Solutions Guide: Please reword the answers to essay type parts so as to guarantee that

your answer is an original. Do not submit as your own.

Exercise 18-1
The Smith Construction Company received a contract on September 30, 2010 to build a
warehouse over a period of 18 months. The contract price was $600,000 and the estimated cost
to build was $400,000. The actual (and estimated) costs were incurred and the payments made
by the purchaser are as follows:
Costs
Payments
September 30-December 31, 2010
$120,000
$90,000
January 1-December 31, 2011
$240,000
$210,000
January 1-March 31, 2012
$40,000
$300,000
Required:
1. Compute the amount of revenue, expense, and gross profit each year for each of the
following methods (enter zero where necessary):
a. Revenue recognition at the time of sale (completion)
b. Revenue recognition during production
c. Revenue recognition at the time of cash receipt
d. Cost recovery (compute only the gross profit)
2. Which method provides the most useful information to users? Under what circumstances
would the other methods provide more useful information?
1.

a.

Revenue
2010
2011
2012

0
0
600,000

2010
2011
2012
c.
2010
2011
2012

0 $
0
400,000

200,000

Revenue

Expensed

Gross Profit

$180,000a
360,000b
60,000c

$120,000
240,000
40,000

$ 60,000
120,000
20,000

Revenuee

Expense

Gross Profit

$ 90,000
210,000
300,000

$ 60,000f
140,000g
200,000h

$ 30,000
70,000
100,000

Gross Profit
2010
2011
2012

Gross Profit

b.

d.

Expense

$ 0
0
200,000i

0
0

$120,000
x
$400,000

$600,000

$240,000
x
$400,000

$600,000

$ 40,000
x
$400,000

$600,000

Costs incurred

Cash received

$ 90,000
x
$600,000

$400,000

$210,000
x
$600,000

$400,000

$300,000
x
$600,000

$400,000

2.

Cost of $400,000 recovered during 2012

In the situation of a long-term construction contract, recognition of revenue during

production is generally the most useful, if the criteria discussed in the chapter are
met (reasonably dependable estimates can be made, the contract specifies the
enforceable rights, and the buyer and seller can be expected to satisfy their
obligations). The method produces a better measure of the income-producing
activities of the company each period and an asset valued at the selling price of the
portion of the construction that has been completed.

The recognition of revenue at the time of sale (completed contract) would be

appropriate when there is significant uncertainty about the earning process being
completed (i.e., when the criteria are not met). The recognition of revenue in the
period of cash collection would be appropriate only if there is significant
uncertainty about the collectibility of the cash.
Exercise 18-3
The King Construction Company began work on a contract in 2010. The contract price is
$4,000,000, and the company uses the percentage-of-completion method. Other
information relating to the contract is as follows:
2010
Costs incurred during the year
$800,000
Estimated costs to complete. December 31
$2,400,000
Billings during the year
$600,000
Collections during the year
$400,000
Required:
1. How much gross profit or loss does King recognize in 2010?
2. Prepare the appropriate sections of the 2010 income statement and ending balance
sheet.
1.
Construction costs incurred to date
800,000
Estimated costs to complete
2,400,000
Total estimated costs
$3,200,000
Percent completed:

$ 800,000
= 25%
$3,200,000

Revenue to date:
% completed x contract price
25% x $4,000,000 =
$1,000,000
Revenue recognized (no revenue
previously recognized)
$1,000,000
Construction costs incurred for year
(800,000)
Gross profit
200,000
2.

Income Statement
Construction revenue
Construction expense
Gross profit

$1,000,000
(800,000)
$ 200,000
Balance Sheet
December 31, 2010

Current Assets
Accounts receivable
$200,000
Inventory
Construction in progress
Less: Partial billings
(600,000)
Costs and recognized profit not yet billed
$400,000

$1,000,000

Exercise 18-10
The following information is available for the Butler Company in 2010, its first year of
operations:
Total credit sales (including installment method sales)
$205,000
Total cost of goods sold (including installment method cost of goods sold $130,000
Installment method sales
$65,000
Installment method cost of goods sold
$39,000
Cash receipts on credit sales (including installment method sales of $20,000)
$120,000
Required:

1. Prepare the journal entries for 2010.

2. If the company collected $45,000 in 2011 on its 2010 installment method sales,
prepare the appropriate journal entries in 2011.
1.

Accounts Receivable
205,000
Sales
205,000
Cost of Goods Sold
Inventory

130,000
130,000

Cash
Accounts Receivable
120,000

120,000

Sales
Cost of Goods Sold
39,000
Deferred Gross Profit, 2010
26,000

65,000

Deferred Gross Profit, 2010

Gross Profit Realized on Installment Method Sales

8,000a
8,000

$26,000 $65,000 = 40%; 40% x $20,000 = $8,000

Gross Profit Realized on Installment

Method Sales
Income Summary
2.

