Intermediate Chapters 4, 7, 18

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Earnings management generally makes income statement information more useful for predicting future earnings and cash flows.

False

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

False

Companies often restrict retained earnings to comply with contractual requirements or current necessity.

True

Lawrence Company has cash in bank of $25,000, restricted cash in a separate account of $4,000, and a bank overdraft in an account at another bank of $2,000. Lawrence should report cash of

b. $25,000.

When a company sells a bundle of goods at a discount, the discount should be allocated to the product that caused the discount and not to the entire bundle.

True

A strength of the income statement as compared to the balance sheet is that items which cannot be measured reliably can be reported in the income statement.

False

Dividends declared on common and preferred stock are subtracted from net income in the computation of earnings per share.

False

GAAP permits the reversal of impairment losses recorded on receivables.

False

Bank overdrafts are always offset against the cash account in the balance sheet.

False

Both IFRS and U.S. GAAP allow for comprehensive income to be reported in either a Statement of Stockholders' Equity or a Statement of Recognized Income and Expense.

False

Both U.S. GAAP and IFRS discuss income statement presentation using either a single-step or multi-step approach.

False

Cash equivalents are investments with original maturities of six months or less.

False

Companies include postdated checks and petty cash funds as cash.

False

Warranties that the product meets agreed-upon specifications in the contract at the time the product is sold are referred to as assurance-type warranties.

True

The accountant for the Lintz Sales Company is preparing the income statement for 2017 and the balance sheet at December 31, 2017. The January 1, 2017 merchandise inventory balance will appear

b. only in the cost of goods sold section of the income statement.

The last step in the process for revenue recognition is to

b. recognize revenue when each performance obligation is satisfied.

A performance obligation is a written guarantee in a contract to provide a product or service to a customer.

False

Which of the following methods of determining bad debt expense does not properly match expense and revenue?

d. Charging bad debts as accounts are written off as uncollectible.

Which of the following items should be included in accounts receivable reported on the balance sheet?

Allowance for doubtful accounts.

Ex. 7-157—Asset classification. Below is a list of items. Classify each into one of the following balance sheet categories: a. Cash c. Short-term Investments b. Receivables d. Other ___ 1. Compensating balances held in long-term borrowing arrangements ___ 2. Savings account ___ 3. Trust fund ___ 4. Checking account ___ 5. Postage stamps ___ 6. Treasury bills maturing in six months ___ 7. Post-dated checks from customers ___ 8. Certificate of deposit maturing in five years ___ 9. Common stock of another company (to be sold by December 31, this year) ___ 10. Change fund

1. d 3. d 5. d 7. b 9. c 2. a 4. a 6. c 8. d 10. a

Horner Construction Co. uses the percentage-of-completion method. In 2018, Horner began work on a contract for $22,000,000; it was completed in 2019. The following cost data pertain to this contract: Year Ended December 31 2018 2019 Cost incurred during the year $7,800,000 $5,600,000 Estimated costs to complete at the end of year 5,200,000 — If the completed-contract method of accounting was used, the amount of gross profit to be recognized for years 2018 and 2019 would be 2018 2019

2018- $0. 2019- $8,600,000. 2019: $22,000,000-$13,400,000 = $8,600,000.

Adler Construction Co. uses the percentage-of-completion method. In 2018, Adler began work on a contract for $11,000,000 and it was completed in 2019. Data on the costs are: Year Ended December 31 2018 2019 Costs incurred $3,900,000 $2,800,000 Estimated costs to complete 2,600,000 — For the years 2018 and 2019, Adler should recognize gross profit of 2018 2019

2018- ($3,900,000/$6,500,000) x ($11,000,000-$6,500,000)= $2,700,000 2019- ($11,000,000-$6,700,000)-$2,700,000=$1,600,000

How is days to collect accounts receivable determined?

365 days divided by accounts receivable turnover.

Which of the following is an appropriate reconciling item to the balance per bank in a bank reconciliation?

Deposit in transit.

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. *102. At December 31, 2019, 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, 2019 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 Debit/Credit

Difference between the accounts- $1,550,000 Debit/Credit- Debit ($18,600,000 × .75) - ($1,550,000 × 8) = $1,550,000 debit.

All claims held against customers and others for money, goods, or services are reported as current assets.

False

Companies must measure the loss on impairment at an undiscounted amount, not at a present-value amount, when it records the loss.

False

Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the completed-contract method.

False

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

False

Ex. 4-107—Income statement relationships. Fill in the appropriate blanks for each of the independent situations below. Company A Company B Company C Sales revenue (a) $_______ $343,400 $540,000 Beginning inventory 52,600 (d) _______ 90,000 Net purchases 205,300 255,600 (g) _______ Ending inventory 52,200 108,000 63,000 Cost of goods sold (b) _______ (e) _______ 437,000 Gross profit 75,300 128,000 (h) _______ Operating expenses (c) _______ 50,000 48,000 Income before taxes 6,000 (f) _______ (i) _______

Solution 4-107 (a) $281,000 (75,300 + 205,700) (b) $205,700 (52,600 + 205,300 - 52,200) (c) $69,300 (75,300 - 6,000) (d) $67,800 (215,400 + 108,000 - 255,600) (e) $215,400 (343,000 - 128,00) (f) $78,000 (128,000 - 50,000) (g) $410,000 (437,000 + 63,000 - 90,000) (h) $103,000 (540,000 - 437,000) (i) $55,000 (103,000 - 48,000 = 55,000)

Ex. 4-108—Multiple-step income statement. Listed below in scrambled order are 11 income statement categories. Use the numerals 1 through 11 to indicate the order in which these categories should appear on a multiple-step income statement. ( ) Discontinued operations. ( ) Cost of goods sold. ( ) Other revenues and gains. ( ) Net income. ( ) Income taxes. ( ) Sales revenue. ( ) Gross profit on sales. ( ) Income from operations. ( ) Income from continuing operations before income taxes. ( ) Operating expenses. ( ) Income from continuing operations.

Solution 4-108 10, 2, 6, 11, 8, 1, 3, 5, 7, 4, 9

Which of the following statements is true?

The company closes Cash Over and Short only at the end of the year.

A contract liability is a company's obligation to transfer goods or services to a customer for which the company has received consideration from the customer.

True

Companies value and report short-term receivables at net realizable value⎯the net amount they expect to receive in cash.

True

For a loan receivable, impairment loss is calculated as the difference between the investment in the loan and the expected future cash flows discounted at the loan's historical effective interest rate.

True

For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor fails to pay.

True

Gross profit and income from operations are reported on a multiple-step but not on a single step income statement.

True

IFRS allows for revaluation of long-term tangible and intangible assets with the differences impacting equity but not net income.

True

IFRS and GAAP are very similar in accounting for cash and receivables.

True

If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset.

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

In the gross method, sales discounts are reported as a deduction from sales.

True

Neither the Billings account balance nor the Construction in Process account balance can exceed the long-term contract price.

True

Noncontrolling interest is the portion of equity (net assets) interest in a subsidiary not attributable to the parent company.

True

Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.

True

Recognition of a recourse liability will make a loss on sale of receivables larger than it would otherwise have been.

True

Revenue from a contract with a customer cannot be recognized until a contract exists.

True

Short-term, highly liquid investments may be included with cash on the balance sheet.

True

The most popular input measure used to determine the progress toward completion in long-term contracts is the cost-to-cost basis.

True

Under IFRS, there is no specific standard related to pledging receivables.

True

On December 31, 2017, Flint Corporation sold for $150,000 an old machine having an original cost of $270,000 and a book value of $120,000. The terms of the sale were as follows: $30,000 down payment $60,000 payable on December 31 each of the next two years The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2017 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)

a. $105,547 $60,000 × 1.75911 = $105,547

Eilert Construction Company had a contract starting April 2018, to construct a $42,000,000 building that is expected to be completed in September 2019, at an estimated cost of $38,500,000. At the end of 2018, the costs to date were $17,710,000 and the estimated total costs to complete had not changed. The progress billings during 2018 were $8,400,000 and the cash collected during 2018 was $5,600,000. Eilert uses the percentage-of-completion method. *119. At December 31, 2018, Eilert would report Construction in Process in the amount of

a. $19,320,000. ($17,710,000 ÷ $38,500,000) × $3,500,000 = $1,610,000. $17,710,000 + $1,610,000 = $19,320,000.

Moorman Corporation reports the following information: Correction of understatement of depreciation expense in prior years, net of tax $ 1,290,000 Dividends declared 960,000 Net income 3,000,000 Retained earnings, 1/1/17, as reported 6,000,000 Moorman should report retained earnings, 1/1/17, as adjusted at

a. $4,710,000. $6,000,000 - $1,290,000 = $4,710,000.

Tresh, Inc. had the following bank reconciliation at March 31, 2017: Balance per bank statement, 3/31/17 $74,400 Add: Deposit in transit 20,600 95,000 Less: Outstanding checks 25,200 Balance per books, 3/31/17 $69,800 Data per bank for the month of April 2017 follow: Deposits $87,400 Disbursements 99,400 All reconciling items at March 31, 2017 cleared the bank in April. Outstanding checks at April 30, 2017 totaled $12,000. There were no deposits in transit at April 30, 2017. What is the cash balance per books at April 30, 2017?

a. $50,400 $74,400 + $87,400 - $99,400 = $62,400 (4/30 balance per bank) $62,400 - $12,000 = $50,400

On the December 31, 2017 balance sheet of Vanoy Co., the current receivables consisted of the following: Trade accounts receivable $ 65,000 Allowance for uncollectible accounts (2,000) Claim against shipper for goods lost in transit (November 2017) 3,000 Selling price of unsold goods sent by Vanoy on consignment at 130% of cost (not included in Vanoy 's ending inventory) 26,000 Security deposit on lease of warehouse used for storing some inventories 30,000 Total $122,000 At December 31, 2017, the correct total of Vanoy's current net receivables was

a. $66,000. $65,000 - $2,000 + $3,000 = $66,000.

James, Inc. incurred the following infrequent losses during 2017: A $280,000 write-down of equipment leased to others. A $160,000 adjustment of accruals on long-term contracts. A $240,000 write-off of obsolete inventory. In its 2017 income statement, what amount should James report as total unusual losses?

a. $680,000. $280,000 + $160,000 + $240,000 = $680,000.

Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of $900,000 to Arch Inc. Arch Inc. will pay $975,000 in one year. Royal Palm Corp. normally sells this type of equipment for 90% of list price. How much should be recorded as revenue?

a. $810,000. ($900,000 × .90) = $810,000.

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 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

a. $995,000 $950,000 + ($50,000 × .65) + ($40,000 × .25) + ($30,000 × .05) + ($20,000 × .05) = $995,000

Which of the following concepts relates to using the allowance method in accounting for accounts receivable?

a. Bad debt expense is an estimate that is based on historical and prospective information.

On July 22, Peter sold $23,500 of inventory items on credit with the terms 2/15, net 30. Payment on $15,000 sales was received on August 1 and the remaining payment was received on August 12. Assuming Peter uses the gross method of accounting for sales discounts, which one of the following entries was made on August 1 to record the cash received?

a. Cash ................................................................... 14,700 Sales Discount ................................................... 300 Accounts Receivable ................................. 15,000 $15,000 ×.02 = $300.

Which of the following is not an acceptable way of displaying the components of other comprehensive income?

a. Combined statement of retained earnings

AG Inc. made a $25,000 sale on account with the following terms: 2/10, n/30. If the company uses the net method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale?

a. Debit Accounts Receivable for $24,500. $25,000 × (1 - .02) = $24,500.

What is the normal journal entry when writing-off an account as uncollectible under the allowance method?

a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.

If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as

a. a deduction from sales in the income statement.

Discontinued operations of a component of a business are classified as a separate item in the income statement:

a. after "income from continuing operations".

Continuing franchise fees should be recorded by the franchisor

a. as revenue when uncertainty related to the variable consideration is resolved.

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

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

The percentage-of-completion method

a. recognizes revenue and gross profit each period based upon progress.

Unconditional rights to receive consideration because a performance obligation has been satisfied are

a. reported as a receivable on the balance sheet.

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. *104. For the year ended December 31, 2018, Cooper would recognize gross profit on the building of:

b. $ 920,000 ($24,000,000 - $22,000,000) × ($10,120,000 ÷ $22,000,000) = $920,000.

The cash account shows a balance of $85,000 before reconciliation. The bank statement does not include a deposit of $4,600 made on the last day of the month. The bank statement shows a collection by the bank of $1,880 and a customer's check for $640 was returned because it was NSF. A customer's check for $900 was recorded on the books as $1,080, and a check written for $158 was recorded as $194. The correct balance in the cash account was

b. $86,096. $85,000 + $1,880 - $640 - $180 + $36 = $86,096.

How can accounting for bad debts be used for earnings management?

b. Changing the percentage of receivables recorded as bad debt expense.

Equestrain Roads sold $120,000 of goods and accepted the customer's $120,000 10%, 1-year note receivable in exchange. Assuming 10% approximates the market rate of return, what would be the debit in this journal entry to record the sale?

b. Debit Notes Receivable for $120,000.

What is imputed interest?

b. Interest based on the implicit interest rate.

Which of the following is false about an income statement?

b. It is used to measure the solvency of a company.

Sun Inc. factors $6,000,000 of its accounts receivables with recourse for a finance charge of 3%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $300,000. What would be recorded as a gain (loss) on the transfer of receivables?

b. Loss of $480,000. ($6,000,000 × .03) + $300,000 = $480,000.

Under which section of the balance sheet is "cash restricted for plant expansion" reported?

b. Non-current assets.

Which of the following is not a selling expense?

b. Office salaries expense

In which account are postage stamps classified?

b. Office supplies.

Which of the following statements is correct regarding receivables?

b. Receivables are claims held against customers and others for money, goods, or services.

What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income?

b. Relax credit policies for customers.

Which of the following is an example of managing earnings down?

b. Revising the estimated life of equipment from 10 years to 8 years.

Which of the following is true of expense classification under IFRS?

b. The nature-of-expense method does not classify the expenses into various subtotals.

Which of the following is included in comprehensive income?

b. Unrealized gains on available-for-sale securities.

Which of the following statements is not true of fair value option?

b. Unrealized holding gains and losses from fair value adjustments are reported as a component of comprehensive income.

A transaction price for multiple performance obligations should be allocated

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

When a contract modification does not result in a separate performance obligation, the additional products are priced at the

b. blended price of original contract and contract modification.

The occurrence which most likely would have no effect on 2017 net income (assuming that all amounts involved are material) is the

b. collection in 2017 of a receivable from a customer whose account was written off in 2016 by a charge to the allowance account.

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

b. cost-to-cost basis.

Botanic Choice sells natural supplements to customers with an unconditional sales return if they are not satisfied. The sales returns extends 60 days. On February 10, 2018, 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

b. debit to Allowance for Sales Returns of $800 and a credit to Cost of Goods sold of $400. $4,000 × .20 = $800; $2000 × .20 = $400.

When a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price, the transaction should be treated as a

b. financing transaction.

The first step in the process for revenue recognition is to

b. identify the contract with customers.

A contract

b. is an agreement that creates enforceable rights and obligations.

Types of franchising arrangements include all of the following except

b. wholesaler-service sponsor.

Maxwell Corporation factored, with recourse, $200,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Maxwell estimates the recourse obligation at $4,800. What amount should Maxwell report as a loss on sale of receivables?

c. $10,800. ($200,000 × .03) + $4,800 = $10,800.

The following information was extracted from the 2017 financial statements of Max Company: Income from continuing operations before income tax $705,000 Selling and administrative expenses 480,000 Income from continuing operations 495,000 Gross profit 1,350,000 The amount reported for other expenses and losses is

c. $165,000. $1,350,000 - $480,000 - $705,000 = $165,000.

Moon Inc. factors $3,000,000 of its accounts receivables without recourse for a finance charge of 4%. The finance company retains an amount equal to 8% of the accounts receivable for possible adjustments. Moon estimates the fair value of the recourse liability at $300,000. What would be the debit to Cash in the journal entry to record this transaction?

c. $2,640,000. $3,000,000 - [$3,000,000 × (.04 + .08)] = $2,640,000.

Benedict Corporation reports the following information: Net income $750,000 Dividends on common stock $210,000 Dividends on preferred stock $ 90,000 Weighted average common shares outstanding 250,000 Benedict should report earnings per share of

c. $2.64. ($750,000 - $90,000) ÷ 250,000 sh. = $2.64.

On August 5, 2018, 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, 2018, 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

c. $22,590 (30 × $850)(.94) - $600 - $780 = $22,590.

Wellington Corp. has outstanding accounts receivable totaling $1.27 million as of December 31 and sales on credit during the year of $6.4 million. There is also a debit balance of $6,000 in the allowance for doubtful accounts. If the company estimates that 2% of its accounts receivable will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense?

c. $25,400. ($1,270,000 × .02) = $25,400.

Jenny Manufactures sold toys listed at $360 per unit to Jack Inc. for $306, a trade discount of 15 percent. Jack Inc. in turn sells the toys in the market at $335. Jenny should record the receivable and related sales revenue (per unit) at:

c. $306.

