Solution manual intermediate accounting 15e by stice ch08

CHAPTER 8
QUESTIONS
1. The two general revenue recognition
criteria are that revenue should be
recognized when it is realized or realizable
and it has been earned through
substantial completion of the activities
involved in the earnings process.

inventory to the extent that they cannot be
used to fill other orders.
7. The presumption is that customer
acceptance provisions are important to the
buyer or else they wouldn’t have been
included in the sales agreement in the first
place. Accordingly, the seller has not
completed the earnings process until the
customer acceptance provisions have
been satisfied.

2. The four revenue recognition criteria
identified in SOP 972 are:
a. Persuasive evidence of an arrangement
exists.
b. Delivery has occurred.
c. The vendor's fee is fixed or
determinable.
d. Collectibility is probable.
The first two items relate to whether
revenue has been earned, and the last two
relate to the realizability of the revenue.

8. Up-front, non-refundable fees are not
recognized as revenue immediately
because the earnings process is not
complete. The buyer is not paying for the
initiation of the service, but instead is
paying for the service itself.
9. Revenue shouldn’t be recognized until the
transaction price can be definitely
determined because it is less likely that an
arm’s-length market transaction has
occurred when the parties have not even
agreed upon the final price and because
the associated measurement uncertainty
means that the information is not reliable
enough for recognition and inclusion in the
financial statements.

3. SAB 101 was issued by the SEC to curtail
specific abuses in revenue recognition
practices.
4. Question 1 of SAB 101 emphasizes the
proper signing of sales agreements to
encourage companies to implement good
internal controls surrounding revenue
recognition. If a company does not have
good internal controls in place for
processing customer contracts, it becomes
much easier for company executives to
manipulate the reported amount of

revenue.

10. A refundable fee can be recognized as
revenue month-by-month before the
refund period is over when the seller can
make a reliable estimate about the
number of refunds that will be requested.
Reliable estimates are possible when the
seller has at least two years’ past
experience with a large pool of similar
transactions.

5. A sale can be turned into a consignment
through a liberal return policy that does
not require the buyer to pay for the
product until the buyer in turn sells it to a
customer. A sale can also be turned into a
consignment if the seller agrees to
repurchase the product at the same price
and provides interest-free financing to the
buyer.

11. Contingent rent can’t be estimated and
recognized on a straight-line basis over
the course of a year because to do so
would involve recognizing the future
impact of
future events. No contingent
rent should be recognized until the
contingency threshold has been reached.

6. In a bill-and-hold arrangement, the seller
“sells” goods to the buyer but holds the
goods for later shipment, either in the
seller’s own warehouse or in a third-party
warehouse. A bill-and-hold arrangement is
a sale when the arrangement comes
about upon the written request of the
buyer, the goods are ready to ship, and
the goods are separated from other

12. A company can reliably estimate product
returns if the company has substantial
past experience with a large pool of
similar transactions. Also, the return
period should be short and demand for the
product should be fairly stable. Also, a

49


50

company can reliably estimate product
returns when there have been no large
inventory increases for either the company
or its customers.
13. A company would prefer gross revenue
reporting over net revenue reporting
because the larger total revenue number

increases the apparent size of the
company’s economic activity. If investors
use a price-to-sales relationship in valuing
the company, gross revenue reporting can
lead to a higher stock price.
14. If percentage-of-completion accounting is
to be used by construction contractors, the
following elements should be present in
the transaction.
a. Dependable estimates can be made of
the extent of progress toward
completion, contract revenues, and
contract costs.
b. The contract should clearly specify the
enforceable rights regarding goods or
services to be provided and received
by the parties, the consideration to be
exchanged, and the manner and
terms of settlement.
c. The buyer can be expected to satisfy
obligations under the contract.
d. The contractor can be expected to
perform the contractual obligation.
Because most contractors with significant
contract obligations have the experience
to make the necessary estimates, it is
recommended that they use percentageof-completion accounting rather than the
completed-contract method.
15. The cost-to-cost method of measuring the
percentage of completion is an input

method and is computed by relating the
costs incurred to date to the total
estimated costs. The efforts-expended
methods are also input methods, but they
are based on the ratio of the efforts
expended by labor or machines on the
contract to the total effort expected to be
expended.
They
include
labor hours, labor dollars, machine hours,
or
even
material
quantities.
The
percentage computed is then applied to
revenue and costs to determine the
amount reported for the period.
16. Output measures of percentage of
completion
include units produced,
contract milestones reached, and values
added to the contract. Particular examples

