ACC 356 Chapter 18

Reedy Builders, Inc. is using the completed-contract method for a $12,400,000 contract that will take three years to complete. Data at December 31, 2017, the end of the first year, are as follows: Costs incurred to date $5,200,000 Estimated costs to complete 7,800,000 Billings to date 4,920,000 Collections to date 4,540,000 The gross profit or loss that should be recognized for 2017 is -$0. -a $240,000 loss. -a $200,000 loss. -a $600,000 loss.

a $600,000 loss contract price - (costs incurred to date + estimated costs to complete) $12,400,000 - ($5,200,000 + $7,800,000) = $600,000 loss

Hendrix Inc., an equipment dealer, sells equipment on January 1, 2016, to Jimi Company for $200,000. Also, on January 1, 2016, Hendrix agrees to repurchase this equipment from Jimi Company on December 31, 2017, for a price of $233,280. At 1/1/16, Hendrix should record: -sales revenue of $200,000 and a liability of $33,280. -a liability of $200,000. -sales revenue of $200,000. -sales revenue of $200,000 and interest expense of $33,280.

a liability of $200,000 this is a financial transaction, not a sale

The seller of a good or service should recognize revenue when: -they identify the contract with customers. -they identify the separate performance obligations in the contract. -each performance obligation is satisfied. -they determine the transaction price.

each performance obligation is satisfied

One criteria that indicates that a company should disregard revenue guidance for contracts is when: -the payment terms for the goods and services to be transferred can be identified. -each party can unilaterally terminate the contract without compensation. -each party's rights regarding the goods or services to be transferred can be identified. -the contract has commercial substance.

each party can unilaterally terminate the contract without compensation

A nonrefundable upfront fee is generally recorded as revenue when received. -True -False

false a nonrefundable upfront fee should generally be recorded as revenue over the periods which benefit

Companies expense incremental costs if these costs are incurred to obtain a contract with a customer. -True -False

false companies capitalize incremental costs if these costs are incurred to obtain a contract with a customer

Conditional rights should be reported separately on the balance sheet as contract liabilities. -True -False

false conditional rights should be reported separately on the balance sheet as contract assets

In a principal-agent relationship, the agent should use the gross method to recognize revenue. -True -False

false in a principal-agent relationship, the agent should use the net method to recognize revenue

An indication that the customer has not taken control of the good or service is: -the customer has no significant risks or rewards of ownership. -the selling company has right to payment for the good or service. -the selling company has transferred legal title to the asset. -the customer has physical possession of the asset.

the customer has no significant risks or rewards of ownership

Pizza Factory enters into a franchise agreement on 11/1/16 giving Mow's House the right to operate as a franchisee of Pizza Factory for 5 years. The initial franchise fee is $100,000. Of this amount, $40,000 is payable when Mow's House signs the agreement, and the balance is payable in five annual payments of $12,000 each on 12/31. Pizza Factory helps locate the site, negotiate the lease or purchase of the site, supervise the construction activity, and provide employee training and the equipment necessary to be a distributor of its products. Similar training services and equipment are sold separately. Mow's House also promises to pay ongoing royalty payments of 1% of its annual sales (payable each January 31 of the following year) and is obliged to purchase products from Pizza Factory at its current standalone selling prices at the time of purchase. The credit rating of Mow's House indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of $12,000 each discounted at 8% is $47,914. Training services and equipment are distinct because similar services and equipment are sold separately. Pizza Factory satisfies those performance obligations when it transfers the services and equipment to Mow's House. The values assigned to the performance obligations are: Rights to the trade name, market area, and proprietary know-how $40,000 Training services 19,914 Equipment (cost of $10,000) 28,000 Total transaction price $ 87,914 Training is completed in November and December 2016, the equipment is installed in December 2016, and Mow's House holds a grand opening on January 2, 2017. What amount of revenue should Pizza Factory recognize at 11/1/16? -$40,000. -$19,914. -$0. -$28,000.