On January 1, 2017, West Co. exchanged equipment for an $800,000 zero-interestbearing note due on January 1, 2020. The prevailing rate of interest for a note of this type at January 1, 2017 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in West's 2018 income statement?

c. $66,000 $800,000 × .75 = $600,000 present value $600,000 × .10 = $60,000 (2017 interest) ($600,000 + $60,000) × .10 = $66,000 (2018 interest).

Equestrain Roads accepted a customer's $100,000 zero-interest-bearing six-month note in a sales transaction. The product sold normally sells for $92,000. If the sale was made on June 30, how much interest revenue from this transaction would be recorded for the year ending December 31?

c. $8,000. $100,000 - $92,000 = $8,000.

If a company purchases merchandise on terms of 2/10, n/30, the cash discount available (assuming a 360-day year) is equivalent to an effective annual interest rate of

c. 36% 02 × 360 ÷ 20 = 36%.

Remington Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting accounts receivable were sales of $900,000 and cash collections of $850,000. The accounts receivable turnover is

c. 7.2. $900,000 ÷ [($100,000 + $150,000) ÷ 2] = 7.2.

AG Inc. made a $25,000 sale on account with the following terms: 1/15, n/30. If the company uses the gross method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale?

c. Debit Accounts Receivable for $25,000. $25,000 × 100% = $25,000.

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?

c. Earnings per share from continuing operations, discontinued operations, and net income should be disclosed on the face of the income statement

How should the balances of Progress Billings and Construction in Process be shown at reporting dates prior to the completion of a long-term contract?

c. Net balance, as a current asset if debit balance, and current liability if credit balance.

Which of the following is true when accounts receivable are factored without recourse?

c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables.

Cost estimates at the end of the second year indicate that a loss will result on completion of the entire contract. Which of the following statements is correct?

c. Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.

On November 1, 2018, Green Valley Farm entered into a contract to buy a $150,000 harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2018. The harvester (cost of $110,000) was delivered on November 30, 2018. The journal entry to record the contract on November 1, 2018 includes a

c. credit to Unearned Sales Revenue for $150,000.

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

c. recorded on March 31, 2018.

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

c. records the returned asset in a separate inventory account

Sun Inc. assigns $6,000,000 of its accounts receivables as collateral for a $2 million 8% loan with a bank. Sun Inc. also pays a finance fee of 1% on the transaction upfront. What would be recorded as a gain (loss) on the transfer of receivables?

d. $0.

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?

d. $1,633,333 $14,700,000/$44,100,000 × ($49,000,000 - $44,100,000) = $1,633,333.

On June 1, 2018, 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 2018 is

d. $100,000 sales revenue and $5,833 interest revenue. ($10,000 × 7/12) = $5,833.

For the year ended December 31, 2017, Dent Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available: Allowance for uncollectible accounts, 1/1/17 $126,000 Provision for uncollectible accounts during 2017 90,000 Uncollectible accounts written off, 11/30/17 104,000 Estimated uncollectible accounts per aging, 12/31/17 156,000 After year-end adjustment, the bad debt expense for 2017 should be

d. $134,000. $156,000 - $126,000 + $104,000 = $134,000

In 2017, Linz Corporation reported a discontinued operations loss of $1,200,000, net of tax. It declared and paid preferred stock dividends of $120,000 and common stock dividends of $360,000. During 2017, Linz had a weighted average of 500,000 common shares outstanding. As a result of the discontinued operations loss, net of tax, the earnings per share would decrease by

d. $2.40 $1,200,000 ÷ 500,000 sh. = $2.40.

During 2018, Gates Corp. started a construction job with a total contract price of $21,000,000. The job was completed on December 15, 2019. Additional data are as follows: 2018 2019 Actual costs incurred during the year $8,100,000 $9,150,000 Estimated remaining costs 8,100,000 — Billed to customer 7,200,000 13,800,000 Received from customer 6,000,000 14,400,000 Under the completed-contract method, what amount should Gates recognize as gross profit for 2019?

d. $3,750,000 $21,000,000 - $8,100,000 - $9,150,000 = $3,750,000.

The following accounts were abstracted from Starr Co.'s unadjusted trial balance at December 31, 2017: Debit Credit Accounts receivable $750,000 Allowance for uncollectible accounts 8,000 Net credit sales $3,000,000 Starr estimates that 6% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2017, the allowance for uncollectible accounts should have a credit balance of

d. $45,000. $750,000 × .06 = $45,000.

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, 2019, 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 the total amount of Construction Expenses that Seasons will recognize for the year ended December 31, 2019?

d. $8,175,000 ($18,000,000 × .75) - ($17,750,000 × .30) = $8,175,000.

If a petty cash fund is established in the amount of $300, and contains $180 in cash and $115 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts

d. Cash, $120. $300 - $180 = $120.

d. Impairment Loss 6,000 Loan Receivable 6,000

Why is the allowance method preferred over the direct write-off method of accounting for bad debts?

d. Improved matching of bad debt expense with revenue.

Which of the following is not true about the information provided in the income statement?

d. It helps in evaluating working capital.

Which one of the following types of losses is excluded from the determination of net income in income statements?

d. Material losses resulting from correction of errors related to prior periods.

The category "trade receivables" includes

d. amounts owed by customers for goods bought or services rendered

Income taxes are allocated to

d. balance sheet adjustments.

Revenue from a contract with a customer

d. cannot be recognized until a contract exists.

A company has satisfied its performance obligation when the

d. company has transferred physical possession of the asset.

A company must account for a contract modification as a new contract if the

d. goods or services are distinct and company has right to receive the standalone price.

The second step in the process for revenue recognition is to

d. identify the separate performance obligations in the contract.

Bank overdrafts, if material, should be

d. reported as a current liability.

Franchise fees should be recognized

d. when performance obligations are satisfied.

A Cash Over and Short account

is debited when the petty cash fund proves out short.

The accounts receivable turnover is computed by dividing

net sales by average net receivables.

Which of the following is a method to generate cash from accounts receivable? Assignment Factoring

Assignment-Yes Factoring-Yes

Which of the following should be reported as a prior period adjustment? Change in Estimated Lives Mistakes in the Application of of Depreciable Assets Accounting Principles

Change in Estimated Lives Mistakes in the Application of of Depreciable Assets-NO Accounting Principles-YES

What is a possible reason for accounts receivable turnover to increase from one year to the next year?

Improved collection process.

BE7-152 Telfer Co. uses the gross method to record sales made on credit. On July 1, 2017, it made sales of $90,000 with terms 2/10 n/30. On July 9, 2017, Telfer received full payment for the July 1 sale. Prepare the required journal entries for Telfer Co.

Solution 7-152 July 1 Accounts Receivable ............................................... 90,000 Sales Revenue ................................................... 90,000 July 9 Cash..... ................................................................... 88,200* Sales Discount ...................................................... 1,800 Accounts Receivable ......................................... 90,000 *$90,000 − ($90,000 × .02) = $88,200

BE7-155 On October 1, 2017, Gomez Inc. assigns $2,000,000 of its accounts receivable to Ottawa National Bank as collateral for a $1,500,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 7%. Prepare the October 1 journal entries for both Gomez and Ottawa.

Solution 7-155 Gomez, Inc. Cash ................................................................................... 1,460,000 Interest Expense ($2,000,000 X 2%) .................................. 40,000 Notes Payable ........................................................... 1,500,000 Ottawa National Bank Notes Receivable .................................................................. 1,500,000 Cash .......................................................................... 1,460,000 Interest Revenue ($2,000,000 X 2%) ........................ 40,000

Savings accounts are usually classified as cash on the balance sheet.

True

When a sales transaction involves a significant financing component, the fair value is determined either by measuring the consideration received or by discounting the payment using an imputed interest rate.

True

A trial balance before adjustments included the following: Debit Credit Sales $1,700,000 Sales returns and allowance $56,000 Accounts receivable 172,000 Allowance for doubtful accounts 3,040 If the estimate of uncollectible accounts is made by taking 10% of gross account receivables, the amount of the adjustment is

a. $14,160. ($172,000 × .10) - $3,040 = $14,160.

Korte Company reported the following information for 2017: Sales revenue $2,500,000 Cost of goods sold 1,750,000 Operating expenses 275,000 Unrealized holding gain on available-for-sale securities 85,000 Cash dividends received on the securities 10,000 For 2017, Korte would report comprehensive income of

a. $570,000. $2,500,000 - $1,750,000 - $275,000 + $85,000 + $10,000 = $570,000.

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. The transaction price of this arrangement should be

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

The opening balance of Accounts Receivable for George Company was $25,000. Net sales (all on account) for the year amounted to $200,000. The Company doesn't offer any cash discount. During the year $180,000 was collected on accounts receivable. Compute accounts receivable turnover for the year.

a. 5.7 times $200,000 ÷ [($25,000 + $45,000) ÷ 2] = 5.7.

Which of the following authoritative IFRS guidance specifically addresses issues related to cash?

a. IAS No.1 (Presentation of Financial Statements)

The role of the agent in a Principal-Agent relationship is to

a. arrange for the principal to provide goods or services to a customer.

Consider the following: Cash in Bank - checking account of $18,500, Cash on hand of $500, Post-dated checks received totaling $3,500, and Certificates of deposit totaling $124,000. How much should be reported as cash in the balance sheet?

b. $ 19,000. $18,500 + $500 = $19,000.

A company is not required to report a per share amount on the face of the income statement for which one of the following items?

b. Prior period adjustment

Steinert Company has the following items at year-end: Cash in bank $45,000 Petty cash 500 Short-term paper with maturity of 2 months 8,200 Postdated checks 2,100 Steinert should report cash and cash equivalents of

c. $53,700. $45,000 + $500 + $8,200 = $53,700.

Equestrain Roads sold $120,000 of goods and accepted the customer's $120,000 10%, 1-year note in exchange. Assuming 10% approximates the market rate of return, how much interest would be recorded for the year ending December 31 if the sale was made on June 30?

c. $6,000. $120,000 × .10 × 6/12 = $6,000.

Leonard Corporation reports the following information: Correction of overstatement of depreciation expense in prior years, net of tax $ 645,000 Dividends declared 480,000 Net income 1,500,000 Retained earnings, 1/1/17, as reported 6,000,000 Leonard should report retained earnings, 1/1/17, as adjusted at

c. $6,645,000. $6,000,000 + $645,000 = $6,645,000.

Which of the following is an example of managing earnings up?

c. Underestimating warranty claims.

The occurrence that most likely would have no effect on 2017 net income is the

c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance.

Antique Company has notes receivable that have a fair value of $920,000 and a carrying amount of $710,000. Antique decides on December 31, 2017, to use the fair value option for these recently-acquired receivables. The adjusting entry to record this change will include a:

c. credit to Unrealized Holding Gain or Loss⎯Income for $210,000.

Wellington Corp. has outstanding accounts receivable totaling $6.5 million as of December 31 and sales on credit during the year of $24 million. There is also a credit balance of $12,000 in the allowance for doubtful accounts. If the company estimates that 6% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year?

d. $ 378,000. ($6,500,000 × .06) - $12,000 = $378,000.

McGlone Corporation had a 1/1/17 balance in the Allowance for Doubtful Accounts of $40,000. During 2017, it wrote off $28,000 of accounts and collected $8,400 on accounts previously written off. The balance in Accounts Receivable was $800,000 at 1/1 and $960,000 at 12/31. At 12/31/17, McGlone estimates that 5% of accounts receivable will prove to be uncollectible. What should McGlone report as its Allowance for Doubtful Accounts at 12/31/17?

d. $48,000. $960,000 × .05 = $48,000.

Assuming the market interest rate is 10% per annum, how much would Green Co. record as a note payable if the terms of the loan with a bank are that it would have to make one $120,000 payment in two years? (The present value of $1 for two periods at 10% is 0.82645).

d. $99,174. $120,000 × .82645 = $99,174.

To address inconsistencies and weaknesses in revenue recognition, a comprehensive revenue recognition standard was developed entitled the

d. Revenue from Contracts with Customers.

Consignments are a specialized marketing method whereby the

d. consignee takes possession of merchandise but title remains with manufacturer.

Gains and losses identified as other comprehensive income have the same status as traditional gains and losses under

d. the two statement approach.

The journal entries for a bank reconciliation

may include a debit to Office Expense for bank service charges.

The IFRS income statement classification

c. distribution

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

False

Under the completed-contract method, companies recognize costs only when the contract is completed.

False

When a company sells a product but gives the buyer the right to return it, revenue should not be recognized until the sale is collected.

False

When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss.

False

Which of the following is considered cash?

b. Money market checking accounts

An IFRS statement might include all of the following except

d. extraordinary gain or loss.

Travel advances should be reported as

d. receivables

Which of the following is a general rule of classifying receivables?

Disclose any receivables designated or pledged as collateral

1. Revenues are increases in net assets of an entity or settlements of its liabilities during a period from delivering goods or services that constitute the entity's major or central operations. 2. Expenses are the using-up of assets or incurrences of liabilities during a period from delivering goods or services that constitute the entity's major or central operations. 3. Gains are increases in net assets from peripheral transactions, events, or circumstances affecting the entity except those resulting from revenues or investments by owners. 4. Losses are decreases in net assets from peripheral transactions, events, or circumstances affecting the entity except those resulting from expenses or distributions to owners. 5. A discontinued operation occurs when (a) a company eliminates the results of operations of a component of the business, and (b) the elimination of a component that represents a strategic shift, having a major effect on the company's operations and financial results. 6. The computation of earnings per share is: Net income minus preferred dividends divided by the weighted average of common shares outstanding. 7. Prior period adjustments include correction of an error in the financial statements of a prior period. Prior period adjustments (net of tax) should be charged or credited to the opening balance of retained earnings of the earliest year presented.

1. Earnings per share. 2. Comprehensive income. 3. Prior period adjustment. 4. Noncontrolling interest. 5. Discontinued operations. 6. Intraperiod tax allocation.

Intraperiod tax allocation relates the income tax expense of a fiscal period to the specific items that give rise to the amount of the tax provision.

True

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

True

AG Inc. made a $25,000 sale on account with the following terms: 1/15, n/30. If the company uses the net method to record sales made on credit, how much should be recorded as revenue?

b. $24,750. $25,000 × (1 - .01) = $24,750.

In calculating earnings per share, companies deduct preferred dividends from net income if:

b. the dividends are declared.

Why would a company sell receivables to another company?

c. To accelerate access to amounts collected.

Earnings per share data are required on the face of the

c. income statement.

Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners.

False

Discontinued operations, and unusual gains and losses are both reported net of tax in the income statement.

False

The primary advantage of the multiple-step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another.

False

Companies frequently report income tax expense separately as the last item before net income on a single-step income statement.

True

Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2017 included the following: Debit Credit Sales revenue $280,000 Cost of goods sold $170,000 Administrative expenses 40,000 Loss on sale of equipment 18,000 Commissions to salespersons 16,000 Interest revenue 10,000 Freight-out 6,000 Loss from discontinued operations 24,000 Bad debt expense 6,000 Totals $280,000 $290,000 Other information: Logan's income tax rate is 30%. Finished goods inventory: January 1, 2017 $160,000 December 31, 2017 140,000 On Logan's multiple-step income statement for 2017, the discontinued operations loss is

a. $16,800. $24,000 × 0.7 = $16,800.

Ortiz Co. had the following account balances: Sales revenue $ 440,000 Cost of goods sold 220,000 Salaries and wages expense 30,000 Depreciation expense 60,000 Dividend revenue 12,000 Utilities expense 24,000 Rent revenue 60,000 Interest expense 36,000 Sales returns and allow. 33,000 Advertising expense 39,000 What would Ortiz report as total revenues in a single-step income statement?

a. $479,000 $440,000 + $12,000 + $60,000 - $33,000 = $479,000.

For the year ended December 31, 2017, Transformers Inc. reported the following: Net income $300,000 Preferred dividends declared 50,000 Common dividend declared 10,000 Unrealized holding loss, net of tax 5,000 Retained earnings, beginning balance 400,000 Common stock 200,000 Accumulated Other Comprehensive Income, Beginning Balance 25,000 What would Transformers report as total stockholders' equity?

a. $860,000 ($400,000 + $300,000 - $50,000 - $10,000) + $200,000 + ($25,000 - $5,000) = $860,000.

The single-step income statement emphasizes

b. total revenues and total expenses.

Which of the following is true of accounting for changes in estimates?

c. Changes in estimates are not carried back to adjust prior years.

The following information was extracted from the accounts of Essex Corporation at December 31, 2017: CR(DR) Total reported income since incorporation $4,800,000 Total cash dividends paid (2,400,000) Unrealized holding loss on available-for-sale securities (360,000) Total stock dividends distributed (600,000) Prior period adjustment, recorded January 1, 2017 225,000 What should be the balance of retained earnings at December 31, 2017?

d. $2,025,000. $4,800,000 - $2,400,000 - $600,000 + $225,000 = $2,025,000.

