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EXERCISE 18-2

 

(a)      1.      6/3          Accounts Receivable—Kim Rhode           5,000

                                  Sales                         5,000

 

                   6/5          Sales Returns and Allowances           400

                                  Accounts Receivable—Kim Rhode                400

 

                   6/7          Transportation-Out            24

                                  Cash                        24

 

                    6/12          Cash               4,508

                             Sales Discounts (2% X $4,600)              92

                                  Accounts Receivable—Kim Rhode                4,600

 

          2.      6/3          Accounts Receivable—Kim Rhode           4,900

                                  Sales [$5,000 – (2% X 5,000)]                   4,900

 

                   6/5          Sales Returns and Allowances           392

                                  Accounts Receivable—Kim Rhode                392

                                            [$400 – (2% x $400)]

 

                   6/7          Transportation-Out            24

                                  Cash                        24

 

                    6/12          Cash               4,508

                             Accounts Receivable—Kim Rhode                4,508

 

(b)               8/5          Cash               4,600

                                  Accounts Receivable—Kim Rhode                4,508

                                  Sales Discounts Forfeited                    92

                                            (2% X $4,600)

 

 

 

 

 

 

 

EXERCISE 18-4

(a)      Gross profit recognized in:

 

 

2004

2005

2006

Contract price

 

$1,500,000

 

$1,500,000

 

$1,500,000

Costs:

 

 

 

 

 

 

Costs to date

$400,000

 

$935,000

 

$1,070,000

 

Estimated costs to         complete

 

 

  600,000

 

 

  1,000,000

 

 

165,000

 

 

  1,100,000

 

 

                0

 

 

  1,070,000

Total estimated profit

 

 

500,000

 

 

400,000

 

 

430,000

Percentage completed to date

 

 

         40%*

 

 

        85%**

 

 

         100%

Total gross profit recognized

 

 

200,000

 

 

340,000

 

 

430,000

Less: Gross profit recognized in previous years

 

 

 

                0

 

 

 

    200,000

 

 

 

      340,000

Gross profit        recognized in current year

 

 

 

$   200,000

 

 

 

$  140,000

 

 

 

$     90,000

 

**$400,000 ÷ $1,000,000

**$935,000 ÷ $1,100,000

(b)          Construction in Process             535,000

                    ($935,000 – $400,000)

                           Materials, Cash, Payables, etc.                     535,000

          Accounts Receivable ($900,000 – $300,000)                  600,000

                    Billings and Construction in Process      ...           600,000

 

          Cash ($810,000 – $270,000)              540,000

                    Accounts Receivable..                     540,000

 

          Construction Expenses              535,000

          Construction in Process          ...           140,000

                    Revenue from Long-term Contracts                  675,000*

 

          *$1,500,000 X (85% – 40%)

(c)      Gross profit recognized in:

 

2004

2005

2006

Gross profit

$ –0–

$ –0–

$430,000*

 

          *$1,500,000 – $1,070,000

EXERCISE 18-15

 

(a) Realized gross profit recognized in 2005 under the installment method of accounting is $87,375. When gross profit is expressed as a percentage of cost, it must be converted to percentage of sales to compute the realized gross profit under the installment method of accounting. Thus, 2004 and 2005 gross profits as a percentage of sales are 20% and 21.875% respectively.

 

Sale Year

 

Gross Profit Percentage

2005                Collections

2002                   Realized Profit

2004

.25/(1.00 + .25) = 20% 

$240,000

$48,000

2005

.28/(1.00 + .28) = 21.875%

180,000

  39,375

 

 

TOTAL

$87,375

 

(b)      The balance of “Deferred Gross Profit” could be reported on the balance sheet for 2005:

 

          (1) As a current liability on the theory that it is related to Installment Accounts Receivables that are normally treated as current assets;

 

          (2) As a deferred credit between liabilities and stockholders’ equity. This treatment is criticized because there is no obligation to 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 installment sales not yet realized. The related receivable will be overstated unless the deferred gross profit is deducted. On the other hand, the amount of deferred gross profit has no direct relationship with the estimated collectibility of the accounts receivable.

