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B EXERCISES
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E18-1B (Revenue RecognitionPoint of Sale) On January 1, Jenny Company sells goods that have a
cost of $400,000 to Denny Inc. for $550,000, with payment due in 1 year. The cash price for these goods
is $450,000, with payment due in 30 days. If Denny paid immediately upon delivery, it would receive a
cash discount of $5,000.
Instructions
(a) Prepare the journal entry to record this transaction at the date of sale.
(b) How much revenue should Jenny report for the entire year?

E18-2B (Revenue RecognitionPoint of Sale) Sheena Company sells goods that cost $400,000 to Richie
Company for $530,000 on January 2, 2014. The sales price includes an installation fee, which is valued at
$50,000. The fair value of the goods is $480,000. The installation is expected to take 6 months.
Instructions
(a) Prepare the journal entry (if any) to record the sale on January 2, 2014.
(b) Sheena prepares an income statement for the first quarter of 2014, ending on March 31, 2014. How
much revenue should Sheena recognize related to its sale to Richie?

E18-3B (Revenue RecognitionPoint of Sale) Presented below are three revenue recognition situations.
(a) Gee sells goods to Pluto for $950,000, payment due at delivery.
(b) Gee sells goods on account to Goofy for $750,000, payment due in 45 days.
(c) Gee sells goods to Donald for $400,000, payment due in four installments: the first installment
payable in 6 months and subsequent payment due every six months thereafter.
Instructions
Indicate how each of these transactions is reported.

E18-4B (Revenue RecognitionPoint of Sale) Wilbur Company is involved in the design, manufacture,
and installation of various types of products for large equestrain projects. Wilbur recently completed a
large contract for Mr. Ed Inc., which consisted of building 78 different types of jumping fences for a new
equestrain arena under construction. The terms of the contract are that upon completion and installation
of the fences, Mr. Ed would pay $3,000,000. Unfortunately, due to the depressed economy, the completion of the new equestrain arena is now delayed. Mr. Ed has therefore asked Wilbur to hold the fences at
its manufacturing plant until the arena is completed. Mr. Ed acknowledges in writing that it ordered the
fences and that they now have ownership. The time that Wilbur Company must hold the fences is totally
dependent on when the arena is completed. Because Wilbur has not received additional progress payments for the arena due to the delay, Mr. Ed has provided a deposit of $400,000.
Instructions
(a) Explain this type of revenue recognition transaction.
(b) What factors should be considered in determining when to recognize revenue in this transaction?
(c) Prepare the journal entry(ies) that Wilbur should make, assuming it signed a valid sales contract
to sell the fences and received at the time of sale the $400,000 payment.

E18-5B (Right of Return) Gyro Company is presently testing a number of new weed control products
that it recently developed. To stimulate interest, it has decided to grant to five of its largest customers the
unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months.
Gyro sells these products on account for $2,000,000 on January 2, 2014. Companies are required to pay
the full amount due by March 15, 2014.
Instructions
(a) Prepare the journal entry for Gyro at January 2, 2014, assuming Gyro estimates returns of 20%
based on prior experience. (Ignore cost of goods sold.)
(b) Assume that one customer returns the product on March 1, 2014, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased
$200,000 of product from Gyro.
(c) Briefly describe the accounting for these sales, if Gyro is unable to reliably estimate returns.

E18-6B (Revenue Recognition on Book Sales with High Returns) Chester Books Co. publishes romance
novels that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms

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f.o.b. shipping point, and payment is due 90 days after shipment. The retailer may return a maximum of
20% of an order at the retailers expense. Sales are made only to retailers who have good credit ratings.
Past experience indicates that the normal return rate is 16%, and the average collection period is 97 days.
Instructions
(a) Identify alternative revenue recognition tests that Chester Books could employ concerning textbook sales.
(b) Briefly discuss the reasoning for your answers in (a) above.
(c) In late October, Chester shipped books invoiced at $6,500,000. Prepare the journal entry to record
this event that best conforms to generally accepted accounting principles and your answer to
part (b).
(d) In January, $725,000 of the invoiced October sales were returned according to the return policy,
and the remaining amounts were paid. Prepare the entry recording the return and payment.

