during Year 2 90,000 250,000 If Pell used the completed contract method, what amount of gross profit (loss) would Pell report in its Year 2 income statement?

$420,000-240,000-120,000=$60,000 profit $300,000-280,000-40,000=-$20,000 loss

Bruner Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2018, Bruner started work on a $49,000,000 construction contract that was completed in 2019. The following information was taken from Bruner's 2018 accounting records: Progress billings: $15,400,000 Costs incurred: 14,700,000 Collections: 9,600,000 Estimated costs to complete: 29,400,000 What amount of gross profit should Bruner have recognized in 2018 on this contract?

$49,000,000x(14,700,000/(14,700,000+29,400,000))=$16,333,333.33 $16,333,333.33-14,700,000=$1,633,333.33

P & G Auto Parts sells parts to AAA Car Repair during 2018. P&G offers rebates of 2% on purchases up to $60,000 and 3% on purchases above $60,000 if the customer's purchases for the year exceed $200,000. In the past, AAA normally purchases $300,000 in parts during a calendar year. On March 25, 2018, AAA Car Repair purchased $74,000 of parts. The journal entry to record the purchase includes a

$60,000x2%+(74,000-60,000)x3%=1,620 $74,000-1,620=$73,280 credit to Sales Revenue

During Year 1, Mitchell stated a construction job with a total contract price of $600,000. The job completed on December 15, Year 2. Additional data are as follows: Year 1 Year 2 Actual costs incurred: $225,000 $255,000 Estimated remaining costs: 255,000 - Billed to customer 240,000 360,000 Received from customer 200,000 400,000 Under the U.S. GAAP completed contract method, what amount should Mitchell recognize as gross profit for Year 2?

$600,000-225,000-255,000=$120,000

Howard Co. had the following first-year amount for a $7,000,000 construction contract Actual costs: $2,000,000 Estimated costs to complete: 6,000,000 Progress billings: 1,800,000 Cash collected: 1,500,000 What amount should Howard recognize as gross profit (loss) using the percentage-of-sales method?

$7,000,000-2,000,000-6,000,000=-$1,000,000

Roche Pharmaceuticals entered into a licensing agreement with Zenith Lab for a new drug under development. Roche will receive $8,100,000 if the new drug receives FDA approval. Based on prior approval, Roche determines that it is 85% likely that the drug will gain approval. Management has concluded that the most likely outcome method is the most predictive approach. The transaction price of this arrangement should be

$8,100,000 (the outcome with 85% probability).

Marle Construction enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2018 with a performance bonus of $50,000 if the building is completed by July 31, 2018. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability July 31, 2018 65% August 7, 2018 25% August 14, 2018 5% August 21, 2018 5% The transaction price for this transaction is

$950,000+(50,000x65%)+(40,000x25%)+(30,000x5%)+(20,000x5%)=$995,000

On August 5, 2021, Famous Furniture shipped 40 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was $350 each. The cost of shipping the dining sets amounted to $1,800 and was paid for by Famous Furniture. On December 30, 2021, the consignee reported the sale of 30 dining sets at $850 each. The consignee remitted payment for the amount due after deducting a 6% commission, advertising expense of $600, and installation and setup costs of $780. The total profit on units sold for the consignor is

($850x30)-($850*30x6%)-($350+($1800/40)x30)-$600-$780=$10,740

On August 5, 2021, Famous Furniture shipped 40 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was $350 each. The cost of shipping the dining sets amounted to $3,600 and was paid for by Famous Furniture. On December 30, 2021, the consignee reported the sale of 30 dining sets at $850 each. The consignee remitted payment for the amount due after deducting a 6% commission, advertising expense of $600, and installation and setup costs of $780. The amount cash received by Famous furniture is

($850x30)-($850x30*6%)-$600-$780=$22,590

Which of the following situations would require that the seller recognize revenue over time rather than at a point in time?

Benefits are received by the buyer as the seller performs.