In 2017, Benfer Corporation reported net income of $210,000. It declared and paid common stock dividends of $24,000 and had a weighted average of 100,000 common shares outstanding. Compute the earnings per share to the nearest cent.

d. $2.10 ($210,000) ÷ 100,000 sh. = $2.10.

The income statement reveals

d. net earnings (net income) of a firm for a period of time.

Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations.

True

Revenues and gains increase both net income and owners' equity.

True

The transaction approach of income measurement focuses on the income-related activities that have occurred during the period.

True

The income statement provides investors and creditors with information to predict all of the following except the:

b. sources of future cash flows.

Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2017 included the following: Debit Credit Sales revenue $280,000 Cost of goods sold $170,000 Administrative expenses 40,000 Loss on disposal of equipment 18,000 Sales commission expense 16,000 Interest revenue 10,000 Freight-out 6,000 Loss from discontinued operations 24,000 Bad debt expense 6,000 Totals $280,000 $290,000 Other information: Logan's income tax rate is 30%. Finished goods inventory: January 1, 2017 $160,000 December 31, 2017 140,000 On Logan's multiple-step income statement for 2017, income from continuing operations is

c. $23,800. $280,000 - $170,000 - $40,000 - $18,000 - $16,000 - $6,000 - $6,000 + $10,000 - ($34,000 × .30) = $23,800.

Norling Corporation reports the following information: Net income $750,000 Dividends on common stock $210,000 Dividends on preferred stock $ 90,000 Weighted average common shares outstanding 200,000 Norling should report earnings per share of

c. $3.30. ($750,000 - $90,000) ÷ 200,000 = $3.30.

Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as

d. a prior period adjustment.

In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be

b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.

Franchise revenue is recognized over time if

b. the franchisor is providing access to the right rather than transferring control.

In accounting for a long-term construction-type contract using the percentage-ofcompletion 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

b. total estimated cost.

Kaniper Company has the following items at year-end: Cash in bank $35,000 Petty cash 300 Short-term paper with maturity of 2 months 5,500 Postdated checks 1,400 Kaniper should report cash and cash equivalents of

c. $40,800. $35,000 + $300 + $5,500 = $40,800.

Boston Company owns more than 50 percent of the ordinary shares of Dynamic Company. Assume Boston net income of $225,000 is allocated as $180,000 to Boston and $45,000 to noncontrolling interest. In Boston's consolidated income statement that includes Dynamic, under IFRS, how will the amount of non-controlling interest be reported?

c. $45,000 will be presented as an allocation to net income below the net income.

Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of $19,200,000. Other details follow: 2018 2019 Costs incurred during the year $3,200,000 $9,800,000 Estimated costs to complete, as of December 31 9,600,000 0 Billings during the year 3,600,000 14,400,000 Collections during the year 2,400,000 15,600,000 *112. Assume that Gomez uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2019 is

c. $6,200,000. $19,200,000-$13,000,000= $6,200,000

Laventhol Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting accounts receivable were sales of $1,050,000 and cash collections of $1,000,000. The accounts receivable turnover is

c. 8.4. $1,050,000 ÷ [($100,000 + $150,000) ÷ 2] = 8.4.

Which of the following statements is incorrect regarding the classification of accounts and notes receivable?

c. Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively.

Which of the following items should not be included in the Cash caption on the balance sheet?

d. Postage stamps on hand

Which of the following is not considered cash for financial reporting purposes?

d. Postdated checks and I. O. U.'s

*Ex. 18-135—Percentage-of-completion and completed-contract methods. On February 1, 2017, Marsh Contractors agreed to construct a building at a contract price of $17,400,000. Marsh estimated total construction costs would be $12,000,000 and the project would be finished in 2019. Information relating to the costs and billings for this contract is as follows: 2017 2018 2019 Total costs incurred to date $4,500,000 $7,920,000 $13,800,000 Estimated costs to complete 7,500,000 5,280,000 -0- Customer billings to date 6,600,000 12,000,000 16,800,000 Collections to date 6,000,000 10,500,000 16,500,000 Instructions Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and for completed-contract accounting, show the gross profit that should be recorded for 2017, 2018, and 2019. Percentage-of-Completion Completed-Contract Gross Profit Gross Profit 2017 __________ 2017 __________ 2018 __________ 2018 __________ 2019 __________ 2019 __________

*Solution 18-135 Percentage-of-Completion Gross Profit 2017 $2,025,000a 2018 $ 495,000b 2019 $1,080,000c Completed-Contract Gross Profit 2017 — 2018 — 2019 $3,600,000d a ($4,500,000/12,000,000) × $5,400,000 = $2,025,000 b ($7,920,000/$13,200,000) × $4,200,000 = $2,520,000 2017 gross profit (2,025,000) 2018 gross profit $ 495,000 c Total revenue $17,400,000 Total costs 13,800,000 Total gross profit 3,600,000 Recognized to date (2,520,000) 2019 gross profit $ 1,080,000 d Total revenue $17,400,000 Total costs 13,800,000 Total gross profit $ 3,600,000

A loss in the current period on a profitable contract must be recognized under both the percentage-of-completion and completed-contract method.

False

Companies use the expected value, a probability-weighted amount to estimate variable consideration.

False

What is a compensating balance?

d. Minimum deposits required to be maintained in connection with a borrowing arrangement.

Which of the following should be recorded in Accounts Receivable?

d. Oral promises from customers to pay for good or services sold

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

True

Both the FASB and IASB have indicated that they believe all financial instruments should be recorded and reported at fair value.

True

Horner Construction Co. uses the percentage-of-completion method. In 2018, Horner began work on a contract for $22,000,000; it was completed in 2019. The following cost data pertain to this contract: Year Ended December 31 2018 2019 Cost incurred during the year $7,800,000 $5,600,000 Estimated costs to complete at the end of year 5,200,000 — The amount of gross profit to be recognized on the income statement for the year ended December 31, 2019 is

a. $3,200,000. 2018: ($7,800,000/ ($7,800,000+ $5,200,000)) x $9,000,000 = $5,400,000 2019: ($22,000,000-$13,400,000)- $5,400,000 = $3,200,000

Kiner, Inc. began work in 2018 on a contract for $21,000,000. Other data are as follows: 2018 2019 Costs incurred to date $9,000,000 $14,000,000 Estimated costs to complete 6,000,000 — Billings to date 7,000,000 21,000,000 Collections to date 5,000,000 18,000,000 *113. If Kiner uses the percentage-of-completion method, the gross profit to be recognized in 2018 is

a. $3,600,000. ($9,000,000/$15,000,000) x ($21,000,000-$15,000,000) = $3,600,000

Moon Inc. assigns $4,500,000 of its accounts receivables as collateral for a $3 million loan with a bank. The bank assesses a 3% finance charge on the loan amount and charges interest on the note at 6%. What would be the journal entry to record this transaction?

a. Debit Cash for $2,910,000, debit Interest Expense for $90,000, and credit Notes Payable for $3,000,000. $3,000,000 × .03 = $90,000; $3,000,000 - $90,000 = $2,910,000.

Harrison Company has a loan receivable with a carrying value of $15,000 at December 31, 2016. On January 3, 2017, the borrower, Thomas Clark Imports, declares bankruptcy, and Harrison estimates that it will collect only 60% of the loan balance. 2. Assume that on January 5, 2018, Harrison learns that Thomas Clark Imports has emerged from bankruptcy. As a result, Harrison now estimates that all but $1,500 will be repaid on the loan. Under IFRS, which of the following entries would be made on January 5, 2018?

a. Loan Receivable 4,500 Recovery of Impairment Loss 4,500

Sun Inc. factors $6,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $230,000. What would be recorded as a gain (loss) on the transfer of receivables?

a. Loss of $300,000. $6,000,000 × .05 = $300,000.

In which account are post-dated checks received classified?

a. Receivables.

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

The cost-to-cost basis measures progress towards completion by

a. comparing costs incurred to date with total costs to complete the contract.

The third step in the process for revenue recognition is to

a. determine the transaction price.

At the close of its first year of operations, December 31, 2017, Ming Company had accounts receivable of $1,620,000, after deducting the related allowance for doubtful accounts. During 2017, the company had charges to bad debt expense of $270,000 and wrote off, as uncollectible, accounts receivable of $120,000. What should the company report on its balance sheet at December 31, 2017, as accounts receivable before the allowance for doubtful accounts?

b. $1,770,000 $1,620,000 + ($270,000 - $120,000) = $1,770,000.

In 2018, Fargo Corporation began construction work under a three-year contract. The contract price is $7,200,000. Fargo uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2018, follow: Balance Sheet Accounts receivable—construction contract billings $300,000 Construction in progress $900,000 Less contract billings 720,000 Costs and recognized profit in excess of billings 180,000 Income Statement Income (before tax) on the contract recognized in 2018 $180,000 *108. How much cash was collected in 2018 on this contract?

b. $420,000 $720,000 - $300,000 = $420,000.

A trial balance before adjustments included the following: Debit Credit Sales $1,700,000 Sales returns and allowance $56,000 Accounts receivable 172,000 Allowance for doubtful accounts 3,040 104. If the estimate of uncollectible accounts is made by taking 5% of gross accounts receivables, the amount of the adjustment is

b. $5,560. ($172,000 X .05) - $3,040 = $5,560.

Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?

b. A percentage of accounts receivable adjusted for the balance in the allowance

A performance obligation exists when

c. a company provides a distinct product or service.

The fourth step in the process for revenue recognition is to

c. allocate transaction price to the separate performance obligations.

If a company prepares a consolidated income statement, IFRS requires that net income be reported for:

c. both the controlling and the noncontrolling interest.

All of the following are problems associated with the valuation of accounts receivable except

c. cash discounts under the net method.

The Billings on Construction in Progress account is a(n)

c. contra-inventory account.

Partial satisfaction of a multiple performance obligation is reported on the balance sheet as

c. contract asset.

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

c. credit to Sales Revenue for $72,380. $74,000 - ($60,000 × .02) - ($14,000 × .03) = $72,380.

On April 2, Kelvin sold $40,000 of inventory items on credit with the terms 1/10, net 30. Payment on $24,000 sales was received on April 8 and the remaining payment on $16,000 sales was received on April 27. Assuming Kelvin uses the net method of accounting for sales discounts, the entry recorded on April 27 would include a:

c. debit to Accounts Receivable and credit to Sales Discounts Forfeited for $160. $16,000 ×.01 = $160.

In 2018, Fargo Corporation began construction work under a three-year contract. The contract price is $7,200,000. Fargo uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2018, follow: Balance Sheet Accounts receivable—construction contract billings $300,000 Construction in progress $900,000 Less contract billings 720,000 Costs and recognized profit in excess of billings 180,000 Income Statement Income (before tax) on the contract recognized in 2018 $180,000 *109. What was the initial estimated total income before tax on this contract?

d. $1,440,000 $900,000 - $180,000 = $720,000 $720,000/Total Estimated Cost x (7,200,000- Total estimated cost)= $180,000 Total estimated cost= $5,760,000 $7,200,000-$5,760,000= $1,440,000

Black Corporation had a 1/1/17 balance in the Allowance for Doubtful Accounts of $21,000. During 2017, it wrote off $15,120 of accounts and collected $4,410 on accounts previously written off. The balance in Accounts Receivable was $420,000 at 1/1 and $504,000 at 12/31. At 12/31/17, Black estimates that 5% of accounts receivable will prove to be uncollectible. What should Black report as its Allowance for Doubtful Accounts at 12/31/17?

d. $25,200. $504,000 × .05 = $25,200.

Ace Co. prepared an aging of its accounts receivable at December 31, 2017 and determined that the net realizable value of the receivables was $900,000. Additional information is available as follows: Allowance for uncollectible accounts at 1/1/17—credit balance $102,000 Accounts written off as uncollectible during 2017 69,000 Accounts receivable at 12/31/17 975,000 Uncollectible accounts recovered during 2017 15,000 For the year ended December 31, 2017, Ace's bad debt expense would be

d. $27,000. Allowance for Uncollectible Acct. balance $102,000 + $15,000 - $69,000 = $48,000 (before bad debt expense) $975,000 - $900,000 - $48,000 = $27,000 (bad debt expense).

During the year, Kiner Company made an entry to write off a $32,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $400,000 and the balance in the allowance account was $36,000. The net realizable value of accounts receivable after the write-off entry was

d. $364,000. ($400,000 - $32,000) - ($36,000 - $32,000) = $364,000.

Which of the following is an not acceptable method of presenting the income statement?

d. A partial statement of income.

d. $7,665,000. $6,000,000 + $645,000 + $1,500,000 - $480,000 = $7,665,000.

Which of the following items would be reported net of tax on the face of the income statement?

d. Discontinued operations

Earnings per share should always be shown separately for

c. income from continuing operations.

The accounting profession has adopted a current operating performance approach to income reporting.

False

Provide clear, concise answers for the following. 1. What are revenues? 2. What are expenses? 3. What are gains? 4. What are losses? 5. When does a discontinued operation occur? 6. Indicate how earnings per share is computed. 7. State the primary category of prior period adjustments and indicate how they are reported in the financial statements.

A change in accounting principle requires that the cumulative effect of the change for prior periods be shown as an adjustment to:

a. beginning retained earnings of the earliest period presented.

A correction of an error in prior periods' income will be reported

In the income statement-NO Net of tax -YES

*Ex. 18-132—Journal entries—percentage-of-completion. Dixon Construction Company was awarded a contract to construct an interchange at the junction of U.S. 94 and Highway 30 at a total contract price of $15,000,000. The estimated total costs to complete the project were $12,000,000. Instructions (a) Make the entry to record construction costs of $7,200,000, on construction in process to date. (b) Make the entry to record progress billings of $4,000,000. (c) Make the entry to recognize the profit that can be recognized to date, on a percentage-ofcompletion basis.

*Solution 18-132 (a) Construction in Process ................................................................. 7,200,000 Materials, Cash, Payables. ................................................ 7,200,000 (b) Accounts Receivable ...................................................................... 4,000,000 Billings on Construction in Process ................................... 4,000,000 (c) Construction Expenses .................................................................. 7,200,000 Construction in Process (60% complete) ....................................... 1,800,000 Revenue from Long-Term Contracts ................................. 9,000,000

*Ex. 18-133—Percentage-of-completion method. Dalton Construction Co. contracted to build a bridge for $10,000,000. Construction began in 2018 and was completed in 2019. Data relating to the construction are: 2018 2019 Costs incurred during the year $3,300,000 $2,750,000 Estimated costs to complete 2,700,000 — Dalton uses the percentage-of-completion method. Instructions (a) How much revenue should be reported for 2018? Show your computation. (b) Make the entry to record progress billings of $4,100,000 during 2018. (c) Make the entry to record the revenue and gross profit for 2018. (d) How much gross profit should be reported for 2019? Show your computation.

*Solution 18-133 (a) $3,300,000 ————— × $10,000,000 = $5,500,000 $6,000,000 (b) Accounts Receivable ...................................................................... 4,100,000 Billings on Construction in Process ................................... 4,100,000 (c) Construction Expenses .................................................................. 3,300,000 Construction in Process ................................................................. 2,200,000 Revenue from Long-Term Contracts ................................. 5,500,000 (d) Revenue $10,000,000 Costs 6,050,000 Total gross profit 3,950,000 Recognized in 2018 (2,200,000) Recognized in 2019 $ 1,750,000 Or Total revenue $10,000,000 Recognized in 2018 (5,500,000) Recognized in 2019 4,500,000 Costs in 2019 (2,750,000) Gross profit in 2019 $ 1,750,000

*Ex. 18-134—Percentage-of-completion method. Penner Builders contracted to build a high-rise for $35,000,000. Construction began in 2018 and is expected to be completed in 2020. Data for 2018 and 2019 are: 2018 2019 Costs incurred to date $4,500,000 $13,000,000 Estimated costs to complete 18,000,000 12,000,000 Penner uses the percentage-of-completion method. Instructions (a) How much gross profit should be reported for 2018? Show your computation. (b) How much gross profit should be reported for 2019? (c) Make the journal entry to record the revenue and gross profit for 2019.

*Solution 18-134 (a) $4,500,000 ————— × $12,500,000 = $2,500,000 $22,500,000 (b) $13,000,000 —————— × $10,000,000 =$5,200,000 $25,000,000 Less 2018 gross profit 2,500,000 Gross profit in 2019 $2,700,000 (c) Construction in Process ................................................................. 2,700,000 Construction Expenses .................................................................. 8,500,000 Revenue from Long-Term Contracts ................................. 11,200,000

*Ex. 18-136—Franchises. Pasta Inn charges an initial fee of $2,400,000 for a franchise, with $480,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $1,521,000. The franchisee has the right to purchase $90,000 of kitchen equipment and supplies for $75,000. An additional part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract. Instructions Prepare the entry to record the initial franchise fee. Show supporting computations in good form.

