Exam 8: Revenue Recognition

Rainbow Construction Company uses the percentage-of-completion method for long-term construction contracts. The company started a project with a contract price of $2,750 in 2011. Given the following data, what is the balance in Construction in Progress for this contract at the end of 2011?

The theoretical support for using the percentage-of-completion method of accounting for long-term construction projects is that it

Summit Electronics Company sends appliances to dealers on a consignment basis. The selling price per unit is $920 and the dealer earns a 30% commission. The manufacturing cost of the appliance to Summit Electronics is $570. Assume that in 2011, 800 units were sent on consignment to Farley Hardware. Four hundred of these units were sold for cash, and by December 31, 2011, remittance had been made to Summit Electronics for 380 units. Prepare the required journal entries on the books of Summit Electronics Company and Farley Hardware for the transactions in 2011.

Measuring progress toward completion of long-term construction projects can be accomplished in a number of ways. Nonetheless, all of these measurements can be classified into two basic groups: input measures and output measures. Input measures attempt to measure the effort devoted to a project to date compared to the total effort expected to be required in order to complete the project. A common input measure is the ratio of costs incurred to date to total estimated costs for the project. Output measures attempt to measure the results to date compared to total results when the project is completed. A common output measure would be the number of stories of a building completed compared to the total number of stories to be built. Identify the general problems associated with input and output measures in determining the level of completion of a long-term construction project.

The Buford Corporation introduced a new line of product the profitability of which is quite uncertain. This uncertainty has resulted in Buford choosing to use the cost recovery method to account for this product. The following information relating to the new product line is available for the year 2011: Required:

Wedtec Enterprises, which began operations on January 1, appropriately uses the installment method of accounting. The following information is available for its first year: What is the total amount of Wedtec's installment sales for the first year?

A construction company uses the percentage-of-completion method for long-term construction contracts. A particular job was begun in 2010 and completed in 2012. During 2011, it appeared that the project would cost 25 percent more than originally expected. Data at the end of each year are given below: The contract price was $700,000. Assuming the company properly recorded income in 2010, how much income should be recorded in 2011?

Salmon Construction Company uses the percentage-of-completion method of accounting. In 2011, Salmon began work on a project which had a contract price of $1,600,000 and estimated costs of $1,200,000. Additional information is as follows: The amount of gross profit Salmon should recognize on this contract during 2011 is

Goods on consignment should be included in the inventory of

Lake Construction Company uses the percentage-of-completion method for long-term construction contracts. The company has a project with a contract price of $7,000 on which $600 of gross profit has been recognized in prior years. Information for the current year is as follows: What is the loss that Lake should recognize in the current year?

Clarity Communications manufactures and sells audio and video conferencing equipment. The company sells its products through a nationwide network of distributors complemented by a direct sales force. The distributors had a written agreement with Clarity requiring the distributors to pay Clarity within 90 days of receiving Clarity products. The agreement also required distributors to take title to Clarity products at the time the products left Clarity's warehouse. Through early 2011, Clarity experienced robust growth and increased product sales every quarter. In early 2011, it became apparent to Clarity's CEO, Melinda Waters, that the company would not meet its sales and revenue projections for the quarter ended March 31, 2011. At the end of March 2011, Waters instructed Phillip Potts, Clarity's Director of Manufacturing, to assemble enough products to ship to distributors in order to meet Clarity's sales projections. Waters entered into an agreement with one of Clarity's distributors, Star Marketing, to accept these products. The management of Star Marketing was assured that the transaction posed no risk to them. Waters also informed Star management that Star would not be required to pay for the merchandise until it was sold. Meanwhile, Clarity recorded an account receivable and revenue for this sale. These same procedures were followed at the end of each quarter for which Clarity anticipated falling short of its sales projections, including the recognition of revenue by Clarity. During this same time period, Clarity, whose stock was publicly traded, was planning a private placement of additional shares of stock totaling $25.5 million. Accordingly, the stock price needed to remain high in order for the private placement to be attractive to investors. Required: Does the plan effected by Waters conform with Generally Accepted Accounting Principles (GAAP)?

In accounting for a long-term construction contract for which there is a projected profit, the balance in the Construction in Progress account at the end of the first year of work using the percentage-of-completion method would be

A company providing maintenance services on equipment for a fixed periodic fee would recognize

On January 3, 2011, Lincoln Services, Inc., signed an agreement authorizing Lisa Company to operate as a franchisee over a 20-year period for an initial franchise fee of $100,000 received when the agreement was signed. Lisa commenced operations on July 1, 2011, at which date all of the initial services required of Lincoln had been performed. The agreement also provides that Lisa must pay a continuing franchise fee equal to 5% of the revenue from the franchise annually to Lincoln. Lisa's franchise revenue for 2011 was $800,000. For the year ended December 31, 2011, how much should Lincoln record as revenue from franchise fees from the Lisa franchise?

Which of the following types of service transactions is most likely to require the proportional performance method of revenue recognition based on the seller's direct costs to perform each act?

Jessup Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. During 2011, Jessup started work on a $1,500,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2011: How much loss should Jessup have recognized in 2011?

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

Bill's Club is a discount retailer subject to SEC regulation. Bill's Club charges its customers an annual membership fee. Although the fee is collected in advance, a customer can cancel and receive a full refund at any time during the year of membership. Should Bill's Club recognize the entire initial membership fee at the beginning of the year or on a straight-line basis over the course of the membership year? Explain. What journal entry should be made to record the initial receipt of the membership fees?

Grover, Inc., appropriately uses the installment sales method of revenue recognition. The company sold $1,500,000 on installment accounts during 2011. The cost of items sold was $900,000. At December 31, 2011, Grover reported a balance of $100,000 in the Deferred Gross Profit account. How much cash did Grover collect on installment contracts during 2011?

Superior Builders has a fixed -price contract providing $120,000 of revenue. Construction on the contract was begun in 2010 and was completed in 2011. Information relating to the contract is as follows: What amount of income should Superior recognize in 2011 assuming that the company appropriately uses the percentage-of-completion method of income recognition?