ACCT 557 Suggested Review Assignments

BE 18-2, BE 18-4, BE 18-7, BE 18-9, BE 18-13, BE 18-15, and CA 18-1 (part 1 only)
BE18-2

Adani Inc. sells goods to Geo Company for $11,000 on January 2, 2012, with payment due in 12 months. The
fair value of the goods at the date of sale is $10,000. Prepare the journal entry to record this transaction on
January 2, 2012. How much total revenue should be recognized on this sale in 2012?

Modified:3/6/2013 4:48 PM
BRIEF EXERCISE 18-2
Notes Receivable............................................................... 10,000dr
Sales Revenue........................................................... 10,000cr
Sales revenue ..................................................................... $ 10,000 plus
Interest revenue ................................................................1,000 equals
Total revenue ............................................................. $ 11,000cr

BE18-3
Travel Inc. sells tickets for a Caribbean cruise to Carmel Company employees. The total cruise package
costs Carmel $70,000 from ShipAway cruise liner. Travel Inc. receives a commission of 6% of the total price.
Travel Inc. therefore remits $65,800 to ShipAway. Prepare the entry to record the revenue recognized by
Travel Inc. on this transaction.

Modified:3/5/2013 10:03 AM
.BRIEF EXERCISE 18-3
Cash ($70,000 X 6%)......................................................... 4,200dr
Sales Revenue........................................................... 4,200cr

BE18-4
Aamodt Music sold CDs to retailers and recorded sales revenue of $700,000. During 2012, retailers returned CDs to
Aamodt and were granted credit of $78,000. Past experience indicates that the normal return rate is 15%. Prepare Aamodts
entries to record (a) the $78,000 of returns and (b) estimated returns at December 31, 2012.

BRIEF EXERCISE 18-4

(a) Sales Returns and Allowances ............................ 78,000dr
Accounts Receivable...................................... 78,000cr
(b) Sales Returns and Allowances ............................ 27,000dr
Allowance for Sales Returns and
Allowances
[(15% X $700,000) $78,000].................. 27,000cr
BE18-5
Jansen Corporation shipped $20,000 of merchandise on consignment to Gooch Company. Jansen paid freight costs of
$2,000. Gooch Company paid $500 for local advertising, which is reimbursable from Jansen. By year-end, 60% of the

merchandise had been sold for $21,500. Gooch notified Jansen, retained a 10% commission, and remitted the cash due to
Jansen. Prepare Jansens entry when the cash is received.

BRIEF EXERCISE 18-5

Cash ................................................................................................. 18,850*
Advertising Expense................................................................... 500
Commission Expense................................................................. 2,150
Revenue from Consignment Sales ............................... 21,500
*[$21,500 $500 ($21,500 X 10%)]
Cost of Goods Sold..................................................................... 13,200
Inventory on Consignment
[60% X ($20,000 + $2,000)]............................................ 13,200

BE18-7
Turner, Inc. began work on a $7,000,000 contract in 2012 to construct an office building. During 2012, Turner,
Inc. incurred costs of $1,700,000, billed its customers for $1,200,000, and collected $960,000. At December
31, 2012, the estimated future costs to complete the project total $3,300,000. Prepare Turners 2012 journal
entries using the percentage-of-completion method.

Contract price
Less Estimated costs:
Cost to date
Estimated costs to complete
Estimated Gross Profit
Percent complete

$ 7,000,000
$ 1,700,000
$ 3,300,000
$ 4,000,000
42.5% * $ 7,000,000 = 2,975,000 Revenue recognized to date.

Journal Entries:
Construction in Process
1,700,000
Materials
1,700,000
Accounts Receivable
1,200,000
Billings on Construction Process
1,200,000
Cash
960,000
Accounts Receivable
960,000

BRIEF EXERCISE 18-7

Construction in Process.................................................. 1,700,000
Materials, Cash, Payables...................................... 1,700,000
Accounts Receivable........................................................ 1,200,000

Billings on Construction in Process .................. 1,200,000

Cash ....................................................................................... 960,000
Accounts Receivable............................................... 960,000
Construction in Process
[($1,700,000 5,000,000) X $2,000,000]................... 680,000
Construction Expenses ................................................... 1,700,000
Revenue from Long-Term Contracts
($7,000,000,000 X 34%) ........................................ 2,380,000

BE18-9
Use the information from BE18-7, but assume Turner uses the completed-contract method. Prepare the
companys 2012 journal entries.
Under the completed-contract method, the company would make the same annual entries to record costs of construction, progress
billings, and collections from customers as those illustrated under the percentage-of-completion method. The significant difference is
that the company would not make entries to recognize revenue and gross profit.

