Exam 18: Revenue Recognition

When there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract, which of the following is correct?

Deferred gross profit is generally treated as unearned revenue and classified as a current liability under the installment-sales method.

Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as

Under the cost-recovery method of revenue recognition,

In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the

Dobson Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost-to-cost basis. Dobson began work on a lump-sum contract at the beginning of 2015. As bid, the statistics were as follows: At the end of the first year, the following was the status of the contract: It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the costs incurred to date. Instructions (a) Compute the percentage of completion on the contract at the end of 2015. (b) Indicate the amount of gross profit that would be reported on this contract at the end of 2015. (c) Make the journal entry to record the income (loss) for 2015 on Dobson's books.(d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Dobson Construction at the end of 2015 related to its construction accounts. Also indicate where these items would be classified on the balance sheet. Billings collected during the year amounted to $1,900,000.(e) Assume the latest forecast on total costs at the end of 2015 was $4,060,000. How much income (loss) would Dobson report for the year 2015?

During 2014, Gates Corp. started a construction job with a total contract price of $14,000,000. The job was completed on December 15, 2015. Additional data are as follows: Under the completed-contract method, what amount should Gates recognize as gross profit for 2015?

Use the following information for questions 96-98. During 2014, Vaughn Corporation sold merchandise costing $2,250,000 on an installment basis for $3,000,000. The cash receipts related to these sales were collected as follows: 2014, $1,200,000; 2015, $1,050,000; 2016, $750,000. -If expenses, other than the cost of the merchandise sold, related to the 2014 installment sales amounted to $135,000, by what amount would Vaughn's net income for 2014 increase as a result of installment sales?

Use the following information for questions 65-68: Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is $14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2014. -Seasons Construction completes the remaining 25% of the building construction on December 31, 2016, as scheduled. At that time the total costs of construction are $15,000,000. What is the total amount of Revenue from Long-Term Contracts and Construction Expenses that Seasons will recognize for the year ended December 31, 2016? The following information relates to questions 69 and 70.Cooper Construction Company had a contract starting April 2015, to construct a $18,000,000 building that is expected to be completed in September 2017, at an estimated cost of $16,500,000. At the end of 2015, the costs to date were $7,590,000 and the estimated total costs to complete had not changed. The progress billings during 2015 were $3,600,000 and the cash collected during 2015 was 2,400,000.

Use the following information for questions 76 and 77. Gomez, Inc. began work in 2014 on contract #3814, which provided for a contract price of $14,400,000. Other details follow: -Assume that Gomez uses the completed-contract method of accounting. The portion of the total gross profit to be recognized as income in 2015 is

The installment-sales method of recognizing profit for accounting purposes is acceptable if

In 2012, Concord Inc. sells inventory with a cost of $32,000 for $50,000. Concord will receive payments of $14,000 in 2012, $26,000 in 2013, and $10,000 in 2014. If the cost-recovery method applies to this transaction, what would be the journal entry to recognize gross profit at the end of 2013?

Companies should recognize revenue when it is realized and when cash is received.

Use the following information for questions 102 and 103. Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is unable to reliably predict bad debts. During 2014, Coaster sold equipment costing $4,800,000 for $7,200,000. The terms of the sale were 20% down, with equal payments due quarterly over the next 3 years. All payments for 2014 were made on schedule. Round answers to two places. -Assuming that Coaster uses the cost-recovery method of accounting for its installment sales, what amount of realized gross profit will Coaster report in its income statement for the year ended December 31, 2015?

Evans Construction, Inc. experienced the following construction activity in 2015, the first year of operations. Each of the above contracts is with a different customer, and any work remaining at December 31, 2015 is expected to be completed in 2016. InstructionsPrepare a partial income statement and a partial balance sheet to indicate how the above contract information would be reported. Evans uses the completed-contract method.

Use the following information for questions 65-68: Seasons Construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is $14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2014. -At December 31, 2014, Seasons estimates that it is 30% complete with the construction, based on costs incurred. What is the total amount of Revenue from Long-Term Contracts recognized for 2014 and what is the balance in the Accounts Receivable account assuming Cannon Cafe has not yet made its last quarterly payment?

Green Construction Co. has consistently used the percentage-of-completion method of recognizing revenue. During 2014, Green entered into a fixed-price contract to construct an office building for $24,000,000. Information relating to the contract is as follows: Contract costs incurred during 2015 were

Carperter Company has used the installment method of accounting since it began operations at the beginning of 2015. The following information pertains to its operations for 2015: Installment sales \ 2,800,000 Cost of installment sales 1,960,000 Collections of installment sales 1,120,000 General and administrative expenses 280,000 The amount to be reported on the December 31, 2015 balance sheet as Deferred Gross Profit should be

Use the following information for questions 108 and 109. On May 1, 2015, TV Inc. consigned 80 TVs to Ed's TV. The TVs cost $450. Freight on the shipment paid by Ed's TV was $1,000. On July 10, TV Inc. received an account sales and $21,500 from Ed's TV. Thirty TVs had been sold and the following expenses were deducted: Freight \ 1,000 Commission (20\% of sales price) ? Advertising 650 Delivery 350 -The total sales price of the TVs sold by Ed's TV was

Finley Company sells office equipment. On January 1, 2015, Finley entered into an installment sale contract with Miller Company for a six-year period expiring January 1, 2021. Equal annual payments under the installment sale are $702,000 and are due on January 1. The first payment was made on January 1, 2015.Additional information is as follows:The cash selling price of the equipment, i.e., the amount that would be realized on an outright sale, is $3,438,000.The cost of sales relating to the equipment is $2,868,000.The finance charges relating to the installment period are $774,000 based on a stated interest rate of 7% which is appropriate. For tax purposes, Finley appropriately uses the accrual basis for recording finance charges.Circumstances are such that the collection of the installment sale is reasonably assured.The installment sale qualified for the installment method of reporting for tax purposes.Assume that the income tax rate is 30%. InstructionsWhat income (loss) before income taxes should Finley appropriately record as a result of this transaction for the year ended December 31, 2015? Show supporting computations in good form.