Solutions CH 18

SOLUTIONSTO EXERCISES
EXERCISE18-1 (15-20 minutes)

(a)
Huish could recognize revenue at the point of sale based upon the time of
shipment because the books are sold f.o.b. shipping point. Because of the
returnpolicy one might arguein favor of the cash collectionbasis. Becausethe
returns can be estimated, one could argue for shipping point less estimated
returns.
(b) Based on the available information and lack of any information indicating that
any of the criteria in FASBStatementNo. 48 werenot met, the correct treatment
is to report revenueat the time of shipment as the gross amount less the 12%
normal return factor. This is supported by the legal test of transfer of title and
the criteria in FASBNo. 48. One could be very conservative and use the 30%
maximumreturnallowance.
(c)
July Sale Entry.

AccountsReceivable............................................
Allowancefor Returns...........................................
($16,000,000X 12%)
SalesRevenueTexts..........................................
16,000,000
1,920,000
14,080,000
(d) OctoberCollection.
Cash.................................................... 14,000,000
SalesRevenueTexts*.........................................
Allowancefor Returns...........................................
80,000
1,920,000
16,000,000
*A debit to eitherSalesRevenueTextsor SalesReturnscouldbe madehere.

(a)
1.
6/3
AccountsReceivableKimRhode..........................
Sales...........................................................
5,000
SalesReturnsand Allowances.............................
AccountsReceivableKimRhode................
400
Transportation-Out.............................................
Cash.........................................................
24
5,000
6/5
6/7
6/12
Cash......................................................... 4,508
SalesDiscounts(2%X $4,600).............................
400
24
92
4,600
2.
6/3
AccountsReceivableKimRhode........................
Sales[$5,000 (2%X 5,000)]........................
4,900
SalesReturnsand Allowances.............................
[$400 (2%x $400)]
392
Transportation-Out.............................................
Cash.........................................................
24
4,900
6/5
6/7
6/12
392
24
Cash......................................................... 4,508
AccountsReceivableKimRhode........................
4,508
(b)
8/5
Cash......................................................... 4,600
4,508
SalesDiscountsForfeited............................
(2%X $4,600)
92

(a)
Cash(2004slips) (300X $900).........................................

DockRentRevenue................................................
270,000
270,000
Cash(2005slips) [200X $900X (1.00 .05)]......................

UnearnedRevenue(current)....................................
171,000
171,000
Cash(2006slips) [60 X $900X (1.00 .25)]........................

UnearnedRevenue(non-current).............................
40,500
40,500
(b) The marina operator should recognizethat advancerentals generated$211,500

($171,000 + $40,500) of cash in exchange for the marinas promise to deliver
future services. In effect, this has reduced future cash flow by accelerating
payments from boat owners. Also, the price of rental services has effectively
been reduced. The current cash bonanza does not reflect current earned
income. The future costs of operation must be covered, in part, from this
accelerated cash inflow. On a present value basis, the granting of these
discountsseemsill-advisedunless interest rates were to skyrocket so that the
interestearnedwouldoffset the discountsprovided.

(a)
Grossprofit recognizedin:
2004
Contractprice
Costs:
Coststo date
Estimatedcosts
to
complete
2005
$1,500,000
$400,000
600,000
2006
$1,500,000
$935,000
1,000,000
165,000
$1,500,000
$1,070,000
1,100,000
1,070,000
Total estimatedprofit
Percentage
completedto date
Total grossprofit
recognized
Less:Grossprofit
recognizedin
previousyears
Grossprofit
recognizedin current
year
**$400,000 $1,000,000
**$935,000 $1,100,000
500,000
400,000
430,000
40%*
85%**
100%
200,000
340,000
430,000
200,000
340,000
$ 200,000
$ 140,000
90,000
EXERCISE18-4 (Continued)
(b) Constructionin Process................................................
($935,000 $400,000)
Materials,Cash,Payables,etc.............................
535,000
AccountsReceivable($900,000 $300,000).....................
Billingsand Constructionin Process......................
600,000
Cash($810,000 $270,000)............................................
540,000
ConstructionExpenses.................................................
Constructionin Process................................................
RevenuefromLong-termContracts........................
535,000
535,000
600,000
540,000
140,000
675,000*
*$1,500,000X (85% 40%)

(c)
Grossprofit
*$1,500,000 $1,070,000
2004
$ 0
2005
$ 0
2006
$430,000*

(a)
(b)
Contractbillingsto date
Lessaccountsreceivable12/31/04
Portionof contractbillingscollected
$18,200 = 28%
$65,000
(Theratio of grossprofit to revenuerecognizedin 2004.)
$1,000,000X .28 = $280,000
(Theinitial estimatedtotal grossprofit beforetax on the contract.)
$61,500
21,500
$40,000

BRADBRIDGEWATER,INC.
Computationof GrossProfit to Be
Recognizedon UncompletedContract
Year EndedDecember31, 2004
_____________________________________________________________
Total contractprice
Estimatedcontractcost at completion
($700,000+ $1,300,000)
Fixedfee
Total
Total estimatedcost
Grossprofit
Percentageof completion($700,000 $2,000,000)
Grossprofit to be recognized($450,000X 35%)
$2,000,000
450,000
2,450,000
2,000,000
450,000
35%
$ 157,500

(a)
(1)
Grossprofit recognizedin 2004:

Contractprice
Costs:
Coststo date
Estimatedadditionalcosts
Percentagecompletionto date
($280,000/$800,000)
Grossprofit recognizedin 2004
Contractprice
Costs:
Coststo date
($600,000/$800,000)
Total grossprofit recognized
Less: Grossprofit recognizedin 2004
$1,000,000
$280,000
520,000
800,000
200,000
35%
70,000
$1,000,000
$600,000
200,000
800,000
200,000
75%
150,000
70,000
$ 80,000
EXERCISE18-7 (Continued)
(2)
Constructionin Process........................................
($600,000 $280,000)
Materials,Cash,Payables,etc........................
320,000
($400,000 $150,000)
Billingson Constructionin Process................
250,000
Cash($320,000 $120,000)....................................
AccountsReceivable.....................................
200,000
Constructionin Process........................................
ConstructionExpense...................................
RevenuesfromLong-termContract................
80,000
320,000
400,000*
320,000
250,000
200,000
*$1,000,000X [($600,000 $280,000) $800,000]

(b) IncomeStatement(2005)
Grossprofit on long-termconstructioncontract
BalanceSheet(12/31/05)
Currentassets:
Receivablesconstructionin process
Inventoriesconstructionin processtotaling
$750,000**less billingsof $400,000
**$80,000= $400,000
**Totalcost to date
2004Grossprofit
2005Grossprofit
$320,000
$600,000
70,000
80,000
$750,000
$ 80,000
$ 80,000*
$350,000

(a)
2004
$480,000
$1,600,000
X $2,200,000= $660,000
2005$2,200,000(contractprice) minus$660,000(revenuerecognizedin 2004)

= $1,540,000(revenuerecognizedin 2005).
(b) All $2,200,000of the contractpriceis recognizedas revenuein 2005.
(c)
Using the percentage-of-completion method, the following entries would be

made:
Constructionin Process.................................................
Materials,Cash,Payables,etc..................................
480,000
480,000
AccountsReceivable......................................................
Billingson Constructionin Process.........................
420,000
420,000
Cash................................................................. 350,000
AccountsReceivable..............................................
350,000
Constructionin Process.................................................
180,000*
ConstructionExpenses..................................................
480,000
RevenuefromLong-termContracts[from(a)]............
660,000
*[$2,200,000 ($480,000+ $1,120,000)]X ($480,000 $1,600,000)
(Usingthe completed-contractmethod,all the sameentriesare madeexceptfor
the last entry. No incomeis recognizeduntil the contractis completed.)