*Solution 18-136 Total fee $2,400,000 Amount due $1,920,000 Present value of payments (1,521,000) (399,000) Bargain purchase (15,000) Advertising ($1,000 × 60) (60,000) Revenue from franchise fees $1,926,000 Cash ............................................................................................ 480,000 Notes Receivable ........................................................................ 1,920,000 Discount on Notes Receivable ....................................... 399,000 Franchise Revenue ......................................................... 1,926,000 Unearned Franchise Revenue ....................................... 75,000

*Pr. 7-166—Bank reconciliation. Benson Plastics Company deposits all receipts and makes all payments by check. The following information is available from the cash records: MARCH 31 BANK RECONCILIATION Balance per bank $53,492 Add: Deposits in transit 4,200 Deduct: Outstanding checks (7,600) Balance per books $50,092 Month of April Results Per Bank Per Books Balance April 30 $55,990 $54,710 April deposits 23,568 27,778 April checks 22,200 20,160 April note collected (not included in April deposits) 6,000 -0- April bank service charge 70 -0- April NSF check of a customer returned by the bank (recorded by bank as a charge) 1,800 -0- Instructions (a) Calculate the amount of the April 30: 1. Deposits in transit 2. Outstanding checks (b) What is the April 30 adjusted cash balance? Show all work.

*Solution 7-166 (a) 1. Deposits in transit, $8,410 [$27,778 - ($23,568 - $4,200)] 2. Outstanding checks, $5,560 [$20,160 - ($22,200 - $7,600)] (b) Adjusted cash balance at April 30, $58,840 ($55,990 + $8,410 - $5,560) OR ($54,710 + $6,000 - $70 - $1,800)

BE. 4-102—Income statement disclosures. What is disclosed in an income statement? Be specific.

Solution 4-102 An income statement discloses revenues, expenses, gains, and losses. It discloses the net income (loss) for a period and earnings per share data. The income statement may also include discontinued operations (net of tax). A company that reports a discontinued operation must report per share amounts for these line items either on the face of the income statement or in the notes to the financial statements.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for cash and receivables.

1. Key similarities relate to (1) the definition used for cash equivalents, (2) accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts, how to record trade and sales discounts, use of percentage of sales and receivables methods, pledging, and factoring and (3) both Boards are working to implement fair value measurement for all financial instruments but both Boards have faced bitter opposition from various factions. 2. Key differences relate to (1) IFRS has no guidance for segregation of receivables with different characteristics, (2) IFRS and GAAP standards on the fair value option are similar but not identical. The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S. standard. In addition, there is some difference in the financial instruments covered, (3) IFRS and GAAP differ in the criteria used to derecognize a receivable. IFRS is a combination of a risks and rewards and a loss of control approach. GAAP uses loss of control as the primary criterion. In addition, IFRS permits partial transfers— GAAP does not.

Certificates of deposit are usually classified as cash on the balance sheet.

False

IFRS does not permit the reversal of impairment losses, as does GAAP.

False

The Construction in Process account includes only construction costs under the percentage-of-completion method.

False

The FASB believes that historical cost for financial instruments provides more relevant and understandable information than fair value.

False

The accounts receivable turnover is computed by dividing net sales by the ending net receivables.

False

The new revenue recognition standard adopts a liability approach as the basis for revenue recognition.

False

The percentage-of-receivables approach is used for impairment measurement and reporting.

False

The percentage-of-receivables approach of estimating uncollectible accounts emphasizes matching over valuation of accounts receivable.

False

The percentage-of-receivables approach requires companies to set up an aging schedule of accounts receivable.

False

The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not completed-contract.

False

Trade receivables include notes receivable and advances to officers and employees.

False

Under IFRS, there is a specific standard that mandates segregation of receivables with different characteristics.

False

When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value.

False

Pr. 4-113—Multiple-step income statement. Presented below is information related to Farr Company. Retained earnings, December 31, 2017 $ 650,000 Sales revenue 1,600,000 Selling and administrative expenses 290,000 Discontinued operations loss (pre-tax) 290,000 Cash dividends declared on common stock 33,600 Cost of goods sold 880,000 Gain resulting from computation error on depreciation charge in 2016 (pre-tax) 520,000 Other revenue 120,000 Other expenses 100,000 Instructions Prepare in good form a multiple-step income statement for the year 2018. Assume a 30% tax rate and that 80,000 shares of common stock were outstanding during the year.

Farr Company INCOME STATEMENT For the Year Ended December 31, 2018 Sales revenue $1,600,000 Cost of goods sold 880,000 Gross profit 720,000 Selling and administrative expenses 290,000 Income from operations 430,000 Other revenue 120,000 Other expenses (100,000) Income before income taxes 450,000 Income taxes (450,000 × .30) 135,000 Income from continuing operations 315,000 Discontinued operations loss, net of applicable income taxes of $87,000 (203,000) Net income $ 112,000 Per share of common stock— Income from continuing operations $3.94 (315,000/80,000) Discontinued operations item, net of tax (2.54) (112,000/80,000) Net income $1.40

Pr. 4-115—Multiple-step income statement. Shown below is an income statement for 2017 that was prepared by a poorly trained bookkeeper of Howell Corporation. Howell Corporation INCOME STATEMENT December 31, 2017 Sales revenue $ 815,000 Investment revenue 19,500 Cost of goods sold (408,500) Selling expenses (145,000) Administrative expenses (195,000) Interest expense (13,000) Income before special items 73,000 Special items Loss on disposal of a component of the business (40,000) Net federal income tax liability (19,900) Net income $ 23,100 Instructions Prepare a multiple-step income statement for 2017 for Howell Corporation that is presented in accordance with generally accepted accounting principles (including format and terminology). Howell Corporation has 50,000 shares of common stock outstanding and has a 30% federal income tax rate on all tax related items. Round all earnings per share figures to the nearest cent.

Howell Corporation INCOME STATEMENT For the Year Ended December 31, 2017 Sales $815,000 Cost of goods sold 408,500 Gross profit 406,500 Selling expenses $145,000 Administrative expenses 195,000 340,000 Income from operations 66,500 Other revenue: Investment revenue 19,500 86,000 Other expenses: Interest expense 13,000 Income before income taxes 73,000 Income taxes (73,000 × .30) 21,900 Income from continuing operations 51,100 Loss from discontinued operations, net of applicable income tax of $12,000 28,000 Net income $ 23,100 Per share of common stock— Income from continuing operations $1.02 (51,100/50,000) Discontinued operations loss net of tax (.56) (23,100/50,000) Net income $ .46

Ex. 4-103—Calculation of net income from the change in stockholders' equity. Presented below is certain information pertaining to Edson Company. Assets, January 1 $250,000 Assets, December 31 230,000 Liabilities, January 1 150,000 Common stock, December 31 90,000 Retained earnings, December 31 41,000 Common stock sold during the year 10,000 Dividends declared during the year 13,000 Compute the net income for the year.

Solution 4-103 January 1 December 31 Assets $250,000 Liabilities 150,000 Stockholders' equity $100,000 $131,000* Computation of net income: Stockholders' equity December 31 $131,000 Stockholders' equity January 1 100,000 Increase 31,000 Add: Dividend declared 13,000 Less: Common stock sold (10,000) Net income $ 34,000 *$90,000 + $41,000

Presented below is an income statement for Kinder Company for the year ended December 31, 2017. Kinder Company Income Statement For the Year Ended December 31, 2017 Net sales $840,000 Costs and expenses: Cost of goods sold 560,000 Selling, general, and administrative expenses 70,000 Other, net 40,000 Total costs and expenses 670,000 Income before income taxes 170,000 Income taxes 51,000 Net income $119,000 Additional information: 1. "Selling, general, and administrative expenses" included a usual but infrequent charge of $7,000 due to a loss on the sale of investments. 2. "Other, net" consisted of interest expense, $10,000, and a discontinued operations loss of $30,000 before taxes. If the discontinued operations loss had not occurred, income taxes for 2017 would have been $60,000 instead of $51,000. 4. Kinder had 40,000 shares of common stock outstanding during 2017.

Kinder Company Income Statement For the Year Ended December 31, 2017 Net sales $840,000 Costs and expenses: Cost of goods sold $560,000 Selling, general, and administrative expenses 63,000 (70,000 - 7,000) Interest expense 10,000 Infrequent charge—loss on sale of investments 7,000 Total costs and expenses 640,000 Income from continuing operations before taxes 200,000 Income taxes 60,000 Income from continuing operations 140,000 Discontinued operations loss 30,000 Less applicable taxes (60,000 - 51,000) 9,000 (21,000) Net income $119,000 Per share of common stock— Income from continuing operations $3.50 (140,000/40,000) Discontinued operations loss, net of tax (.52) Net income $2.98

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. *103. Seasons Construction completes the remaining 25% of the building construction on December 31, 2020, as scheduled. At that time the total costs of construction are $18,750,000. What is the total amount of Revenue from Long-Term Contracts and Construction Expenses that Seasons will recognize for the year ended December 31, 2020? Revenue Expenses

Revenue- $4,650,000 Expenses- $5,250,000 $18,600,000 × .25 = $4,650,000 $18,750,000 - ($18,000,000 × .75) = $5,250,000.

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. *100. 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 Accounts Receivable

Revenue- $5,580,000 Accounts Receivable- $1,550,000 $18,600,000 × .30 = $5,580,000.

Ex. 4-105—Income Computations Presented below is information related to Wise Company at December 31, 2017, the end of its first year of operations. Sales revenue $775,000 Cost of goods sold 350,000 Selling and administrative expenses 125,000 Gain on sale of plant assets 75,000 Unrealized gain on available-for-sale investments 25,000 Interest expense 15,000 Loss on discontinued operations 30,000 Allocation to noncontrolling interest 100,000 Dividends declared and paid 12,000 Instructions Compute the following: (a) income from operations, (b) net income, (c) net income attributable to Wise Company's controlling stockholders, (d) comprehensive income, and (e) retained earnings balance at December 31, 2017. Ignore income tax effects.

Solution 105 Sales revenue .................................................................. $775,000 Cost of goods sold ........................................................... 350,000 Gross profit ....................................................................... 425,000 Selling administrative expenses ...................................... 125,000 Income from operations 300,000 (a) Other revenues and gains Gain on sale of plant assets .................................. 75,000 Other expenses and losses ............................................ 375,000 Interest expense.............................................................. 15,000 Income from continuing operations ................................ 360,000 Loss on discontinued operations .................................... (30,000) Net Income ...................................................................... 330,000(b) Allocation to noncontrolling interest ................................ (100,000) Net income attributable to controlling shareholders ....... $ 230,000(c) Net income ...................................................................... $ 330,000 Unrealized gain on available-for-sale investments ......... 25,000 Comprehensive income .................................................. $ 355,000(d) Net income ...................................................................... $330,000 Dividends......................................................................... (12,000) 12/31/17 Retained earnings ............................................ $ 318,000(e)

Ex. 4-109—Multiple-step income statement. Hendrick, Inc. has the following data for the year ended December 31, 2017: Net sales .......................................................................... $270,000 Discontinued operations loss ........................................... 20,000 Cost of goods sold ........................................................... 165,000 Interest expense .............................................................. 3,000 Selling expenses .............................................................. 15,000 Administrative expenses .................................................. 35,000 Shares of capital stock outstanding, 10,000 Tax rate of 30% on all items Instructions Prepare a multiple-step income statement for Hendrick, Inc. for the year ended December 31, 2017.

Solution 109 Hendrick Inc. Income Statement Year Ended December 31, 2017 Net sales ....................................................................... $270,000 Cost of goods sold ........................................................ 165,000 Gross margin ............................................................ 105,000 Operating Expenses Selling expenses ..................................................... $15,000 Administrative expenses .......................................... 35,000 Total operating expenses .................................... 50,000 Income from operations ............................................... 55,000 Other Expenses and Losses Interest expense ...................................................... 3,000 Income from continuing operations before taxes ......... 52,000 Income tax .................................................................... 15,600 Income from continuing operations ............................. 36,400 Discontinued operations loss .................................. 20,000 Less: Income tax ..................................................... 6,000 (14,000) Net income .................................................................... $22,400 Earnings per share: Income from continuing operations ($36,400 ÷ 10,000) $3.64 Discontinued operations ($14,000 ÷ 10,000) .......... 1.40 Net income ($22,400 ÷ 10,000) ............................... $2.24

Ex. 4-110—Income computations. Presented below is financial information of the Martin Corporation for 2017. Gain on the sale of investments 160,000 Net sales 45,000,000 Cost of goods sold 31,000,000 Loss on disposal of wholesale division 670,000 Interest revenue 105,000 Loss on operations of wholesale division 690,000 Selling and administrative expenses 8,200,000 Dividends declared on common stock 340,000 Write off of goodwill 780,000 Dividends declared on preferred stock 120,000 Effective tax rate on all items is 34% Martin Corporation decided to discontinue its wholesale operations and to retain their manufacturing operations. On July 1, Martin sold the wholesale operations. During 2017, there were 800,000 shares of common stock outstanding all year. Instructions Compute each of the following. 1. Income from operations 2. Income before income tax 3. Income from continuing operations 4. Net income 5. Earnings per share

Solution 110 1. Income from operations $45,000,000 - $31,000,000 - $8,200,000 = $5,800,000 2. Income before income tax $5,800,000 + $160,000 + $105,000 - $780,000 = $5,285,000 3. Income from continuing operations $5,285,000 - ($5,285,000 × .34) = $3,488,100 4. Net income $3,488,100 - [($670,000 + 690,000) × (1 - .34)] = $2,590,500 5. Earnings per share ($2,590,500 - $120,000) ÷ 800,000 = $3.09

Ex. 4-111—Multiple-step income statement Presented below is information related to Donaldson Corp., for the year 2017. Net sales $1,950,000 Cost of goods sold 1,200,000 Selling expenses 95,000 Administrative expenses 70,000 Dividend revenue 30,000 Interest revenue 20,000 Interest expense 45,000 Write-off of goodwill due to impairment 75,000 Depreciation expense omitted in 2015 105,000 Dividends declared 120,000 Effect on prior years of change in accounting principle (credit) 220,000 Loss from operations of discontinued component of business 240,000 Gain from disposal of component of business 300,000 Federal tax rate of 30% on all items Instructions Prepare a multiple-step income statement for 2017. Assume the 200,000 shares of common stock were outstanding during 2017.

Solution 111 (a) Donaldson Corp. INCOME STATEMENT For the Year Ended December 31, 2017 Net sales $1,950,000 Cost of goods sold 1,200,000 Gross profit 750,000 Operating expenses Selling expenses $ 95,000 Administrative expenses 70,000 165,000 Income from operations 585,000 Other revenues and gains Dividend revenue 30,000 Interest revenue 20,000 50,000 635,000 Other expenses and losses Interest expense 45,000 Loss due to write-off of goodwill 75,000 120,000 Income before income tax 515,000 Income taxes 154,500 Income from continuing operations 360,500 Discontinued operations Loss from operations of discontinued component of business (net of $72,000 income tax effect) (168,000) (240,000 × .70) Gain from disposal of component of business (net of $90,000 income tax effect) 210,000 (300,00 × .70) 42,000 Net income 402,500 Per share of common stock: Income from continuing operations 1.80 Discontinued operations .21 Net income 2.01

Ex. 18-127—Allocate transaction price. Windsor Windows manufactures and sells custom storm windows for enclosed porches. Windsor also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be provided by other vendors. Windsor enters into the following contract on June 1, 2018, with a local homeowner. The customer purchases windows for a price of $4,700 and chooses Windsor to do the installation. Windsor charges the same price for the windows irrespective of whether it does the installation or not. The price of the installation service is estimated to have a fair value of $1,200. The customer pays Windsor $4,000 (which equals the fair value of the windows, which have a cost of $2,300) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on August 1, 2018, Windsor completes installation on September 15, 2018, and the customer pays the balance due. Prepare the journal entries for Windsor in 2018. (Round amounts to nearest dollar.)

Solution 18-127 June 1, 2018 No entry - neither party has performed under the contract. On August 1, 2018, Windsor has two performance obligations: (1) the delivery of the windows and (2) the installation of the windows. Windows $4,000 Installation 1,200 Total $5,200 Allocation Windows ($4,000 ÷ $5,200) X $4,700 = $3,615 Installation ($1,200 ÷ $5,200) X $4,700 = 1,085 Revenue recognized $4,700 (round to nearest dollar) Windsor makes the following entries for delivery and installation. August 1, 2018 Cash ...................................................................................... 4,000 Accounts Receivable ............................................................. 700 Unearned Service Revenue .......................................... 1,085 Sales Revenue .............................................................. 3,615 Cost of Goods Sold ............................................................... 2,300 Inventory ........................................................................ 2,300 (Windows delivered, performance obligation for installation recorded) September 15, 2018 Cash .............................................................................................................. 700 Unearned Service Revenue .......................................................................... 1,085 Service Revenue (Installation) .............................................................. 1,085 Accounts Receivable ............................................................................. 700

Ex. 18-128—Sales with returns and discounts. On July 2, 2018, Lake Company sold to Sue Black merchandise having a sales price of $9,000 (cost $5,400) with terms of 2/10. n/30. f.o.b. shipping point. Lake estimates that merchandise with a sales value of $900 will be returned. An invoice totaling $120, terms n/30, was received by Black on July 6 from Pacific Delivery Service for the freight cost. Upon receipt of the goods, on July 3, Black notified Lake that $350 of merchandise contained flaws. The same day, Lake issued a credit memo covering the defective merchandise and asked that it be returned at Lake's expense. Lake estimates the returned items to have a fair value of $140. The freight on the returned merchandise was $20 paid by Lake on July 7. On July 12, the company received a check for the balance due from Black. Instructions (a) Prepare journal entries for Lake Company to record all the events noted above assuming sales and receivables are entered at gross selling price. (b) Prepare the journal entry assuming that Sue Black did not remit payment until August 5.