E18-7B (Sales Recorded Both Gross and Net) On October 5, Veri-Wyn Company sold to Dunn & Brooks
merchandise having a sale price of $23,000 with terms of 1/10, n/30, f.o.b. shipping point. Dunn & Brooks
received the goods on October 9 and promptly notified Veri-Wyn Company that merchandise costing
$2,400 contained flaws that rendered it worthless. The same day Veri-Wyn Company issued a credit memo
covering the worthless merchandise and asked that it be returned at company expense. An invoice totaling $230, terms n/30, was received by Dunn & Brooks on October 8 from Sugarland Express for the freight
cost. The freight on the returned merchandise was $36, paid by Veri-Wyn Company on October 25. Finally, Veri-Wyn received a check for the balance due from Dunn & Brooks on November 2.
Instructions
(a) Prepare journal entries on Veri-Wyn Company books to record all the events noted above under
each of the following bases.
(1) Sales and receivables are entered at gross selling price.
(2) Sales and receivables are entered net of cash discounts.
(b) Prepare the journal entry under basis 2, assuming that Dunn & Brooks remitted the payment on
October 14.

E18-8B (Revenue Recognition on Annual Country Club Dues with Discounts) KimoCo Country Club
is an exclusive country club located in North Dakota that offers a maximum of 1,000 annual memberships
that it sells for $16,000 per year. Payments must be made in full at the start of the golfing season, April
1. Memberships for the next season may be reserved if paid for by December 31. Under a new policy, if
payment is made by December 31, a 10% discount is allowed. The golfing season ends September 30, and
the country club has a December 31 year-end. To provide cash flow for construction of an indoor pool
and fitness center, the Board of Directors is also offering a 20% discount to members who pay for a 2-year
membership before December 31.
For the fiscal year ended December 31, 2014, 900 memberships for 2015 were sold. Members reserved
and paid for 400 single-season memberships and for 150 2-year memberships. The balance of the memberships was paid for on April 1, 2015.
Instructions
Prepare the appropriate journal entries for fiscal 2014 in connection with the advance payments for the
2015 season.

E18-9B (Consignment Computations) On August 15, 2014, Japan Ideas consigned 500 electronic play
systems, costing $100 each, to YoYo Toys Company. The cost of shipping the play systems amounted to
$1,250 and was paid by Japan Ideas. On December 31, 2014, an account sales summary was received from
the consignee, reporting that 420 play systems had been sold for $160 each. Remittance was made by the
consignee for the amount due, after deducting a commission of 20% commission.
Instructions
Compute the following at December 31, 2014:
(a) The inventory value of the units unsold in the hands of the consignee.
(b) The profit for the consignor for the units sold.
(c) The amount of cash that will be remitted by the consignee.

E18-10B (Multiple-Deliverable Arrangement) Apple Core is an experienced technology retailer. Apple

Core also offers a number of services together with the electronic items that it sells. Assume that Apple
Core sells home entertainment systems on a standalone basis. Apple Core also sells installation services
and maintenance services for the entertainment systems. However, Apple Core does not offer installation
or maintenance services to customers who buy entertainment systems from other vendors. Pricing for one
entertainment systems is as follows.

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Entertainment
Entertainment
Entertainment
Entertainment

system
system
system
system

only
with installation service
with maintenance services
with installation and maintenance services

$ 2,000
2,150
2,225
2,300

In each instance in which maintenance services are provided, the maintenance service is separately priced
within the arrangement at $225. Additionally, the incremental amount charged by Apple Core for installation approximates the amount charged by independent third parties. Entertainment systems are sold
subject to a general right of return. If a customer purchases an entertainment system with installation
and/or maintenance services, in the event Apple Core does not complete the service satisfactorily, the
customer is only entitled to a refund of the portion of the fee that exceeds $2,000.
Instructions
(a) Assume that a customer purchases an entertainment system with both installation and maintenance services for $2,300. Based on its experience, Apple Core 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. Explain whether the conditions for a multiple-deliverable
arrangement exist in this situation.
(b) Indicate the amount of revenues that should be allocated to the entertainment system, the installation, and to the maintenance contract.
2

E18-11B (Multiple-Deliverable Arrangement) On December 31, 2014, Gard Company sells production
equipment to Wells Inc. for $75,000. Gard includes a 1-year warranty service with the sale of all its equipment. The customer receives and pays for the equipment on December 31, 2014. Gard estimates the prices
to be $74,000 for the equipment and $1,000 for the warranty.
Instructions
(a) Prepare the journal entry to record this transaction on December 31, 2014.
(b) Indicate how much (if any) revenue should be recognized on January 31, 2015, and for the year
2015.