(a)
Computation of Gross Profit to Be Recognized under CompletedMethod.
Contract
No computationnecessary.No grossprofit to be recognizedprior to completion

of contract.
Computation of Billings on Uncompleted Contract in Excess of Related Costs
underCompleted-ContractMethod.
Constructioncostsincurredduringthe year
Partial billingson contract(30%X $6,300,000)
$1,185,800
(1,890,000)
$ (704,200)
(b) Computationof GrossProfit to Be RecognizedunderPercentage-of-Completion

Method.
Total contractprice
Total estimatedcost ($1,185,800+ $4,204,200)
Estimatedtotal grossprofit fromcontract
Percentage-of-completion($1,185,800/$5,390,000)
Grossprofit to be recognizedduringthe year
($910,000X 22%)
$6,300,000
5,390,000
910,000
22%
$ 200,200
Computation of Billings on Uncompleted Contract in Excess of Related Costs

underPercentage-of-CompletionMethod.
Constructioncostsincurredduringthe year
Grossprofit to be recognizedduringthe year (above)
Total chargedto construction-in-process
Partial billingson contract(30%X $6,300,000)
$1,185,800
200,200
1,386,000
(1,890,000)
$ (504,000)

DERRICKADKINSCONSTRUCTIONCOMPANY
Partial IncomeStatement
_____________________________________________________________
Revenuefromlong-termcontracts(Project3)
Costsof construction(Project3)
Grossprofit
Provisionfor loss(Project1)*
*Contractcoststhrough12/31/04
Estimatedcoststo complete
Total estimatedcosts
Total contractprice
Lossrecognizedin 2004
$500,000
330,000
170,000
(30,000)
$450,000
140,000
590,000
560,000
$ (30,000)
DERRICKADKINSCONSTRUCTIONCOMPANY
Partial BalanceSheet
December31, 2004
_____________________________________________________________
Currentassets:
Accountsreceivable
($1,080,000 $990,000)
Inventories
Constructionin process
Less: Billings
Unbilledcontractcosts(Project1)
Currentliabilities:
Billings($220,000)in excessof contract
costs($126,000)(Project2)
$90,000
$420,000*
360,000
*Theloss of $30,000wassubtractedfromthe constructionin processaccount.
60,000
94,000

(a)
Computationof grossprofit recognized:

2004
$370,000X 30%*
$111,000
$350,000X 30%*
$475,000X 32%**
_________
$111,000
2005
$105,000
152,000
$257,000
**($900,000 $630,000) $900,000

**($1,000,000 $680,000) $1,000,000
(b) InstallmentAccountsReceivable2005.....................
InstallmentSales.............................................
Cost of InstallmentSales..........................................
Inventory........................................................
1,000,000
1,000,000
680,000
680,000
Cash........................................................... 825,000
InstallmentAccountsReceivable
2004............................................................
2005............................................................
InstallmentSales.....................................................
Cost of InstallmentSales..................................
DeferredGrossProfit on Installment
Sales2005.................................................
Sales2004..........................................................
Sales2005.........................................................
RealizedGrossProfit on Installment
Sales..........................................................
Sales..................................................................
IncomeSummary.............................................
350,000
475,000
1,000,000
680,000
320,000
105,000
152,000
257,000
257,000
257,000

(a)
DeferredGrossProfit2004.....................................
RealizedGrossProfit.......................................
(To recognizegrossprofit on installmentsales)
3,150*
12,400**
69,400***
84,950
*Adjustmentfor deferredgrossprofit2004:
Balancein deferredgrossprofit account
prior to adjustment
Balanceafter adjustment($11,000X 35%)
Adjustment
$7,000
3,850
$3,150
**Adjustmentfor deferredgrossprofit2005:
prior to adjustment
Adjustment
$26,000
13,600
$12,400
***Adjustmentfor deferredgrossprofit2006:
prior to adjustment
Adjustment
$95,000
25,600
$69,400
(b) Cashcollectedin 2003on accountsreceivableof 2004:

$3,150/35%= $9,000.
Cashcollectedin 2003on accountsreceivableof 2005:
$12,400/34%= $36,470.59.
Cashcollectedin 2003on accountsreceivableof 2006:
$69,400/32%= $216,875.

GrossProfit Ratio2004:($750,000 $525,000) $750,000= 30%
GrossProfit Ratio2005:($840,000 $604,800) $840,000= 28%
(a)
Balance,December31, 2004:
DeferredGrossProfit Account2004InstallmentSales
Grossprofit on installmentsales2004
($750,000 $525,000)
Less: Grossprofit realizedin 2004($310,000X 30%)
Balanceat 12/31/04
Balance,December31, 2005:
Balanceat 12/31/04
Less: Grossprofit realizedin 2005on 2004sales
($300,000X 30%)
Balanceat 12/31/05
Grossprofit on installmentsales2005
($840,000 $604,800)
Less: Grossprofit realizedin 2005on 2005sales
($400,000X 28%)
Balanceat 12/31/05
(b) RepossessedMerchandise................................................
DeferredGrossProfit ($12,000X 30%).................................
Losson Repossession......................................................
InstallmentAccountsReceivable................................
(To recordthe default andthe
repossessionof the merchandise)
$225,000
(93,000)
$132,000
$132,000
(90,000)
$ 42,000
$235,200
(112,000)
$123,200
8,000
3,600
400
12,000

GAILDEVERSCORPORATION
IncomebeforeIncomeTaxeson InstallmentSale Contract
For the Year EndedDecember31, 2004
_____________________________________________________________
Sales
Cost of sales
Grossprofit
Interestrevenue(Schedule1)
Incomebeforeincometaxes
$676,000
500,000
176,000
28,800
$204,800
Schedule1
Computationof InterestRevenueon InstallmentSale Contract
Cashsellingprice
DeductpaymentmadeJuly 1, 2004
Interestrate
Annualinterest
InterestJuly 1, 2004to December31, 2004($57,600X 1/2)
$676,000
100,000
576,000
X
10%
$ 57,600
$ 28,800

(a) Realized gross profit recognized in 2005 under the installment method of
accountingis $87,375. Whengross profit is expressedas a percentageof cost,
it must be convertedto percentageof salesto computethe realizedgrossprofit
under the installmentmethodof accounting. Thus, 2004 and 2005 gross profits
as a percentageof salesare 20%and 21.875%respectively.
2005
2002
SaleYear
GrossProfit Percentage
Collections
RealizedProfit
2004
2005
.25/(1.00+ .25) = 20%

.28/(1.00+ .28) = 21.875%
$240,000
180,000
TOTAL
$48,000
39,375
$87,375
(b) The balanceof DeferredGross Profit could be reported on the balancesheet

for 2005:
(1) As a currentliability on the theorythat it is relatedto InstallmentAccounts
Receivablesthat are normallytreatedas currentassets;
(2) As a deferred credit between liabilities and stockholders equity. This
treatmentis criticizedbecausethereis no obligationto outsiders;or
(3) As an adjustmentor offset to the relatedInstallmentAccountsReceivable.
This is because the deferred gross profit is a part of revenue from
installmentsales not yet realized.The relatedreceivablewill be overstated
unless the deferred gross profit is deducted. On the other hand, the
amount of deferred gross profit has no direct relationship with the
estimatedcollectibilityof the accountsreceivable.
It is not a settledmatteras to the properclassificationof deferredgrossprofit
on the balance sheet when the installment method of accounting is used to
measureincome.
(c)
Gross profit as a percent of sales in 2004 is 20% (as computed in (a) above);
gross profit therefore is $96,000 ($480,000 X .20) and the cost of 2004 sales is
$384,000 ($480,000 $96,000). Because the amounts collected in 2004
($140,000) and 2005 ($240,000) do not exceed the total cost of $384,000, no
profit is recognizedin 2004 or 2005 on 2004 sales. Also, no profit is recognized
on 2005 sales since the collections of $180,000 do not exceed the total cost of
$484,375.