Solution 18-128 (a) July 2 Accounts Receivable ...................................................................... 9,000 Allowance for Sales Returns .............................................. 900 Sales Revenue ................................................................... 8,100 Estimated Inventory Returns .......................................................... 540* Cost of Goods Sold ........................................................................ 4,860 Inventory ............................................................................. 5,400 *($5,400 ÷ $9,000) X $900 July 3 Allowance for Sales Returns .......................................................... 350 Accounts Receivable .......................................................... 350 Returned Inventory ......................................................................... 140 Estimated Inventory Returns .............................................. 140 The journal entry to record delivery cost is as follows. July 7 Delivery Expense ........................................................................... 20 Cash ................................................................................... 20 The journal entry to record payment within the discount period is as follows. July 12 Cash ............................................................................................ 8,477 Sales Discounts (2% X $8,650) ..................................................... 173 Accounts Receivable .......................................................... 8,650 (b) August 5, 2018 Cash ............................................................................................ 8,650 Accounts Receivable .......................................................... 8,650

Ex. 18-129—Allocate transaction price. The Appliance Store is an experienced home appliance dealer. Appliance Store also offers a number of services together with the home appliances that it sells. Assume that Appliance Store sells dishwashers on a standalone basis. Appliance Store also sells installation services and maintenance services for dishwashers. However, Appliance Store does not offer installation or maintenance services to customers who buy dishwashers from other vendors. Pricing for dishwashers is as follows. Dishwasher only $1,140 Dishwasher with Installation service 1,260 Dishwasher with maintenance services 1,380 Dishwasher with installation and maintenance services 1,450 In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $240. Additionally, the incremental amount charged by Appliance Store for installation approximates the amount charged by independent third parties. Dishwashers are sold subject to a general right of return. If a customer purchases a dishwasher with installation and/or maintenance services, in the event Appliance Store does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $1,140. Instructions (a) Assume that a customer purchases a dishwasher with both installation and maintenance services for $1,450. Based on its experience, Appliance Store 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. Identify the separate performance obligations related to the Appliance Store revenue arrangement. (b) Indicate the amount of revenue that should be allocated to the dishwasher the installation, and to the maintenance contract. (c) Prepare the necessary journal entry for the Appliance Store.

Solution 18-129 (a) The separate performance obligations are the dishwasher, installation, and maintenance service, since each item has standalone value to the customer. (b) Dishwasher $1,140/$1,500 X $1,450 = $1,102 Installation $ 120/$1,500 X $1,450 = $ 116 Maintenance $ 240/$1,500 X $1,450 = $ 232 Total $1,500 (c) Cash 1,450 Sales Revenue 1,102 Service Revenue 116 Unearned Service Revenue 232

Ex. 18-130—Warranty arrangement. On December 31, 2017, Dieker Company sells equipment to Tabor Inc. for $125,000. Dieker includes a 1-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on December 31, 2017. Dieker estimates the prices to be $122,000 for the equipment and $3,000 for the cost of the warranty. Instructions (a) Prepare the journal entry to record this transaction on December 31, 2017. (b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Dieker sold an extended warranty (service type warranty) for an additional 2 years (2019-2020) for $2,000.

Solution 18-130 (a) Cash ............................................................................................... 125,000 Sales Revenue ................................................................... 125,000 (b) Dieker should recognize $1,000 of warranty revenue in 2019 and 2020. Cash ............................................................................................... 127,000 Sales Revenue ................................................................... 125,000 Unearned Warranty Revenue ............................................ 2,000

Ex. 18-131—Existence of a contract. On July 1, 2018, Ellsbury Inc. entered into a contract to deliver one of its specialty machines to Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of $3,000 in advance on July 15, 2018. Kickapoo pays Ellsbury on July 15, 2018, and Ellsbury delivers the machine (with cost of $1,900) on July 31, 2018. Instructions (a) Prepare the journal entry on July 1, 2018, for Ellsbury. (b) Prepare the journal entry on July 15, 2018, for Ellsbury. (c) Prepare the journal entry on July 31, 2018, for Ellsbury.

Solution 18-131 (a) July 1, 2018 No entry - neither party has performed on July 1, 2018. (b) July 15, 2018 Cash ............................................................................................... 3,000 Unearned Sales Revenue .................................................. 3,000 (c) July 31, 2018 Unearned Sales Revenue .............................................................. 3,000 Sales Revenue ........................................................................ 3,000 Cost of Goods Sold ........................................................................ 1,900 Inventory .................................................................................. 1,900

Pr. 18-137—Allocate Transaction Price, Discounts, Time Value. Master Grill Company sells outdoor grilling products, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations. Instructions Respond to the requirements related to the following independent revenue arrangements for Master Grill products and services. (a) Master Grill offers contract MG100 which is comprised of a free-standing gas grill for small patio use plus installation to a customer's gas line for a total price $950. On a standalone basis, the grill sells for $800 (cost $470), and Master Grill estimates that the fair value of the installation service (based on cost-plus estimation) is $200. Master Grill signed 15 MG100 contracts on May 30, 2018, and customers paid the contract price in cash. The grills were delivered and installed on June 15, 2018. Prepare journal entries for Master Grill for MG100 in May and June 2018. (b) Master Grill sells its specialty combination gas/wood-fired grills to local restaurants. Each grill is sold for $1,200 (cost $670) on credit with terms 2/20, net/60. Prepare the journal entries for the sale of 20 grills on August 1, 2018, and upon payment, assuming the customer paid on (1) August 20, 2018, and (2) September 29, 2018. Assume the company records sales net.

Solution 18-137 (a) The total revenue of $14,250 ($950 X 15) should be allocated to the two performance obligations based on their relative fair values. In this case, the fair value of the grills is considered $12,000 ($800 X 15) and the fair value of the installation fee is $3,000 ($200 X 15). The total fair value to consider is therefore $15,000 ($12,000 + $3,000). The allocation is as follows. Equipment ($12,000 / $15,000) X $14,250 = $11,400 Installation ($3,000 / $15,000) X $14,250 = $2,850 Master Grill makes the following entries. May 30, 2018 Cash ............................................................................................ 14,250 Unearned Service Revenue (Installation) ....................... 2,850 Unearned Sales Revenue ............................................... 11,400 June 15, 2018 Unearned Service Revenue (Installation) ................................... 2,850 Unearned Sales Revenue ........................................................... 11,400 Service Revenue (Installation) ........................................ 2,850 Sales Revenue ................................................................ 11,400 Cost of Goods Sold ..................................................................... 7,050 Inventory ($470 X 15) ...................................................... 7,050 (b) 1. August 1, 2018 Accounts Receivable [$24,000 - (2% X $24,000)] .......................................... 23,520 Sales Revenue .......................................................... 23,520 Cost of Goods Sold ........................................................... 13,400 Inventory ($670 X 20) ................................................ 13,400 August 20, 2018 Cash .................................................................................. 23,520 Accounts Receivable ................................................. 23,520 2. August 1, 2018 Accounts Receivable [$24,000 - (2% X $24,000)] .......................................... 23,520 Sales Revenue .......................................................... 23,520 Cost of Goods Sold ........................................................... 13,400 Inventory ($670 X 20) ................................................ 13,400 September 29, 2018 Cash .................................................................................. 24,000 Accounts Receivable ................................................. 23,520 Sales Discounts Forfeited (2% X $24,000) ....................................................... 480

Pr. 18-138—Long-term construction project accounting. Dobson Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a costto-cost basis. Dobson began work on a lump-sum contract at the beginning of 2018. As bid, the statistics were as follows: Lump-sum price (contract price) $8,000,000 Estimated costs Labor $1,700,000 Materials and subcontractor 3,500,000 Indirect costs 800,000 6,000,000 $2,000,000 At the end of the first year, the following was the status of the contract: Billings to date $4,500,000 Costs incurred to date Labor $ 928,000 Materials and subcontractor 1,296,000 Indirect costs 386,000 2,610,000 Latest forecast total cost 6,000,000 It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $210,000. These costs should not be considered in the costs incurred to date. Instructions (a) Compute the percentage of completion on the contract at the end of 2018. (b) Indicate the amount of gross profit that would be reported on this contract at the end of 2018. (c) Make the journal entry to record the income (loss) for 2018 on Dobson's books. (d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Dobson Construction at the end of 2018 related to its construction accounts. Also indicate where these items would be classified on the balance sheet. Billings collected during the year amounted to $3,800,000. (e) Assume the latest forecast on total costs at the end of 2018 was $8,120,000. How much income (loss) would Dobson report for the year 2018?

Solution 18-138 (a) Costs to date $2,610,000 Less materials on job site (210,000) $2,400,000 Costs Incurred to Date —————————— = Percentage of Completion Total Estimated Costs $2,400,000 ————— = 40% $6,000,000 (b) Revenue 40% × $8,000,000 = $3,200,000 Costs incurred 2,400,000 Gross profit $ 800,000 (c) Construction Expenses .................................................................. 2,400,000 Construction in Process ................................................................. 800,000 Revenue from Long-Term Contracts ................................. 3,200,000 (d) Current Assets Accounts receivable $700,000 ($4,500,000 - $3,800,000) Current Liability Billings in excess of contract costs and recognized profit $1,300,000 ($4,500,000 - $3,200,000) (e) Total loss reported in 2018 Contract price $8,000,000 Estimated cost to complete 8,120,000 Amount of loss to be reported $ (120,000)

Pr. 18-139—Accounting for long-term construction contracts. The board of directors of Ogle Construction Company is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for long-term contracts in the company's financial statements. You have been engaged to assist Ogle's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information: 1. Ogle commenced doing business on January 1, 2018. 2. Construction activities for the year ended December 31, 2018, were as follows: Total Contract Billings Through Cash Collections Project Price 12/31/18 Through 12/31/18 A $ 500,000 $ 340,000 $ 310,000 B 720,000 210,000 210,000 C 475,000 475,000 390,000 D 200,000 100,000 65,000 E 450,000 400,000 400,000 $2,345,000 $1,525,000 $1,375,000 Contract Costs Estimated Incurred Through Additional Costs to Project 12/31/18 Complete Contracts A $ 424,000 $101,000 B 195,000 455,000 C 350,000 -0- D 123,000 97,000 E 320,000 80,000 $1,412,000 $733,000 3. Each contract is with a different customer. 4. Any work remaining to be done on the contracts is expected to be completed in 2019. Instructions (a) Prepare a schedule by project, computing the amount of income (or loss) before selling, general, and administrative expenses for the year ended December 31, 2018, which would be reported under: (1) The completed-contract method. (2) The percentage-of-completion method (based on estimated costs). (b) Prepare the general journal entry(ies) to record revenue and gross profit on project B (second project) for 2018, assuming that the percentage-of-completion method is used. (c) Indicate the balances that would appear in the balance sheet at December 31, 2018 for the following accounts for Project D (fourth project), assuming that the percentage-of-completion method is used. Accounts Receivable Billings on Construction in Process Construction in Process (d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D (fourth project), if the completed-contract method is used?

Solution 18-139 (a) (1) and (2) Projects A B C D E Contract price $500,000 $720,000 $475,000 $200,000 $450,000 Contract costs incurred 424,000 195,000 350,000 123,000 320,000 Additional costs to complete 101,000 455,000 -0- 97,000 80,000 Total cost 525,000 650,000 350,000 220,000 400,000 Total gross profit or (loss) $ (25,000) $ 70,000 $125,000 $ (20,000) $ 50,000 The amount reported as income (loss) under the completed-contract method for 2018 is: Project A $(25,000) B -0- C 125,000 D (20,000) E -0- $ 80,000 The amount reported as income (loss) under the percentage-of-completion method for 2018 is: Project A $(25,000) B 21,000 $70,000 × ($195,000 ÷ $650,000) C 125,000 D (20,000) E 40,000 $50,000 × ($320,000 ÷ $400,000) $141,000 (b) Construction in Process ................................................................. 21,000 Construction Expenses .................................................................. 195,000 Revenue from Long-term Contracts .................................. 216,000 (c) Billings $100,000 Cash collections (65,000) Accounts receivable $ 35,000 Billings on Construction in Process 100,000 Costs incurred $123,000 Loss reported (20,000) Construction in process $103,000 (d) The account balances would be the same.

Pr. 18-140—Long-term contract accounting (completed-contract). Evans Construction, Inc. experienced the following construction activity in 2018, the first year of operations. Cash Cost Estimated Total Billings Collections Incurred Additional Contract through through through Costs to Contract Price 12/31/18 12/31/18 12/31/18 Complete X $260,000 $170,000 $155,000 $182,000 $ 63,000 Y 330,000 125,000 125,000 105,000 252,000 Z 233,000 233,000 198,000 158,000 -0- $823,000 $528,000 $478,000 $445,000 $315,000 Each of the above contracts is with a different customer, and any work remaining at December 31, 2018 is expected to be completed in 2019. Instructions Prepare a partial income statement and a partial balance sheet to indicate how the above contract information would be reported. Evans uses the completed-contract method.

Solution 18-140 Evans Construction, Inc. Income Statement For the Year 2018 Revenue from long-term contracts (contract Z) $233,000 Cost of construction (contract Z) 158,000 Gross profit $ 75,000 Provision for loss (contract Y)* 27,000 *Contract costs through 12/31/18 $105,000 Estimated costs to complete 252,000 Total estimated costs 357,000 Total contract price 330,000 Loss recognized in 2018 $ 27,000 Evans Construction, Inc. Balance Sheet As of 12/31/18 Current assets: Accounts receivable ($528,000 - $478,000) $ 50,000 Inventories Construction in process (contract X) $182,000 Less: Billings 170,000 Unbilled contract costs 12,000 Current liabilities: Billings ($125,000) in excess of contract costs ($105,000) 20,000 Estimated liability from long-term contracts 27,000

Before year-end adjusting entries, Dunn Company's account balances at December 31, 2017, for accounts receivable and the related allowance for uncollectible accounts were $1,500,000 and $90,000, respectively. An aging of accounts receivable indicated that $125,000 of the December 31 receivables are expected to be uncollectible. The net realizable value of accounts receivable after adjustment is

b. $1,375,000. $1,500,000 - $125,000 = $1,375,000.

Ex. 4-104—Calculation of net income from the change in stockholders' equity. Presented below are changes in the account balances of Wenn Company during the year, except for retained earnings. Increase Increase (Decrease) (Decrease) Cash $29,000 Accounts payable $34,000 Accounts receivable (net) (18,000) Bonds payable (20,000) Inventory 52,000 Common stock 62,000 Plant assets (net) 57,000 Paid-in capital 16,000 The only entries in Retained Earnings were for net income and a dividend declaration of $17,000. 1. Compute the net income for the current year. 2. Explain what else can affect the Retained Earnings account.

Solution 4-104 1. Computation of net income Change in assets ($138,000 - $18,000) $120,000 Increase Change in liabilities ($34,000 - $20,000) 14,000 Increase Change in stockholders' equity 106,000 Increase Add: Dividend declared 17,000 Less: Investment by stockholders (78,000) Net income $ 45,000 2. Changes in accounting principles and prior period adjustments can increase or decrease the Retained Earnings account. In addition, a net loss also decreases retained earnings.

Ex. 4-106—Income statement classifications. Indicate the major section or subsection of a multiple-step income statement in which each of the following items would usually appear: a. Advertising b. Depletion c. Dividend revenue d. Freight-in e. Loss on disposal of a component of a business, net of tax f. Income taxes g. Purchase discounts h. Sales discounts i. Officers' salaries j. Freight-out k. Interest income

Solution 4-106 a. Selling expense. b. Cost of goods sold. c. Other revenue. d. Cost of goods sold as an addition to purchases. e. Discontinued operations. f. Income taxes; subtracted from income before income taxes in arriving at net income. g. Cost of goods sold as a subtraction from purchases. h. Subtracted from gross revenues. i. Administrative or general expenses. j. Selling expense. k. Other revenue.

Ex. 4-112—Classification of income statement and retained earnings statement items. For each of the items listed below, indicate how it should be treated in the financial statements. Use the following letter code for your selections: a. Continuing operations b. Discontinued operations c. Prior period adjustment _____ 1. The bad debt rate was increased from 1% to 2%, thus increasing bad debt expense. _____ 2. Obsolete inventory was written off. This was the first loss of this type in the company's history. _____ 3. Loss on sale of investments. The company last sold some of its investments two years ago. _____ 4. Recognition of income earned last year which was inadvertently omitted from last year's income statement. _____ 5. The company sold one of its warehouses at a loss. _____ 6. Settlement of litigation with federal government related to income taxes of three years ago. The company is continually involved in various adjustments with the federal government related to its taxes. _____ 7. Loss on the disposal of a component of a business. _____ 8. The company neglected to record its depreciation in the previous year. _____ 9. Discontinuance of all production in the United States. The manufacturing operations were relocated in Mexico.

