BUSI 353

ASSIGNMENT #3

GENERAL INSTRUCTIONS FOR ALL ASSIGNMENTS:

(A) See the course outline for due dates.
(B) Please do not use a cover page. Provide your full name and student number on the top of the first page and then proceed
with your answers.
(C) All assignments must be typed and submitted via Canvas using PDF.
(D) Use Arial font and font size 11 with a minimum 2.5-centimetre (1-inch) margin.
(E) For some questions, a page limit is indicated at the top. If you are having difficulty maintaining the page limit, consider that a
challenge for being clear and concise. Effective use of point form is a good technique for being clear and concise. Do not
feel obligated to use the entire page limit. Often times, the best answers are the ones that directly address the relevant
aspects of the question.
(F) It is unnecessary to repeat the question. You can assume that I am familiar with the question and proceed with your answer.
(G) Failure to comply with the above instructions may result in a deduction of marks.

Question 1

Parple Limited uses the instalment sales method to recognize revenue on its sales to its customers. During August,
instalment sales of $175,000 were recorded. The gross margin percentage on instalment sales is 25%. No cash was
collected in August. During the month of September, $55,000 is collected on previous month’s instalment sales.

REQUIRED

1. Prepare the relevant journal entries for August and September using the instalment sales method.

2. If revenue were recognized at the date of delivery, how much gross margin would be reported for the month of
August? September?

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Question 2

Meadows Undone Inc. (MUI) produces and sells lawnmowers. To encourage sales of a new type of mower, MUI offered
a rebate program to end-consumers. The rebate is $50 per mower and can be claimed online. Additional information is
as follows:

(a) During the promotional period, MUI sold 10,000 mowers to distributors (wholesalers) who offered the rebate to their
end-consumers. The wholesale price was $350 per unit while the cost of goods sold was $185 per unit. The
distributors sold the units to end-consumers at an average price of $425 per unit.
(b) MUI estimated that 60% of the end-consumers would take advantage of the rebate offer.
(c) The actual redemption rate was 55%.

REQUIRED

1. Prepare a summary journal entry to record the sales of the lawnmowers to the distributors during the promotional
period.

2. Prepare a summary journal entry to record the receipts of the rebate claims from the end-consumers and the
related payment of the rebate amounts.

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Question 3

Chevla is a manufacturer of hot tubs. Chevla’s hot tubs are sold with a typical “assurance-type” warranty of six months. At the time
of a sale, the purchaser has the option to buy the hot tub with a 5-year extended warranty. The 5-years would begin after the end of
the six-month assurance-type warranty. If the purchaser chooses not to buy the 5-year extended warranty at the time of the
purchase, the purchaser can still buy the 5-year extended warranty up to six months later. The following information is available
regarding the manufacturer’s “Nova” model of hot tub:

(a) The normal selling price of a Nova, without the 5-year extended warranty, is $14,000. The cost of goods sold is $9,000.
(b) When a Nova is purchased as a package with the 5-year extended warranty, the selling price for the package is $15,000.
This special offer is only available at the time of the initial purchase.
(c) If the 5-year optional extended warranty were to be purchased by itself (separate from the hot tub), the price would be $1,500.
(d) Chevla estimates that its hot tubs will have assurance-type warranty claims of 3% of the normal selling price.

REQUIRED

1. If Chevla sold a Nova, for cash, without a 5-year extended warranty, prepare all of the applicable journal entries at
the date of delivery associated with the sale.

2. If Chevla sold a Nova, for cash, with the 5-year extended warranty as a package, prepare all of the applicable
journal entries at the date of the delivery associated with the sale.

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Question 4

Rasher Construction Limited (RCL) entered into a contract to construct a building for $975,000. The contract provided for
progress payments. RCL’s accounting year ends December 31. Work began under the contract on August 1, 2017, and
was completed on October 31, 2019. Construction activities are summarized below:

2017 2018 2019

Construction costs incurred during the year 180,000 450,000 195,000
Estimated remaining costs to complete 630,000 190,000 0
Progress Billings to date 153,000 535,500 975,000
Cash Collections during the year 140,000 375,000 450,000

REQUIRED

1. Record RCL’s journal entries assuming that the percentage-of-completion method is used. Assume that the
percentage of completion is measured by the ratio of costs incurred to date divided by total estimated construction
costs.

2. Complete the following table for RCL using the percentage-of-completion method (as of and for the year ended
December 31):

2017 2018 2019

Accounts Receivable

CIP Inventory
Billings on Contract
Cost in excess of billings

Construction Revenue
Costs of Construction
Gross Profit

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3. How could management of RCL manipulate the accounting for this construction contract in order to achieve its
motivation of maximizing net income (e.g. to earn a bigger bonus) in the earlier years?

4. Return to the original given information. Assume that for 2018 the “estimated remaining costs to complete” is
$410,000 instead of the original $190,000.

(a) Prepare the journal entries for 2018 using the percentage-of-completion method.

(b) Complete the following table for RCL for 2018 only:

Percentage of Completed
Completion Contract
CIP Inventory

Revenue

Income (Loss) before income taxes