(a)
Computationof grossprofit realizedcostrecoverymethod:
Year
Cash
Received
Beginningbalance
2004
2005
2006
$100,000
60,000
40,000
OriginalCost
Recovered
Balanceof
Unrecovered
Cost
Gross
Profit
Realized
$150,000
50,000
0
0
$100,000
50,000
0
(b) Computationof grossprofit realizedinstallmentmethod:

Grossprofit rate:($200,000 $150,000) $200,000= 25%
2004Grossprofit realized:
$100,000X 25%= $25,000

$60,000X 25%= $15,000
$40,000X 25%= $10,000
$0
10,000
40,000
Cash(Dr.)
Year
1/1/05
2005
2006
2007
$ 52,557
52,557
52,557
$157,671
Deferred
Interest
Revenue
(Cr.)
$18,000a
12,816
(30,816)*
Installment
Accounts
Receivable
(Cr.)
$34,557b
39,741
45,702
Installment
Unpaid
Balance
Uncovered
Cost
$120,000
85,443c
45,702
$110,000
57,443d
4,886
Realized
Gross
Profit
Realized
Interest
Revenue
$10,000
$37,671e
$10,000 $37,671
$120,000X 15%= $18,000.

$52,557 $18,000= $34,557.
c
$120,000 $34,557= $85,443.
d
$110,000 $52,557= $57,443.
a
*This amount is used to transfer the Deferred Interest Revenue from 2005 ($18,000) and 2006 ($12,816) to
RealizedInterestRevenuein 2007.
2007interestrevenue($45,702X 15%)
2005and2006interestrevenueto be recognized($18,000+ $12,816)
Realizedinterestrevenuein 2007
$ 6,855
30,816
$37,671

1.
RepossessedMerchandise....................................................
DeferredGrossProfit............................................................
InstallmentAccountsReceivable...........................................
1,080**
Gainon Repossession..........................................................
800
378*
98
**$378= 35%X $1,080

**Sellingprice
Downpayment(20%)
1,440
Installmentpayments(4/16X $1,440)
Installmentaccountsreceivablebalance
2.
$1,800
(360)
(360)
$1,080
RepossessedMerchandise....................................................
DeferredGrossProfit.............................................................
Gainon Repossession..........................................................
**($1,600 $1,200)/$1,600= 25%grossprofit rate;
$220= 25%X $880
**Sellingprice
Downpayment
Monthlypayments($80 X 6)
Installmentaccountsreceivablebalance
$1,600
(240)
1,360
480
$ 880
750
220*
880**
90

Cash........................................................................................ 400
InstallmentAccountsReceivable..............................................
(To recordthe collectionof cashon installment
accountsreceivable)
400
DeferredGrossProfit (40%X $400)...................................................

RealizedGrossProfit...............................................................
(To recognizegrossprofit on installmentsale)
160
RepossessedMerchandise.............................................................
DeferredGrossProfit (40%X $1,400)...............................................
Losson Repossession...................................................................
InstallmentAccountsReceivable.............................................
(To recorddefault andrepossessionof
merchandise)
RepossessedMerchandise.............................................................
Cash....................................................................................
(To recordcashspenton reconditioningof
inventory)
590
560
250
1,400
160
60
60

InstallmentPaymentSchedule
Interestat 10%
Cost RecoveryMethod
Cash(Debit)
Date
Deferred
Interest
Revenue
(Credit)
Installment
Accounts
Receivable
(Credit)
1/1/05
12/31/05
$241,269
$ 60,000
12/31/06
241,269
12/31/07
241,269
$723,807
Installment
Unpaid
Balance
Uncovered
Cost
Realized
GrossProfit
Realized
Interest
Revenue
$600,000
$500,000
$181,269
418,731
258,731
41,873
199,396
219,335
17,462
( (101,873)
219,335
$600,000
*$100,000**
$100,000
**Consistsof $101,873of deferredinterestrevenuefrom2005and 2006and$21,934of interestfor 2007.

**$600,000 $500,000= $100,000or [$241,269 ($101,873+ $21,934+ $17,462)]= $100,000.
*$123,807*
$123,807
*EXERCISE18-21 (14-18 minutes)

(a)
Cash...................................................................... 40,000
NotesReceivable..............................................................
Discounton NotesReceivable....................................
[$30,000 (2.48685X $10,000)]
RevenuefromFranchiseFees.....................................
(b) Cash...................................................................... 40,000

UnearnedFranchiseFees...........................................
(c)
Cash...................................................................... 40,000
NotesReceivable..............................................................
Discounton NotesReceivable....................................
RevenuefromFranchiseFees.....................................
UnearnedFranchiseFees...........................................
($10,000X 2.48685)
(Calculationsrounded)
30,000
5,132
64,868
40,000
30,000
5,132
40,000
24,868

(a)
Downpaymentmadeon 1/1/04
Presentvalueof an ordinaryannuity($6,000X 3.69590)
Total revenuerecordedby Short-Trackand total
acquisitioncost recordedby SvetlanaMasterkova
(b) Cash.....................................................20,000.00
NotesReceivable..................................................
Discounton NotesReceivable........................
UnearnedFranchiseFees..............................
(c)
1.
2.
3.
$20,000.00
22,175.40
$42,175.40
30,000.00
7,824.60
$42,175.40
$20,000 cash received from down payment. ($22,175.40 is recorded as

unearnedrevenuefromfranchisefees.)
$20,000cashreceivedfromdownpayment.
None.($20,000is recordedas unearnedrevenuefromfranchisefees.)

(a)
Inventoriablecosts:
70 units shippedat cost of $500each
Freight
Total inventoriablecost
$35,000
840
$35,840
30 units on hand(30/70X $35,840)
$15,360
(b) Computationof ConsignmentProfit:

Consignmentsales(40 X $700)
Cost of units sold (40/70X $35,840)
Commissionchargedby consignee(6%X $28,000)
Advertisingcost
Installationcosts
Profit on consignmentsales
(c)
Remittanceof Consignee:
Consignmentsales
Less: Commissions
Advertising
Installation
Remittancefromconsignee
$28,000
(20,480)
(1,680)
(200)
(320)
$ 5,320
$28,000
$1,680
200
320
2,200
$25,800
SOLUTIONSTO PROBLEMS
PROBLEM18-1
(a)
1.
Point of sale method recognizes revenue when the earnings process is