Solution 4-112 1. a 4. c 7. b 2. a 5. a 8. c 3. a 6. a 9. a

Pr. 4-117—Income statement and retained earnings statement. Porter Corporation's capital structure consists of 50,000 shares of common stock. At December 31, 2017 an analysis of the accounts and discussions with company officials revealed the following information: Sales revenue $1,250,000 Discontinued operations loss (net of tax) 63,000 Selling expenses 128,000 Cash 60,000 Accounts receivable 90,000 Common stock 200,000 Cost of goods sold 700,000 Accumulated depreciation-machinery 180,000 Dividend revenue 8,000 Unearned service revenue 4,400 Interest payable 1,000 Land 370,000 Patents 100,000 Retained earnings, January 1, 2017 270,000 Interest expense 17,000 Administrative expenses 170,000 Dividends declared 24,000 Allowance for doubtful accounts 5,000 Notes payable (maturity 7/1/20) 200,000 Machinery 450,000 Materials 40,000 Accounts payable 60,000 The amount of income taxes applicable to income was $72,900, excluding the tax effect of the discontinued operations loss which amounted to $27,000. Instructions (a) Prepare a multiple-step income statement. (b) Prepare a retained earnings statement.

Solution 4-117 Porter Corporation INCOME STATEMENT For the Year Ended December 31, 2017 Sales revenue $1,250,000 Cost of goods sold 700,000 Gross profit 550,000 Operating expenses: Selling expenses $128,000 Administrative expenses 170,000 Total operating expenses 298,000 Operating income 252,000 Other revenue and expense: Dividend revenue 8,000 Interest expense (17,000) (9,000) Income before income taxes 243,000 Income taxes 72,900 Income from continuing operations 170,100 Discontinued operations loss, net of applicable taxes of $27,000 (63,000) Net income $ 107,100 Per share of common stock— Income from continuing operations $3.40 Discontinued operations loss, net of tax (1.26) Net income $2.14 Porter Corporation RETAINED EARNINGS STATEMENT For the Year Ended December 31, 2017 Retained earnings, January 1, 2017 $270,000 Add: Net income $107,100 Deduct: Dividends declared 24,000 83,100 Retained earnings, December 31, 2017 $353,100

The accountant preparing the income statement for Bakersfield, Inc. had some doubts about the appropriate accounting treatment of the seven items listed below during the fiscal year ending December 31, 2017. Assume a tax rate of 40 percent. 1. Office equipment purchased January 1, 2017 for $60,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated threeyear service life with no expected salvage value. Bakersfield uses the straight-line method to depreciate office equipment for financial reporting purposes. This error has not been recorded. 2. The corporation disposed of its sporting goods division during 2017. This disposal meets the criteria for discontinued operations. The division correctly calculated income from operating this division of $110,000 before taxes and a loss of $20,000 before taxes on the disposal of the division. All of these events occurred in 2017 and have not been recorded. 3. The company recorded advances of $10,000 to employees made December 31, 2017 as Salaries and Wages Expense. 4. Dividends of $10,000 during 2017 were recorded as an operating expense. 5. In 2017, Bakersfield changed its method of accounting for inventory from the first-in-firstout method to the average cost method. Inventory in 2017 was correctly recorded using the average cost method. The new inventory method would have resulted in an additional $125,000 of cost of goods sold (before taxes) being reported on prior years' income statement. 6. On January 1, 2013, Bakersfield bought a building that cost $85,000, had an estimated useful life of ten years, and had a salvage value of $5,000. Bakersfield uses the straight-line depreciation method to depreciate the building. In 2017, it was estimated that the remaining useful life was eight years and the salvage value was zero. Depreciation expense reported on the 2017 income statement was correctly calculated based on the new estimates. No adjustment for prior years' depreciation estimates was made. Part A. For each item, record corrections to income from continuing operations before taxes, if any. Denote any negative numbers by using brackets < >.

Solution 4-118 Number Item Description Increase <Decrease> to Income from Continuing Operations before taxes 1 To correct, need to put back all $60,000 of equipment into Equipment account and take out of Supplies Expense account. Also take depreciation of $20,000 for the year. Net effect is to increase income by $40,000. $40,000 2 Discontinued Items are reported after Income from Continuing Operations No Effect 3 Correct with Dr: Advances to Employees Cr: Salaries/Wages Expense $10,000 4 Dividends are not reported on the Income Statement; should be on R/E Statement. $10,000 5 Change in inventory method: Current year reported correctly on income statement, need to adjust beginning R/E balance. No Effect 6 Current year is correct. A change in estimate does not need retroactive action. No Effect Part B. At January 1, 2017, Bakersfield, Inc.'s retained earnings balance was $200,000. Assume that income from continuing operations (before taxes) and after correctly considering any of the six additional items was $1,600,000. Prepare the income statement and retained earnings statement. Denote negative numbers by using brackets < >. Do not disclose earnings per share data. Bakersfield Incorporated Partial Income Statement For the Year Ending December 31, 2017 Income from continuing operations before income taxes $1,600,000 Less: Income tax expense ($1,600,000 × 40%) (640,000) Income from continuing operations 960,000 Discontinued operations Income from discontinued operations, $66,000 net of tax ($110,000 × .6) Less: Loss on disposal of discontinued operations, (12,000) net of tax ($20,000 × .6) 54,000 Net income $1,014,000 Bakersfield Incorporated Retained Earnings Statement For the Year Ending December 31, 2017 Beginning Retained earnings as of January 1, 2017 $200,000 Adjustment for change in inventory method ($125,000 × .6) (75,000) Beginning Retained earnings adjusted 125,000 Add: Net Income 1,014,000 Less: Dividends (10,000) Ending Retained earnings $1,129,000

BE7-153 Sutherland Corporation sold goods to Rice Decorators for $75,000 on September 1, 2017, accepting Rice's $75,000, 6-month, 6% note. Prepare Sutherland's September 1 entry, December 31, annual adjusting entry, and March 1 entry for the collection of the note and interest.

Solution 7-153 9/1/17 Notes Receivable ............................................... 75,000 Sales Revenue ....................................... 75,000 12/31/17 Interest Receivable 1,500 Interest Revenue .................................... ($75,000 × 6% × 4/12) ............................ 1,500 3/1/18 Cash .................................................................. 77,250 Notes Receivable ................................... 75,000 Interest Receivable ................................ 1,500 Interest Revenue .................................... 750

Chase Corp. had the following unusual transactions during 2017: A $450,000 gain from selling the only investment Chase has ever owned. A $630,000 gain on the sale of equipment. A $210,000 loss on the write-down of inventories. In its 2017 income statement, what amount should Chase report as total unusual net gains?

c. $870,000. $460,000 + $630,000 - $210,000 = $870,000.

BE7-154 Kohl Company loaned $66,116 to Hemingway, Inc, accepting Hemingway's 2-year, $80,000, zero-interest-bearing note. The implied interest rate is 10%. Prepare Kohl's journal entries for the initial transaction, recognition of interest each year, and the collection of $80,000 at maturity.

Solution 7-154 Notes Receivable ................................................................. 80,000 Discount on Notes Receivable .................................. 13,884 Cash ........................................................................... 66,116 Discount on Notes Receivable ............................................. 6,612 Interest Revenue ....................................................... ($66,116 × 10%) ........................................................ 6,612 Discount on Notes Receivable ............................................. 7,273 Interest Revenue ....................................................... ($66,116 + $6,612) × 10% ......................................... 7,273 Cash .................................................................................. 80,000 Notes Receivable ....................................................... 80,000

BE7-156 Hunt Incorporated sold $300,000 of accounts receivable to Gannon Factors Inc. on a with recourse basis. Gannon assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entries for Hunt Incorporated and Gannon Factors to record the sale of the accounts receivable to Gannon assuming that the recourse liability has a fair value of $15,000.

Solution 7-156 Hunt Cash ................................................................................... 276,000 Due from Gannon Factors ................................................... 18,000* Loss on Sale of Receivables ............................................... 21,000** Accounts Receivable ................................................. 300,000 Recourse Liability ...................................................... 15,000 *6% X $300,000 = $18,000 **2% X $300,000 = $6,000 + $15,000 = $21,000 Gannon Accounts Receivables ......................................................... 300,000 Due to Customer (Hunt) ............................................ 18,000 Interest Revenue ....................................................... 6,000 Cash .......................................................................... 276,000

Ex. 7-158—Allowance for doubtful accounts. When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt expense. There are basically two methods of recognizing bad debt expense: (1) direct write-off method, and (2) allowance method. Instructions (a) Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense. (b) Discuss the reasons why one of the above methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles.

Solution 7-158 (a) There are basically two methods of recognizing bad debt expense: (1) direct write-off and (2) allowance. The direct write-off method requires the identification of specific balances that are deemed to be uncollectible before any bad debt expense is recognized. At the time a specific account is deemed uncollectible, the account is removed from accounts receivable and a corresponding amount of bad debt expense is recognized. The allowance method requires an estimate of bad debt expense for a period of time by reference to the composition of the accounts receivable balance at a specific point in time. Thus, total bad debt expense expected to arise as a result of operations for a specific period is estimated, the valuation account (allowance for doubtful accounts) is appropriately adjusted, and a corresponding amount of bad debt expense is recognized. As specific accounts are identified as uncollectible, the account is written off. It is removed from accounts receivable and a corresponding amount is removed from the valuation account (allowance for doubtful accounts). Net accounts receivable do not change, and there is no charge to bad debt expense when specific accounts are identified as uncollectible and written off using the allowance method. (b) The allowance method is preferable because it matches the cost of making a credit sale with the revenues generated by the sale in the same period and achieves a proper carrying value for accounts receivable at the end of a period. Since the direct write-off method does not recognize the bad debt expense until a specific amount is deemed uncollectible, which may be in a subsequent period, it does not comply with the expense recognition principle and does not achieve a proper carrying value for accounts receivable at the end of a period.

Ex. 7-159-—Entries for bad debt expense. A trial balance before adjustment included the following: Debit Credit Accounts receivable $140,000 Allowance for doubtful accounts 730 Sales $610,000 Sales returns and allowances 8,000 Give journal entries assuming that the estimate of uncollectible accounts is determined by taking (1) 5% of gross accounts receivable and (2) 3% of gross accounts receivable and assume a $730 debit allowance account balance.

Solution 7-159 (1) Bad Debt Expense ............................................................... 6,270 Allowance for Doubtful Accounts ............................. 6,270 Gross receivables $140,000 Rate 5% Total allowance needed 7,000 Present allowance (730) Adjustment needed $ 6,270 (2) Bad Debt Expense ............................................................... 4,930 Allowance for Doubtful Accounts ............................. 4,930 Gross receivables $140,000 Rate 3% Total allowance needed 4,200 Present allowance 730 Adjustment Needed $ 4,930

Ex. 7-160—Fair Value Option. Ellison Company sells large store-rack systems and frequently accepts notes receivable from customers as payment. Ellison conducts a through credit check on its customers, and it charges a fairly low interest rate (1/2 of 1% payable monthly) on these notes. Ellison has elected to use the fair value option for one of these notes and has the following data related to the carrying and fair value for its note. Carrying Value Fair Value December 31, 2017 $90,000 $85,000 December 31, 2018 72,000 76,000 Instructions Prepare the journal entry at December 31 (Ellison's year-end) for 2017 and 2018, to record the fair value option for these notes.

Solution 7-160 12/31/17 Unrealized Holding Gain/Loss- Income............................................... 5,000 Notes Receivable ($90,000 − $85,000).................... 5,000 12/31/18 Notes Receivable [($76,000 − $72,000) + $5,000]....... 9,000 Unrealized Holding Gain/Loss - Income.................................... 9,000

Bella Pool Company sells prefabricated pools that cost $80,000 to customers for $144,000. The sales price includes an installation fee, which is valued at $20,000. The fair value of the pool is $128,000. The installation is considered a separate performance obligation and is expected to take 3 months to complete. The transaction price allocated to the pool and the installation is

a. $124,541 and $19,459 respectively ($128,000/$148,000) × $144,000 = $124,541. ($20,000/$148,000) × $144,000 = $19,459.

In preparing its August 31, 2017 bank reconciliation, Bing Corp. has available the following information: Balance per bank statement, 8/31/17 $25,650 Deposit in transit, 8/31/17 3,900 Return of customer's check for insufficient funds, 8/30/17 600 Outstanding checks, 8/31/17 2,750 Bank service charges for August 100 At August 31, 2017, Bing's correct cash balance is

a. $26,800. $25,650 + $3,900 - $2,750 = $26,800.

Sources of revenue for franchise companies are

c. sale of initial franchise and continuing fees.

Ex. 7-161—Accounts receivable assigned. Accounts receivable in the amount of $700,000 were assigned to the Fast Finance Company by Marsh, Inc., as security for a loan of $600,000. The finance company assessed a 4% finance charge on the face amount of the loan, and the note bears interest at 8% per year. During the first month, Marsh collected $390,000 on assigned accounts. This amount was remitted to the finance company along with one month's interest on the note. Instructions Make all the entries for Marsh Inc. associated with the transfer of the accounts receivable, the loan, and the remittance to the finance company.

Solution 7-161 Cash ................................................................................................... 576,000 Interest Expense ................................................................................ 24,000 Notes Payable ........................................................................ 600,000 Cash ................................................................................................... 390,000 Accounts Receivable ............................................................. 390,000 Notes Payable .................................................................................... 390,000 Interest Expense ................................................................................ 4,000 Cash ....................................................................................... 394,000

Pr. 7-162—Entries for bad debt expense. The trial balance before adjustment of Risen Company reports the following balances: Dr. Cr. Accounts receivable $300,000 Allowance for doubtful accounts $ 5,000 Sales (all on credit) 1,700,000 Sales returns and allowances 80,000 Instructions (a) Prepare the entry for estimated bad debts assuming that doubtful accounts are estimated to be 6% of gross accounts receivable. (b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $5,000 instead of a credit balance. How will this difference affect the journal entry in part (a)? (c) What is the theoretical justification for the percentage-of-receivables method used to estimate bad debts?

Solution 7-162 (a) Bad Debt Expense .......................................................... 13,000 Allowance for Doubtful Accounts ........................ 13,000 Gross receivables $300,000 Rate × 6% Total allowance needed 18,000 Present allowance (5,000) Bad debt expense $ 13,000 (b) Gross receivables $300,000 Rate × 6% Total allowance needed 18,000 Present allowance 5,000 Additional amount required $ 23,000 The journal entry is therefore as follows: Bad Debt Expense .......................................................... 23,000 Allowance for Doubtful Accounts ........................ 23,000 The entry would be the same—only the dollar amount would change. (c) The percentage-of-receivables method estimates bad debts based on the balance in the accounts receivable account. This method focuses on the balance sheet and attempts to value the account receivable at their net realizable value.

Pr. 7-163—Amortization of discount on note. On December 31, 2016, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $800,000, a due date of December 31, 2019, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. The following interest factors are provided: Interest Rate Table Factors For Three Periods 5% 10% Future Value of 1 1.15763 1.33100 Present Value of 1 .86384 .75132 Future Value of Ordinary Annuity of 1 3.15250 3.31000 Present Value of Ordinary Annuity of 1 2.72325 2.48685 Instructions (a) Determine the present value of the note. (b) Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method. (Round to whole dollars.) (c) Explain how the accounting for a zero-interest-bearing note would differ in (a) and (b) above.

Solution 7-163 (a) Present value of interest = $40,000 × 2.48685 = $ 99,474 Present value of maturity value = $800,000 × .75132 = 601,056 $700,530 (b) Green Company Schedule of Note Discount Amortization Effective Interest Method 5% Note Discounted at 10% (Imputed) Cash Effective Unamortized Present Interest Interest Discount Discount Value Date (5%) (10%) Amortized Balance of Note 12/31/16 $99,470 $700,530 12/31/17 $ 40,000 $ 70,053 $30,053 69,417 730,583 12/31/18 40,000 73,058 33,058 36,359 763,641 12/31/19 40,000 76,359* 36,359 0 800,000 $120,000 $219,470 $99,470 *$5 adjustment to compensate for rounding. (c) The present value of the note would only include the present value of the $800,000 face value since the note is zero-interest-bearing. In the calculation of interest revenue, the amount of interest recorded is based on the present value of the note's face value. Because the note is zero-interest-bearing, the amount of interest revenue is equal to the amount of discount amortized.

Pr. 7-164—Accounts receivable assigned. Prepare journal entries for Mars Co. for: (a) Accounts receivable in the amount of $1,500,000 were assigned to Utley Finance Co. by Mars as security for a loan of $1,300,000. Utley charged a 3% commission on the accounts; the interest rate on the note is 12%. (b) During the first month, Mars collected $600,000 on assigned accounts after deducting $1,400 of discounts. Mars wrote off a $1,600 assigned account. (c) Mars paid to Utley the amount collected plus one month's interest on the note. (d) Explain the differences in accounting for a secured borrowing and a sale of receivables.