 

          It is not a settled matter as to the proper classification of “deferred gross profit” on the balance sheet when the installment method of accounting is used to measure income.

 

(c)      Gross profit as a percent of sales in 2004 is 20% (as computed in (a) above); gross profit therefore is $96,000 ($480,000 X .20) and the cost of 2004 sales is $384,000 ($480,000 – $96,000). Because the amounts collected in 2004 ($140,000) and 2005 ($240,000) do not exceed the total cost of $384,000, no profit is recognized in 2004 or 2005 on 2004 sales. Also, no profit is recognized on 2005 sales since the collections of $180,000 do not exceed the total cost of $484,375.

 

 

 

 

 

 

 

 

PROBLEM 18-3

 

(a)      Gross profit recognized in:

 

2004

2005

2006

Contract price

 

$3,000,000

 

$3,000,000

 

$3,000,000

Costs:

 

 

$1,560,000

 

$2,100,000

 

Costs to date

$  600,000

 

 

 

 

 

Estimated costs to complete

 

1,400,000

 

  2,000,000

390,000

  1,950,000

                0

  2,100,000

Total estimated profit

 

 1,000,000

 

 1,050,000

 

900,000

Percentage completed to date

 

           30%*

 

           80%**

 

        100%

Total gross profit recognized

 

    300,000

 

840,000

 

900,000

Less: Gross profit recognized in       previous years

 

                0

 

300,000

 

     840,000

Gross profit        recognized in      current year

 

$  300,000

 

$   540,000

 

$     60,000

*                    *$600,000 ÷ $2,000,000    **$1,560,000 ÷ $1,950,000

 (b)          Construction in Process                540,000

              ($2,100,000 – $1,560,000)

                    Materials, Cash, Payables, etc.                     540,000

          Accounts Receivable..           900,000

              ($3,000,000 – $2,100,000)

                    Billings on Construction in Process      ...           900,000

          Cash ($2,750,000 – $1,950,000)           800,000

                    Accounts Receivable..                     800,000

          Construction Expenses              540,000

          Construction in Process                60,000

                    Revenue from Long-term Contracts        ...           600,000*

          *$3,000,000 X (100% – 80%)

          Billings on Construction in Process             3,000,000

                    Construction in Process          ...           3,000,000

 

(c)    WINTER COMPANY

Balance Sheet (Partial)

December 31, 2005

           

          Current assets:

                    Accounts receivable ($2,100,000 – $1,950,000)           $150,000

                    Inventories

                    Construction in process    ($1,560,000 + $840,000)          $2,400,000

                              Less:  Billings           2,100,000

                    Costs and recognized gross profit in excess of billings               300,000


 

PROBLEM 18-17

 (a)  Schedule to Compute Gross Profit for 2004

 

A

B

C

D

E

Estimated profit (loss):

 

 

 

 

 

A:    ($300,000 – $315,000)

$(15,000)

 

 

 

 

B:    ($350,000 – $339,000)

 

$11,000

 

 

 

C:    ($280,000 – $186,000)

 

 

$94,000

 

 

D:    ($200,000 – $210,000)

 

 

 

$(10,000)

 

E:    ($240,000 – $200,000)

 

 

 

 

$40,000

 

 

 

 

 

 

A:    (not applicable)

 

 

 

 

B:    ($67,800 ÷ $339,000)

 

20%

 

 

 

C:    ($186,000 ÷ $186,000)

 

 

100%

 

 

D:    (not applicable)

 

 

 

 

E:    ($185,000 ÷ $200,000)

                

             

             

                

   92.5%

Gross profit (loss) recognized

$(15,000)

$  2,200

$94,000

$(10,000)

$37,000

 

Schedule to Compute Unbilled Contract Costs

and Recognized Profit and Billings

in Excess of Costs and Recognized Profit

 

Costs and Estimated Earnings or Losses

 

Related Billings

Costs and Estimated Earnings in Excess of Billings

Billings in Excess

       of Costs and Estimated Earnings

A

a$233,000a

$200,000

$  33,000

 

B

70,000b

110,000

 

$40,000

D

113,000c

35,000

78,000

 