$0

Bret Company sold 3,000 Holsks during 2017 at a total price of $12,000,000, with a warranty guarantee that the product was free of any defects. The cost of Holsks sold is $7,200,000. The term of the assurance warranty is two years, with an estimated cost of $80,000. In addition, Bret sold extended warranties related to 1,100 Holsks for 3 years beyond the 2-year period for $110,000. Bret should recognize Unearned Warranty Revenue in 2017 of -$110,000 -$ 80,000 -$190,000 -$ 0

$110,000 (unearned warranty revenue of $110,000) (warranty liability of $80,000)

Black Bear Construction Company has a contract to construct a $6,000,000 bridge at an estimated cost of $5,300,000. The contract is to start in July 2017, and the bridge is to be completed in October 2019. The following data pertain to the construction period. (Note that by the end of 2018, Black Bear has revised the estimated total cost from $5,300,000 to $5,400,000.) 2017 2018 2019 Costs to date $1,325,000 $3,780,000 $5,430,000 Estimated costs to complete 3,975,000 1,620,000 — Progress billings during the year 1,200,000 3,200,000 1,600,000 Cash collected during the year 1,000,000 2,340,000 2,660,000 What amount of gross profit should Black Bear recognize in 2019 using the percentage-of-completion method? -$ 0 -$270,000 -$245,000 -$315,000

$150,000 (Contract Price, $6,000,000 - Costs to date for 2019, $5,430,000) - Gross Profit recognized to date for 2018: [(Costs to date for 2018, $3,780.000 / Cost to date for 2018, $3,780,000 + Estimated costs to complete for 2018, $1,620,000) = 70% X (Contract Price, $6,000,000 - Total estimated contract costs at 2018, $5,400,000)] = $150,000

Stossel Company sells 300 units for $200 each to Liberty Inc. for cash. Stossel allows Liberty to return any unused product within 30 days and receive a full refund. The cost of each product is $120. To determine the transaction price, Stossel decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the most likely amount. Using the most likely amount, Stossel estimates that ten (10) units will be returned, the costs of recovering the units will be immaterial, and the returned units are expected to be resold at a profit. What amount of refund liability should Stossel record at the time of sale? -$1,200 -$2,000 -$ 0 -$800

$2,000 refund liability =(estimated units x selling price) (10 x $200) = $2,000 estimated inventory returns = (estimated units to be returned x cost per unit) (10 x $120) = $1,200

Black Bear Construction Company has a contract to construct a $6,000,000 bridge at an estimated cost of $5,300,000. The contract is to start in July 2017, and the bridge is to be completed in October 2019. The following data pertain to the construction period. (Note that by the end of 2018, Black Bear has revised the estimated total cost from $5,300,000 to $5,400,000.) 2017 2018 2019 Costs to date $1,325,000 $3,780,000 $5,430,000 Estimated costs to complete 3,975,000 1,620,000 — Progress billings during the year 1,200,000 3,200,000 1,600,000 Cash collected during the year 1,000,000 2,340,000 2,660,000 What amount of gross profit should Black Bear recognize in 2018 using the percentage-of-completion method? -$ 0 -$270,000 -$245,000 -$315,000

$245,000 [(Costs to date for 2018, $3,780.000 / Cost to date for 2018, $3,780,000 + Estimated costs to complete for 2018, $1,620,000) = 70% X (Contract Price, $6,000,000 - Total estimated contract costs at 2018, $5,400,000)] - Gross Profit recognized in 2017: [(Costs to date for 2017, $1,325.000 / Cost to date for 2017, $1,325,000 + Estimated costs to complete for 2017, $3,975,000) = 25% X (Contract Price, $6,000,000 - Total estimated costs at 2017, $5,300,000)] = $245,000 gross profit to be recognized for 2018.