complete and an exchange transaction has taken place. This can be the
date goods are delivered, when title passes, when services are rendered
and billable, or as time passes (e.g., rent or royalty income). This method
most closely followsthe accrual accountingmethodand is in accordance
with generallyacceptedaccountingprinciples(GAAP).
2. The completion-of-production method recognizes revenue only when the
project is complete and the contract is completed. This is used primarily
with short-term contracts, or with long-term contracts when there is
considerable difficulty in estimating the costs remaining to complete a
project. The advantageof this methodis that incomeis recognizedon final
results, not estimates.The disadvantageis that whenthe contractextends
over morethan one accountingperiod,currentperformanceon the project
is not recognizedand earningsare distorted. It is acceptable accordingto
GAAP only in the extraordinary circumstances when forecasting the
amountof workcompletedto date is not possible.
3. The percentage-of-completion method of revenue recognition is used on
long-term projects, usually construction. To apply it, the following
conditionsmustexist:
(i)
A firmcontractpricewith a highprobabilityof collection.
(ii)
A reasonably accurate estimate of costs (and, therefore, of gross
profit).
(iii)
A way to reasonablyestimatethe extent of progressto completion
of the project.
Gross profit is recognized in proportion to the work completed. The
progress toward contract completion is the revenue-generating event.
Normally, progressis measuredas the percentageof actual costs to date
to estimatedtotal costs. This percentageis appliedto estimated
gross
profit to indicatethe total profit whichshouldbe recognizedto that
PROBLEM18-1 (Continued)
date. That total less the incomethat was recognizedin previousperiodsis
the amountrecognizedin the current period. In the final period, the actual
total profit is known and the difference between this amount and profit
previouslyrecognizedis shownas profit of the period.
This method is in accordance with generally accepted accounting principlesfor long-termprojectswhenestimatesare dependable.
4. The installment sales method may be applicable when the sales price is
received over an extended period of time. The installment method
recognizesrevenueas the cash is collectedand is used whenthe collection
of the sales price is not reasonablyassured.This methodis commonlyused
for tax purposes, but it is not in accordance with GAAP, except in certain
situations, because it violates accrual basis accounting. The installment
method can be used in special circumstances when collectibility is very
unsure.
(b)
GinaConstruction
A change of cost estimates calls for a revision of revenue and profit to be

recognizedin the period in which the change was made (in this case, the
first period).
Contractprice
$30,000,000
Costs
Actualcoststo 11/30/04
Total cost
Estimatedprofit
% of contractcompleted($7,800,000 $24,000,000)
Revenueto be recognizedin 2004($30,000,000X 32.5%)
$ 7,800,000
16,200,000
24,000,000
$ 6,000,000
32.5%
$ 9,750,000
GogeanPublishingDivision
Salesfiscal2004
Less: Salesreturnsand allowances(20%)
Net salesrevenueto be recognizedin fiscal 2004
$8,000,000
1,600,000
$6,400,000
Althoughdistributorscan returnup to 30 percentof sales, prior experienceindicates

that 20 percent of sales is the expected average amount of returns. The
collection of 2003 sales has no impact on fiscal 2004 revenue. The 21
percent of returns on the initial $5,500,000 of 2004 sales confirms that 20
percentof saleswill providea reasonableestimate.
ChorkinaSecuritiesDivision
Revenuefor fiscal 2004= $5,200,000.
The revenue is the amount of goods actually billed and shipped when revenue is
recognized at point of sale (terms of F.O.B. factory). Orders for goods do
not constitute sales. Down payments are not sales. The actual freight
costs are expensesmadeby the seller that the buyer will reimburseat the
times/hepaysfor the goods.
Commissions and warranty returns are also selling expenses. Both of these
expenses will be accrued and will appear in the operating expenses
sectionof the incomestatement.
PROBLEM18-2
(a)
Contractprice
Lessestimatedcost:
Cost to date
Estimatedcost to complete
Estimatedtotal cost
Estimatedtotal grossprofit
2004
$900,000
2005
$900,000
2006
$900,000
270,000
330,000
420,000
180,000
600,000
600,000
$300,000
600,000
$300,000
600,000
$300,000
Grossprofit recognizedin
2004:
$270,000
$600,000
X $300,000=
2005:
$420,000
$600,000
X $300,000=
$210,000
Less2004recognizedgross
profit
Grossprofit in 2005
135,000
$ 75,000
2006:
$135,000
Less20042005recognized
grossprofit
Grossprofit in 2006
210,000
$ 90,000
(b) In 2004and 2005, no grossprofit wouldbe recognized.

Total billings
Total cost
$900,000
600,000
$300,000
PROBLEM18-3
(a)
2004
Contractprice
Costs:
Coststo date
$ 600,000
Estimatedcoststo
complete
1,400,000
Percentagecompleted
to date
Total grossprofit
recognized
Less:Grossprofit
recognizedin
previousyears
Grossprofit
recognizedin
currentyear
**$600,000 $2,000,000
**$1,560,000 $1,950,000
2005
$3,000,000
2006
$3,000,000
$1,560,000
390,000
$3,000,000
$2,100,000
1,950,000
2,100,000
2,000,000
1,000,000
30%*
1,050,000
80%**
900,000
100%
300,000
840,000
900,000
300,000
840,000
$ 300,000
$ 540,000
(b) Constructionin Process................................................

($2,100,000 $1,560,000)
Materials,Cash,Payables,etc................................
540,000
AccountsReceivable....................................................
($3,000,000 $2,100,000)
Billingson Constructionin Process........................
900,000
Cash($2,750,000 $1,950,000).......................................
800,000
ConstructionExpenses.................................................
Constructionin Process................................................
RevenuefromLong-termContracts........................
540,000
60,000
600,000*
540,000
900,000
800,000
*$3,000,000X (100% 80%)

Billingson Constructionin Process...........................
Constructionin Process...................................
3,000,000
3,000,000
60,000
(c)
WINTERCOMPANY
BalanceSheet(Partial)
December31, 2005
Currentassets:
Accountsreceivable
($2,100,000 $1,950,000)
Inventories
($1,560,000+ $840,000)
Less: Billings
Costsandrecognizedgross
profit in excessof billings
$150,000
$2,400,000
2,100,000
300,000
PROBLEM18-4
(a)
Contractprice
Lessestimatedcost:
Cost to date
Estimatedcost to complete
Estimatedtotal cost
Estimatedtotal grossprofit
2004
$6,600,000
2005
$6,600,000
2006
$6,510,000
1,782,000
3,618,000
5,400,000
$1,200,000
3,850,000
1,650,000
5,500,000
$1,100,000
5,500,000
5,500,000
$1,010,000
Grossprofit recognizedin
2004:
$1,782,000
$5,400,000
X $1,200,000=
2005:
$3,850,000
$5,500,000
X $1,100,000=
$396,000
Less:2004recognizedgross profit
Grossprofit in 2005
2006:
$770,000
396,000
$374,000
Less:20042005recognized grossprofit
Grossprofit in 2006
770,000
$240,000
(b)
BEARDCONSTRUCTIONCOMPANY
BalanceSheet
December31, 2005
_____________________________________________________________
Currentassets:
Accountsreceivable
($3,100,000 $2,800,000)
Inventories
Constructionin process*
Less: Billings
Costsandrecognizedgross
profit in excessof billings
*$6,600,000X ($3,850,000 $5,500,000)
$ 300,000
$4,620,000
3,100,000
1,520,000
PROBLEM18-5
(a)
The completed-contract methodof revenuerecognitionrecognizesincomeonly