Chapter 8

of output measures include miles of
roadway, cubic yards of dirt removed, or
architects' and engineers' estimates of job

completion.
17. The construction in progress account is
used to accumulate all costs directly
chargeable to a contract, including a share
of indirect overhead costs and the
recognized gross profit earned to date if
the company is using the percentage-ofcompletion method. The progress billings
on construction contracts account is used
to accumulate the total progress billings
made on a contract, including any billed
retainer fees. These accounts are offset
against each other on the balance sheet. If
Construction in Progress is the larger of
the two accounts, both are reported in the
Current Asset section. If Progress Billings
on Construction Contracts is larger, both
are reported in the Current Liability
section.
18. A minority of the members of the
Construction Contractor Guide Committee
of the AICPA feels that the costs reported
under
the
percentage-of-completion
method should always be the costs
incurred to date. If the method of arriving
at the percentage of completion is other
than the cost-to-cost method, the only way
this could occur would be to compute
revenue as the sum of costs incurred and

the computed gross profit rather than by
applying the percentage of completion to
the total contract price.
19. Under
percentage-of-completion
accounting,
the difference between
recognized revenue and recognized costs,
or the recognized gross profit, is added to
the costs incurred in arriving at the
balance reported in the construction in
progress account.
20. The major reason for a fluctuating gross
profit percentage under the percentage-ofcompletion method is the revision of
estimates that is inherent in this type of
contract. As costs incurred differ from
those anticipated, and as expectations of
future costs change over the contract time
period, the total gross profit to be earned
on the project also changes. When some
profit has already been recognized, these
adjustments can create large changes in
the reported gross profit percentage from


21.

22.

23.

24.

year to year. These fluctuations would also
increase if a measure of completion other
than cost-to-cost was used and if the
minority
position
of
the
AICPA
Construction Contractor Guide Committee
was followed.
If a loss is anticipated on a contract, the
entire loss should be recognized in the
period when the loss is first anticipated.
This is true under both the completedcontract and the percentage-of-completion
methods. Under the completed-contract
method, the amount of the expected loss
is charged to a loss account and credited
to Construction in Progress. Under the
percentage-of-completion
method,
however, the amount of the loss plus any
profit recognized in prior periods on the
contract must be recognized and reported
as a loss. Under either method, the
balance reported in Construction in
Progress will be the same.
The measures used to compute a

percentage of performance in long-term
service contracts depend on the nature of
the acts of service to be performed. If the
acts of service are identical or similar in
nature, an output measure derived by
relating the number of acts performed to
the total number of acts to be performed
over the contract life is recommended. If
the acts are defined, but are not identical,
the sales value of the acts performed to
date related to the total contract sales
value is used.
When a service company is organized and
its activities grow rapidly in the early years
of its life, the deferral of all revenue over
the service life fails to recognize any profit
on the sale of the contracts. Because the
sale is the critical event in many service
companies, failure to recognize profit in
the early years of a company results in
both direct and indirect costs being
charged against very little revenue. Thus,
in a newly formed company, large losses
will often be shown even if the company
may be profitable over time. The deferred
revenue recognition method may not do
an acceptable job of predicting the pattern
of future cash flows.
The three methods of revenue recognition
that await the receipt of cash are (a)

installment sales, (b) cost recovery, and (c)
cash. Under the installment sales method,

