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SOLUTIONSTO B EXERCISES

E18-1B (1520minutes)
(a)

Chester Books 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 return
policy, one might arguein favor of the cash collectionbasis. Becausethe returnscan
be estimated,onecouldarguefor shippingpoint less estimatedreturns.

(b) Based on the available informationand lack of any information indicating that any of
the criteria in FASB Statement No. 48 were not met, the correct treatment is to
report revenue at the time of shipment as the gross amount less the 16% normal
return factor. This is supported by the legal test of transfer of title and the criteria in
FASB No. 48.
One could be very conservativeand use the 20%maximumreturn
allowance.
(c)

Octobersale entry:
AccountsReceivable............................................
Allowancefor Returns...................................
($6,500,000X 16%)
SalesRevenue.............................................

6,500,000
1,040,000
5,460,000

(d) Januarycollection:
Cash.....................................................5,775,000
Allowancefor Returns...........................................
SalesRevenue.............................................
AccountsReceivable.....................................

18-1

1,040,000
315,000
6,500,000

E18-2B (1520minutes)
(a)

(1) 10/5

10/9

10/25

11/2

(2) 10/5

10/9

10/25

11/2

(b)

10/14

AccountsReceivableDunn& Brooks....................
Sales...........................................................

23,000

SalesReturnsand Allowances.............................
AccountsReceivableDunn&Brooks...............

2,400

Transportation-Out.............................................
Cash.........................................................

23,000

2,400
36
36

Cash.......................................................20,600
AccountsReceivableDunn&Brooks...............

20,600

AccountsReceivableDunn& Brooks..................
Sales[$23,000 (1%X 23,000)].....................

22,770

SalesReturnsand Allowances.............................
AccountsReceivableDunn&Brooks...............
[$2,400 (1%X $2,400)]

2,376

Transportation-Out.............................................
Cash.........................................................
Cash.......................................................20,600
AccountsReceivableDunn& Brooks..................
SalesDiscountsForfeited....................................
(1%X $20,600)
Cash.......................................................20,394
AccountsReceivableDunn&Brooks...............

18-2

22,770

2,376

36
36

20,394
206

20,394

E18-3B (1015minutes)
Cash(2008memberships)............................................
[400 X $16,000X (1.00 0.10)]
UnearnedRevenue(current).................................

5,760,000

Cash(2008memberships)............................................
[150 X $16,000X (1.00 .20)]
UnearnedRevenue(noncurrent)...........................

1,920,000

Cash(2009memberships)............................................
[150 X $16,000X (1.00 .20)]
UnearnedRevenue(noncurrent)...........................

1,920,000

18-3

5,760,000

1,920,000

1,920,000

E18-4B (2025minutes)
(a)

Grossprofit recognizedin:
2007

Contractprice
Costs:
Coststo date
Estimatedcosts
to
complete

2008
$2,500,000

$ 600,000
1,400,000

2009
$2,500,000

$1,435,000
2,000,000

615,000

$2,500,000
$2,100,000

2,050,000

2,100,000

Total estimatedprofit
500,000
Percentage
completedto date
Total grossprofit
recognized
Less:Grossprofit
recognizedin
previousyears
Grossprofit
recognizedin current
year

450,000

30%*

400,000

70%**

100%

150,000

315,000

400,000

150,000

315,000

$ 150,000

$ 165,000

**$600,000 $2,000,000
**$1,435,000 $2,050,000

18-4

85,000

E18-4B (Continued)
(b) Constructionin Process................................................
($1,435,000 $600,000)
Materials,Cash,Payables,etc.............................

835,000

AccountsReceivable($500,000 $100,000).....................
Billingsand Constructionin Process......................

400,000

Cash($300,000 $100,000)............................................
AccountsReceivable............................................

200,000

ConstructionExpenses.................................................
Constructionin Process................................................
RevenuefromLong-termContracts........................

