EXERCISES

Ex. 18-127—Allocate transaction price.

Windsor Windows manufactures and sells custom storm windows for enclosed porches. Windsor
also provides installation service for the windows. The installation process does not involve
changes in the windows, so this service can be provided by other vendors. Windsor enters into
the following contract on June 1, 2014, with a local homeowner. The customer purchases
windows for a price of $3,500 and chooses Windsor to do the installation. Windsor charges the
same price for the windows irrespective of whether it does the installation or not. The price of the
installation service is estimated to have a fair value of $900. The customer pays Windsor $3,000
(which equals the fair value of the windows, which have a cost of $1,700) upon delivery and the
remaining balance upon installation of the windows. The windows are delivered on August 1,
2014, Windsor completes installation on September 15, 2014, and the customer pays the balance
due. Prepare the journal entries for Windsor in 2014. (Round amounts to nearest dollar.)

Solution 18-127

June 1, 2014
No entry – neither party has performed under the contract.

On August 1, 2014, Windsor has two performance obligations: (1) the delivery of the windows
and (2) the installation of the windows.

Windows $3,000
Installation 900
Total $3,900

Allocation
Windows ($3,000  $3,900) X $3,500  $2,692
Installation ($900  $3,900) X $3,500  808
Revenue recognized $3,500
(round to nearest dollar)

Windsor makes the following entries for delivery and installation.

August 1, 2014
Cash ................................................................................... 3,000
Accounts Receivable........................................................... 500
Unearned Service Revenue ........................................ 808
Sales Revenue ............................................................ 2,692

Cost of Goods Sold ............................................................. 1,700

Inventory ..................................................................... 1,700

(Windows delivered, performance obligation for installation recorded)

Solution 18-127 (cont.)
September 15, 2014
Cash .......................................................................................................... 500
Unearned Service Revenue ....................................................................... 808
Service Revenue (Installation) ............................................................ 808
Accounts Receivable .......................................................................... 500

Ex. 18-128—Sales with discounts.

On July 2, 2014, Lake Company sold to Sue Black merchandise having a sales price of $6,000
(cost $3,600) with terms of 2/10, n/30, f.o.b. shipping point. Lake estimates that merchandise with
a sales value of $600 will be returned. An invoice totaling $120, terms n/30, was received by Black
on July 6 from Pacific Delivery Service for the freight cost. Upon receipt of the goods, on July 3,
Black notified Lake that $250 of merchandise contained flaws. The same day, Lake issued a credit
memo covering the defective merchandise and asked that it be returned at Lake’s expense. Lake
estimates the returned items to have a fair value of $100. The freight on the returned merchandise
was $20 paid by Lake on July 7. On July 12, the company received a check for the balance due
from Black.

Instructions
(a) Prepare journal entries for Lake Company to record all the events noted above assuming
sales and receivables are entered at gross selling price.
(b) Prepare the journal entry assuming that Sue Black did not remit payment until August 5.

Solution 18-128
(a)
July 2

Accounts Receivable ................................................................... 6,000

Refund Liability ................................................................ 600
Sales Revenue ................................................................ 5,400

Estimated Inventory Returns ....................................................... 360*

Cost of Goods Sold ..................................................................... 3,240
Inventory .......................................................................... 3,600
*($3,600  $6,000) X $600

July 3
Refund Liability ............................................................................ 250
Accounts Receivable ....................................................... 250

Returned Inventory ...................................................................... 100

Estimated Inventory Returns ............................................ 100
Solution 18-128 (cont.)
The journal entry to record delivery cost is as follows.

July 7

Delivery Expense ........................................................................ 20

Cash ................................................................................ 20

The journal entry to record payment within the discount period is as follows.

July 12

Cash ........................................................................................ 5,635

Sales Discounts (2% X $5,750) ................................................... 115
Accounts Receivable ....................................................... 5,750

(b) August 2, 2014

Cash ........................................................................................ 5,750

Accounts Receivable ....................................................... 5,750

Ex. 18-129—Allocate transaction price.

The Appliance Store is an experienced home appliance dealer. Appliance Store also offers a
number of services together with the home appliances that it sells. Assume that Appliance Store
sells dishwashers on a standalone basis. Appliance Store also sells installation services and
maintenance services for dishwashers. However, Appliance Store does not offer installation or
maintenance services to customers who buy dishwashers from other vendors. Pricing for
dishwashers is as follows.

