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.