uponcompletionof a project or shipmentof a product. All associatedcosts are
expensed at the point of sale, and there are no interim charges or credits to
income.Completed-contract revenuerecognition is used for long-term projects
whenestimatesof revenueand costsare not reliable.
The percentage-of-completion method of revenue recognition recognizes
incomeand associated costs in each accounting period based upon progress.
This methodis preferredfor long-termprojectswhenestimatesof revenuesand
costs are reasonablydependable. Under the percentage-of-completionmethod,
the current status of uncompleted contracts is reflected on the financial
statements.
(b) Using the data provided for the Dagmar Haze Tractor Plant, and on the
assumptionthat the percentage-of-completionmethodof revenuerecognitionis
used, the calculations of GMCBs revenue and gross profit for 2003, 2004, and
2005,underthreesets of circumstancesare presentedbelow.
1. Assuming that all costs are incurred, all billings to customers are made,
and all collections from customers are received within 30 days of billing,
the GMCBs revenue, cost of sales, and gross profit for 2003, 2004, and
2005,are calculatedas follows:
Percentage-of-Completion(Cost-to-Cost Basis)
($000omitted)
Year
(1)
2003
2004
2005
Contract
Price
(2)
$8,000
8,000
8,000
Costs to
Date
(3)
$2,010
5,025
6,700
Estimated
Total Costs
(4)
$6,700
6,700
6,700
EstimatedGross
Profit (Col. 2Col.
4)
(5)
$1,300
1,300
1,300
Percent
Complete
(Col. 3/Col. 4)
(6)
30%
75%
100%
Revenuerecognition
Contract
Year
Price
2003
2004
2005
$8,000
8,000
8,000
Profit recognition
Estimated
Year
Profit
2003
2004
2005
2.
$1,300
1,300
1,300
Percent
Complete
Revenue
Recognizable
30%
75%
100%
LessPrior
Year(s)
Current
Year
$2,400
6,000
$2,400
3,600
2,000
LessPrior
Year(s)
Current
Year
$390
975
$390
585
325
$2,400
6,000
8,000
Percent
Complete
Revenue
Recognizable
30%
75%
100%
$ 390
975
1,300
Assuming the same facts as in Instruction (b)1., but that cost overruns of
$800,000 were experienced, GMCBs revenue, costs of sales, and gross profit
for 2003,2004, and 2005werecalculatedas follows:
Percentage-of-Completion(Cost-to-Cost Basis)
($000omitted)
Year
Contract
Price
(1)
2003
2004
2005
(2)
$8,000
8,000
8,000
Costs to
Date
Estimated EstimatedGross
Total Costs Profit (Col. 2Col.
4)
(3)
$2,810
5,825
7,500
(4)
$7,500
7,500
7,500
Percent
Complete
(Col. 3/Col. 4)
(5)
$500
500
500
(6)
37.47%
77.67%
100%
Revenuerecognition
Year
Contract
Price
2003
$8,000
2004
8,000
2005
8,000
Percent
Complete
37.47%
77.67%
100%
Revenue
Recognizable
$2,997.6
6,213.6
8,000
LessPrior
Year(s)
$2,997.6
6,213.6
Current
Year
$2,997.6
3,216
1,786.4
Profit recognition
Estimated
Year
Profit
2003
2004
2005
3.
$500
500
500
Percent
Complete
Profit
Recognizable
37.47%
77.67%
100%
LessPrior
Year(s)
$187.4
388.4
500
$187.4
388.4
Current
Year
$187.4
201
111.6
Assuming the same facts as in Instructions (b)1. and (b)2., but that additional cost
overruns of $540,000 are experienced, GMCBs revenue, cost of sales, and gross
profit for 2003, 2004, and 2005are calculatedas follows:
Percentage-of-Completion(Cost-to-CostBasis)
($000omitted)
Year
Contract
Price
(1)
2003
2004
2005
(2)
$8,000
8,000
8,000
Costs to
Date
Estimated EstimatedGross
Total Costs Profit (Col. 2Col.
4)
(3)
$2,810
6,365
8,040
(4)
$7,500
8,040
8,040
Percent
Complete
(Col. 3/Col. 4)
(5)
$500
(40)
(40)
(6)
37.47%
79.17%
100%
Revenuerecognition
Year
Contract
Price
Percent
Complete
Revenue
Recognizable
2003
2004
2005
$8,000
8,000
8,000
37.47%
79.17%
100%
$2,997.6
6,333.6
8,000
Percent
Complete
Profit
Recognizable
LessPrior
Year(s)
$2,997.6
6,333.6
Current
Year
$2,997.6
3,336
1,666.4
Profit recognition
Year
2003
2004
2005
Estimated
Profit
$500
(40)
(40)
37.47%
100%a
100%
$187.4
(40)
(40)
LessPrior
Year(s)
$187.4
(40)
Current
Year
$187.4
(227.4)
Whenthere is a projectedloss at any time, it must be recognizedin full in the period

in whicha loss on the contractappearsprobable.
PROBLEM18-6
(a)
Computationof RecognizableProfit/Loss
Percentage-of-CompletionMethod
2004
Coststo date (12/31/04)
Estimatedtotal costs
$3,200,000
3,200,000
$6,400,000
Percentcomplete($3,200,000 $6,400,000)
Revenuerecognized($8,400,000X 50%)
Costsincurred
50%
$4,200,000
3,200,000
$1,000,000
2005
($3,200,000+ $2,600,000)
$5,800,000
1,450,000
$7,250,000
Revenuerecognizedin 2005
($8,400,000X 80%) $4,200,000
Costsincurredin 2005
80%
$2,520,000
2,600,000
$ (80,000)
2006
Total revenuerecognized
Total costsincurred
Total profit on contract
Deductprofit previouslyrecognized
($1,000,000 $80,000)
Profit recognizedin 2006
$8,400,000
7,250,000
1,150,000
920,000
$ 230,000*
*Alternative
($8,400,000X 20%)
(b)
$1,680,000
1,450,000
$ 230,000
Completed-ContractMethod
2004NONE
2005NONE
2006
Total costsincurred
$8,400,000
7,250,000
$1,150,000
PROBLEM18-7
(a)
2004
$ 150,000
1,350,000
$1,500,000
Percentcomplete($150,000 $1,500,000)
Revenuerecognized($1,950,000X 10%)
Costsincurred
10%
$ 195,000
150,000
$ 45,000
2005
$1,200,000
800,000
2,000,000
$1,950,000
$ 50,000
Contractprice
Total loss
Total loss
Plusgrossprofit recognizedin 2004
50,000
45,000
$ (95,000)
OR
[($1,950,000X 60%) $195,000]
($1,200,000 $150,000)
Lossto date
Lossattributableto 2006*
60%
$ 975,000
1,050,000
75,000
20,000
$ (95,000)
*2006revenue
($1,950,000 $195,000 $975,000)
2003estimatedcosts
2003loss
$780,000
800,000
$ (20,000)
2006
$2,100,000
0
2,100,000
1,950,000
$ (150,000)
Contractprice
Total loss
Total loss
Less: Lossrecognizedin 2005
(b)
$ (150,000)
$95,000
(45,000)
(50,000)
$ (100,000)
Completed-ContractMethod
2004NONE
2005
$1,200,000
800,000
2,000,000
Deductcontractprice
1,950,000
$ (50,000)
2006
Total costsincurred
$2,100,000
1,950,000
Total losson contract

Deductloss recognizedin 2005
(150,000)
(50,000)
$ (100,000)
PROBLEM18-8
(a)
Rateof grossprofit
Grossprofit realized:
40%of $ 75,000
40%of $100,000
37%of $100,000
40%of $ 50,000
37%of $120,000
35%of $110,000
Grossprofit
Sales
2004
2005
2006
40%
37%
35%
$30,000
$40,000
37,000
$30,000
(b) InstallmentAccountsReceivable2006...........................
InstallmentSales....................................................
$77,000
$ 20,000
44,400
38,500
$102,900
280,000
280,000
Cash................................................................. 280,000
InstallmentAccountsReceivable2004....................
50,000
120,000
110,000
Cost of InstallmentSales................................................
Inventory(or Purchases).........................................
182,000
182,000
InstallmentSales...........................................................
Cost of InstallmentSales........................................
DeferredGrossProfit on InstallmentSales- 2006.......
280,000
182,000
98,000
DeferredGrossProfit on InstallmentSales 2004....20,000