E18-12B (Recognition of Profit on Long-Term Contracts) During 2014 AFCO started a construction job
with a contract price of $2,500,000. The job was completed in 2016. The following information is available.

Costs incurred to date

Estimated costs to complete
Billings to date
Collections to date

2014

2015

2016

$ 600,000
1,400,000
100,000
100,000

$1,435,000
615,000
500,000
300,000

$2,100,000
0
2,500,000
2,000,000

Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-ofcompletion method is used.
(b) Prepare all necessary journal entries for 2015.
(c) Compute the amount of gross profit to be recognized each year assuming the completed-contract
method is used.
3

E18-13B (Analysis of Percentage-of-Completion Financial Statements) In 2014, Landers Construction

Corp. began construction work under a 5-year contract. The contract price was $25,000,000. Landers uses
the percentage-of-completion method for financial accounting purposes. The income to be recognized each
year is based on the proportion of cost incurred to total estimated costs for completing the contract. The
financial statement presentations relating to this contract at December 31, 2014, follow.
Balance Sheet
Accounts receivableconstruction contract billings
Construction in progress
Less: Contract billings

$150,500
$650,000
260,000

Cost of uncompleted contract in excess of billings

390,000

Income Statement
Income (before tax) on the contract recognized in 2014

$130,000

Instructions
(a) How much cash was collected in 2014 on this contract?
(b) What was the initial estimated total income before tax on this contract?
(AICPA adapted)

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E18-14B (Gross Profit on Uncompleted Contract) On July 1, 2014, Welton Inc. entered into a costplus-fixed-fee contract to construct a prototype robotic assembly line for New Car Corporation. At the
contract date, Welton estimated that it would take 2 years to complete the project at a cost of $4,200,000.
The fixed fee stipulated in the contract is $750,000. Welton appropriately accounts for this contract under
the percentage-of-completion method.
During 2014 Welton incurred costs of $1,600,000 related to the project. The estimated cost at December 31, 2014, to complete the contract is $2,400,000. New Car was billed $1,200,000 under the contract.
Instructions
Prepare a schedule to compute the amount of gross profit to be recognized by Welton under the contract
for the year ended December 31, 2014. Show supporting computations in good form.
(AICPA adapted)

E18-15B (Recognition of Loss, Percentage-of-Completion) In 2014 Norcraft Sisters Construction agreed

to construct a residence hall at University of the North at a price of $8,500,000. The information relating
to the costs and billings for this contract is shown below.

Costs incurred to date

Estimated costs yet to be incurred
Customer billings to date
Collection of billings to date

2014

2015

2016

$ 800,000
7,200,000
500,000
200,000

$4,050,000
4,950,000
4,000,000
3,200,000

$8,950,000
0
8,500,000
8,000,000

Instructions
(a) Assuming that the percentage-of-completion method is used, (1) compute the amount of gross
profit to be recognized in 2014 and 2015, and (2) prepare journal entries for 2015.
(b) For 2015, show how the details related to this construction contract would be disclosed on the balance sheet and on the income statement.
3

E18-16B (Recognition of Revenue on Long-Term Contract and Entries) Young Tree Construction Company uses the percentage-of-completion method of accounting. In 2014, Young Tree began work under a
contract with a contract price of $1,500,000. Other details follow:

Costs incurred during the year

Estimated costs to complete, as of December 31
Billings to date
Collections to date

2014

2015

$980,000
420,000
800,000
250,000

$1,375,000
0
1,500,000
1,500,000

Instructions
(a) What portion of the total contract price would be recognized as revenue in 2014? In 2015?
(b) Assuming the same facts as those above except that Young Tree uses the completed-contract
method of accounting, what portion of the total contract price would be recognized as revenue
in 2015?
(c) Prepare a complete set of journal entries for 2014 (using percentage-of-completion).
3

E18-17B (Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts) Harman Construction Company began operations January 1, 2014. During the year, Harman Construction entered into
a contract with Kardon Corp. to construct a retail showcase facility. At that time, Harman estimated that
it would take 2 years to complete the facility, at a total cost of $7,500,000. The total contract price for construction of the facility is $9,000,000. During the year, Harman incurred $3,040,000 in construction costs
related to the construction project. The estimated cost to complete the contract is $4,560,000. Kardon Corp.
was billed and paid 20% of the contract price.
Instructions
Prepare schedules to compute the amount of gross profit to be recognized for the year ended December
31, 2014, and the amount to be shown as costs and unrecognized 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, 2014, under each of the following methods.
(a) Completed-contract method.
(b) Percentage-of-completion method.
Show supporting computations in good form.
(AICPA adapted)

