Exam 8: Revenue Recognition

Golden 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 2014.Given the following data,what is the balance in Construction in Progress for this contract at the end of 2014?

On January 1,2014,Artigas,Inc.obtained a contract to construct a building.It was estimated at the beginning of the contract that it would take 3 years to complete the project at an expected cost of $200,000.The contract price was $250,000.The following information describes the status of the job at the close of production each year: Compute the items listed below for each year assuming the use of the percentage-of- completion cost-to-cost method.(Round all percentages to two decimals.)

The percentage-of-completion method is a generally accepted accounting procedure that allows revenue to be recognized prior to the completion of a project or product.Revenues and gross profit are recognized each period based upon the progress of the construction.Construction costs plus gross profit earned to date are accumulated in an inventory account (Construction in Progress)and progress billings are accumulated in a contra-inventory account (Billings on Construction in Progress). Required: Explain the effect on shareholders and managers if an enterprise did not use the percentage-of-completion method to account for long-term contracts and projects.

On November 30,Monet Company consigned 90 freezers to Vangogh Company for sale at $1,600 each and paid $1,200 in transportation costs.A report of sales was received on December 30 from Vangogh reporting the sale of 20 freezers,together with a remittance of the $27,200 balance due.The remittance was net of the agreed 15% commission.How much,and in what month,should Monet recognize as consignment sales revenue?

The importance of revenue to a business enterprise has caused much discussion among accountants as to how the term "revenue" should be defined.The FASB in Statement of Financial Accounting Concepts No.6,"Elements of Financial Statements," defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both)from delivering or producing goods,rendering services,or other activities that constitute the entity's ongoing major or central operations." Evaluate the soundness of the definition of the term "revenue" provided by the FASB in Statement of Financial Accounting Concepts No.6.

Arnold's Club is a discount retailer subject to SEC regulation.Arnold'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 Arnold'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?

Stanton Industrial sells machinery on the installment plan.On September 1,2014,Stanton entered into an installment sale contract with Saunders Productions for a six-year period.Equal annual payments under the installment sale are $187,500 and are due on August 31 of each year beginning in 2015. Additional information: (a)The cost of the machinery sold to Saunders was $637,500. (b)The implicit interest rate on the installment sale is 10%. Compute the income or loss before taxes that Stanton should record for the year ended December 31,2014,as a result of the above transaction,assuming that circumstances are such that the collection of the installments due under the contract (1)is reasonably assured. (2)cannot be reasonably assured.

Wavelength,a cellular phone company,conducts a promotion in which new customers who sign a two-year contract receive a free phone.The contract requires the customer to pay a cancellation fee of $250 if the customer cancels the contract.Wavelength charges a one-time activation fee of $60 and a monthly fee of $42 for ongoing service.The monthly fee is the same regardless of whether a free phone is provided.The phone costs Wavelength $105,and Wavelength sells the phone separately for $125.Wavelength is not required to refund any portion of the fees paid for any reason.The customer has no obligation to Wavelength if phone service is not provided.Wavelength is a profitable business and has no reason to believe that the two-year service requirement will not be met. Required: 1.Are the phone and the phone service (airtime)separate deliverables under this agreement? 2.What is the amount of revenue to be recognized upon signing of the agreement and delivery of the phone to the customer?

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.

Cantor Company sold $400,000 to customers on account during 2014,and collected $200,000 during the year.The company properly uses the installment sales method of revenue recognition due to the uncertainty of collection of these installment receivables.The company has determined that cost of sales for the $400,000 of sales was $340,000. What is the correct balance of the company's Deferred Gross Profit account at the end of 2014,after the recognition of revenue for that year?

A layaway "sale" is not really a sale because the seller still has custody and legal title to the merchandise; Therefore,revenue from a layaway sale is not recognized until the purchaser pays fully for the merchandise. Diane is giving her husband Dennis an HD Projection System for Christmas.On November 15th.,Diane puts down a $1,200 deposit toward the full price of $3,200 at TV Depot to place the system on layaway.On December 1st,Diane pays another $1,000,and on December 15th.,she makes the final $1,000 payment and takes the system home to be Christmas wrapped. TV Depot's cost for the HD system is $2,400. Required: Make the necessary journal entries to record this transaction.

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?

On December 31,2014,Woodley Furniture (a retailer)sells a television and a three-year warranty to a customer.Woodley would normally sell the television and warranty separately for $2,000 and $400,respectively.The cost of the television to Woodley is $1,400.As part of a year-end promotion,Woodley 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.

Simpson Construction entered into a contract to construct a floating bridge across a lake.The contract price for the bridge is $7,500,000.During 2012,costs of $1,800,000 were incurred representing 30% of total expected costs. Prepare the necessary entries for 2014 to recognize gross profit for the year assuming the firm uses the (1)completed-contract method. (2)percentage-of-completion method.

Warthog 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 Warthog's installment sales for the first year?

Sonnet Construction Company uses the completed-contract method for long-term construction contracts.The information for a specific contract as of January 1,2014,is shown below. $600,000 of cost was incurred during 2014 and on December 31,2014,the estimated remaining cost to complete was still $800,000.The correct balance for the Construction in Progress at December 31,2014 is

The following data relate to a construction job started by Harrington Co. during 2014: -See Harrington Co.information above.Under the completed-contract method,how much should Harrington recognize as gross profit for 2014?

For a construction firm using the completed-contract method,if costs exceed billings on some contracts by $1,000,000 and billings exceed costs by $800,000 on others,the contracts should ordinarily be reported as a

You are an accounting major who recently completed your masters degree in accounting and began working in public accounting as of September 1,2014.Your younger sister currently is enrolled in a principles of accounting course.Your sister 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 sister tells you that her accounting instructor discussed the installment sales method of recognition in class recently.Since your sister knows that you are paying for the stereo by making monthly payments,your sister (in an attempt to impress with her new-found knowledge)begins to describe the process for accounting under the installment sales method of revenue recognition.Your sister 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 sister's comments?

In 2011,Huxley Corp.began construction work under a three-year contract.The contract price is $800,000.Huxley used the percentage-of-completion method for financial accounting purposes.The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract.The financial presentations relating to this contract at December 31,2014,appear below. How much cash was collected in 2014 on this contract?