BRIEF EXERCISE 18-9

Construction in Process ................................................. 1,700,000
Materials, Cash, Payables...................................... 1,700,000
Accounts Receivable ....................................................... 1,200,000
Billings on Construction in Process.................. 1,200,000
Cash....................................................................................... 960,000
Accounts Receivable............................................... 960,000

BE18-13
Lazaro Inc. sells goods on the installment basis and uses the installment-sales method. Due to a customer
default, Lazaro repossessed merchandise that was originally sold for $800, resulting in a gross profit rate of
40%. At the time of repossession, the uncollected balance is $520, and the fair value of the repossessed
merchandise is $275. Prepare Lazaros entry to record the repossession.
Installment account receivable
Payments to date
Installment account receivable
Gross Profit rate

$ 800
$ 280
$ 520
40%

Balance on account receivable $ 520

Less Deferred Gross Profit
$ 208
Unrecovered Costs
$312
Less estimated fair value

$275

Deferred Gross Profit

$ 208

Loss on repossession

( $ 37)

Journal Entries
Deferred Gross Profit
Repossessed Goods
Loss on repossession
Installment Accounts receivable

$ 208
$ 275
$ 37
$ 520

BRIEF EXERCISE 18-13

Repossessed Merchandise ................................................ 275
Loss on Repossession ........................................................ 37*
Deferred Gross Profit ($520 X 40%)................................. 208
Installment Accounts Receivable........................
*[$275 ($520 $208)]

.... 520

Cost-Recovery Method
Under the cost-recovery method, a company recognizes no profit until cash payments by the buyer exceed the cost
of the merchandise sold. After the seller has recovered all costs, it includes in income any additional cash collections.
The sellers income statement for the period reports sales revenue, the cost of goods sold, and the gross profitboth
the amount (if any) that is recognized during the period and the amount that is deferred. The deferred gross profit is
offset against the related receivablereduced by collectionson the balance sheet. Subsequent income statements
report the gross profit as a separate item of revenue when the company recognizes it as earned.
A seller is permitted to use the cost-recovery method to account for sales in which there is no reasonable basis for
estimating collectibility. In addition, use of this method is required where a high degree of uncertainty exists related
to the collection of receivables.
BE 18-15
Schuss Corporation sold equipment to Potsdam Company for $20,000. The equipment is on Schusss books
at a net amount of $13,000. Schuss collected $10,000 in 2012, $5,000 in 2013, and $5,000 in 2014. If Schuss
uses the cost-recovery method, what amount of gross profit will be recognized in each year?

2012
Cash collected
Revenue
Cost of Equipment
Deferred Gross Profit
Less Recognize GP
Deferred GP Balance

$10,000
$20,000
$13,000
$ 7,000
0
$ 7,000

2013

2014

$5,000
0

$5,000
0

$7,000
$2,000
$5,000

$5,000
$5,000
0

2012
Cost of Equipment
$ 13,000
Less Cash collected $ 10,000
Unrecovered costs
3,000
Excess Cash

2013

2014

5,000
3,000
2,000

CA18-1
Instructions
(a)
There are a variety of methods for revenue recognition. Define and describe each of the following
methods of revenue recognition, and indicate whether each is in accordance with generally accepted
accounting principles.
(1)

Completion-of-production method.

1. The completion-of-production method allows revenue to be recognized when production

is complete even though a sale has not yet been made. The circumstances that justify
revenue recognition at this point are:
The product is sold in a market with a reasonably assured selling price.
The costs of selling and distributing the product are insignificant and can reasonably be
estimated.
Production, rather than sale, is considered the most critical event in the earnings process.
This method is in accordance with GAAP; however, it is an exception to the normal revenue
recognition rules.

(2)

Percentage-of-completion method.

2. The percentage-of-completion method is used on long-term projects and the following

conditions must exist for its use:
A firm contract price with a high probability of collection.
A reasonably accurate estimate of costs.
A way to reasonably estimate the extent of progress to the completion of the project.
Gross profit is recognized in proportion to the work completed. Normally, progress is
measured as a percentage of the actual costs to date to the estimated total costs, or some
other method that reasonably estimates actual completion.
The method is in accordance with GAAP for long-term projects when estimates are
dependable.

(3)

Installment-sales method.

3. The installment-sales method allows revenue to be recognized when cash is collected

rather than at the point of sale. Due, in part, to improved credit procedures that increase the
likelihood of collection, the installment-sales method of recognizing revenue is generally
considered unacceptable. However, there are exceptional cases where receivables are
collectible over an extended period of time and, because of the terms of the transaction or
other conditions, there is no reasonable basis for estimating the degree of collectibility. When
such circumstances exist, and as long as they exist, either the installment-sales method or
cost-recovery method of accounting may be used.