a portion of
recognized

51

each

cash

receipt

is


52

Chapter 8

as income. Under the cost recovery
method, no income is recognized until all
costs are recovered. Under the cash
method, all costs incurred are expensed
immediately, and all cash receipts are
recognized as revenue. Costs incurred are
deferred and matched against cash
received under both the installment sales
and cost recovery methods. As indicated

previously, under the cash method all
costs are expensed immediately.
25. The
installment
sales
method
of
accounting is preferred over the full
accrual method if cash collection is highly
uncertain and if the amount of loss due to
uncollectible
accounts
cannot
be
reasonably estimated. This can occur if
the sales transaction is unusual in nature
and involves a customer in a way that
default carries little cost or penalty.
26. Installment sales accounting requires
recognition of gross profit as the cash is
collected. The amount to be recognized is
based on the gross profit percentage of

the sales year. Because these percentages
can vary from year to year, it is necessary
to maintain records that identify sales and
collections by year and to maintain a
record of each year's gross profit
percentage.
27. Interest on installment sales contracts

should be recognized each period as
earned. Each cash collection, therefore,
should be reduced by the interest earned
before the gross profit percentage is
applied to the balance of the collection to
determine the gross profit earned.
28. The cash method of recognizing revenue
would be acceptable for reporting
purposes only if the probability of recovery
of product or service costs is slight.
Seldom would the method be appropriate
for product or real estate sales because of
repossession rights held by the seller.
However, in service contracts with high
initial costs and great uncertainty as to
collection, the cash method might be
appropriate.


PRACTICE EXERCISES
PRACTICE 81

BASIC JOURNAL ENTRIES FOR REVENUE RECOGNITION

1.
Cash

1,000
Unearned Service Revenue

1,000

2.
Unearned Service Revenue
Service Revenue
PRACTICE 82

1,000
1,000

JOURNAL ENTRIES FOR A CONSIGNMENT

1.
Inventory on Consignment
Inventory

10,000

Accounts Receivable
Sales

16,000

Cost of Goods Sold
Inventory on Consignment

10,000

10,000

2.

PRACTICE 83

16,000
10,000

JOURNAL ENTRIES FOR A LAYAWAY

1.
Cash (2  $50)
Deposits Received from Customers

100

Cash
Deposits Received from Customers
Sales

300
50

Cost of Goods Sold
Inventory

200

100

2.

350
200

3.
Deposits Received from Customers
Revenue from Layaway Forfeitures

50
50


PRACTICE 84
1.
2.
3.

JOURNAL ENTRIES FOR AN UP-FRONT, NONREFUNDABLE FEE

Cash (200  $360)
Unearned Initial Sign-up Fees

72,000

Cash (200  $50)
Monthly Service Revenue

10,000

72,000
10,000

Unearned Initial Sign-up Fees ($72,000/36 months)
Initial Sign-up Fee Revenue

PRACTICE 85

2,000
2,000

JOURNAL ENTRIES FOR AN UP-FRONT, REFUNDABLE FEE

1.

Cash (1,500  $1,000)
1,500,000
Customers’ Refundable Fees (30%)
450,000
Unearned Membership Fees (70%)
1,050,000

2.

Unearned Membership Fees ($1,050,000/12 months) 87,500
Membership Fee Revenue
87,500
Cost of Membership Fee Revenue (70%)
10,500
Administrative Expense (30%)
4,500
Cash [($120/12 months)  1,500 customers] 15,000

3.

Unearned Membership Fees ($1,050,000/12 months)87,500
Membership Fee Revenue
87,500
Cost of Membership Fee Revenue (70%)
10,500
Administrative Expense (30%)
4,500
Cash [($120/12 months)  1,500 customers] 15,000
Customers’ Refundable Fees
Cash

PRACTICE 86
1.

450,000
450,000

JOURNAL ENTRIES FOR CONTINGENT RENT

Cash

40,000
Rent Revenue

2.