Green Construction Co. has consistently used the percentage-of-completion method of recognizing revenue. During 2018, Green entered into a fixed-price contract to construct an office building for $28,000,000. Information relating to the contract is as follows: At December 31 2018 2019 Percentage of completion 15% 45% Estimated total cost at completion $21,000,000 $22,400,000 Gross profit recognized (cumulative) 1,400,000 3,360,000 Contract costs incurred during 2019 were

Contract costs incurred during 2019 were 2018: $21,000,000x15%=$3,150,000 2019: $22,400,000x45%=$10,080,000 $10,080,000-3,150,000=$6,930,000

During Year 1, Tidal Co. began construction on a project scheduled for completion in Year 3. At December 31, Year 1, an overall loss was anticipated at contract completion. What would be the effect of the project on Year 1 operating income under the U.S. GAAP percentage-of-completion and completed-contract methods? Percentage-of-Completion Completed-Contract

Decrease, Decrease

Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144,000 on March 15, 2018. Estimated standalone fair values of the equipment, installation, and training are $90,000, $60,000, and $30,000 respectively. The transaction price allocated to equipment, installation and training is

Equipment: $144000x(90000/(90000+60000+30000))=$72000 Installation: $144000x(60000/180000)=$48000 Training: $144000x(30000/180000)=$24000

A company can only satisfy its performance obligations at a point in time.

False

Companies rarely have to allocate the transaction price to more than one performance obligation in a contract.

False

The first step in the revenue recognition process is to identify the separate performance obligations in the contract.

False

A company used the percentage-of-completion method of accounting for a 5-year construction contract. Which of the following items will the company use to calculate the income recognized in the third year? Progress billings to date Income previously recognized

No, Yes

Seasons Construction is constructing an office building under contract for Cannon Company and uses the percentage-of-completion method. The contract calls for progress billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000 and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2018. At December 31, 2018, Seasons estimates that it is 30% complete with the construction, based on costs incurred. What is the total amount of Revenue from Long-Term Contracts recognized for 2018 and what is the balance in the Accounts Receivable account assuming Cannon Company has not yet made its last quarterly payment?

Revenue: $18,600,000x30%=$5,580,000

A company recognizes revenue from a performance obligation over time by measuring the progress toward completion.

True

If the performance obligation is not highly dependent on, or interrelated with, other promises in the contract, then each performance obligation should be accounted for separately.

True

Revenue is recognized in the accounting period when the performance obligation is satisfied.

True

A company used the percentage-of-completion method of accounting for a 5-year construction contract. Which of the following items will the company use to calculate the income recognized in the third year? Actual total costs Income previously recognized

Yes, Yes

Companies can use the expected value to estimate variable consideration when

a company has a large number of contracts with similar characteristics.

A performance obligation exists when

a company provides a distinct product or service

A transaction price for multiple performance obligations should be allocated

based on what the company could sell the goods for on a standalone basis.

Revenue from a contract with a customer

cannot be recognized until a contract exists.

A company has satisfied its performance obligation when the

company has transferred physical possession of the asset.

Consignments are a specialized marketing method whereby the

consignee takes possession of merchandise but title remains with manufacturer.

Consigned goods are recognized as revenues by the

consignor when it receives notification and payment from consignee for goods sold.

The most popular input measure used to determine the progress toward completion is

cost-to-cost basis.

Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144,000 on March 15, 2018. Estimated standalone fair values of the equipment, installation and training are $90,000, $60,000 and $30,000 respectively. The journal entry to record the transaction on March 15, 2018 will include a

credit to Unearned Service Revenue of $24,000 ($30,000/$180,000) × $144,000 = $24,000.

When multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when

each service is interdependent and interrelated.

The first step in the process for revenue recognition is to

identify the contract with customers.

A contract between Boeing and Delta in which Boeing supplies planes to Delta

is an agreement that creates enforceable rights and obligations for both parties.

A contract

is an agreement that creates enforceable rights and obligations.

Noncash consideration should be

recognized on the basis of fair value of what is received.

The converged standard on revenue recognition

recognizes and measures revenue based on changes in assets and liabilities

The percentage-of-completion method

recognizes revenue and gross profit each period based upon progress.

On January 15, 2018, Bella Vista Company enters into a contract to build custom equipment for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000 30 days after delivery. The revenue for this contract should be

recorded on March 31, 2018.

In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the

total estimated cost.