ISB FADM 2022

Practice Set 4

Revenue Recognition, Accounts Receivable, Inventory, PP&E

QUESTION 1

SOLUTION

Company Revenue recognition

a. GAP The performance obligation is fulfilled when the customer takes the
merchandise and the right of return period has expired or costs of returns
can be reasonably estimated.

b. Merck The performance obligation is fulfilled when the customer takes delivery
of the merchandise and the right of return period, if any, has expired or
costs of returns can be reasonably estimated. The company will also
establish a reserve and recognize expense for uncollectible accounts
receivable when revenue is recognized.

c. Deere & Co. The performance obligation is fulfilled when the customer takes the
merchandise and the right of return period, if any, has expired or costs of
returns can be reasonably estimated. The company will also establish a
reserve and recognize expense for uncollectible accounts receivable and
anticipated warranty costs at the time the sale is recorded. Revenues for
financial or insurance services are recognized when the services are
provided.

d. Bank of The performance obligation is fulfilled with the passage of time. Interest
America is earned by the passage of time. Each period Bank of America accrues
 income on each of its loans and establishes an account receivable on its
balance sheet.

e. Johnson The performance obligation is to build and complete projects. Revenue

Controls is recognized for long-term construction contracts under the percentage-
of-completion method, typically using cost-to-cost method to identify the
percentage of the project that is complete.
QUESTION 2

SOLUTION

c. Accounts receivable, net = $200,000 - $6,900 = $193,100

Reported in the balance sheet as follows:

Accounts receivable, net of allowance of $6,900 $193,100
QUESTION 3

SOLUTION

The ending balance of Penman’s accounts receivable and allowance accounts are as
follows.

Accounts receivable $385,700

Less allowance for uncollectible accounts 24,172 $361,528

Computations

Allowance for
Accounts Receivable Uncollectible Accounts
Beginning balance $ 356,000 $ 21,400
Sales 2,008,000
Collections (1,963,000)
Write-offs* (15,300) (15,300)
Bad debts expense** ________ 18,072
Ending balance $ 385,700 $ 24,172

* Write offs = $8,200 + $4,800 + $2,300 = $15,300

** Bad debts expense = $2,008,000 × 0.9% = $18,072
QUESTION 4

SOLUTION

a. FIFO cost of goods sold = 400 @ $12 + 200 @ $14 = $7,600

FIFO ending inventories = $14,600 – $7,600 = $7,000

b. LIFO cost of goods sold = 600 @ $14 = $8,400

LIFO ending inventories = $14,600 – $8,400 = $6,200

c. Average cost of goods sold = 600 @ $14,600 / 1,100 = $7,964

Average cost ending inventories = $14,600 – $7,964 = $6,636

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QUESTION 5

SOLUTION

Units Cost
Beginning Inventory @ 32 1,000 $ 32,000
Purchases: #1 @ 34 1,800 61,200
#2 @ 38 800 30,400
#3 @ 41 1,200 49,200
Goods available for sale 4,800 $172,800

Units in ending inventory = 4,800 – 2,800 = 2,000

a. First-in, first-out

Units Cost Total

1,200 @ $41 = $49,200
800 @ $38 = 30,400
Ending Inventory 2,000 $79,600

Cost of goods available for sale $172,800

Less: Ending inventory 79,600

Cost of goods sold $ 93,200

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 Balance Sheet Income Statement

Liabil- Earned Rev- Expen- Net

Cash Noncash Contrib.
Transaction + = + + – =
Asset Assets Capital
ities Capital enues ses Income

COGS 93,200

INV 93,200
-93,200
+93,200
Record FIFO -93,200
cost of goods = Retained – = -93,200
Cost of
COGS sold Inventory
Goods Sold
93,200 Earnings

INV
93,200

b. Last-in, first-out

Units Cost Total

1,000 @ $32 = $32,000
1,000 @ $34 = 34,000
Ending Inventory 2,000 $66,000

Cost of goods available for sale $172,800

Less: Ending inventory 66,000

Cost of goods sold $ 106,800

c. Average cost

$172,800 / 4,800 = $36 average unit cost

2,000 × $36 = $72,000 ending inventory

$172,800 - $72,000 = $100,800 cost of goods sold (or $100,800 = 2,800 × $36)

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QUESTION 6

SOLUTION
a. Straight-line: ($37,000 – $2,900) / 5 years = $6,820 for both years

b. Double-declining-balance: Twice straight-line rate = 2 × 1/5 = 40%

1st year: $37,000 × 0.40 = $14,800
2nd year: ($37,000 – $14,800) × 0.40 = $8,880

Notice that, over the first two years, the company reports $13,640 ($6,820 x 2) of
depreciation expense under the straight-line method and $23,680 ($14,800 + $8,880) of
depreciation expense under the double-declining balance method.

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QUESTION 7

SOLUTION

a. 1. Cumulative depreciation expense to date of sale:

[($1,280,000 - $160,000) / 10 years] × 7 years = $784,000

2. Net book value of the plane at date of sale:

$1,280,000 - $784,000 = $496,000

b. 1. There is no gain or loss if the cash proceeds are equal to the plane’s net book value
at the disposal date.

2. $211,000 loss on sale calculated as: $285,000 – $496,000

3. $204,000 gain on sale calculated as: $700,000 – $496,000