DeferredGrossProfit on InstallmentSales- 2005.....44,400
DeferredGrossProfit on InstallmentSales- 2006.....38,500
RealizedGrossProfit on InstallmentSales................
102,900
RealizedGrossProfit on InstallmentSales................................
IncomeSummary...........................................................
102,900
102,900
PROBLEM18-9
Sales
Cost of Sales
Grossmarginon sales
Grossmarginrealizedon installmentsales
(Seecalculationbelow)
Total grossprofit
Sellingexpenses
Administrativeexpenses
Total sellingandadministrative
expenses
Net income
2004
$385,000
270,000
115,000
2005
$426,000
277,000
149,000
2006
$525,000
341,000
184,000
36,300
151,300
72,600
221,600
119,050
303,050
77,000
50,000
87,000
51,000
92,000
52,000
127,000
138,000
144,000
$ 24,300
$ 83,600
$159,050
Calculationof grossmarginrealizedon installmentsales:
Rateof grossprofit
Grossmarginrealized:
33%of $110,000
33%of $ 90,000
39%of $110,000
33%of $ 40,000
39%of $140,000
41%of $125,000
2004
33%*
2005
** 39%**
2006
41%***
$36,300
$29,700
42,900
$36,300
*
$320,000$214,400
$320,000
*
= 33%
**
$275,000 $167,750
$275,000
= 39%
***
$380,000 $224,200
$380,000
= 41%
$72,600
$ 13,200
54,600
51,250
$119,050
PROBLEM18-10
(a)
Rateof grossprofit on 2005installmentsales:

Deferredgrossprofit on repossessions
$8,000 $800 $4,800= $2,400
$2,400 $8,000= 30%
It mayalso be computedas follows:
Accountsreceivableat beginningof year
$48,000+ $104,000+ $8,000= $160,000
Deferredgrossprofit at beginningof year
$45,600+ $2,400= $48,000
$48,000 $160,000= 30%
Rateof grossprofit on 2006installmentsales:
$200,000 $128,000
$200,000
= 36%
(b) InstallmentSales...........................................................
DeferredGrossProfit, 2006.....................................
200,000
128,000
72,000
DeferredGrossProfit, 2005(30%X $104,000)....................

DeferredGrossProfit, 200636%X $109,000).....................
31,200
39,240
RealizedGrossProfit on InstallmentSales........................
Sales............................................................................
IncomeSummary...................................................
Cost of Sales.........................................................
Gainor Losson Repossessions..............................
Sellingand AdministrativeExpenses........................
70,440
343,000
IncomeSummary...........................................................
RetainedEarnings..................................................
29,640
70,440
29,640
255,000
800
128,000
29,640
(c)
ISABELLWERTHSTORES
Statementof Income
_________________________________________________________
Sales
Cost of goodssold
Grossmarginon sales
Grossmarginrealizedon installmentsales
Total grossmargin
Sellingand administrativeexpenses
Losson repossessions
Net incomefor the year
$343,000
255,000
88,000
70,440
158,440
$128,000
800
128,800
$ 29,640
PROBLEM18-11
(a)
InstallmentAccountsReceivable.....................................
InstallmentSales....................................................
500,000
500,000
Cash................................................................. 200,000
InstallmentAccountsReceivable.............................
200,000
RepossessedMerchandise.............................................
DeferredGrossProfit.....................................................
Losson Repossessions..................................................
InstallmentAccountsReceivable.............................
*(Rateof grossprofit =
9,200
8,160*
6,640
24,000
$170,000 = 34%
$500,000
*(34%X $24,000= $8,160)

Purchases(or Inventory).........................................
330,000
330,000
330,000
Sales.................................................................
170,000
500,000
(b) DeferredGrossProfit on InstallmentSales........................

Sales(34%of $200,000= $68,000)..........................
68,000
68,000
PROBLEM18-12
(a)
Rateof grossprofit2005:
Deferredgrossprofit beginningof year
$64,000+ $7,200= $71,200
Accountsreceivablebeginningof year
$80,000+ $18,000+ $80,000= $178,000
Rateof grossprofit
$71,200 $178,000= 40%
(Inasmuch as the repossessions were recorded correctly, the 2005 rate of
grossprofit also maybe computedby dividing$7,200by $18,000)
Rateof grossprofit2006:
Installmentsales
Cost of installmentsales
$180,000
117,000
Grossprofit
Rateof grossprofit2006= $63,000 $180,000= 35%
$ 63,000
Cost of GoodsSold........................................................
Inventory1/1/06.....................................................
120,000
Purchases.............................................................
380,000
RepossessedMerchandise......................................
391,000*
117,000
8,000
*($120,000+ $380,000+ $8,000 $117,000)

Inventory12/31/06..........................................................
RepossessedMerchandise.............................................
Cost of GoodsSold................................................
131,400
127,400
4,000
180,000
117,000
DeferredGrossProfit on InstallmentSales2006......
63,000
DeferredGrossProfit on InstallmentSales2005.....32,000
DeferredGrossProfit on InstallmentSales2006.....17,500
(40%X $80,000= $32,000;
35%X $50,000= $17,500)
RealizedGrossProfit on InstallmentSales........................
IncomeSummary...................................................
Sales............................................................................
Cost of GoodsSold($391,000 $131,400).................
OperatingExpenses...............................................
Losson Repossessions..........................................
IncomeSummary...................................................
IncomeSummary($49,500+ $25,600)...............................
RetainedEarnings..................................................
49,500
49,500
49,500
400,000
259,600
112,000
2,800
25,600
75,100
75,100
(b)
CATHERINEFOXINC.
Statementof Income
_____________________________________________________________
Sales
$400,000
Cost of goodssold:
Inventory,January1
Purchases
Merchandiserepossessed
Availablefor sale
InventoriesDecember31:
Newmerchandise
Repossessedmerchandise
Cost of merchandisesold
Lesscost of installmentsales
259,600
Grossprofit on regularsales
Grossprofit realizedon
installmentsales
49,500
Total grossprofit realized
Operatingexpenses
$120,000
380,000
8,000
508,000
$127,400
4,000
131,400
376,600
117,000
140,400
189,900
112,000
114,800
Net incomefor the year
75,100
2,800
$
PROBLEM18-13
-1Cash............................................................................ 200
InstallmentAccountsReceivable..........................................
InstallmentSales........................................................
-2Cash............................................................................. 30
InstallmentAccountsReceivable..................................
-3InstallmentCostof GoodsSold............................................
Inventory(or Purchase)...............................................
600
800
30
560
560
InstallmentSales .......................................................800
InstallmentCostof GoodsSold....................................
DeferredGrossProfit on InstallmentSales.....................
560
240
DeferredGrossProfit on InstallmentSales............................
RealizedGrossProfit on InstallmentSales.....................
($240 $800= 30%;30%of $230= $69)
69
RealizedGrossProfit on InstallmentSales.............................
IncomeSummary........................................................
-4Cash($30 X 7)....................................................................
-5RepossessedMerchandise..................................................
DeferredGrossProfit on InstallmentSales............................
Losson Repossession........................................................
69
Balanceat repossession
Grossprofit (30%)
Bookvalue
Valueof repossessed
merchandise
Loss
$152
*$30X (20 8) = $360
$360*
(108)
252
100
69
69
210
210
100
108
152
360
PROBLEM18-14
(a)
1.
VALENTINAVEZZALICOMPANY
Scheduleto ComputeCost
of GoodsSoldon Installments
For 2004, 2005, and 2006
_________________________________________________________
2004
Purchases:
1,400units at $130
1,200units at $112
900 unitsat $136
Repossessed:
50 units at $60
Inventoryat December31:
2004(1,400 1,100)X $130
2006(950 850) X $132**
Cost of goodssold
2005
2006
($182,000
$134,400
*$122,400
3,000*
(39,000)
($143,000
39,000
$173,400
( (13,200)
($112,200
*An alternative valuation of the repossessed merchandise would be at an