835,000
165,000

835,000

400,000

200,000

1,000,000*

*$2,500,000X (70% 30%)


(c)

Grossprofit recognizedin:
Grossprofit

2007
$ 0

2008
$ 0

*$2,500,000 $2,100,000

18-5

2009
$400,000*

E18-5B (1015minutes)
(a)

Contractbillingsto date
Less:Accountsreceivable12/31/07
Portionof contractbillingscollected

$260,000
150,500
$109,500

(b) Theratio of grossprofit to revenuerecognizedin 2007:


$130,000 = 20%
$650,000
Theinitial estimatedtotal grossprofit beforetax on the contract:
$25,000,000X .20 = $5,000,000

E18-6B (1012minutes)
Welton,Inc.
Computationof GrossProfit to Be
Recognizedon UncompletedContract
Year EndedDecember31, 2007
__________________________________________________________________
Total contractprice
Estimatedcontractcost at completion
($1,600,000+ $2,400,000)
Fixedfee
Total
Total estimatedcost
Grossprofit
Percentageof completion($1,600,000 $4,000,000)
Grossprofit to be recognized($750,000X 40%)

18-6

$4,000,000
750,000
4,750,000
4,000,000
750,000
40%
$ 300,000

E18-7B (2530minutes)
(a)

(1)

Grossprofit recognizedin 2007:


Contractprice
Costs:
Coststo date
Estimatedadditionalcosts
Total estimatedprofit
Percentagecompletionto date
($800,000/$8,000,000)
Grossprofit recognizedin 2007

$8,500,000
$ 800,000
7,200,000

8,000,000
500,000
10%
$ 50,000

Grossprofit recognizedin 2008:


Contractprice
Costs:
Coststo date
Estimatedadditionalcosts
Total estimatedprofit (loss)
Percentageloss to recognize
Total grossloss recognized
Less: Grossprofit recognizedin 2007
Grossloss recognizedin 2008
(2)

$8,500,000
$4,050,000
4,950,000

Constructionin Process....................................
($4,050,000 $800,000)
Materials,Cash,Payables,etc....................

3,250,000

AccountsReceivable........................................
($4,000,000 $500,000)
BillingsonConstructionin Process...............

3,500,000

Cash($3,200,000 $200,000)..............................
AccountsReceivable.................................

3,000,000

ConstructionExpense.......................................
Constructionin Process............................
RevenuesfromLong-termContract...............

3,525,000**

3,250,000

3,500,000

3,000,000

*[$8,500,000X ($4,050,000 $9,000,000)] (10%X $8,500,000)


**($4,050,000 $800,000)+ [$500,000X (1 45%)]
18-7

9,000,000
(500,000)
100%
(500,000)
50,000
$ (550,000)

550,000
2,975,000*

E18-7B (Continued)
(b) Incomestatement(2008):
Losson long-termconstructioncontract

$550,000

Balancesheet(12/31/08):
Currentassets:
Receivablesconstructionin process
Currentliabilities
Billingsof $4,000,000in excessof
constructionin processof $3,550,000**
**$4,000,000 $3,200,000= $800,000
**Totalcost to date
2007Grossprofit
2008Loss

$4,050,000
50,000
(550,000)
$3,550,000

18-8

$800,000*

$450,000

E18-8B (1520minutes)
(a)

2007

$980,000 X $1,500,000= $1,050,000


$1,400,000

2008 $1,500,000 (contract price) $1,050,000 (revenue recognized in 2007) =


$450,000(revenuerecognizedin 2008)
(b) All $1,500,000of the contractpriceis recognizedas revenuein 2008.
(c)

Using the percentage-of-completion method, Young Tree Construction would make


the followingentries:
Constructionin Process................................................
Materials,Cash,Payables,etc.................................

980,000

AccountsReceivable.....................................................
Billingson Constructionin Process.........................

800,000

980,000

800,000

Cash................................................................ 250,000
AccountsReceivable.............................................
Constructionin Process................................................
ConstructionExpenses..................................................
RevenuefromLong-termContracts
[from(a)]...........................................................