Mocha purchases equipment, installation, and training from Lynne for a price of $1,000,000 and chooses Lynne to do the installation. Lynne charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The price of the installation service is estimated to have a fair value of $20,000. The standalone selling price of the equipment is $1,000,000. The fair value of the training sessions is estimated at $40,000. Other companies can also provide these training services. Mocha is obligated to pay Lynne the $1,000,000 upon the delivery and installation of the equipment. Lynne delivers the equipment on May 1, 2017, and completes the installation of the equipment on July 1, 2017. Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 8 years. What amount is recorded by Lynne as Unearned Service Revenue at 7/1/17? -$0 -$18,868 -$37,736 -$20,000

$37,736 (fair value of the training session + fair value of the installation + fair value of the equipment) ($40,000 + $20,000 + $1,000,000) = $1,060,000 [($40,000 / $1,060,000) x $1,000,000] = $37,736

Black Bear Construction Company has a contract to construct a $6,000,000 bridge at an estimated cost of $5,300,000. The contract is to start in July 2017, and the bridge is to be completed in October 2019. The following data pertain to the construction period. (Note that by the end of 2018, Black Bear has revised the estimated total cost from $5,300,000 to $5,400,000.) 2017 2018 2019 Costs to date $1,325,000 $3,780,000 $5,430,000 Estimated costs to complete 3,975,000 1,620,000 — Progress billings during the year 1,200,000 3,200,000 1,600,000 Cash collected during the year 1,000,000 2,340,000 2,660,000 What amount of gross profit (loss) should Black Sea recognize in 2018 using the percentage-of-completion method? -($375,000) -($200,000) -($900,000) -($295,000)

$375,000 [(Costs to date for 2017, $1,325.000 / Cost to date for 2017, $1,325,000 + Estimated costs to complete for 2017, $3,975,000) = 25% X (Contract Price, $6,000,000 - Total estimated costs at 2017, $5,300,000)] = 25% X $700,000 = $175,000. ($175,000) + ($200,000) = ($375,000)

On January 1, 2017, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $629,406 (imputed rate of 12%). The goods have an inventory cost on Fullbright's books of $240,000. What amount of Sales Revenue should Fullbright recognize in 2017? -$240,000 -$629,406 -$400,000 -$229,406

$400,000 SR = $400,000 Remaining = $229,406 (interest revenue)

On January 1, 2017, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $629,406 (imputed rate of 12%). The goods have an inventory cost on Fullbright's books of $240,000. What amount of Interest Revenue should Fullbright recognize in 2017? -$ 75,529 -$229,406 -$ 57,352 -$ 48,000

$48,000 (carrying value of the note x imputed rate) ($400,000 x 12%) = $48,000

Sherman Company enters into a contract with a customer to build a warehouse for $400,000, with a performance bonus of $100,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 20% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that Sherman has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 50% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed 1 week late, and a 20% probability that it will be completed 2 weeks late. What is the total transaction price for this revenue arrangement? -$486,000 -$500,000 -$480,000 -$460,000

$486,000 [($500,000 x 50%) + ($500,000 - $20,000 = $480,000 x 30%) + ($500,000 - $40,000 = $460,000 x 20%)] [250,000 + 144,000 + 92,000] $486,000

Sufjan Company has a contract to sell 200 units to a customer for $14,000. After 140 units have been delivered, Sufjan modifies the contact by promising to deliver 30 more units for an additional $60 per unit (the standalone selling price at the time of the contract modification). What is the additional revenue to be earned after the modification? -$6,000 -$5,400 -$6,300 -$1,800

$6,000 [(60 units remaining from the contract x $70) + (30 more units from modification x $60)]

Pizza Factory enters into a franchise agreement on 11/1/16 giving Mow's House the right to operate as a franchisee of Pizza Factory for 5 years. Pizza Factory prepared this entry on 11/1/16: Cash 40,000 Notes Receivable 60,000 Discount on Notes Receivable 12,086 Unearned Franchise Revenue 40,000 Unearned Service Revenue (training) 19,914 Unearned Sales Revenue (equipment) 28,000 Pizza Factory satisfies the performance obligations related to the elements above when the franchise opens on 3/1/17. Other than interest, how much revenue should Pizza factory recognize on 3/1/17? -$ 43,957. -$100,000. -$ 87,914. -$ 0.