CA18-1
(Revenue RecognitionAlternative Methods) Peterson Industries has three operating divisionsFarber
Mining, Glesen Paperbacks, and Enyart Protection Devices. Each division maintains its own accounting
system and method of revenue recognition.
Farber Mining
Farber Mining specializes in the extraction of precious metals such as silver, gold, and platinum. During the
fiscal year ended November 30, 2012, Farber entered into contracts worth $2,250,000 and shipped metals
worth $2,000,000. A quarter of the shipments were made from inventories on hand at the beginning of the
fiscal year, and the remainder were made from metals that were mined during the year. Mining totals for the
year, valued at market prices, were silver at $750,000, gold at $1,400,000, and platinum at $490,000. Farber
uses the completion-of-production method to recognize revenue because its operations meet the specified
criteria, i.e., reasonably assured sales prices, interchangeable units, and insignificant distribution costs.
(b)

Compute the revenue to be recognized in the fiscal year ended November 30, 2012, for

(1)

Farber Mining.

1. Farber Mining would recognize as revenue the market value of metals mined during the
year.
Silver $ 750,000
Gold 1,400,000
Platinum 490,000
Total revenues $2,640,000

18-78 Copyright 2011 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use
Only)
CA 18-1 (Continued)

(2)

Enyart Paperbacks.

2. Enyart Paperbacks would recognize revenue of $5,600,000, calculated as follows.

Sales in fiscal 2012............................................. $7,000,000
Less: Estimated sales returns
and allowances (20%)............................ 1,400,000
Net salesrevenue to be
recognized in fiscal 2012 .............................. $5,600,000
Although book distributors can return up to 30 percent of sales, prior experience indicates
that 20 percent of sales is the expected average amount of returns. The collection of 2011
sales has no effect on fiscal 2012 sales recognition. The 21 percent of returns on the initial
$4,800,000 of 2012 sales confirms that 20 percent of sales will provide a reasonable
estimate.

(3)

Glesen Protection Devices.

3. Glesen Protection Devices would recognize revenue of $5,000,000. Revenue to be recognized

represents the amount of goods actually billed and shipped when the method of
recognizing revenue is at the point of sale (terms are F.O.B. shipping point

E18-11
(Multiple-Deliverable Arrangement) On December 31, 2012, Grando Company sells production equipment to
Fargo Inc. for $50,000. Grando includes a 1-year warranty service with the sale of all its equipment. The
customer receives and pays for the equipment on December 31, 2012. Grando estimates the prices to be
$48,800 for the equipment and $1,200 for the warranty.
Instructions
(a)

Prepare the journal entry to record this transaction on December 31, 2012.

(b)

Indicate how much (if any) revenue should be recognized on January 31, 2013, and for the year 2013.

EXERCISE 18-11 (510 minutes)

(a) Cash......................................................................................... 50,000
Sales Revenue........................................................
..... 48,800
Unearned Warranty Revenue...........................
....... 1,200
(b) Grando should recognize $100 of warranty revenue on January 31, 2013,
and $1,200 for the year 2013.

E18-17
(Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts) Yanmei Construction Company
began operations January 1, 2012. During the year, Yanmei Construction entered into a contract with
Lundquist Corp. to construct a manufacturing facility. At that time, Yanmei estimated that it would take 5
years to complete the facility at a total cost of $4,500,000. The total contract price for construction of the
facility is $6,000,000. During the year, Yanmei incurred $1,185,800 in construction costs related to the
construction project. The estimated cost to complete the contract is $4,204,200. Lundquist Corp. was billed
and paid 25% of the contract price.
Instructions

Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31,
2012, and the amount to be shown as costs and recognized profit on uncompleted contract in excess of
related billings or billings on uncompleted contract in excess of related costs and recognized profit at
December 31, 2012, under each of the following methods.
(a)

Completed-contract method.

(b)

Percentage-of-completion method.

Show supporting computations in good form.

EXERCISE 18-17
(a) Computation of Gross Profit to Be Recognized under CompletedContract Method.
No computation necessary. No gross profit to be recognized prior to
completion of contract.
Computation of Billings on Uncompleted Contract in Excess of Related
Costs under Completed-Contract Method.
Construction costs incurred during the year...................... $ 1,185,800
Partial billings on contract (25% X $6,000,000) .................. (1,500,000)
$ (314,200)
18-28 Copyright 2011 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use
Only)
EXERCISE 18-17 (Continued)
(b) Computation of Gross Profit to Be Recognized under Percentage-ofCompletion Method.
Total contract price ........................................................................ $6,000,000
Total estimated cost ($1,185,800 + $4,204,200)..................... (5,390,000)
Estimated total gross profit from contract............................. 610,000
Percentage-of-completion ($1,185,800/$5,390,000)............. X 22%
Gross profit to be recognized during the year
($610,000 X 22%).......................................................................... $ 134,200
Computation of Billings on Uncompleted Contract in Excess of Related
Costs and Recognized Profit under Percentage-of-Completion Method.
Construction costs incurred during the year ........................ $ 1,185,800
Gross profit to be recognized during the year (above)...... 134,200
Total charged to construction-in-process..................... 1,320,000
Partial billings on contract (25% X $6,000,000).....................

