Intermediate 3 chap 18

Hayes Construction Corporation contracted to construct a building for $7,500,000. Construction began in 2021 and was completed in 2022. Data relating to the contract are summarized below: Year ended December 31, 2021 2022Costs incurred $3,000,000 $2,250,000Estimated costs to complete 1,200,000 — Hayes uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2021, and 2021, respectively, Hayes should report gross profit of

$1,500,000 and $750,000

On June 1, 2021, Johnson & Sons sold equipment to James Landscaping Service in exchange for a zero-interest bearing note with a face value of $110,000, with payment due in 12 months. The fair value of the equipment on the date of sale was $100,000. The amount of revenue to be recognized on this transaction in 2021 is

$100,000 sales revenue and $5,833 interest revenue

Cooper Construction Company had a contract starting April 2021, to construct a $24,000,000 building that is expected to be completed in September 2023, at an estimated cost of $2,000,000. At the end of 2021, the costs to date were $10,120,000 and the estimated total costs to complete had not changed. The progress billings during 2021 were $4,800,000 and the cash collected during 2021 was 3,200,000 For the year ended December 31, 2013, Cooper would recognized gross profit on building of

$11,040,000

Gomez, Inc. began work in 2021 on contract #3814, which provided for a contract price of $19,200,000. Other details follow: 2014 2015 Costs incurred during the year $3,200,000 $9,800,000Estimated costs to complete (12/31) 9,600,000 0Billings during the year 3,600,000 14,400,000Collections during the year 2,400,000 15,600,000 Assume that Gomez uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2022 is

$6,200,000

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

$6,885,000

Kiner, Inc. began work in 2021 on a contract for $21,000,000. Other data are as follows:2021 2022 Costs incurred to date $9,000,000 $14,000,000Estimated costs to complete 6,000,000 —Billings to date 7,000,000 21,000,000Collections to date 5,000,000 18,000,000 If Kiner uses the completed-contract method, the gross profit to be recognized in 2022 is

$7,000,000

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

$72,000, $48,000, and $24,000 respectively

Arizona Communications contracted to set up a call center for the City of Phoenix. Underthe terms of the contract, Arizona Communications will design and set-up a call center with the following costs: Design of call center............................................................$20,000 Computers, servers, telephone equipment..............$550,000 Software.....................................................................................$170,000 Installation and testing of equipment..........................$30,000 Selling commission...............................................................$50,000 Annual service contract.....................................................$100,000 In addition, Arizona Communications will maintain and service the equipment and softwareto ensure smooth operations of the call center for an annual fee of $180,000. Ownership ofequipment installed remains with the City of Phoenix. The contract costs that should becapitalized is

$820,000

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 iscompleted by July 31, 2018. The bonus is reduced by $10,000 each week that completionis delayed. Marle commonly includes these completion bonuses in its contracts and, basedon 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

$995,000

Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,550,000 each quarter. The total contract price is $18,600000 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, 2021.~At December 31, 2015, Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $18,000,000 due to unanticipated price increases. What is reported in the balance sheet at December 31, 2021 for Seasons as the difference between the Construction in Process and the Billings on Construction in Process accounts, and is it a debit or a credit?

Difference between the accounts $1,550,000 Debit

Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,550,000 each quarter. The total contract price is $18,600000 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, 2021.~At December 31, 2021, Seasons Construction 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 2021 and what is the balance in the Accounts Receivable account assuming Cannon Company has not yet made its last quarterly payment?

Revenue: $5,580,000 Accounts Receivable: $1,550,000

The transaction price

The amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services

Companies can use the expected value to estimate variable consideration when

a company has a large number of contracts with similar characteristics

Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing the software, the company also provides consulting services and support to ensure smooth operation of the software. The total transaction price is $420,000. Based on standalone values, the company estimates the consulting services and support have a value of $120,000 and the software license has a value of $300,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes

a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000

New Age Computers manufactures and sells pagers and radio paging systems which include a 180 day warranty on product defects. It also sells an extended warranty which provides an additional two years of protection. On May 10, it sold a paging system for $4,500 and an extended warranty for another $1,400. The journal entry to record this transaction would include

a credit to Unearned Warranty Revenue of $1,400

Revenue from a contract with a customer

cannot be recognized until a contract exists.

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 Billings on Construction in Progress account is a

contra-inventory account

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, 2021 will include a

credit to Unearned Service Revenue of $24,000

Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days. Entertainment Tonight also offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the extended warranty is $3,000. The standalone price of each is $2,100 and $900, respectively. The estimated cost of the assurance-warranty is $350. The accounting for warranty will include a

credit to Unearned Warranty Revenue $900

Botanic Choice sells natural supplements to customers with an unconditional sales return if they are not satisfied. The sales returns period extends 60 days. On February 10, 2021, a customer purchases $4,000 of products (cost $2,000). Assuming that based on prior experience, estimated returns are 20%. The journal entry to record the expected sales return and cost of goods sold includes a

debit to Allowance for Sales Returns of $800 and a credit to Cost of Goods sold of $500

On July 31, O'Malley Company contracted to have two products built by Taylor Manufacturing for a total of $370,000. The contract specifies that payment will only occur after both products have been transferred to O'Malley Company. Taylor determines that the standalone prices are $200,000 for Product 1 and $170,000 for Product 2. On August 1, when Product 1 has been transferred, Taylor's journal entry to record this event includes a

debit to Contract Assets for $200,00

A contract

is an agreement that creates enforceable rights and obligations

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

The use of the net method of recognized revenue by an agent

is the correct method in a principle-agent relationship

Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be

recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.

Noncash organization should be

recognized on the basis of fair value of what is received

On January 15, 2021, 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, 2021

When sales are made with a right of return, the company

records the returned asset in a separate inventory account

Consideration paid or payable to customers

reduces the consideration received and the revenue to be recognized.

The principle advantage of the completed-contract method is that

reported revenue is based on final results rather than estimates of unperformed work

If a contract involves a significant component

the time value of money is used to determine the fair value of the transaction

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 gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the

total estimated cost