250,000
70,000*
980,000
1,050,000

*[$1,500,000 ($980,000+ $420,000)]X ($980,000 $1,400,000)


Using the completed-contract method, Young Tree would make all the same entries
exceptfor the last entry. No incomeis recognizeduntil the contractis completed.

18-9

E18-9B (1525minutes)
(a)

Computationof grossprofit to be recognizedundercompleted-contractmethod:


No computation necessary. No gross profit to be recognized prior to completion of
contract.
Computation of billings on uncompleted contract in excess of related costs, under
completed-contractmethod:
Constructioncostsincurredduringthe year
Partial billingson contract(20%X $9,000,000)

$3,040,000
(1,800,000)
$1,240,000

(b) Computation of gross profit to be recognized under percentage-of-completion


method:
Total contractprice
Total estimatedcost ($3,040,000+ $4,560,000)
Estimatedtotal grossprofit fromcontract
Percentage-of-completion($3,040,000/$7,600,000)
Grossprofit to be recognizedduringthe year
($1,400,000X 40%)

$9,000,000
7,600,000
1,400,000
40%
$ 560,000

Computation of billings on uncompleted contract in excess of related costs, under


percentage-of-completionmethod:
Constructioncostsincurredduringthe year
Grossprofit to be recognizedduringthe year (above)
Total chargedto construction-in-process
Partial billingson contract(20%X $9,000,000)

18-10

$3,040,000
560,000
3,600,000
(1,800,000)
$1,800,000

E18-10B(1525minutes)
BEARINGCONSTRUCTIONCOMPANY
IncomeStatement(partial)
Year EndedDecember31, 2007
__________________________________________________________________
Revenuefromlong-termcontracts(ProjectY)
Costsof construction(ProjectY)
Grossprofit

$200,000
191,000
9,000

Provisionfor loss(ProjectZ)*

(29,000)

*Contractcoststhrough12/31/07
Estimatedcoststo complete
Total estimatedcosts
Total contractprice
Lossrecognizedin 2007

$ 79,000
310,000
389,000
360,000
$ (29,000)

BEARINGCONSTRUCTIONCOMPANY
BalanceSheet(partial)
December31, 2007
__________________________________________________________________
Currentassets:
Accountsreceivable
($490,000 $460,000)
Inventories
Constructionin process
Less: Billings
Unbilledcontractcosts(ProjectX)

$30,000

$115,000
80,000

Currentliabilities:
Billings($210,000)in excessof contract
costs($50,000)(ProjectZ)*
*Thelossof $29,000wassubtractedfromtheconstructionin processaccount.

18-11

35,000

$160,000

E18-11B(1520minutes)
(a)

Computationof grossprofit recognized:


2007
$70,000X 15%*

2008

$10,500

$201,000X 15%*

$30,150

$216,000X 12%**

25,920
$56,070

$10,500

**($300,000 $255,000) $300,000


**($750,000 $660,000) $750,000

(b) InstallmentAccountsReceivable2008.....................
InstallmentSales.............................................

750,000

Cost of InstallmentSales..........................................
Inventory........................................................

660,000

750,000

660,000

Cash........................................................... 417,000
InstallmentAccountsReceivable
2007............................................................
InstallmentAccountsReceivable
2008............................................................
InstallmentSales.....................................................
Cost of InstallmentSales..................................
DeferredGrossProfit on Installment
Sales2008.................................................
DeferredGrossProfit on Installment
Sales2007..........................................................
DeferredGrossProfit on Installment
Sales2008.........................................................
RealizedGrossProfit on Installment
Sales...........................................................