E

  222,000d

  205,000

    17,000

          

 

$638,000

$550,000

$128,000

$40,000

            a$248,000 – $15,000            c$123,000 – $10,000

                        b$67,800 + $2,200                          d$185,000 + $37,000

 

(b)        Partial Income Statement

         Revenue from long-term contracts         $925,333*

         Costs of construction

             ($251,190 + $67,800 + $186,000 + $127,143 + $185,000)        817,133

         Gross profit $108,200

         *A: $300,000 X ($248,000 ÷ $315,000) = $236,190

         B:         $350,000 X ($ 67,800 ÷ $339,000) =         70,000

         C:         $280,000 X ($186,000 ÷ $186,000) =         280,000

         D:         $200,000 X ($123,000 ÷ $210,000) =         117,143

         E:         $240,000 X ($185,000 ÷ $200,000) =   222,000

                 Total revenue recognized         $925,333

             Partial Balance Sheet

         Current assets:

         Accounts receivable             $  65,000

             ($830,000 – $765,000)

         Inventories

         Construction in process         $568,000         ***

         Less:  Billings          440,000      ***

         Unbilled contract costs

             and recognized profit

             (project A, D, and E)                 128,000

         Current liabilities:

         Billings ($110,000) in excess of costs and

             recognized profit ($70,000) (project B)           $  40,000

 

Project

 

Costs

 

Profit/(loss)

Construction in Process

 

Billings

A

$248,000

$(15,000)

$233,000

$200,000

D

123,000

(10,000)

113,000

35,000

E

  185,000

(  37,000)

  222,000

  205,000

Total

$556,000

$12,000)

*$568,000**

$440,000***

 

(c) Schedule to Compute Gross Profit for 2004

 

A

B

C

D

E

A:    ($300,000 – $315,000)

$(15,000)

 

 

 

 

B:    Not completed

 

 

 

 

C:    ($280,000 – $186,000)

 

 

$94,000

 

 

D:    ($200,000 – $210,000)

 

 

 

$(10,000)

 

E:    Not completed

                

                

                

                

            

Gross profit (loss) recognized

$(15,000)

               

$94,000

$(10,000)

            

 

    Schedule to Compute Unbilled Contract Costs

and Billings in Excess of Costs

 

 

Costs and            Estimated Earnings or Losses

 

Related Billings

Costs and             Estimated Earnings in Excess of Billings

Billings in Excess            of Costs and Estimated Earnings

A

a$233,000a

$200,000

$  33,000

 

B

67,800

110,000

 

$42,200

D

113,000b

35,000

78,000

 

E

185,000

205,000

              

  20,000

 

$598,800

$550,000

$111,000

$62,200

 

            a$248,000 – $15,000                          b$123,000 – $10,000

 

           

(d)     The principal advantage of the completed-contract method is that it reports revenue based on the final results and not on estimates made throughout the construction period. However, the disadvantage of using this method is that for contracts which extend more than one accounting period, income recognition is distorted. For example, in this exercise Rich Mathre Construction Company would recognize $39,200 less gross profit using the completed-contract method than if it was using the percentage-of-completion method. This difference exists because the only project completed at the end of 2004 was project C and so that is the only project from which Mathre may recognize revenue and gross profit. Therefore, even though a portion of the work was completed on projects B and E, no revenues or gross profit can be recognized until those projects are completed.

 

 

         On the other hand, the percentage-of-completion method does recognize revenue and gross profit before the completion of a project. If Mathre can determine reliable estimates of its progress and meets the other conditions for this method, Mathre can recognize revenues as the work progresses. The use of this method provides financial statement users with a more current picture of the results of the company’s operations; however, problems may occur if the estimates are poor. If revised estimates, or even rising costs, show that a project will result in a loss, the company must offset gross profit previously recognized for that project. Thus, it is possible that the financial statements may present a good picture one year and the next year present a picture that is not as good.

 

         The end results will be the same under either method and so the dif­ference is simply one of timing. Therefore, if a company can determine reliable estimates of its progress towards completion and meets the required conditions, the percentage-of-completion method is preferred. Otherwise the completed-contract method is more appropriate.