amountto earnthe normalgrossprofit for the period.
**($122,400+ $3,000) (900+ 50) = $132
2.
Scheduleto ComputeAverageUnit Cost
of GoodsSoldon Installments
For 2004, 2005, and 2006
2004
2004($182,000 1,400)
2005($173,400 1,500)
2006($125,400* 950**)
**($122,400+ $3,000)
**(900+ 50)
2005
2006
$130
$115.60
$132
(b)
Scheduleto ComputeGrossProfit Percentages
For 2004, 2005, and 2006
2004
Sales:
1,100units at $200
1,500units at $170
800 unitsat $182
50 units at $80
Cost of goodssold
Grossprofit
Grossprofit percentages:
$77,000 $220,000
$81,600 $255,000
$37,400 $149,600
(c)
2005
2006
$220,000
$255,000
220,000
143,000
$ 77,000
255,000
173,400
$ 81,600
$145,600
4,000
149,600
112,200
$ 37,400
35%
32%
25%
Scheduleto ComputeLosson Repossessions
For 2006
Originalsalesamount(50 X $170)
Collectionsprior to repossessions
Unpaidbalance
Deduct:
Unrealizedgrossprofit ($7,060X 32%)
Valueof repossessedmerchandise
$8,500.00
1,440.00
7,060.00
$2,259.20
3,000.00 5,259.20
$1,800.80
(d)
Scheduleto ComputeNet Income
FromInstallmentSales
For 2006
Grossprofit realizedon installmentsales:
2006($34,600X 25%)
2005($100,000X 32%)
2004($80,000X 35%)
Total grossprofit realized
Net grossprofit realized
Generaland administrativeexpense
[$60,000+ (1/3 X $7,200)]
Net income
$ 8,650.00
32,000.00
28,000.00
68,650.00
1,800.80
66,849.20
62,400.00
$ 4,449.20
PROBLEM18-15
(a)
MAUERCONSTRUCTIONCOMPANY,INC.
Computationof Billingson UncompletedContract
In Excessof RelatedCosts
December31, 2002
Partial billingson contractduring2002
Deductconstructioncostsincurredduring2002
Balance,December31, 2002
$1,500,000
1,140,000
$ 360,000
Computationof Costsof UncompletedContract
In Excessof RelatedBillings
December31, 2003
Balance,December31, 2002excessof
billingsover costs
Addconstructioncostsincurredduring2003
($3,055,000 $1,140,000)
Deductprovisionfor loss on contract
recognizedduring2003
($3,055,000+ $1,645,000 $4,500,000)
Deductpartial billingsduring2003
($2,500,000 $1,500,000)
$ (360,000)
1,915,000
1,555,000
200,000
1,355,000
1,000,000
$ 355,000
Computationof CostsRelatingto Substantially
CompletedContractin Excessof Billings
December31, 2004
Balance,December31, 2003excessof costs
over billings
Addconstructioncostsincurredduring2004
($4,800,000 $3,055,000)
Deductloss on contractrecognizedduring2004
($4,800,000 $4,500,000 $200,000)
Deductpartial billingsduring2004
($4,300,000 $2,500,000)
(b)
$ 355,000
1,745,000
2,100,000
100,000
2,000,000
1,800,000
$ 200,000
Computationof Profit or Lossto Be Recognized
On UncompletedContract
Contractprice
Deductcontractcosts
Incurredto December31, 2002
Total estimatedcontractcost
Estimatedgrossprofit on contractat completion
$4,500,000
Profit to be recognized
1,140,000
2,660,000
3,800,000
$ 700,000
0
(The completed-contract method recognizes income only when the contract is

completed,or substantiallyso.)
Computationof Lossto Be Recognized
On UncompletedContract
Contractprice
Deductcontractcosts
Incurredto December31, 2003
Total estimatedcontractcost
Lossto be recognized
$4,500,000
3,055,000
1,645,000
4,700,000
$ (200,000)
(The completed-contract methodrequires that provisionshould be made for an

expectedloss.)
Computationof Lossto Be Recognized
On SubstantiallyCompletedContract
Contractprice
Deductcontractcostsincurred
Losson contract
Deductprovisionfor loss booked
at December31, 2003
Lossto be recognized
$4,500,000
4,800,000
(300,000)
200,000
$ (100,000)
PROBLEM18-16
DearJoy:
This letter regards the revenue recognition matter which we discussed earlier. By
usinga recognitionmethodcalledpercentage-of-completion,you will showa profit in
every year of the construction project, assuming, of course, that no unexpected
lossesoccur.
The completed-contract method which you use presumes that revenue from the
contract is not truly earned until the entire contract is finished. Although costs
associated with the contract and billings to the customer are recorded, the actual
grossprofit is not recognizeduntil the year of projectcompletion.
The percentage-of-completionmethod,on the other hand,presumesthat, as portions
of the contract are completed, part of the gross profit is being earned as well.
Therefore,it attemptsto measurethe degreeof the projectscompletionat eachyearend. (Thismethodassumesthat the contractwill be completed.)
The most frequently used measure of this degree of completion is the cost-to-cost
method, which determines the percentage of a projects completion as the ratio of
coststhat havealreadybeenincurredto the total estimatedcostsrequiredin orderto
finish the project. This percentageis then applied to the total contract price or gross
profit to arriveat the amountof revenueor grossprofit recognizedfor the period.
In succeeding periods, the above ratio becomes larger as the project nears
completion.(If the estimatedcoststo completethe contracthavechanged,the ratios
denominator as well as its numerator should be adjusted.) The new ratio will still be
appliedto the total contractprice or grossprofit, this time subtractingout the portion
of revenue(grossprofit) alreadyrecognizedin earlier periods.
To help you see the advantagesof this method,I havecomputedthe amountof gross
profit you would have recognized on the building contract if you had used the
percentage-of-completionmethod. Referring to the accompanying schedule, you will
see that, in 2003,2004,and2005, you wouldhaverecognized$80,000,$70,000,and
$60,000, respectively. Althoughthe amount recognizedin 2005 is significantly lower
than it would have been under the completed-contract method, the amounts
recognized in 2003 and 2004 actually allow you to show a profit before the project
has been finished. In addition, where applicable, generally accepted accounting
principles require the use of the percentage-of-completion method in preference to

the completed-contractmethod.
I hopeyoufind this informationhelpful.
Sincerely,
A. SmartStudent
Three-Year Scheduleof GrossProfit Recognition
Contractprice
Costs:
Coststo date
Percentagecompletionto date ($320,000/$800,000)
Contractprice
Costs:
Coststo date
Percentagecompletionto date ($600,000/$800,000)
$1,000,000
$320,000
480,000
200,000
800,000
40%
$ 80,000
$1,000,000
$600,000
200,000
800,000
200,000
75%
150,000
(80,000)
$ 70,000
Contractprice
Costs:
Coststo date
($790,000/$790,000)
and 2004($80,000+ $70,000)
$1,000,000
$790,000
0
790,000
210,000
100%
210,000
150,000
$ 60,000
PROBLEM18-17
(a)
Scheduleto ComputeGrossProfit for 2004