18-12

201,000
216,000
750,000
660,000
90,000
30,150
25,920
56,070

E18-12B(1520minutes)
(a)

DeferredGrossProfit2005.....................................
DeferredGrossProfit2006.....................................
DeferredGrossProfit2007.....................................
RealizedGrossProfit.......................................
(To recognizegrossprofit on installmentsales)

34,700*
49,400**
30,000***
114,100

*Adjustmentfor deferredgrossprofit2005:
Balancein deferredgrossprofit account
prior to adjustment
Balanceafter adjustment($85,000X 26%)
Adjustment

$56,800
22,100
$34,700

**Adjustmentfor deferredgrossprofit2006:
Balancein deferredgrossprofit account
prior to adjustment
Balanceafter adjustment($140,000X 22%)
Adjustment

$80,200
30,800
$49,400

***Adjustmentfor deferredgrossprofit2007:
Balancein deferredgrossprofit account
prior to adjustment
Balanceafter adjustment($60,000X 25%)
Adjustment
(b) Cashcollectedin 2007on accountsreceivableof 2005:
$34,700/26%= $133,462
Cashcollectedin 2007on accountsreceivableof 2006:
$49,400/22%= $224,545
Cashcollectedin 2007on accountsreceivableof 2007:
$30,000/25%= $120,000

18-13

$45,000
15,000
$30,000

E18-13B(1520minutes)
Grossprofit ratio2007:($600,000 $480,000) $600,000= 20%
Grossprofit ratio2008:($530,000 $442,800) $530,000= 18%
(a)

Balance,December31, 2007:
DeferredGrossProfit Account2007InstallmentSales
Grossprofit on installmentsales2007
($600,000 $480,000)
Less: Grossprofit realizedin 2007($250,000X 20%)
Balanceat 12/31/07

$120,000
(50,000)
$ 70,000

Balance,December31, 2008:
DeferredGrossProfit Account2007InstallmentSales
Balanceat 12/31/07
Less: Grossprofit realizedin 2008on 2007sales
($285,000X 20%)
Balanceat 12/31/08

$70,000
(57,000)
$13,000

DeferredGrossProfit Account2008InstallmentSales
Grossprofit on installmentsales2008
($530,000 $434,600)
Less: Grossprofit realizedin 2008on 2008sales
($168,000X 18%)
Balanceat 12/31/08

(b) RepossessedMerchandise................................................
DeferredGrossProfit ($12,000X 20%).................................
Losson Repossession......................................................
InstallmentAccountsReceivable................................
(To recordthe default andthe
repossessionof the merchandise)

18-14

$95,400
(30,240)
$65,160

8,000
2,400
1,600
12,000

E18-14B(1015minutes)
UPPERWORLDCORPORATION
IncomebeforeIncomeTaxeson Installment-Sale Contract
For the Year EndedDecember31, 2007
__________________________________________________________________
Sales
Cost of sales
Grossprofit
Interestrevenue(Schedule1)
Incomebeforeincometaxes

$965,000
786,000
179,000
26,634
$205,634

Schedule1
Computationof InterestRevenueon Installment-Sale Contract
Cashsellingprice
Deduct:PaymentmadeOctober1, 2007

$965,000
250,000
715,000
X 14.9%
$106,535

Interestrate
Annualinterest
InterestOctober1, 2007, to December31, 2007($106,535X 1/4)

18-15

$26,634

E18-15B(1015minutes)
(a)

Realizedgrossprofit recognizedin 2007underthe installmentmethodof accountingis


$148,531.Whengrossprofitis expressedas a percentageof cost, it mustbe convertedto
percentage
of
sales
to
compute
the
realized gross profit under the installmentmethodof accounting. Thus, 2006 and 2007
grossprofitsas a percentageof salesare 15.25%and16.67%respectively.

Sale Year
2006
2007

GrossProfit Percentage
.18/(1.00+ .18) = 15.25%*
.20/(1.00+ .20) = 16.67%*

2007
Collections
$340,000
580,000
Total

2007
RealizedProfit
$ 51,850
96,686
$148,536

*Rounded
(b) Thebalanceof DeferredGrossProfitcouldbe reportedon thebalancesheetfor 2007:
(1)

as a current liability on the theory that it is related to Installment Accounts


Receivablesthat are normallytreatedas currentassets;

(2)

as a deferred credit between liabilities and stockholders equity. This treatment is


criticizedbecausethereis no obligationto outsiders;or

(3)

as an adjustment or offset to the related Installment Accounts


Receivable. This is because the deferred gross profit is a part of revenue from
installmentsales not yet realized. The related receivable will be overstated unless
the deferredgross profit is deducted. On the other hand, the amount of deferred
gross profit has no direct relationship with the estimated collectibility of the
accountsreceivable.