BE18-12
Gordeeva Corporation began selling goods on the installment basis on January 1, 2012. During 2012,
Gordeeva had installment sales of $150,000; cash collections of $54,000; cost of installment sales of
$102,000. Prepare the companys entries to record installment sales, cash collected, cost of installment
sales, deferral of gross profit, and gross profit recognized, using the installment-sales method.

EXERCISE 18-12
Installment Accounts Receivable, 2012 ......................... 150,000
Installment Sales Revenue ...............................
......... 150,000
Cash ........................................................................................... 54,000
Installment Accounts Receivable, 2012 .............
... 54,000
Cost of Installment Sales .................................................... 102,000

Inventory................................................................
.......... 102,000
Installment Sales Revenue ................................................. 150,000
Cost of Installment Sales ........................................
... 102,000
Deferred Gross Profit, 2012...................................
.... 48,000
Deferred Gross Profit, 2012.............................. 17,280
Realized Gross Profit (32% X $54,000)................... 17,280

P18-7
(Long-Term Contract with an Overall Loss) On July 1, 2012, Torvill Construction Company Inc. contracted to
build an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1, Torvill estimated
that it would take between 2 and 3 years to complete the building. On December 31, 2014, the building was
deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to
complete the contract, and accumulated billings to Gumbel for 2012, 2013, and 2014.

Instructions
(a)
Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be
recognized as a result of this contract for the years ended December 31, 2012, 2013, and 2014. (Ignore
income taxes.)
(b)
Using the completed-contract method, prepare schedules to compute the profit or loss to be
recognized as a result of this contract for the years ended December 31, 2012, 2013, and 2014. (Ignore
income taxes.)
PROBLEM 18-7
(a) Computation of Recognizable Profit/Loss
Percentage-of-Completion Method
2012
Costs to date (12/31/12).......................................................... $ 300,000
Estimated costs to complete................................................ 1,200,000
Estimated total costs...................................................... $1,500,000
Percent complete ($300,000 $1,500,000)....................... 20%

Revenue recognized ($1,900,000 X 20%).......................... $ 380,000

Costs incurred........................................................................... (300,000)
Profit recognized in 2012 ....................................................... $ 80,000
2013
Costs to date (12/31/13).......................................................... $1,200,000
Estimated costs to complete................................................ 800,000
Estimated total costs...................................................... 2,000,000
Contract price............................................................................ (1,900,000)
Total loss..................................................................................... $ 100,000
Total loss..................................................................................... $ 100,000
Plus gross profit recognized in 2012 ................................. 80,000
Loss recognized in 2013 ........................................................ $ 180,000
OR
Percent complete ($1,200,000 $2,000,000).................... 60%
Revenue recognized in 2013
[($1,900,000 X 60%) $380,000] ...................................... $ 760,000
Less: Costs incurred in 2013
($1,200,000 $300,000) ............................................. 900,000
Loss to date................................................................................ (140,000)
Loss attributable to 2014*...................................................... (40,000)
Loss recognized in 2013 ........................................................ $ (180,000)

18-52
Copyright 2011 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)

PROBLEM 18-7 (Continued)

*2014 revenue
($1,900,000 $380,000 $760,000)...................... $ 760,000
Less: 2014 estimated costs....................................... 800,000

2014 loss.............................................................. $ (40,000)

2014
Costs to date (12/31/14) ............................................... $2,100,000
Estimated costs to complete ..................................... 0
2,100,000
Contract price.................................................................. 1,900,000
Total loss .......................................................................... $ (200,000)
Total loss .......................................................................... $ (200,000)
Less: Loss recognized in 2013................................. $180,000
Gross profit recognized in 2012................................ (80,000) (100,000)
Loss recognized in 2014.............................................. $ (100,000)
(b) Computation of Recognizable Profit/Loss
Completed-Contract Method
2012NONE
2013
Costs to date (12/31/13)................................................. $1,200,000
Estimated costs to complete....................................... 800,000
Estimated total costs ............................................ 2,000,000
Contract price................................................................... 1,900,000
Loss recognized in 2013 ............................................... $ (100,000)
2014
Total costs incurred........................................................ $2,100,000
Total revenue recognized ............................................. 1,900,000
Total loss on contract........................................... (200,000)
Deduct loss recognized in 2013.................................. (100,000)
Loss recognized in 2014 ............................................... $ (100,000)