Week5-Chapter6: In class Examples

Example 1

LCD Corp Inc. is a retailer of electronic equipment including televisions. On all television

products, if the television is found not to work within the first six months of purchase, LCD will

either fix it or replace it. LCD also sells a separate warranty that extends the warranty period up

to three years from the date of sale. LCD has entered into two separate transactions:

1. In the first transaction, Customer A purchases a television for $500 but with no additional

warranty coverage. With the expected cost of $30 if television does not work

2. In the second transaction, Customer B purchases a television and warranty for future

service for $600 with the same expected cost of $30 if television does not work

Example 2

The following are independent situations that require professional judgement for determining

when to recognize revenue from the transactions.

1- Costco sells you a one-year membership with a single, one-time upfront payment. This non-

refundable fee is paid at the time of signing the contract, and entitles you to shop at Costco for

one year.

2- DOT Home and Patio sells you patio furniture on a “no money down, no interest, and no

payments for one year” promotional deal. The furniture is delivered to your home the same

day.

3- The Toronto Blue Jays sell season tickets on-line to games in the Rogers Centre. Fans can

purchase the tickets at any time, although the season does not officially begin until April 1.

The season runs from April 1 through October each year. Payment is due in full at the time of

purchase.

4- CIBC lends you money in August. The loan and interest are repayable in full in two years.

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Week5-Chapter6: In class Examples

5- Students pre-register for fall classes at Seneca College in August. The fall term runs from

September through December.

6- Sears sells you a sweater. In August, you place the order using Sears' on-line catalogue. The

sweater is shipped and arrives in September and you charge it to your Sears credit card. In

October, you receive the Sears credit card statement and pay the amount due.

7- In March, Hometown Appliances sells a washing machine with an extended warranty plan for

five years. The washing machine will not be delivered to the customer until June. Payment is

due upon delivery. The extended warranty plans are normally sold separately.

8- Premier Health Clubs sells you a membership with an initiation fee (which covers a medical

assessment) and an ongoing monthly fee. The initiation fee is payable at the time of the

medical assessment and approximates the cost of the medical assessment.

Instructions

a- For each scenario, identify what is being “sold”: goods, services, or a combination.

b- Discuss when revenue should be recognized under the earnings approach. Provide the journal

entries that would be recorded to recognize the revenue under the earnings approach.

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Example 3

Chang Industries ships merchandise costing $120,000 on consignment to XYZ Inc. Chang pays

the freight of $5,000. XYZ Inc. is to receive a 15% commission upon sale and a 5% allowance to

offset its advertising expenses. At the end of the period, XYZ notifies Chang that 75% of the

merchandise has been sold for $160,000.

Instructions

Record the entries required by the two companies under the earnings-based approach.

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Example 4

During 2017 Skywalker started a construction job with a contract price of $2.5 million. The job was

completed in 2019 and information for the three years of construction is as follows:

2017 2018 2019

Costs incurred to date $1,050,000 $1,555,000 $1,785,000
Estimated costs to complete 850,000 175,000 -0-
Billings to date 1,000,000 1,900,000 2,500,000
Collections to date 770,000 1,810,000 2,500,000
Instructions

Under the earnings approach:

(a)  Calculate the amount of gross profit that should be recognized each year under the percentage-of-

completion method. Round the percentage complete to two decimal places.

(b)  Prepare all necessary journal entries for 2017, 2018, and 2019, including closing the contract accounts

upon completion of the contract, assuming the percentage-of-completion method is used.

(c)  Calculate the amount of gross profit that should be recognized each year under the completed-contract

method.
(d)  Prepare the necessary journal entry in 2019 to close the contract accounts and to recognize the revenues

and costs upon completion, assuming the completed-contract method is used.

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Solution Template:

  2017 2018 2019

Contract price      

$2,500,00 $2,500,000 $2,500,00

0 0
Costs incurred to date      

$1,050,00 $1,555,000 $1,785,00

0 0
Estimated costs to complete $850,000   $175,000   $-  
Billings to date      

$1,000,00 $1,900,000 $2,500,00

0 0
Collections to date $770,000      

$1,810,000 $2,500,00

0
% of Completion  
Step 1: Estimate the total costs (= Cost incurred to date +Estimated Costs)  
  2017 2018 2019
Contract Price          
Opening balance of costs          
Costs incurred to date          
Cost during the year (A)          
A= Cost incurred to date - Beginning costs  
Estimated costs to complete        
Total Costs (B)            
B= Cost during the year + Estimated Cost  

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Step 2: Estimate % of Completion =Cost Incurred to date/Total Costs  

% of Complete (D)            
D=cost incurred to date /Total            

Cost

Step 3: Estimate Total Gross Profit  

(GP) to date =(Contract Price- Total Costs) x % of Completion

GP during the year = GP to date= GP previous period

Gross Profit to date (E)            
E= D x (Contract Price-Total          

Cost)
Gross Profit previously recognized          
Gross Profit For the Year (F)            
F=E- ( E-1)            

Step 4: Estimate Revenue (Gross Profit for year + Costs for year)  
Revenue for the year (F+A)            
Cost for the year (A)          
Gross Profit for the year (F)            

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Journal Entries
1- Cost During the year 2017 2018 2019
 
           
2- Billing            
           
             
3- Collection            
           
             
4- Revenue recognition            
           
           
5-Construction Expenses            
           
             

c & d) Completed Contract            

  2017 2018 2019
     
     
     

Suggested Practice Questions:

E6-3 p.321

E6-5 p.322

E6-12 p.323

E6-15 p.324

E6-23 p.325

E6-27 p.326

E6-29p.327

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P6-1 p.327-328

P6-5 p.329

Homework 4

E6-7 p.322

E6-22 p.325

P6-9 p.331

CA 6-1 p.331-332