Chapter 5 recommended end of chapter problems.docx

Chapter 5 recommended end of chapter problems.docx

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Chapter5recommendedendofchapterproblems

Ch5Recommendedend-of-chapterproblems

E5-1

Servicerevenue

 LO1

AlpineWest,Inc.,operatesadownhillskiareanearLakeTahoe,California.Anall-day,adultticketcanbepurchasedfor$55.Adultcustomersalsocanpurchaseaseasonpassthatentitlesthepassholdertoskianydayduringtheseason,whichtypicallyrunsfromDecember1throughApril30.Theseasonpassisnontransferable,andthe$450priceisnonrefundable.Alpineexpectsitsseasonpassholderstousetheirpassesequallythroughouttheseason.Thecompany'sfiscalyearendsonDecember31.

   OnNovember6,2011,JakeLawsonpurchasedaseasonticket.

Required:

1.

WhenshouldAlpineWestrecognizerevenuefromthesaleofitsseasonpasses?

2.

PreparetheappropriatejournalentriesthatAlpinewouldrecordonNovember6andDecember31.

3.

Whatwillbeincludedinthe2011incomestatementand2011balancesheetrelatedtothesaleoftheseasonpasstoJakeLawson?

E5-4

Installmentsales;alternativerecognitionmethods

 LO2

OnJuly1,2011,theFosterCompanysoldinventorytotheSlateCorporationfor$300,000.Termsofthesalecalledforadownpaymentof$75,000andthreeannualinstallmentsof$75,000dueoneachJuly1,beginningJuly1,2012.Eachinstallmentalsowillincludeinterestontheunpaidbalanceapplyinganappropriateinterestrate.TheinventorycostFoster$120,000.Thecompanyusestheperpetualinventorysystem.

Required:

1.

Computetheamountofgrossprofittoberecognizedfromtheinstallmentsalein2011,2012,2013,and2014usingpointofdeliveryrevenuerecognition.Ignoreinterestcharges.

2.

Repeatrequirement1applyingtheinstallmentsalesmethod.

3.

Repeatrequirement1applyingthecostrecoverymethod.

E5-6

Installmentsalesandcostrecoverymethods;solveforunknowns

 LO2

WolfComputerCompanybeganoperationsin2011.Thecompanyallowscustomerstopayininstallmentsformanyofitsproducts.Installmentsalesfor2011were$1,000,000.Ifrevenueisrecognizedatthepointofdelivery,$600,000ingrossprofitwouldberecognizedin2011.Ifthecompanyinsteadusesthecostrecoverymethod,$100,000ingrossprofitwouldberecognizedin2011.

Required:

1.

Whatwastheamountofcashcollectedoninstallmentsalesin2011?

2.

Whatamountofgrossprofitwouldberecognizedifthecompanyusestheinstallmentsalesmethod?

E5-11

Percentage-of-completionmethod;lossprojectedonentireproject

 LO4

OnFebruary1,2011,ArrowConstructionCompanyenteredintoathree-yearconstructioncontracttobuildabridgeforapriceof$8,000,000.During2011,costsof$2,000,000wereincurredwithestimatedcostsof$4,000,000yettobeincurred.Billingsof$2,500,000weresentandcashcollectedwas$2,250,000.

   In2012,costsincurredwere$2,500,000withremainingcostsestimatedtobe$3,600,000.2012billingswere$2,750,000and$2,475,000cashwascollected.Theprojectwascompletedin2013afteradditionalcostsof$3,800,000wereincurred.Thecompany'sfiscalyear-endisDecember31.Arrowusesthepercentage-of-completionmethod.

Required:

1.

Calculatetheamountofgrossprofitorlosstoberecognizedineachofthethreeyears.

2.

Preparejournalentriesfor2011and2012torecordthetransactionsdescribed（creditvariousaccountsforconstructioncostsincurred）.

3.

PrepareapartialbalancesheettoshowthepresentationoftheprojectasofDecember31,2011and2012.

E5-12

Completedcontractmethod;lossprojectedonentireproject

 LO4

[ThisisavariationofExercise5-11focusingonthecompletedcontractmethod.]

   OnFebruary1,2011,ArrowConstructionCompanyenteredintoathree-yearconstructioncontracttobuildabridgeforapriceof$8,000,000.During2011,costsof$2,000,000wereincurredwithestimatedcostsof$4,000,000yettobeincurred.Billingsof$2,500,000weresentandcashcollectedwas$2,250,000.

p.278

   In2012,costsincurredwere$2,500,000withremainingcostsestimatedtobe$3,600,000.2012billingswere$2,750,000and$2,475,000cashwascollected.Theprojectwascompletedin2013afteradditionalcostsof$3,800,000wereincurred.Thecompany'sfiscalyear-endisDecember31.Arrowusesthecompletedcontractmethod.

Required:

1.

Calculatetheamountofgrossprofitorlosstoberecognizedineachofthethreeyears.

2.

Preparejournalentriesfor2011and2012torecordthetransactionsdescribed（creditvariousaccountsforconstructioncostsincurred）.

3.

PrepareapartialbalancesheettoshowthepresentationoftheprojectasofDecember31,2011and2012.