A
Estimatedprofit (loss):
A: ($300,000 $315,000)
B: ($350,000 $339,000)
C: ($280,000 $186,000)
D: ($200,000 $210,000)
E: ($240,000 $200,000)
$(15,000)
$11,000
$94,000
$(10,000)
$40,000
A: (not applicable)
B: ($67,800 $339,000)
C: ($186,000 $186,000)
D: (not applicable)
E: ($185,000 $200,000)
Grossprofit (loss)recognized
20%
100%
$(15,000)
$ 2,200
$94,000
$(10,000)
92.5%
$37,000
Scheduleto ComputeUnbilledContractCosts
and RecognizedProfit and Billings
in Excessof Costsand RecognizedProfit
Costsand
EstimatedEarningsor
Losses
a
$233,000a
70,000b
113,000c
222,000d
$638,000
A
B
D
E
$248,000 $15,000
$67,800+ $2,200
c
$123,000 $10,000
d
$185,000+ $37,000
b
RelatedBillings
$200,000
110,000
35,000
205,000
$550,000
Costsand
EstimatedEarningsin
Excessof Billings
Billingsin Excess
of
Costsand Estimated
Earnings
$ 33,000
$40,000
78,000
17,000
$128,000
$40,000
(b)
Partial IncomeStatement
Revenuefromlong-termcontracts
Costsof construction
($251,190+ $67,800+ $186,000+ $127,143+ $185,000)
Grossprofit
*A: $300,000X ($248,000 $315,000)=
B:$350,000X ($67,800 $339,000)=
C:$280,000X ($186,000 $186,000)=
D:$200,000X ($123,000 $210,000)=
E:$240,000X ($185,000 $200,000)=
$925,333*
817,133
$108,200
$236,190
70,000
280,000
117,143
222,000
$925,333
Partial BalanceSheet
Currentassets:
Accountsreceivable
($830,000 $765,000)
Inventories
Less: Billings
Unbilledcontractcosts
and recognizedprofit
(projectA, D, and E)
$ 65,000
$568,000***
440,000***
128,000
Currentliabilities:
Billings($110,000)in excessof costsand
recognizedprofit ($70,000)(projectB)
Project
Costs
A
D
E
Total
$248,000
123,000
185,000
$556,000
$ 40,000
Profit/(loss)
Constructionin
Process
$(15,000)
(10,000)
( 37,000)
$12,000)
$233,000
113,000
222,000
*$568,000**
Billings
$200,000
35,000
205,000
$440,000***
(c)
Scheduleto ComputeGrossProfit for 2004

A
A: ($300,000 $315,000)
B: Not completed
C: ($280,000 $186,000)
D: ($200,000 $210,000)
E: Not completed
Grossprofit (loss)recognized
$(15,000)
$94,000
$(10,000)
$(15,000)
$94,000
$(10,000)
Scheduleto ComputeUnbilledContractCosts
and Billingsin Excessof Costs
Costsand
EstimatedEarningsor
Losses
a
$233,000a
67,800
113,000b
185,000
$598,800
A
B
D
E
RelatedBillings
$200,000
110,000
35,000
205,000
$550,000
Costsand
EstimatedEarningsin
Excessof Billings
Billingsin Excess
of
Costsand Estimated
Earnings
$ 33,000
$42,200
78,000
$111,000
20,000
$62,200
$248,000 $15,000
$123,000 $10,000
(d) The principal advantage of the completed-contract method is that it reports

revenue based on the final results and not on estimates made throughout the
constructionperiod. However, the disadvantageof using this methodis that for
contractswhichextendmorethan one accountingperiod, incomerecognitionis
distorted. For example, in this exercise Rich Mathre Construction Company
would recognize$39,200less gross profit using the completed-contract method
than if it was using the percentage-of-completionmethod.This differenceexists
becausethe only project completedat the end of 2004was projectC and so that
is the only project from which Mathre may recognize revenue and gross profit.
Therefore, even thougha portion of the work was completedon projects B and
E, no revenues or gross profit can be recognized until those projects are
completed.
On the other hand, the percentage-of-completion method does recognize
revenue and gross profit before the completion of a project. If Mathre can
determinereliable estimates of its progress and meets the other conditions for
this method,Mathrecan recognizerevenuesas the workprogresses.The use of
this method provides financial statement users with a more current picture of
the results of the companys operations; however, problems may occur if the
estimatesare poor. If revisedestimates,or evenrisingcosts, showthat a project
will result in a loss, the companymust offset grossprofit previouslyrecognized
for that project. Thus, it is possible that the financial statementsmay present a
goodpictureone year and the next year presenta picturethat is not as good.
The end results will be the same under either method and so the difference is
simply one of timing. Therefore, if a companycan determine reliable estimates
of its progress towards completion and meets the required conditions, the
percentage-of-completion method is preferred. Otherwise the completedcontractmethodis moreappropriate.

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Solutions CH 18

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SOLUTIONSTO EXERCISES

EXERCISE18-1 (15-20 minutes)

July Sale Entry.

*A debit to eitherSalesRevenueTextsor SalesReturnscouldbe madehere.

EXERCISE18-2 (15-20 minutes)

EXERCISE18-3 (10-15 minutes)

Cash(2004slips) (300X $900).........................................

Cash(2005slips) [200X $900X (1.00 .05)]......................

Cash(2006slips) [60 X $900X (1.00 .25)]........................

(b) The marina operator should recognizethat advancerentals generated$211,500

EXERCISE18-4 (20-25 minutes)

*$1,500,000X (85% 40%)

EXERCISE18-5 (10-15 minutes)

EXERCISE18-6 (10-12 minutes)

EXERCISE18-7 (25-30 minutes)

Grossprofit recognizedin 2004:

*$1,000,000X [($600,000 $280,000) $800,000]

EXERCISE18-8 (15-20 minutes)

2005$2,200,000(contractprice) minus$660,000(revenuerecognizedin 2004)

Using the percentage-of-completion method, the following entries would be

EXERCISE18-9 (15-25 minutes)

Computation of Gross Profit to Be Recognized under CompletedMethod.

No computationnecessary.No grossprofit to be recognizedprior to completion

(b) Computationof GrossProfit to Be RecognizedunderPercentage-of-Completion

Computation of Billings on Uncompleted Contract in Excess of Related Costs

EXERCISE18-10 (15-25 minutes)

*Theloss of $30,000wassubtractedfromthe constructionin processaccount.

EXERCISE18-11 (15-20 minutes)

Computationof grossprofit recognized:

**($900,000 $630,000) $900,000

EXERCISE18-12 (15-20 minutes)

(b) Cashcollectedin 2003on accountsreceivableof 2004:

EXERCISE18-13 (15-20 minutes)

EXERCISE18-14 (10-15 minutes)

EXERCISE18-15 (10-15 minutes)

.25/(1.00+ .25) = 20%

(b) The balanceof DeferredGross Profit could be reported on the balancesheet

EXERCISE18-16 (15-20 minutes)

Computationof grossprofit realizedcostrecoverymethod:

(b) Computationof grossprofit realizedinstallmentmethod:

$100,000X 25%= $25,000

EXERCISE18-17 (15-20 minutes)

$120,000X 15%= $18,000.

EXERCISE18-18 (10-15 minutes)

**$378= 35%X $1,080

EXERCISE18-19 (15-20 minutes)

DeferredGrossProfit (40%X $400)...................................................

EXERCISE18-20 (15-25 minutes)

**Consistsof $101,873of deferredinterestrevenuefrom2005and 2006and$21,934of interestfor 2007.

*EXERCISE18-21 (14-18 minutes)

(b) Cash...................................................................... 40,000

*EXERCISE18-22 (12-16 minutes)

$20,000 cash received from down payment. ($22,175.40 is recorded as

*EXERCISE18-23 (15-20 minutes)

30 units on hand(30/70X $35,840)

(b) Computationof ConsignmentProfit:

Point of sale method recognizes revenue when the earnings process is

A change of cost estimates calls for a revision of revenue and profit to be

Althoughdistributorscan returnup to 30 percentof sales, prior experienceindicates

(b) In 2004and 2005, no grossprofit wouldbe recognized.

(b) Constructionin Process................................................

*$3,000,000X (100% 80%)

The completed-contract methodof revenuerecognitionrecognizesincomeonly