Cash

40,000
40,000

Rent Revenue

40,000

Contingent Rent Receivable
100,000
Contingent Rent Revenue
100,000
($55,000,000  $50,000,000)  0.02 = $100,000


Chapter 8

55

PRACTICE 86 (Concluded)
3.

Cash

40,000
Rent Revenue

Contingent Rent Receivable
Contingent Rent Revenue
$12,000,000  0.02 = $240,000

40,000
240,000
240,000

Cash

600,000
Contingent Rent Receivable
600,000
($80,000,000  $50,000,000)  0.02 = $600,000
PRACTICE 87
1.
2.

REPORTING REVENUE GROSS AND NET

Cash ($300,000  0.02)
Commission Revenue
Cash

6,000
6,000
300,000

Sales
Cost of Goods Sold
Inventory
Commission Expense
Cash

PRACTICE 88

300,000
210,000
210,000
6,000
6,000

COST-TO-COST METHOD

1.
Percentage of completion: [$100,000/($100,000 + $450,000)] = 18.182%
Cumulative revenue to be recognized:
$800,000  0.18182
Revenue recognized in previous years
Revenue to be recognized in Year 1

$145,456
0
$145,456

2.
Percentage of completion: [($100,000 + $150,000)/($100,000 + $150,000 + $280,000)] =
47.170%
Cumulative revenue to be recognized:
$800,000  0.47170
Revenue recognized in previous years
Revenue to be recognized in Year 2

$377,360

145,456
$231,904

3.
Percentage of completion: 100.000%
Cumulative revenue to be recognized:
$800,000  1.00000
Revenue recognized in previous years

$800,000
377,360


Revenue to be recognized in Year 3

$422,640


Chapter 8

PRACTICE 89

57

EFFORTS-EXPENDED METHOD

1.
Percentage of completion: [150/(150 + 850)] = 15.000%
Cumulative revenue to be recognized:
$800,000  0.15000

$120,000
Revenue recognized in previous years
0
Revenue to be recognized in Year 1
$120,000
2.
Percentage of completion: [(150 + 300)/(150 + 300 + 520)] = 46.392%
Cumulative revenue to be recognized:
$800,000  0.46392
Revenue recognized in previous years
Revenue to be recognized in Year 2

$371,136
120,000
$251,136

3.
Percentage of completion: 100.000%
Cumulative revenue to be recognized:
$800,000  1.00000
Revenue recognized in previous years
Revenue to be recognized in Year 3
PRACTICE 810

$800,000
371,136
$428,864

PERCENTAGE OF COMPLETION BASED ON OUTPUT MEASURES

1.
Percentage of completion: [3,000/(3,000 + 15,200)] = 16.484%
Cumulative revenue to be recognized:
$800,000  0.16484
Revenue recognized in previous years
Revenue to be recognized in Year 1

$131,872
0
$131,872

2.
Percentage of completion: [(3,000 + 7,500)/(3,000 + 7,500 + 8,200)] = 56.150%
Cumulative revenue to be recognized:
$800,000  0.56150
Revenue recognized in previous years
Revenue to be recognized in Year 2

$449,200
131,872
$317,328

3.
Percentage of completion: 100.000%
Cumulative revenue to be recognized:
$800,000  1.00000
Revenue recognized in previous years
Revenue to be recognized in Year 3

$800,000

449,200
$350,800


PRACTICE 811
1.

BASIC CONSTRUCTION JOURNAL ENTRIES

Construction in Progress
Materials, Cash, etc.

100,000

Accounts Receivable
Progress Billings

200,000

Cash

180,000

100,000
200,000

Accounts Receivable
2.

180,000

Construction in Progress
Materials, Cash, etc.

150,000

Accounts Receivable
Progress Billings

200,000

Cash

170,000

150,000
200,000

Accounts Receivable
3.

170,000

Construction in Progress
Materials, Cash, etc.