E5-13

Income（loss）recognition;percentage-of-completionandcompletedcontractmethodscompared

 LO4

BradyConstructionCompanycontractedtobuildanapartmentcomplexforapriceof$5,000,000.Constructionbeganin2011andwascompletedin2013.Thefollowingareaseriesofindependentsituations,numbered1through6,involvingdifferingcostsfortheproject.Allcostsarestatedinthousandsofdollars.

Required:

Copyandcompletethefollowingtable.

Problem:

P5-4

Installmentsalesandcostrecoverymethods

 LO2

MulcaheyBuilders（MB）remodelsofficebuildingsinlow-incomeurbanareasthatareundergoingeconomicrevitalization.MBtypicallyacceptsa25%downpaymentwhentheycompleteajobandanotewhichrequiresthattheremainderbepaidinthreeequalinstallmentsoverthenextthreeyears,plusinterest.Becauseoftheinherentuncertaintyassociatedwithreceivingthesepayments,MBhashistoricallyusedthecostrecoverymethodtorecognizerevenue.

     AsofJanuary1,2011,MB'soutstandinggrossinstallmentaccountsreceivable（notnetofdeferredgrossprofit）consistofthefollowing:

1.

$400,000duefromtheBluebirdMotel.MBcompletedtheBluebirdjobin2009,andestimatedgrossprofitonthatjobis25%.

2.

$150,000duefromthePitStopGasandMiniMart.MBcompletedthePitStopjobin2008,andestimatedgrossprofitonthatjobis35%.

     DanMulcaheyhasbeenconsideringswitchingfromthecostrecoverymethodtotheinstallmentsalesmethod,becausehewantstoshowthehighestpossiblegrossprofitin2011andheunderstandsthattheinstallmentsalesmethodrecognizesgrossprofitsoonerthandoesthecostrecoverymethod.

Required:

1.

Calculatehowmuchgrossprofitisexpectedtobeearnedonthesejobsin2011underthecostrecoverymethod,andhowmuchwouldbeearnedifMBinsteadusedtheinstallmentsalesmethod.Ignoreinterest.

2.

IfDanisprimarilyconcernedabout2011,doyouthinkhewouldbehappywithaswitchtotheinstallmentsalesmethod?

Explain.

P5-5

Percentage-of-completionmethod

 LO4

In2011,theWestgateConstructionCompanyenteredintoacontracttoconstructaroadforSantaClaraCountyfor$10,000,000.Theroadwascompletedin2013.Informationrelatedtothecontractisasfollows:

   Westgateusesthepercentage-of-completionmethodofaccountingforlong-termconstructioncontracts.

Required:

1.

Calculatetheamountofgrossprofittoberecognizedineachofthethreeyears.

2.

Prepareallnecessaryjournalentriesforeachoftheyears（creditvariousaccountsforconstructioncostsincurred）.

3.

Prepareapartialbalancesheetfor2011and2012showinganyitemsrelatedtothecontract.

4.

Calculatetheamountofgrossprofittoberecognizedineachofthethreeyearsassumingthefollowingcostsincurredandcoststocompleteinformation:

p.286

5.

Calculatetheamountofgrossprofittoberecognizedineachofthethreeyearsassumingthefollowingcostsincurredandcoststocompleteinformation:

P5-6

Completedcontractmethod

 LO4

[ThisisavariationofProblem5-5modifiedtofocusonthecompletedcontractmethod.]

Required:

CompletetherequirementsofProblem5-5assumingthatWestgateConstructionusesthecompletedcontractmethod.

P5-8

Constructionaccounting;lossprojectedonentireproject

 LO4

CurtissConstructionCompany,Inc.,enteredintoafixed-pricecontractwithAxelrodAssociatesonJuly1,2011,toconstructafour-storyofficebuilding.Atthattime,Curtissestimatedthatitwouldtakebetweentwoandthreeyearstocompletetheproject.Thetotalcontractpriceforconstructionofthebuildingis$4,000,000.Curtissappropriatelyaccountsforthiscontractunderthecompletedcontractmethodinitsfinancialstatements.ThebuildingwascompletedonDecember31,2013.Estimatedpercentageofcompletion,accumulatedcontractcostsincurred,estimatedcoststocompletethecontract,andaccumulatedbillingstoAxelrodunderthecontractwereasfollows:

Required:

1.

Prepareschedulestocomputegrossprofitorlosstoberecognizedasaresultofthiscontractforeachofthethreeyears.

2.

AssumingCurtissusesthepercentage-of-completionmethodofaccountingforlong-termconstructioncontracts,computegrossprofitorlosstoberecognizedineachofthethreeyears.

3.

Assumingthepercentage-of-completionmethod,computetheamounttobeshowninthebalancesheetattheendof2011and2012aseithercostinexcessofbillingsorbillingsinexcessofcosts.

CPAExamQuestions

ThefollowingquestionsareusedintheKaplanCPAReviewCoursetostudyrevenuerecognitionwhilepreparingfortheCPAexamination.Determinetheresponsethatbestcompletesthestatementsorquestions.

1.

OnOctob