Dishwasher only $ 950

Dishwasher with Installation service 1,050
Dishwasher with maintenance services 1,150
Dishwasher with installation and maintenance services 1,200

In each instance in which maintenance services are provided, the maintenance service is
separately priced within the arrangement at $200. Additionally, the incremental amount charged
by Appliance Store for installation approximates the amount charged by independent third parties.
Dishwashers are sold subject to a general right of return. If a customer purchases a dishwashers
with installation and/or maintenance services, in the event Appliance Store does not complete the
service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds
$800.

Instructions
(a) Assume that a customer purchases a dishwasher with both installation and maintenance
services for $1,200. Based on its experience, Appliance Store believes that it is probable that
the installation of the equipment will be performed satisfactorily to the customer. Assume that
 the maintenance services are priced separately. Identify the separate performance
obligations related to the Appliance Store revenue arrangement.
Ex. 18-129 (cont.)

(b) Indicate the amount of revenue that should be allocated to the dishwasher the installation,
and to the maintenance contract.
(c) Prepare the necessary journal entry for the Appliance Store.

Solution 18-129
(a) The separate performance obligations are the dishwasher, installation, and maintenance
service, since each item has standalone value to the customer.

(b) Dishwasher $ 950/$1,250 X $1,200 = $ 912

Installation $ 100/$1,250 X $1,200 = $ 96
Maintenance $ 200/$1,250 X $1,200 = $ 192
Total $1,250

(c) Cash 1,200

Sales Revenue 912
Service Revenue 96
Unearned Service Revenue 192

Ex. 18-130—Warranty arrangement.

On December 31, 2014, Dieker Company sells equipment to Tabor Inc. for $62,500. Dieker
includes a 1-year assurance warranty service with the sale of all its equipment. The customer
receives and pays for the equipment on December 31, 2014. Dieker estimates the prices to be
$61,000 for the equipment and $1,500 for the cost of the warranty.

Instructions
(a) Prepare the journal entry to record this transaction on December 31, 2014.
(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Dieker
sold an extended warranty (service type warranty) for an additional 2 years (2016–2017) for
$1,000.

Solution 18-130
(a) Cash............................................................................................ 62,500
Warranty Expense ....................................................................... 1,500
Warranty Liability ............................................................. 1,500
Sales Revenue ................................................................ 62,500

(b) Dieker should recognize $500 of warranty revenue in 2016 and 2017.

Cash............................................................................................ 63,500
Warranty Expense ....................................................................... 1,500
Warranty Liability ............................................................. 1,500
Sales Revenue ................................................................ 62,500
Unearned Service Revenue (Warranty) ........................... 1,000
Ex. 18-131—Existence of a contract.
On July 1, 2014, Ellsbury Inc. entered into a contract to deliver one of its specialty machines to
Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of $2,500 in
advance on July 15, 2014. Kickapoo pays Ellsbury on July 15, 2014, and Ellsbury delivers the
machine (with cost of $1,600) on July 31, 2014.

Instructions
(a) Prepare the journal entry on July 1, 2014, for Ellsbury.
(b) Prepare the journal entry on July 15, 2014, for Ellsbury.
(c) Prepare the journal entry on July 31, 2014, for Ellsbury.

Solution 18-131
(a) July 1, 2014
No entry – neither party has performed on July 1, 2014.

(b) July 15, 2014

Cash............................................................................................ 2,500
Unearned Sales Revenue ................................................ 2,500

(c) July 31, 2014

Unearned Sales Revenue ........................................................... 2,500
Sales Revenue ..................................................................... 2,500

Cost of Goods Sold ..................................................................... 1,600

Inventory............................................................................... 1,600

*Ex. 18-132—Journal entries—percentage-of-completion.

Dixon Construction Company was awarded a contract to construct an interchange at the junction
of U.S. 94 and Highway 30 at a total contract price of $12,000,000. The estimated total costs to
complete the project were $9,000,000.

Instructions
(a) Make the entry to record construction costs of $5,400,000, on construction in process to
date.
(b) Make the entry to record progress billings of $3,000,000.
(c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-
completion basis.

*Solution 18-132
(a) Construction in Process............................................................... 5,400,000
Materials, Cash, Payables. .............................................. 5,400,000

(b) Accounts Receivable ................................................................... 3,000,000

Billings on Construction in Process .................................. 3,000,000
*Solution 18-132 (cont.)

(c) Construction Expenses................................................................ 5,400,000

Construction in Process (60% complete) ..................................... 1,800,000
Revenue from Long-Term Contracts ................................ 7,200,000

*Ex. 18-133—Percentage-of-completion method.

Dalton Construction Co. contracted to build a bridge for $8,000,000. Construction began in 2014
and was completed in 2015. Data relating to the construction are:
2014 2015
Costs incurred during the year $2,640,000 $2,200,000
Estimated costs to complete 2,160,000 —

Dalton uses the percentage-of-completion method.