Solution 7-164 (a) Cash .......................................................................................... 1,255,000 Interest Expense ......................................................................... 45,000 Notes Payable ................................................................. 1,300,000 (b) Cash .......................................................................................... 600,000 Sales Discounts ........................................................................... 1,400 Allowance for Doubtful Accounts ................................................ 1,600 Accounts Receivable ....................................................... 603,000 (c) Notes Payable ............................................................................. 600,000 Interest Expense ......................................................................... 13,000 Cash ................................................................................ 613,000 (d) In a secured borrowing a company uses receivables as collateral in a borrowing transaction. If the loan is not repaid when due, the creditors can convert the collateral to cash (i.e. collect the receivables). With a sale of receivables, the company recognizes a loss on the sale for the difference between the net proceeds and the receivables' carrying value. A liability is always recorded in a secured borrowing, but a sale of receivables only involves a liability when the receivables are sold with recourse.

Palomo Corp has a tax rate of 30 percent and income before non-operating items of $1,785,000. It also has the following items (gross amounts). Unusual gain $ 115,000 Loss from discontinued operations 915,000 Dividend revenue 30,000 Income increasing prior period adjustment 370,000 What is the amount of income tax expense Palomo would report on its income statement?

a. $579,000 ($1,785,000 + $115,000 + $30,000) × .30 = $579,000.

Didde Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2017 included the following expense and loss accounts: Accounting and legal fees $210,000 Advertising 290,000 Freight-out 120,000 Interest 105,000 Loss on sale of long-term investment 45,000 Officers' salaries 335,000 Rent for office space 330,000 Sales salaries and commissions 355,000 One-half of the rented premises is occupied by the sales department. Didde's total selling expenses for 2017 are

a. $930,000. $290,000 + $120,000 + ($330,000 × .50) + $355,000 = $930,000.

For Mortenson Company, the following information is available: Cost of goods sold $390,000 Dividend revenue 15,000 Income tax expense 36,000 Operating expenses 138,000 Sales revenue 600,000 In Mortenson's multiple-step income statement, gross profit

c. should be reported at $210,000 $600,000 - $390,000 = $210,000.

Pr. 7-165—Factoring Accounts Receivable. On May 1, Dexter, Inc. factored $1,600,000 of accounts receivable with Quick Finance on a without recourse basis. Under the arrangement, Dexter was to handle disputes concerning service, and Quick Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Quick Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts. Instructions (a) Prepare the journal entry required on Dexter's books on May 1. (b) Prepare the journal entry required on Quick Finance's books on May 1. (c) Assume Dexter factors the $1,600,000 of accounts receivable with Quick Finance on a with recourse basis instead. The recourse provision has a fair value of $28,000. Prepare the journal entry required on Dexter's books on May 1. (d) Explain the main advantage and disadvantage of selling receivables (1) without recourse and (2) with recourse.

Solution 7-165 (a) Cash ................................................................................................. 1,472,000 Due from Factor (2% × $1,600,000) ................................................ 32,000 Loss on Sale of Receivables (6% × $1,600,000) ............................ 96,000 Accounts Receivable ....................................................... 1,600,000 (b) Accounts Receivable ....................................................................... 1,600,000 Due to Dexter ........................................................................ 32,000 Interest Revenue ................................................................... 96,000 Cash ....................................................................................... 1,472,000 (c) Cash ................................................................................................. 1,472,000 Due from Factor ............................................................................. 32,000 Loss on Sale of Receivables ........................................................... 124,000 Accounts Receivable ............................................................. 1,600,000 Recourse Liability .................................................................. 28,000 (d) (1) The main advantage of selling receivables without recourse is that the purchaser (rather than the seller) assumes the risk of collectability and absorbs any losses. The primary disadvantage is the seller does not receive as much proceeds from the factor as it would if receivables were sold on a with recourse basis. (2) The biggest advantage of selling receivables with recourse is that the purchaser should assess a lower finance charge and pay a higher amount for the receivables. The major disadvantage of selling receivables with recourse is that the seller guarantees payment to the purchaser if the debtor (customer) fails to pay. This also requires the seller to record a recourse liability.

A company that reports a discontinued operation item must report per share amounts for this item.

True

Companies record and report long-term notes receivable at the present value of the cash they expect to collect.

True

The components of other comprehensive income can be reported in the statement of comprehensive income.

True

The income statement is useful in assessing the risk or uncertainty of achieving future cash flows.

True

The net amount reported for short-term receivables is not affected when a specific account receivable is determined to be uncollectible.

True

The phrase "income from continuing operations" is used only when gains or losses on discontinued operations occur.

True

The principal advantage of the completed-contract method is that reported revenue reflects final results rather than estimates.

True

Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different quantities purchased.

True

Under IFRS, a company may classify expenses by function, but must also disclose the classification of expenses by nature.

True

Under IFRS, both revenues and expenses and other income and expenses are reported as part of income from operations.

True

When a contract modification is treated as a separate performance obligation or prospectively, the same amount of revenue is recognized before and after the modification.

True

Walton Company, which uses IFRS, has a note receivable with a carrying value of $30,000 at December 31, 2016. On January 2, 2017, the borrower declares bankruptcy, and Walton estimates that only $25,000 of the note will be collected. Briefly describe the accounting for the loan subsequent to the bankruptcy, assuming Walton estimates that more than $25,000 can be repaid.

Under IFRS, Walton may record recovery of losses on prior impairments. Under U.S. GAAP, reversal of impairment is not permitted. Rather the balance on the loan after the impairment becomes the new basis for the loan.

Pr. 4-114—Income statement form. Wilcox Corporation had income from continuing operations of $650,000 (after taxes) in 2017. In addition, the following information, which has not been considered, is as follows. 1. A machine was sold for $140,000 cash during the year at a time when its book value was $110,000. (Depreciation has been properly recorded.) The company often sells machinery of this type. 2. Wilcox decided to discontinue its stereo division in 2017. During the current year, the loss on the disposal of this component of the business was $210,000 less applicable taxes. Instructions Present in good form the income statement of Wilcox Corporation for 2017 starting with "income from continuing operations." Assume that Wilcox's tax rate is 30% and 200,000 shares of common stock were outstanding during the year.

Wilcox Corporation Partial Income Statement For the Year Ended December 31, 2017 Income from continuing operations $671,000* Discontinued operations Loss on disposal of a component of a business, $210,000, less applicable income taxes, $63,000 (147,000) Net income $524,000 Per share of common stock—Income from cont. operations $3.36 (671,000/200,000) Discontinued operations, net of tax (.74) (524,000/200,000) Net income $2.62 *Income from cont. operations (unadjusted) $650,000 Gain on sale of machinery (after tax) 21,000 (140,000 - 110,000) × .70 Income from cont. operations (adjusted) $671,000

Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2017, included the following expense accounts: Accounting and legal fees $420,000 Advertising 360,000 Freight-out 225,000 Interest 180,000 Loss on sale of long-term investments 90,000 Officers' salaries 540,000 Rent for office space 540,000 Sales salaries and commissions 405,000 One-half of the rented premises is occupied by the sales department. How much of the expenses listed above should be included in Perry's general and administrative expenses for 2017?

a. $1,230,000. $420,000 + $540,000 + ($540,000 × .50) = $1,230,000.

Lantos Company had a 40 percent tax rate. Given the following pre-tax amounts, what would be the income tax expense reported on the face of the income statement? Sales revenue $ 1,000,000 Cost of goods sold 600,000 Salaries and wages expense 80,000 Depreciation expense 110,000 Dividend revenue 90,000 Utilities expense 10,000 Discontinued operations loss 100,000 Interest expense 20,000

a. $108,000 ($1,000,000 - $600,000 - $80,000 - $110,000 + $90,000 - $10,000 - $20,000) × .40 = $108,000.

If a contract involves a significant financing component,

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

Revenue for ongoing sales-based royalty payments should be recognized

a. when the amount of sales can be determined.

The following items were among those that were reported on Dye Co.'s income statement for the year ended December 31, 2017: Legal and audit fees $580,000 Rent for office space 720,000 Interest on inventory floor plan 840,000 Loss on abandoned equipment used in operations 140,000 The office space is used equally by Dye's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Dye's multiple-step income statement?

a. $940,000. $580,000 + ($720,000 × .50) = $940,000.

At Ruth Company, events and transactions during 2017 included the following. The tax rate for all items is 30%. (1) Depreciation for 2015 was found to be understated by $150,000. (2) A strike by the employees of a supplier resulted in a loss of $125,000. (3) The inventory at December 31, 2015 was overstated by $200,000. The effect of these events and transactions on 2017 income from continuing operations net of tax would be

a. ($87,500). $125,000 - ($125,000 × .30) = $87,500.

What might a manager do during the last quarter of a fiscal year if she wanted to decrease current annual net income?

a. Delay shipments and sales to customers until after the end of the fiscal year.

Which of the following is not a generally practiced method of presenting the income statement?

a. Including prior period adjustments in determining net income

Johnstone Company has a loan receivable with a carrying value of $125,000 at December 31, 2016. On January 1, 2017, the borrower, Ralph Young Industries, declares bankruptcy, and Johnstone estimates that it will collect only 45% of the loan balance. Assume that on January 4, 2018, Johnstone learns that Ralph Young Industries has emerged from bankruptcy. As a result, Johnstone now estimates that all but $11,500 will be paid on the loan. Under IFRS, which of the following entries would be made on January 4, 2018?

a. Loan Receivable 57,250 Recovery of Impairment Loss 57,250

Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct?

a. Net approach

Which of the following methods of determining annual bad debt expense best achieves the matching concept?

a. Percentage of sales

The IFRS approach for derecognizing a receivable focuses on which of the following?

a. Risks b. Rewards c. Loss of control d. All of these answers choices are correct. Answer: D

What is "recourse" as it relates to selling receivables?

a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.

Of the following conditions, which is the only one that is not required if the transfer of receivables with recourse is to be accounted for as a sale?

a. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible.

*121. Douglas Diners Inc. charges an initial franchise fee of $180,000 broken down as follows: Rights to trade name, market area, and proprietary know-how $ 80,000 Training services 23,000 Equipment (cost of $21,600) 77,000 Total initial franchise fee $180,000 Upon signing of the agreement, a payment of $80,000 is due. Thereafter, two annual payments of $50,000 are required. The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise agreement is signed on August 1, 2018, and the franchise commences operation on November 1, 2018. Assume that the total training fees includes training services for the period leading up to the franchise opening ($11,000 value) and for 3 months following opening. The journal entry on August 1, 2018 would include

a. a credit to Unearned Service Revenue for $23,000.

If plant assets of a manufacturing company are sold at a gain of $1,800,000 with related taxes of $540,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as

a. a gain of $1,800,000 and an increase in income tax expense of $540,000. $1,800,000 gain; $540,000, income tax expense

a. debit to Unearned Sales Revenue for $150,000.

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

a. each service is interdependent and interrelated.

The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach

a. gives a reasonably correct statement of receivables in the balance sheet.

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

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

When a customer is able to benefit from a good or service on its own or together with other readily available resources, the good or service

a. is distinct.

The accounts receivable turnover measures the

a. number of times the average balance of accounts receivable is collected during the period.

When a company has cash available in another account in the same bank at which an overdraft has occurred, the company will:

a. offset the overdraft against cash account.

Under IFRS,

a. receivables are generally reported in the current assets section of the statement of financial position. b. cash and receivables are reported as the last items in the current assets section of the statement of financial position. c. bank overdrafts are generally reported as cash. d. All of these answer choices are correct. Answers: D

The principal advantage of the completed-contract method is that

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

a. should not be reported.

When preparing a bank reconciliation, bank credits are

added to the balance per books.

Gomez, Inc. began work in 2018 on contract #3814, which provided for a contract price of $19,200,000. Other details follow: 2018 2019 Costs incurred during the year $3,200,000 $9,800,000 Estimated costs to complete, as of December 31 9,600,000 0 Billings during the year 3,600,000 14,400,000 Collections during the year 2,400,000 15,600,000 *111. Assume that Gomez uses the percentage-of-completion method of accounting. The portion of the total gross profit to be recognized as income in 2018 is

b. $1,600,000. ($3,200,000/$12,800,000) x ($19,200,000-$12,800,000) = $1,600,000

Wynne Inc. charges an initial franchise fee of $2,300,000, with $500,000 paid when the agreement is signed and the balance in five annual payments. The present value of the future payments, discounted at 10%, is $1,364,680. The franchisee has the option to purchase $300,000 of equipment for $240,000. Wynne has substantially provided all initial services required and collectibility of the payments is reasonably assured. The amount of revenue from franchise fees is

b. $1,804,680 $500,000 + $1,364,680 - $60,000 = $1,804,680.

In 2017, Esther Corporation reported net income of $600,000. It declared and paid preferred stock dividends of $150,000 and common stock dividends of $60,000. During 2017, Esther had a weighted average of 300,000 common shares outstanding. Compute Esther's 2017 earnings per share.

b. $1.50 ($600,000 - $150,000) ÷ 300,000 sh. = $1.50.

On August 5, 2018, 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, 2018, 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

b. $10,290 (30)($850 - $350) - (30 × $850)(.06) - $1,800 - $600 - $780 = $10,290.

In preparing its bank reconciliation for the month of April 2017, Henke, Inc. has the following information available. Balance per bank statement, 4/30/17 $102,420 NSF check returned with 4/30/17 bank statement 1,350 Deposits in transit, 4/30/17 15,000 Outstanding checks, 4/30/17 15,600 Bank service charges for April 60 What should be the correct balance of cash at April 30, 2017?

b. $101,820 $102,420 + $15,000 - $15,600 = $101,820.

Remington Construction Company uses the percentage-of-completion method. During 2018, the company entered into a fixed-price contract to construct a building for Sherman Company for $36,000,000. The following details pertain to the contract: At December 31, 2018 At December 31, 2019 Percentage of completion 25% 60% Estimated total cost of contract $27,000,000 $30,000,000 Gross profit recognized to date 2,250,000 3,600,000 The amount of construction costs incurred during 2019 was

b. $11,250,000. ($30,000,000 × .60) - ($27,000,000 × .25) = $11,250,000.

If the month-end bank statement shows a balance of $144,000, outstanding checks are $48,000, a deposit of $16,000 was in transit at month end, and a check for $2,000 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is

b. $114,000. $144,000 - $48,000 + $16,000 + $2,000 = $114,000.

David Company uses the gross method to record sales made on credit. On June 10, 2017, it sold goods worth $250,000 with terms 2/10, n/30 to Charles Inc. On June 19, 2017, David received payment for 1/2 of the amount due from Charles Inc. David's fiscal year end is on June 30, 2017. What amount will be reported in the financial statements for the accounts receivable due from Charles Inc.?

b. $125,000. $250,000 − $125,000 = $125,000

Shelton Company has the following account balances at year-end: Accounts receivable $140,000 Allowance for doubtful accounts 7,200 Sales discounts 4,800 Shelton should report accounts receivable at a net amount of

b. $132,800. $140,000 - $7,200 = $132,800.

Kennison Company has cash in bank of $20,000, restricted cash in a separate account of $3,000, and a bank overdraft in an account at another bank of $1,000. Kennison should report cash of

b. $20,000.

Nenn Co.'s allowance for uncollectible accounts was $190,000 at the end of 2017 and $180,000 at the end of 2016. For the year ended December 31, 2017, Nenn reported bad debt expense of $31,000 in its income statement. What amount did Nenn debit to the appropriate account in 2017 to write off actual bad debts?

b. $21,000 $180,000 + $31,000 - $190,000 = $21,000.

On February 1, 2017, Henson Company factored receivables with a carrying amount of $700,000 to Agee Company. Agee Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Henson Company for February. Assume that Henson factors the receivables on a without recourse basis. The loss to be reported is

b. $21,000. $700,000 × .03 = $21,000.

Smithson Corporation had a 1/1/17 balance in the Allowance for Doubtful Accounts of $30,000. During 2017, it wrote off $21,600 of accounts and collected $6,300 on accounts previously written off. The balance in Accounts Receivable was $600,000 at 1/1 and $720,000 at 12/31. At 12/31/17, Smithson estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2017?

b. $21,300. ($720,000 × .05) - [$30,000 - ($21,600 - $6,300)] = $21,300.

b. $24,500. ($700,000 × .03) + $3,500 = $24,500.

Vasguez Corporation had a 1/1/17 balance in the Allowance for Doubtful Accounts of $40,000. During 2017, it wrote off $28,800 of accounts and collected $8,400 on accounts previously written off. The balance in Accounts Receivable was $800,000 at 1/1 and $960,000 at 12/31. At 12/31/17, Vasguez estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2017?

b. $28,400. $960,000 × .05 - [$40,000 - ($28,800 - $8,400)] = $28,400.