$87,914 unearned franchise revenue + unearned service revenue (training) + unearned sales revenue (equipment) $40,000 + $19,914 + $28,000 = $87,914

ELO Construction Co. began operations in 2017. Construction activity for 2017 is shown below. ELO uses the completed-contract method. ContractContract Price Billings Through 12/31/17 Collections Through 12/31/17Costs to 12/31/17Estimated Costs to Complete1$4,650,000$4,450,000$3,900,000$3,700,000-2 3,600,000 1,800,000 1,600,000 870,000$2,030,0003 3,100,000 1,860,000 1,600,000 1,680,000 1,120,000 What amount of gross profit should be reported on the income statement for 2017? -$1,340,000 -$1,480,000 -$950,000 -$0

$950,000 Contract 1 Price, $4,650,000 - Contract 1 Costs, $3,700,000 = Contract 1 Gross Profit, $950,000

Grouper Construction Inc. agrees to construct a boat dock at the Smooth Sailing Marina for $41,900. In addition, under the terms of the contract, Smooth Sailing will pay Grouper a performance bonus of up to $9,000 based on the timing of completion. The performance bonus will be paid fully if construction is completed by the agreed-upon date. The performance bonus decreases by $1,800 per week for every week beyond the agreed-upon completion date. Grouper has constructed a number of boat docks under similar agreements. Grouper's management estimates, that it has a 60% probability of completing the project on time, a 20% probability of completing the project one week late, and a 20% probability of completing the project two weeks late. Management does not believe the project will be more than two weeks late. Determine the transaction price that Grouper should compute for this agreement.

DETERMINATION OF TRANSACTION PRICE: Transaction price = Contract cost + Variable consideration = $41,900 + $7,920 = $49,820 EXPLANATION: - It was given that contract cost is $41,900 - Variable consideration is the sum of estimated considerations at different probabilities given. - When completion of project at 60% probability on time The consideration ( performance bonus ) = $9,000 Expected consideration = $9,000 × 60% = $5,400 - When completion of project, one week late at 20% probability The performance bonus is decreased by $1,800 per week. Hence, the consideration = $9,000 - $1,800 = $7,200 Expected consideration = $7,200 × 20% = $1,440 - When completion of project, two weeks late, at 20% probability The performance bonus is decreased by $3,600 ($1,800×2) Hence, the consideration = $9,000 - $3,600 = $5,400 Expected consideration = $5,400 × 20% = $1,080 - Therefore, Variable consideration = Sum of all expected considerations = $5,400 + $1,440 + $1,080 = $7,920

A loss in the current period on a contract expected to be profitable upon completion in a later year is: -not recognized under either the completed-contract method or the percentage-of-completion method. -recognized only under the completed-contract method. -recognized under both the completed-contract method and the -percentage-of-completion method. -recognized only under the percentage-of-completion method.

recognized only under the percentage-of-completion method

When using the percentage of completion method, the company: -recognizes revenues and gross profit each period during the contract. -recognizes revenues and gross profit only when the contract is completed. -accumulates progress billings in an inventory account (Construction in Process). -accumulates construction costs only in an inventory account (Construction in Process).

recognizes revenues and gross profit each period during the contract

Which method of measuring the fair value of a performance obligation is dependent on the standalone selling prices of other goods or services promised in the contract? -standalone selling price. -adjusted market assessment. -residual value. -expected cost plus a margin.

residual value

In a bill-and-hold arrangement, which of the following is NOT one of the criteria which must be met for the customer to have obtained control of the product? -The product must be physically located in the seller's warehouse. -The reason for the bill-and-hold arrangement must be substantive. -The seller cannot have the ability to use the product or to direct it to another customer. -The product currently must be ready for physical transfer to the customer.

the product must be physically located in the seller's warehouse

A contract is an agreement between two parties that creates enforceable rights or obligations -true -false

true

A performance obligation may be based on customary business practice. -True -False

true

Companies should use the percentage-of completion method to account for long-term construction contracts: -unless required to use the completed-contract method. -when the company has primarily short-term contracts. -when estimates of progress towards satisfaction of the performance obligation (completion) are not dependable. -when there are inherent hazards in the contract beyond the normal, recurring business risks.

unless required to use the completed-control method