Instructions
(a) How much revenue should be reported for 2014? Show your computation.
(b) Make the entry to record progress billings of $3,300,000 during 2014.
(c) Make the entry to record the revenue and gross profit for 2014.
(d) How much gross profit should be reported for 2015? Show your computation.

*Solution 18-133
(a) $2,640,000
————— × $8,000,000 = $4,400,000
$4,800,000

(b) Accounts Receivable ................................................................... 3,300,000

Billings on Construction in Process ................................. 3,300,000

(c) Construction Expenses................................................................ 2,640,000

Construction in Process............................................................... 1,760,000
Revenue from Long-Term Contracts ................................ 4,400,000

(d) Revenue $8,000,000

Costs 4,840,000
Total gross profit 3,160,000
Recognized in 2014 (1,760,000)
Recognized in 2015 $ 1,400,000
Or
Total revenue $8,000,000
Recognized in 2014 (4,400,000)
Recognized in 2015 3,600,000
Costs in 2015 (2,200,000)
Gross profit in 2015 $ 1,400,000
*Ex. 18-134—Percentage-of-completion method.
Penner Builders contracted to build a high-rise for $28,000,000. Construction began in 2014 and
is expected to be completed in 2017. Data for 2014 and 2015 are:
2014 2015
Costs incurred to date $3,600,000 $10,400,000
Estimated costs to complete 14,400,000 9,600,000

Penner uses the percentage-of-completion method.

Instructions
(a) How much gross profit should be reported for 2014? Show your computation.
(b) How much gross profit should be reported for 2015?
(c) Make the journal entry to record the revenue and gross profit for 2015.

*Solution 18-134
(a) $3,600,000
————— × $10,000,000 = $2,000,000
$18,000,000

(b) $10,400,000
—————— × $8,000,000 = $4,160,000
$20,000,000
Less 2014 gross profit 2,000,000
Gross profit in 2015 $2,160,000

(c) Construction in Process............................................................... 2,160,000

Construction Expenses................................................................ 6,800,000
Revenue from Long-Term Contracts ................................ 8,960,000

*Ex. 18-135—Percentage-of-completion and cost-recovery methods.

On February 1, 2014, Marsh Contractors agreed to construct a building at a contract price of
€5,800,000. Marsh estimated total construction costs would be €4,000,000 and the project would
be finished in 2016. Information relating to the costs and billings for this contract is as follows:
2014 2015 2016
Total costs incurred to date €1,500,000 €2,640,000 €4,600,000
Estimated costs to complete 2,500,000 1,760,000 -0-
Customer billings to date 2,200,000 4,000,000 5,600,000
Collections to date 2,000,000 3,500,000 5,500,000
Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting
and for cost-recovery accounting, show the gross profit that should be recorded for 2014, 2015,
and 2016.
*Ex. 18-135 (cont.)

Percentage-of-Completion Cost-Recovery
Gross Profit Gross Profit
2014 __________ 2014 __________

2015 __________ 2015 __________

2016 __________ 2016 __________

*Solution 18-135
Percentage-of-Completion Cost-Recovery
Gross Profit Gross Profit
2014 €675,000a 2014 —
2015 €165,000b 2015 —
2016 €360,000c 2016 €1,200,000d

a€1,500,000

————— × €1,800,000 = €675,000

€4,000,000

b€2,640,000

————— × €1,400,000 = €840,000

€4,400,000

2014 gross profit (675,000)

2015 gross profit €165,000

cTotalrevenue €5,800,000
Total costs 4,600,000
Total gross profit 1,200,000
Recognized to date (840,000)
2016 gross profit € 360,000
dTotalrevenue €5,800,000
Total costs 4,600,000
Total gross profit €1,200,000
*Ex. 18-136—Franchises.
Pasta Inn charges an initial fee of $1,600,000 for a franchise, with $320,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the annual
payments, discounted at 10%, is $1,014,000. The franchisee has the right to purchase $60,000
of kitchen equipment and supplies for $50,000. An additional part of the initial fee is for advertising
to be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a
month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the
initial services required by the contract.

Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in good form.

*Solution 18-136
Total fee $1,600,000
Amount due $1,280,000
Present value of payments (1,014,000) (266,000)
Bargain purchase (10,000)
Advertising ($1,000 × 60) (60,000)
Revenue from franchise fees $1,264,000

Cash ......................................................................................... 320,000

Notes Receivable ..................................................................... 1,280,000
Discount on Notes Receivable ..................................... 266,000
Revenue from Franchise Fees ..................................... 1,264,000
Unearned Franchise Fees ............................................ 70,000