Exam 8: Revenue Recognition

The completed-contract method of accounting for long-term construction-type contracts is preferable when

On May 1, 2011, Green Construction Company entered into a fixed-price contract to construct an apartment building for $3,000,000. Green appropriately accounts for this contract under the percentage-of-completion method. Information relating to the contract is as follows: What is the amount of contract costs incurred during the year ended December 31, 2012?

A company uses the percentage-of-completion method to account for a four-year construction contract. Progress billings sent in the second year that were collected in the third year would

Roberts Company sold inventory to Peterson Incorporated and recorded the sale as revenue. Part of the agreement of the sale is that Roberts will repurchase the merchandise at a specified price over a specified period of time. Meanwhile, Peterson uses the inventory purchased from Roberts as collateral for a loan. Peterson uses the proceeds from the loan to pay Roberts for the inventory purchased. Roberts ultimately repurchases the inventory from Peterson. Peterson then uses the proceeds of the repayment to pay its loan obligation. Required:

In 2011, Johnson Builders began construction work under a three-year contract at a price of $7,525,000. The firm 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 the total estimated costs for completing the contract. The financial statement presentations relating to this contract on December 31, 2011, are: Determine the

Shepard Construction Company has consistently used the percentage-of- completion method. On January 10, 2011, Shepard began work on a $3,000,000 construction contract. At the inception date, the estimated cost of construction was $2,250,000. The following data relate to the progress of the contract: How much gross profit should Shepard recognize for the year ended December 31, 2012?

When comparing the percentage-of-completion and completed-contract methods of accounting for long-term construction contracts, both methods will report the same

You are an accounting major who recently completed your masters degree in accounting and began working in public accounting as of September 1, 2011. Your younger brother currently is enrolled in a principles of accounting course. Your brother calls you at your firm's offices one day to congratulate you on the purchase of your new stereo system for your apartment. In the course of the conversation, your brother tells you that his accounting instructor discussed the installment sales method of recognition in class recently. Since your brother knows that you are paying for the stereo by making monthly payments, your brother (in an attempt to impress with his new-found knowledge) begins to describe the process for accounting under the installment sales method of revenue recognition. Your brother finds it particularly curious that the store that sold you the stereo system will be deferring revenue on the sale until cash is collected. Required: How would you respond to your younger brother's comments?

On December 31, 2011, Wheeler Furniture (a retailer) sells a television and a three-year warranty to a customer. Wheeler would normally sell the television and warranty separately for $2,000 and $400, respectively. The cost of the television to Wheeler is $1,500. As part of a year-end promotion, Wheeler sells the television and warranty together for a reduced price of $2,300. The customer pays in full at the point of sale on the contract-signing.date. Required: 1. Prepare the journal entry required at the contract-signing date. 2. Prepare the entry required when the television is delivered to the customer. Wheeler will allocate the transaction price to the two performance obligations on the basis of the standalone selling prices of $2,000 and $400 for the television and the warranty, respectively, as follows:

Brooke Company began operations on January 1, 2011, and uses the installment sales method of accounting. The company has the following information available for 2011 and 2012: The realized gross profit for 2012 would be

Hillson Company began operations on January 1, 2011, and appropriately uses the installment method of accounting. The following data are available for 2011 and 2012: The realized gross profit for 2012 is

When progress billings are made by a contractor on a long-term contract, what account is credited?

When the percentage-of-completion method of accounting for long-term construction projects is used, why is Construction in Progress increased by the annual recognized gross profit on long-term construction contracts?

Assume that a company receives $500 cash from a customer as the initial sign-up fee for a service. In addition to the sign-up fee, the customer also is required to pay $25 per month for the service. The expected economic life of the service agreement is 50 months. The company providing the service could subcontract with a third party to provide the service for 100 months for $100, which is also the cost to the company of providing the service. Current professional standards regarding revenue recognition would require that the sign-up fee be recognized over the 50 months the service is provided. Nonetheless, you have heard that the FASB is considering another approach to revenue recognition called the asset-and-liability approach. Required: Explain how this transaction would be accounted for under the FASB's asset-and-liability approach and evaluate this new approach.

Sand Company, a publicly traded company, delivers twenty truckloads of sand to Gravel Company prior to December 31, 2011, the end of Sand's fiscal year. Sand normally enters into a written sales agreement with customers similar to Gravel Company. The written sales agreement must be signed by both companies in order to be binding. Although the purchasing department of Gravel has orally agreed to the sale, Gravel management cannot sign the agreement until it is approved by the legal department of Gravel. Personnel of the legal department of Gravel will be on vacation until January 5, 2012. Can Sand recognize on its income statement for the year ending December 31, 2011, the revenue related to the twenty truckloads delivered to Gravel? Explain.

Dilla Construction Company's projects extend over several years and collection of receivables is reasonably certain. Each project has a contract that specifies a price and the rights and obligations of all parties. Both the contractor and the customer are expected to fulfill their contractual obligations on each project. Reliable estimates can be made of the extent of progress and cost to complete each project. The method that the company should use to account for construction revenue is

Seahawks, Inc. had the following consignment transactions during December: No sales of consigned goods were made through December 31. Seahawks' December 31 balance sheet should include consigned inventory at

Brown Construction Company uses the percentage-of-completion method for long-term construction contracts. A specific job was begun in 2011 and completed in 2013. The contract price was $1,400,000 and cost information as of each year-end is given below: Assuming Brown correctly recorded gross profit in 2011, how much gross profit should the company record in 2012?

The percentage-of-completion method is used to recognize revenue and gross profit for construction and other types of projects that extend beyond one accounting period. A problem similar to long-term construction projects exists in accounting for service revenue that is earned for more than one performance act where such activity extends beyond one accounting period. Provide examples of service activities that might extend beyond one accounting period and propose means of recognizing revenues for such activities.

Paral Company began operations on January 2, 2011, and appropriately used the installment sales method of accounting. The following data are available for 2011 and 2012: The realized gross profit for 2012 is