8,000

Cash
Accounts Receivable

8,000
45,000
45,000

Deferred Gross Profit, 2010

Gross Profit Realized on Installment Method Sales
18,000
b
45% x $40,000

18,000b

Gross Profit Realized on Installment Method Sales

Income Summary
18,000

18,000

Problem 18-12

The following are the operating activities of three different companies:

Company X: Engages in long-term contracts involving a specific number of defined but
not similar service acts. Uses proportional performance method to recognize revenues.
Sells two-year service contracts for $600 in advance. Each service contract requires
Company X to perform service act 1 a total of 30 times and service act 2 a total of 50
times during the two-year period. At the beginning of 2010. 200 service contracts were
sold. The following is a summary of the related cost information for the 200 service
contracts:
Initial direct costs
$8,500
Annual indirect costs
$9,300
Estimated (and actual) total direct costs (for two-year period)
$20,000
Direct cost per service act
Service act 1
$1.60
Service act 2
$1.04
During 2010, service act 1 was performed 5,000 times and service act 2 was performed
4,000 times.
During 2011, service acts 1 and 2 were performed 1,000 and 6,000 times, respectively.
Company Y: Sells goods on the installment basis. Uses the installment method, because
these are exceptional cases) to recognize gross profits. The following is a summary of
the installment sales, gross profit, operating expenses, and collections for 2010 and 2011:
2010
2011
Installment method sales
$90,000
$110,000
Gross Profit
$35,100
$45,100
Operating expenses
$18,000
$21,000
Cash collections from:
2009 installment method sales (2009 gross profit is 40% $35,000
2010 installment method sales
$67,000
$23,000
2011 installment method sales
$80,000
Company Z: Engages in long-term construction contracts. Uses the percentage-ofcompletion method to recognize gross profits. Started contract 1 in 2009, contract 2 in
2010, and contract 3 in 2011. The total gross profit (estimated and actual) and the
percentage complete for each contract at the end of 2010 through 2012 are:
Contract 1* Contract 2
Contract 3
Gross profit $800,000 $350,000 $600,000 $800,000
$350,000
$600,000
% complete at the end of
2010 75% 40% 75%
40%
2011 100% 70% 35%
100%
70%
35%
2012 100% 80%
100%
80%
*30% was complete at the end of 2009
Required:
1. Prepare 2010 and 2011 condensed income statements for Company X. (round to
the nearest dollar, where applicable)

2. Prepare 2010 and 2011 condensed income statements for Company Y. (round to
the nearest dollar, where applicable)
3. Prepare a schedule that shows Company Xs gross profit for 2010, 2011, and
2012. (round to the nearest dollar, where applicable)
1. Company X
COMPANY X
Condensed Income Statements
For Years Ended
December 31, 2010
Revenues
Expenses
Initial direct costs
Direct costs
Indirect costs
Total expenses

December 31, 2011

$72,960b

$47,040e

$ 5,168c
12,160a
9,300

$3,332f
7,840d
9,300
(26,628)
(20,47
2)

Net Income

$46,332
$26,56
8

($1.60 x 5,000) + ($1.04 x 4,000) = $12,160

$ 12,160
$20,000

= 60.8%; $120,000 receipts x 60.8% = $72,960

$8,500 x 60.8% = $5,168

($1.60 x 1,000) + ($1.04 x 6,000) = $7,840

$7,840
39.2% ; $120,000 receipts 39.2% = $47,040
$20, 000
f
$8,500 x 39.2% = $3,332
2. Company Y
COMPANY Y
Condensed Income Statements
For Years Ended

Gross profit
Operating expenses
Net income

December 31, 2010

$40,130a
(18,000)
$22,130

December 31, 2011

$41,770b
(21,000)
$20,770

2010 gross profit % = 39%; ($35,100 $90,000)

$67,000 collections of 2010 sales x 39%
= $26,130
$35,000 collections of 2009 sales x 40%
= 14,000
$40,130

2011 gross profit % = 41%; ($45,100 $110,000)

$80,000 collections of 2011 sales x 41%
= $32,800
$23,000 collections of 2010 sales x 39%
=
8,970
$41,770

3. Company Z

Gross profit, Contract 1

Gross profit, Contract 2
105,000f
Gross profit, Contract 3
270,000g
Total gross profit
a

$800,000 x (75% - 30%*) = $360,000

$350,000 x (40% - 0%) = $140,000

$800,000 x (100% - 75%) = $200,000

$350,000 x (70% - 40%) = $105,000

$600,000 x (35% - 0%) = $210,000

$350,000 x (100% - 70%) = $105,000

$600,000 x (80% - 35%) = $270,000

*% completed in previous years

2010

2011

$360,000a
140,000b

$200,000c
105,000d

210,000e

$500,000
$375,000

$515,000

2012
$

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