Arreaga Corp. has a tax rate of 40 percent and income before non-operating items of $1,392,000. It also has the following items (gross amounts). Unusual loss $222,000 Discontinued operations loss 606,000 Gain on disposal of equipment 48,000 Change in accounting principle increasing prior year's income 318,000 What is the amount of income tax expense Arreaga would report on its income statement?

b. $487,200 ($1,392,000 - $222,000 + $48,000) × .40 = $487,200.

b. $6,750,000. $6,000,000 - $1,290,000 + $3,000,000 - $960,000 = $6,750,000.

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

b. $6,930,000. ($22,400,000 × 45%) - ($21,000,000 × 15%) = $6,930,000.

Kiner, Inc. began work in 2018 on a contract for $21,000,000. Other data are as follows: 2018 2019 Costs incurred to date $9,000,000 $14,000,000 Estimated costs to complete 6,000,000 — Billings to date 7,000,000 21,000,000 Collections to date 5,000,000 18,000,000 *114. If Kiner uses the completed-contract method, the gross profit to be recognized in 2019 is

b. $7,000,000. $21,000,000-$14,000,000= $7,000,000

Arizona Communications contracted to set up a call center for the City of Phoenix. Under the 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 software to ensure smooth operations of the call center for an annual fee of $180,000. Ownership of equipment installed remains with the City of Phoenix. The contract costs that should be capitalized is

b. $820,000 $20,000 + $550,000 + $170,000 + $30,000 + $50,000 = $820,000.

Lankton Company has the following account balances at year-end: Accounts receivable $90,000 Allowance for doubtful accounts 4,800 Sales discounts 3,200 Lankton should report accounts receivable at a net amount of

b. $85,200. $90,000 - $4,800 = $85,200.

At Ruth Company, events and transactions during 2017 included the following. The tax rate for all items is 30%. (1) Depreciation for 2015 was found to be understated by $120,000. (2) A strike by the employees of a supplier resulted in a loss of $100,000. (3) The inventory at December 31, 2015 was overstated by $160,000. (4) A disposal of a component of the business resulted in a $2,000,000 loss. The effect of these events and transactions on 2017 net income net of tax would be

b. ($1,470,000). ($100,000 × .70) + ($2,000,000 × .7) = $1,470,000.

During the year Tulip reported net sales of $960,000. The company had accounts receivable of $75,000 at the beginning of the year and $120,000 at the end of the year Compute Tulip's average collection period (assume 365 days a year.)

b. 37.2 days. $960,000 ÷ [($75,000 + $120,000) ÷ 2] = 9.8 365 ÷ 9.8 = 37.2 days.

Lester Company received a seven-year zero-interest-bearing note on February 22, 2017, in exchange for property it sold to Porter Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 6% on February 22, 2017, 6.5% on December 31, 2017, 6.7% on February 22, 2018, and 7% on December 31, 2018. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2017 and 2018, respectively?

b. 6% and 6%

When there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract, which of the following is correct?

b. Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods

A contract liability is a company's obligations to transfer goods or services to a customer for which the company has received consideration from the customer. An example of a contract liability is

b. Unearned magazine subscription.

Jones Company has notes receivable that have a fair value of $950,000 and a carrying amount of $1,250,000. Jones decides on December 31, 2017, to use the fair value option for these recently-acquired receivables. Which of the following entries will be made on December 31, 2017 to record the unrealized holding gain/loss?

b. Unrealized Holding Gain or Loss⎯Income ....... 300,000 Notes Receivable ........................................ 300,000 $1,250,000 - $950,000 = $300,000.

The transaction price

b. is the amount of consideration that a company expects to receive from a customer

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

b. is the correct method in a principal-agent relationship.

IFRS requires an impairment loss for a loan receivable to be recognized when

b. its recoverable amount is less than its carrying amount.

All of the following may be included under the heading of "cash" except

b. money market funds.

Franchise companies derive their revenues from the

b. sale of initial franchises and related services and from continuing fees based on the franchise operation.

The category of franchising that has given rise to accounting challenges is

b. service sponsor-retailer.

c. $640,000 $400,000 + $300,000 - $50,000 - $10,000 = $640,000.

Monroe Construction Company uses the percentage-of-completion method of accounting. In 2018, Monroe began work on a contract it had received which provided for a contract price of $37,500,000. Other details follow: 2018 Costs incurred during the year $18,000,000 Estimated costs to complete as of December 31 12,000,000 Billings during the year 16,500,000 Collections during the year 9,500,000 What should be the gross profit recognized in 2018?

c. $ 4,500,000 ($18,000,000/($18,000,000+$12,000,000)) x ($37,500,000-$30,000,000) = $4,500,000

Wellington Corp. has outstanding accounts receivable totaling $6 million as of December 31 and sales on credit during the year of $30 million. There is also a debit balance of $24,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense?

c. $ 480,000. $6,000,000 × .08 = $480,000.

Geary Co. assigned $1,600,000 of accounts receivable to Kwik Finance Co. as security for a loan of $1,340,000. Kwik charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Geary collected $440,000 on assigned accounts after deducting $1,520 of discounts. Geary accepted returns worth $5,400 and wrote off assigned accounts totaling $11,920. The amount of cash Geary received from Kwik at the time of the assignment was

c. $1,313,200. $1,340,000 - $26,800 = $1,313,200.

Hayes Construction Corporation contracted to construct a building for $7,500,000. Construction began in 2018 and was completed in 2019. Data relating to the contract are summarized below: Year ended December 31, 2018 2019 Costs incurred $3,000,000 $2,250,000 Estimated costs to complete 2,000,000 — Hayes uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2018, and 2019, respectively, Hayes should report gross profit of

c. $1,500,000 and $750,000. $3,000,000/($3,000,000+$2,000,000) x ($7,500,000 - $5,000,000) = $1,500,000 ($7,500,000 - $5,250,000) - $1,500,000 = $750,000.

Eilert Construction Company had a contract starting April 2018, to construct a $42,000,000 building that is expected to be completed in September 2019, at an estimated cost of $38,500,000. At the end of 2018, the costs to date were $17,710,000 and the estimated total costs to complete had not changed. The progress billings during 2018 were $8,400,000 and the cash collected during 2018 was $5,600,000. Eilert uses the percentage-of-completion method. *118. For the year ended December 31, 2018, Eilert would recognize gross profit on the building of

c. $1,610,000. ($17,710,000 ÷ $38,500,000) × $3,500,000 = $1,610,000.

On June 1, 2017, Yang Corp. loaned Gant $500,000 on a 12% note, payable in five annual installments of $100,000 beginning January 2, 2018. In connection with this loan, Gant was required to deposit $5,000 in a zero-interest-bearing escrow account. The amount held in escrow is to be returned to Gant after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2017. Gant made timely payments through November 1, 2017. On January 2, 2018, Yang received payment of the first principal installment plus all interest due. At December 31, 2017, Yang's interest receivable on the loan to Gant should be

c. $10,000. $500,000 × 12% × (2 ÷ 12) = $10,000.

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. *105. At December 31, 2018 Cooper would report Construction in Process in the amount of:

c. $11,040,000 $10,120,000 + $920,000 = $11,040,000.

Gross billings for merchandise sold by Lang Company to its customers last year amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were

c. $12,175,000. $12,720,000 - $370,000 - $175,000 = $12,175,000.

The following information is available for Murphy Company: Allowance for doubtful accounts at December 31, 2016 $ 24,000 Credit sales during 2017 1,200,000 Accounts receivable deemed worthless and written off during 2017 27,000 As a result of a review and aging of accounts receivable in early January 2018, it has been determined that an allowance for doubtful accounts of $16,000 is needed at December 31, 2017. What amount should Murphy record as "bad debt expense" for the year ended December 31, 2017?

c. $19,000 $24,000 - $27,000 + X = $16,000; X = $19,000.

For the year ended December 31, 2017, Transformers Inc. reported the following: Net income $300,000 Preferred dividends declared 50,000 Common dividend declared 10,000 Unrealized holding loss, net of tax 5,000 Retained earnings 400,000 Common stock 200,000 Accumulated Other Comprehensive Income, Beginning Balance 25,000 What would Transformers report as its ending balance of Accumulated Other Comprehensive Income?

c. $20,000 $25,000 - $5,000 = $20,000.

Wilkinson Corporation factored, with recourse, $500,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Wilkinson estimates the recourse obligation at $12,000. What amount should Wilkinson report as a loss on sale of receivables?

c. $27,000. ($500,000 × .03) + $12,000 = $27,000.

In preparing its May 31, 2017 bank reconciliation, Catt Co. has the following information available: Balance per bank statement, 5/31/17 $40,000 Deposit in transit, 5/31/17 5,400 Outstanding checks, 5/31/17 4,900 Note collected by bank in May 1,250 The correct balance of cash at May 31, 2017 is

c. $40,500. $40,000 + $5,400 - $4,900 = $40,500.

c. $409,000 $220,000 + $30,000 + $60,000 + $24,000 + $36,000 + $39,000 = $409,000.

Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because

c. the amount of the discount is not material.

Finley, Inc.'s checkbook balance on December 31, 2017 was $84,800. In addition, Finley held the following items in its safe on December 31. (1) A check for $1,800 from Peters, Inc. received December 30, 2017, which was not included in the checkbook balance. (2) An NSF check from Garner Company in the amount of $3,600 that had been deposited at the bank, but was returned for lack of sufficient funds on December 29. The check was to be redeposited on January 3, 2018. The original deposit has been included in the December 31 checkbook balance. (3) Coin and currency on hand amounted to $5,800. The proper amount to be reported on Finley's balance sheet for cash at December 31, 2017 is

c. $88,800. $84,800 + $1,800 - $3,600 + $5,800 = $88,800.

What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet?

c. As assets but separately from other receivables.

On January 1, 2018 Dairy Treats, Inc. entered into a franchise agreement with a company allowing the company to do business under Dairy Treats' name. Dairy Treats had performed substantially all required services by January 1, 2018, and the franchisee paid the initial franchise fee of $980,000 in full on that date. The franchise agreement specifies that the franchisee must pay a continuing franchise fee of $84,000 annually, of which 20% must be spent on advertising by Dairy Treats. What entry should Dairy Treats make on January 1, 2018 to record receipt of the initial franchise fee and the continuing franchise fee for 2018?

c. Cash ...................................................................................... 1,064,000 Franchise Fee Revenue ............................................ 980,000 Franchise Revenue ................................................... 67,200 Unearned Franchise Revenue .................................. 16,800 Cash = $980,000 + $84,000 = $1,064,000 Franchise Fee Revenue = $980,000 Unearned Franchise Fees = $84,000 × 20% = $16,800 Revenue from Franchise Fees = $84,000 - $16,800 = $67,200.

What is the normal journal entry for recording bad debt expense under the allowance method?

c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts

Which of the following items will not appear in the retained earnings statement?

c. Discontinued operations

Where must earnings per share be disclosed in the financial statements to satisfy generally accepted accounting principles?

c. On the face of the income statement.

During 2017, Lopez Corporation disposed of Pine Division, a major component of its business. Lopez realized a gain of $3,000,000, net of taxes, on the sale of Pine's assets. Pine's operating losses, net of taxes, were $3,500,000 in 2017. How should these facts be reported in Lopez's income statement for 2017? Total Amount to be Included in Income from Results of Continuing Operations Discontinued Operations

c. Total Amount to be Included in Income from Results of Continuing Operations-0 Discontinued Operations-500,000 loss $3,500,000 - $3,000,000 = $500,000.

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as

c. an amount after continuing operations.

Companies use intraperiod tax allocation for all of the following items except

c. changes in accounting estimates.

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

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

c. debit to Allowance for Doubtful Accounts of $11,920.

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, 2018, 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 actual return of $250 of merchandise includes a

c. debit to Returned Inventory for $125. ($2,000/$4,000) × $250 = $125.

Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account

c. has no effect on net income.

Comprehensive income includes all of the following except

c. investments by owners.

A statement of stockholders' equity includes a column for each of the following except

c. net income.

The accounting for cash discounts and trade discounts are

c. not the same.

Noncash consideration should be

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

The converged standard on revenue recognition

c. recognizes and measures revenue based on changes in assets and liabilities.

Consideration paid or payable to customers

c. reduces the consideration received and the revenue to be recognized.

Disclosure related to revenue

c. requires disclosure of remaining performance obligations.

An option to purchase a warranty is recorded as

c. revenue in the period that the service-type warranty is in effect.

Under the completed-contract method

c. revenue, cost, and gross profit are recognized at the time the contract is completed.

The major elements of the income statement are

c. revenues, expenses, gains, and losses.

d. $1,260,000. $360,000 + $225,000 + $405,000 + ($540,000 × .50) = $1,260,000.

Madsen Company reported the following information for 2017: Sales revenue $2,040,000 Cost of goods sold 1,400,000 Operating expenses 220,000 Unrealized holding gain on available-for-sale securities 120,000 Cash dividends received on the securities 8,000 For 2017, Madsen would report other comprehensive income of

d. $120,000.

Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2017 included the following: Debit Credit Sales revenue $280,000 Cost of goods sold $170,000 Administrative expenses 40,000 Loss on disposal of equipment 18,000 Sales commission expense 16,000 Interest revenue 10,000 Freight-out 6,000 Loss from discontinued operations 24,000 Bad debt expense 6,000 Totals $280,000 $290,000 Other information: Logan's income tax rate is 30%. Finished goods inventory: January 1, 2017 $160,000 December 31, 2017 140,000 On Logan's multiple-step income statement for 2017, cost of goods manufactured is

d. $150,000. $170,000 + $140,000 - $160,000 = $150,000.

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

d. $72,000, $48,000 and $24,000 respectively. ($90,000/$180,000) × $144,000 = $72,000. ($60,000/$180,000) × $144,000 = $48,000. ($30,000/$180,000) × $144,000 = $24,000.

Becky had net sales (all on account) in 2017 of $8,000,000. At December 31, 2017, before adjusting entries, the balances in selected accounts were: accounts receivable $1,000,000 debit, and allowance for doubtful accounts $2,000 debit. Becky estimates that 3% of its accounts receivable will prove to be uncollectible. What is the net realizable value of the receivables reported on the financial statements at December 31, 2017?

d. $970,000 $1,000,000 − [($1,000,000 × .03) = $970,000.

On January 1, 2017, Lynn Company borrows $3,000,000 from National Bank at 11% annual interest. In addition, Lynn is required to keep a compensatory balance of $300,000 on deposit at National Bank which will earn interest at 5%. The effective interest that Lynn pays on its $3,000,000 loan is

d. 11.6%. $3,000,000 × .11 = $330,000 $300,000 × (.11 - .05) = 18,000 Interest $348,000 $348,000 ÷ $3,000,000 = .116 = 11.6%.

Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method?

d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

Which of the following earnings per share figures must be disclosed on the face of the income statement?

d. EPS for income from continuing operations

d. Impairment Loss 68,750 Loan Receivable 68,750

Which of the following is an advantage of the single-step income statement over the multiple-step income statement?

d. It does not imply that one type of revenue or expense has priority over another.

Which of the following is true about intraperiod tax allocation?

d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.

At the beginning of 2016, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2016 year-end statement of financial position and $1,000 as sales revenue for 2016. What effect did this accounting for the note have on Gannon's net earnings for 2016, 2017, 2018, and its retained earnings at the end of 2018, respectively?

d. Overstate, understate, understate, zero

When should a transfer of receivables be recorded as a sale?

d. The transferred assets are isolated from the transferor

Why do companies provide trade discounts?

d. To avoid frequent changes in catalogs and to easily alter prices for different customers.

Which of the following would represent the least likely use of an income statement prepared for a business enterprise?

d. Use by investors interested in the financial position of the entity.

When a customer purchases a product but is not yet ready for delivery, this is referred to as

d. a bill-and-hold arrangement

Companies can use the expected value to estimate variable consideration when

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

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

d. a credit to Unearned Warranty Revenue of $1,400.

*120. Douglas Diners Inc. charges an initial franchise fee of $180,000 broken down as follows: Rights to trade name, market area, and proprietary know-how $ 80,000 Training services 23,000 Equipment (cost of $21,600) 77,000 Total initial franchise fee $180,000 Upon signing of the agreement, a payment of $80,000 is due. Thereafter, two annual payments of $50,000 are required. The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise agreement is signed on August 1, 2018, and the franchise commences operation on November 1, 2018. Assuming that no future services are required by the franchisor once the franchise begins operations, the entry on November 1, 2018 would include

d. a debit to Unearned Franchise Revenue for $80,000.

When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n)

d. cash discount.

Consigned goods are recognized as revenues by the

d. consignor when it receives payment from consignee for goods sold.

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 $2,300 and $900, respectively. The estimated cost of the assurance-warranty is $350. The accounting for warranty will include a

d. credit to Unearned Warranty Revenue, $900

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

d. debit to Contract Assets for $200,000.

Deposits held as compensating balances

d. if separately restricted and held against long-term credit may be included as noncurrent assets

A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and

d. is so near its maturity that it presents insignificant risk of changes in interest rates.

Nonrefundable upfront fees

d. should not be recorded as revenue if they are for future delivery of products and services.

Key similarities between GAAP and IFRS include all of the following except

d. the same criteria is used to derecognize a receivable.

Trade discounts are

d. used to avoid frequent changes in catalogs

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