It is not a settled matter as to the proper classificationof deferredgross profit on the


balancesheetwhentheinstallmentmethodof accountingis usedto measureincome.

18-16

E18-15B(Continued)
(c)

Gross profit as a percent of sales in 2006 is 15.25% (as computed in


(a) above); gross profit therefore is $114,375 ($750,000 X .1525) and the cost of 2006
salesis $635,625($750,000 $114,375).
During2007, the cumulativeamountscollectedin 2006 ($340,000) and 2007 ($340,000)
exceeded the total cost of 2006 sales of $635,625. Profit of $ 44,375 is recognized in
2007 for the 2006 sales based on the excess collections ($680,000 $635,625). Also,
no profit is recognizedon 2007 sales since the collectionsof $580,000 do not exceed
the total cost of $1,124,955.

E18-16B(1520minutes)
(a)

Computationof grossprofit realizedcostrecoverymethod:

Year

Cash
Received

Beginningbalance
2006
2007
2008

$100,000
200,000
300,000

OriginalCost
Recovered

Balanceof
Unrecovered
Cost

Gross
Profit
Realized

$122,000
22,000
0
0

$100,000
22,000
0

(b) Computationof grossprofit realizedinstallmentmethod:


Grossprofit rate:($600,000 $122,000) $600,000= 79.67%*
2006Grossprofit realized:
2007Grossprofit realized:
2008Grossprofit realized:

$100,000X 79.67%= $79,670


$200,000X 79.67%= $159,340
$300,000X 79.67%= $238,990*

*Rounded

18-17

$
0
178,000
300,000

E18-17B(1520minutes)

Cash(Dr.)
Year
1/1/07

$ 458,576

Deferred
Interest
Revenue
(Cr.)

Installment
Accounts
Receivable
(Cr.)

2007

458,576

$132,171

2008

458,576

93,002

Installment
Unpaid
Balance

Uncovered
Cost

Realized
Gross
Profit

Realized
Interest
Revenue

$1,101,424

$921,424

775,019

462,848

409,445

4,272
$180,000

$274,304e

$180,000

$274,304

$ 326,405

365,574
2009

458,576

(225,173)*

$1,834,304

409,445

$1,101,424

$1,101,424X 12%= $132,171


$458,576 $132,171= $326,405
c
$1,101,424 $326,405= $775,019
d
$921,424 $458,576= $462,848
b

*This amount is used to transfer the Deferred Interest Revenue from 2007 ($132,171) and
2008($93,002)to RealizedInterestRevenuein 2007.
e

2007interestrevenue($409,445X 12%) Rounded$2


2005and 2006interestrevenueto be recognized
($132,171+ $93,002)
Realizedinterestrevenuein 2007

18-18

$ 49,131
225,173
$274,304

E18-18B(1015minutes)
1.

RepossessedMerchandise....................................................
DeferredGrossProfit............................................................
Losson Repossession.........................................................
InstallmentAccountsReceivable....................................

475
720*
605
1,800**

**$720= 40%X $1,800


**Sellingprice
Downpayment(10%)
Installmentpayments(4 X $90)
Installmentaccountsreceivablebalance
2.

$2,400
(240)
2,160
(360)
$1,800

RepossessedMerchandise....................................................
DeferredGrossProfit............................................................
InstallmentAccountsReceivable....................................
Gainon Repossession..................................................
**($3,180 $1,500)/$3,180= 52.83%grossprofit rate;
$676= 52.83%X $1,280
**Sellingprice
Downpayment
Monthlypayments($160X 10)
Installmentaccountsreceivablebalance

18-19

$3,180
(300)
2,880
1,600
$1,280

850
676*
1,280**
246

E18-19B(1520minutes)
Cash....................................................................................... 700
InstallmentAccountsReceivable..............................................
(To recordthe collectionof cashon installment
accountsreceivable)

700

DeferredGrossProfit (20%X $700)...................................................