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E18-18B (Long-Term Contract Reporting) Bearing Construction Company began operations in 2014. Construction activity for the first year is shown below. All contracts are with different customers, and any
work remaining at December 31, 2014, is expected to be completed by the end of 2015.
Billings
through
12/31/14

Cash
Collections
through
12/31/14

Contract
Costs Incurred
through
12/31/14

Estimated
Additional
Costs to
Complete

Project

Total
Contract
Price

X
Y
Z

$ 450,000
200,000
360,000

$ 80,000
200,000
210,000

$ 70,000
180,000
210,000

$115,000
191,000
79,000

$276,500
0
310,000

$1,010,000

$490,000

$460,000

$385,000

$586,500

Instructions
Prepare a partial income statement and balance sheet to indicate how the above information would be
reported for financial statement purposes. Bearing Construction Company uses the completed-contract
method.
6

E18-19B (Installment-Sales Method Calculations, Entries) Mandarin Partners appropriately uses the installment-sales method of accounting to recognize income in its financial statements. The following information is available for 2014 and 2015.
2014
Installment sales
Cost of installment sales
Cash collections on 2014 sales
Cash collections on 2015 sales

$300,000
255,000
70,000
0

2015
$750,000
660,000
201,000
216,000

Instructions
(a) Compute the amount of realized gross profit recognized in each year.
(b) Prepare all journal entries required in 2015.
6

E18-20B (Analysis of Installment-Sales Accounts) Republic Distributors. appropriately uses the

installment-sales method of accounting. On December 31, 2014, the books show balances as follows.
Installment Receivables
2012
2013
2014

$ 85,000
140,000
60,000

Deferred Gross Profit

Gross Profit on Sales

$56,800
80,200
45,000

26%
22%
25%

Instructions
(a) Prepare the adjusting entry or entries required on December 31, 2014, to recognize 2014 realized gross profit. (Installment receivables have already been credited for cash receipts during
2014.)
(b) Compute the amount of cash collected in 2014 on accounts receivable each year.
6

E18-21B (Gross Profit Calculations and Repossessed Merchandise) Duke Corporation appropriately
uses the installment-sales method of accounting. The following data were obtained for the years 2014 and
2015. Duke did not make any installment sales prior to 2014.

Installment sales
Cost of installment sales
General & administrative expenses
Cash collections on sales of 2014
Cash collections on sales of 2015

2014

2015

$600,000
480,000
25,000
250,000
0

$530,000
434,600
30,000
285,000
168,000

Instructions
(a) Compute the balance in the deferred gross profit accounts on December 31, 2014, and on December 31, 2015.
(b) A 2014 sale resulted in default in 2016. At the date of default, the balance on the installment receivable was $12,000, and the repossessed merchandise had a fair value of $8,000. Prepare the entry to record the repossession.
(AICPA adapted)

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E18-22B (Interest Revenue from Installment Sale) Upper World Corporation sells tractor trailers on the
installment plan. On October 1, 2014, Upper World entered into an installment-sale contract with Lower
Sky Inc. for a 5-year period. Equal annual payments under the installment sale are $250,000 and are due
beginning October 1, 2014.
Additional information
1. The amount that would be realized on an outright sale of similar trailer is $965,000.
2. The cost of the trailer sold to Lower Sky Inc. is $786,000.
3. The finance charges relating to the installment period are $285,000 based on an effective interest
rate of 14.9%, which is appropriate.
4. Circumstances are such that the collection of the installments due under the contract is reasonably
assured.
Instructions
What income or loss before income taxes should Upper World record for the year ended December 31,
2014, as a result of the transaction above?
(AICPA adapted)

E18-23B (Installment-Sales Method and Cost Recovery Method) Eagle Flyer Corp. operates on a
calendar-year basis, and began making installment sales in 2014; the company usese the installment-sales
method of profit recognition in accounting. The following data were taken from the 2014 and 2015 records.
2014
Installment sales
Gross profit as a percent of costs
Cash collections on sales of 2014
Cash collections on sales of 2015

$750,000
18%
$340,000
0

2015
$1,350,000
20%
$340,000
$580,000

The amounts given for cash collections exclude amounts collected for interest charges.
Instructions
(a) Compute the amount of realized gross profit to be recognized on the 2014 income statement, prepared using the installment-sales method.
(b) State where the balance of Deferred Gross Profit would be reported on the financial statements for
2015.
(c) Compute the amount of realized gross profit to be recognized on the 2015 income statement, prepared using the cost-recovery method.
(CIA adapted)
6

E18-24B (Installment-Sales Method and Cost-Recovery Method) On April 1, 2014, Joy Ltd. sold land for
$600,000. The note will be collected as follows: $100,000 in 2014, $200,000 in 2015, and $300,000 in 2016.
The property had cost Joy $122,000 when it was purchased in 2001.
Instructions
(a) Compute the amount of gross profit realized each year, assuming Joy uses the cost-recovery method.
(b) Compute the amount of gross profit realized each year, assuming Joy uses the installment-sales method.

E18-25B (Installment SalesDefault and Repossession) Green Acres Ltd. was involved in two default
and repossession cases during the year:
1. A home theatre system was sold to Jonathan Quick for $2,400, including a 40% markup on selling
price. Quick made a down payment of 10% plus four of the remaining 24 equal payments of $90,
and then defaulted on further payments. The home theatre system was repossessed, at which time
the fair value was determined to be $475.
2. A TV that cost $1,500 was sold to Haji Jari for $3,180 on the installment basis. Jari made a down
payment of $300 and paid $160 a month for 10 months, after which he defaulted. The TV was repossessed, and the estimated value at time of repossession was determined to be $850.
Instructions
Prepare journal entries to record each of these repossessions. (Ignore interest charges.)

E18-26B (Installment SalesDefault and Repossession) X-Run Inc. uses the installment-sales method
in accounting for its installment sales. On January 1, 2014, X-Run had an installment account receivable
from Herman Pringle with a balance of $3,900. During 2014, $700 was collected from Pringle. When no
further collection could be made, the merchandise sold to Pringle was repossessed. The merchandise had
a fair market value of $2,150 after the company spent $110 for reconditioning of the merchandise. The
merchandise was originally sold with a gross profit rate of 20%.

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Instructions
Prepare the entries on the books of X-Run, Inc. to record all transactions related to Pringle during 2014.
(Ignore interest charges.)
8 *E18-27B (Franchise Entries) Burger Universe charges an initial franchise fee of $225,000. Upon the sign-

ing of the agreement, a payment of $25,000 is due. Thereafter, five annual payments of $40,000 are required.
The credit rating of the franchisee is such that it would have to pay interest at 12% to borrow money.
Instructions
Prepare the entries to record the initial franchise fee on the books of the franchisor under the following
assumptions.
(a) The franchisor has minimal services to perform, the down payment is not refundable, and the
collection of the note is certain.
(b) The down payment is not refundable, substantial future services are required by the franchisor,
and collection of the note is reasonably certain.
(c) The down payment is not refundable, collection of the note is reasonably certain; the franchisor
has performed approximately one-half of the required services.
8 *E18-28B (Franchise Fee, Initial Down Payment) On January 1, 2014, Shaw & Shaw signed an agreement

to operate as a franchisee of World Premiere Salons for an initial franchise fee of $130,000. The amount
of $20,000 was paid when the agreement was signed, and the balance is payable in four annual payments
of $27,500 each, beginning January 1, 2015. The agreement provides that the down payment is not refundable and that no future services are required of the franchisor. Shaw & Shaws credit rating indicates that
the company can borrow money at 10% for a loan of this type.
Instructions
(a) How much should World Premiere Salons record as revenue from franchise fees on January 1,
2014? At what amount should Shaw & Shaw record the acquisition cost of the franchise on January 1, 2014?
(b) What entry would be made by World Premiere Salons on January 1, 2014, if the down payment is
refundable and substantial future services remain to be performed by World Premiere Salons?
(c) How much revenue from franchise fees would be recorded by World Premiere Salons on January
1, 2014, under the following conditions?
(1) The initial down payment is not refundable, it represents a fair measure of the services already provided, a significant amount of services is still to be performed by World Premiere
Salons in future periods, and collectibility of the note is reasonably assured.
(2) The initial down payment is not refundable and no future services are required by the franchisor, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted.
(3) The initial down payment has not been earned and collection of the note is so uncertain that
recognition of the note as an asset is unwarranted.

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