RealizedGrossProfit..............................................................
(To recognizegrossprofit on installmentsale)

140

RepossessedMerchandise*.............................................................
DeferredGrossProfit (20%X $3,200)................................................
Losson Repossession....................................................................
InstallmentAccountsReceivable..............................................
(To recorddefault andrepossessionof
merchandise)

2,150
640
410

Losson Repossession....................................................................
Cash.....................................................................................
(To recordcashspenton reconditioningof
inventory)

110

*Fair valueis after reconditioning

18-20

140

3,200

110

E18-20B(1525minutes)
InstallmentPaymentSchedule
Interestat 6%
Cost-RecoveryMethod
Cash(Debit)
Date
7/1/07

Deferred
Interest
Revenue
(Credit)

Installment
Accounts
Receivable
(Credit)

Installment
Unpaid
Balance

Uncovered
Cost

Realized
GrossProfit

Realized
Interest
Revenue

$2,500,000

$2,000,000

6/30/08

$ 935,274

$150,000

$ 785,274

1,714,726

1,064,726

6/30/09

935,274

102,884

832,390

882,336

129,452

6/30/10

935,274

( (252,884)

882,336

$2,805,822

$2,500,000

*$500,000**
$500,000

*$305,822*
$305,822

**Consistsof $252,884of deferredinterestrevenuefrom2005and 2006and$52,938of interestfor 2007.


**$2,500,000 $2,000,000= $500,000,or [$935,274 ($252,884+ $52,938+ $129,452)]= $500,000.

*E18-21B(1418minutes)
Note:For each part below,the presentvalue of the notesreceivableis $141,191,calculated
as follows:
$40,000X 3.60478(ordinaryand???payments,12%)
(a)

Cash.................................................................... 25,000
NotesReceivable.............................................................
Discounton NotesReceivable...................................
RevenuefromFranchiseFees...................................

(b) Cash.................................................................... 25,000


NotesReceivable.............................................................
Discounton NotesReceivable...................................
UnearnedFranchiseFees.........................................
(c)

Cash.................................................................... 25,000
NotesReceivable.............................................................
Discounton NotesReceivable...................................
UnearnedFranchiseFees.........................................
RevenuefromFranchiseFees...................................
(Calculationsrounded)
18-21

200,000
55,809
169,191

200,000
55,809
169,191

200,000
55,809
84,596
84,595

*E18-22B(1216minutes)
(a)

Downpaymentmadeon 1/1/07
Presentvalueof an ordinaryannuity($27,500X 3.169)
Total revenuerecordedby WorldPremiereand total
acquisitioncost recordedby Shaw& Shaw

(b) Cash.............................................................20,000
NotesReceivable......................................................
Discounton NotesReceivable............................
RevenuefromFranchiseFees............................
(c)

(1)
(2)
(3)

$ 20,000
87,147
$107,147

110,000
22,853
107,147

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

*E18-23B(1520minutes)
(a)

Inventoriablecosts:
500 unitsshippedat cost of $100each
Freight
Total inventoriablecost
80 units on hand(80/500X $51,250)

$50,000
1,250
$51,250
$8,200

(b) Computationof consignmentprofit:


Consignmentsales(420 X $160)
Cost of units sold (420/500X $51,250)
Commissionchargedby consignee(20%X $67,200)
Profit on consignmentsales
(c)

$67,200
(43,050)
(13,440)
$10,710

Remittanceof consignee:
Consignmentsales
Less: Commissions
Remittancefromconsignee

$67,200
13,440
$53,760

18-22