250,000

Accounts Receivable
Progress Billings

400,000

Cash

450,000

250,000
400,000

Accounts Receivable
PRACTICE 812

450,000

COMPLETED-CONTRACT JOURNAL ENTRIES

Progress Billings
800,000
Revenue on Construction Contracts
800,000
Cost of Construction Contracts
Construction in Progress
PRACTICE 813

500,000
500,000

PERCENTAGE-OF-COMPLETION JOURNAL ENTRIES

1.

Cost of Construction Contracts
100,000
Construction in Progress
45,456
Revenue on Construction Contracts
145,456

2.

Cost of Construction Contracts
150,000
Construction in Progress
81,904
Revenue on Construction Contracts
231,904

3.

Cost of Construction Contracts
250,000
Construction in Progress
172,640
Revenue on Construction Contracts
422,640


Chapter 8

PRACTICE 814

59

CONSTRUCTION CONTRACTS: BALANCE SHEET REPORTING

1.
Accounts receivable is reported as a current asset. The balance at the end of each year is
computed as follows:
Year 1: $200,000  $180,000 = $20,000
Year 2: $20,000 + $200,000  $170,000 = $50,000
Year 3: $50,000 + $400,000  $450,000 = $0
2. and 3.
For balance sheet reporting purposes, Progress Billings and Construction in Progress are
netted against one another. If the cumulative amount of Progress Billings is larger, the net
amount is reported as a current liability. If the cumulative amount of Construction in
Progress is larger, the net amount is reported as a current asset.
Year 1
Progress billings: $200,000
Construction in progress: $100,000 (cost) + $45,456 (profit) = $145,456
Net current liability of $54,544 ($200,000  $145,456)
Year 2
Progress billings: $200,000 beginning balance + $200,000 = $400,000
Construction in progress: $145,456 (beginning balance) + $150,000 (cost) + $81,904
(profit) = $377,360
Net current liability of $22,640 ($400,000  $377,360)
Year 3
Progress billings: $400,000 beginning balance + $400,000 = $800,000
Construction in progress: $377,360 (beginning balance) + $250,000 (cost) + $172,640
(profit) = $800,000

No net amount is reported because both Construction in Progress and Progress Billings are
equal to $800,000. It would be appropriate to report the two amounts, netting to zero, in
either the Current Asset or Current Liability section of the balance sheet.
PRACTICE 815

MULTIPLE YEARS OF REVENUES AND COSTS: COST-TO-COST METHOD

1.
Percentage of completion: [$200,000/($200,000 + $550,000)] = 26.6667%
Cumulative revenue to be recognized:
$1,200,000  0.266667
Revenue recognized in previous years
Revenue to be recognized in Year 1

$320,000
0
$320,000

Cumulative cost to be recognized:
($200,000 + $550,000)  0.266667
Cost recognized in previous years
Cost to be recognized in Year 1

$200,000
0
$200,000

Cost of Construction Contracts
200,000
Construction in Progress

120,000
Revenue on Construction Contracts
320,000



Chapter 8

PRACTICE 815

61

(Concluded)

2.
Percentage of completion: [($200,000 + $350,000)/($200,000 + $350,000 + $280,000)] =
66.2651%
Cumulative revenue to be recognized:
$1,200,000  0.662651
Revenue recognized in previous years
Revenue to be recognized in Year 2

$795,181
320,000
$475,181

Cumulative cost to be recognized:
($200,000 + $350,000 + $280,000)  0.662651$550,000
Cost recognized in previous years
200,000

Cost to be recognized in Year 2
$350,000
Cost of Construction Contracts
350,000
Construction in Progress
125,181
Revenue on Construction Contracts
475,181
3.
Percentage of completion: 100.000%
Cumulative revenue to be recognized:
$1,200,000  1.000000
Revenue recognized in previous years
Revenue to be recognized in Year 3

$1,200,000
795,181
$ 404,819

Cumulative cost to be recognized:
($200,000 + $350,000 + $250,000)  1.000000$800,000
Cost recognized in previous years
550,000
Cost to be recognized in Year 3
$250,000
Cost of Construction Contracts
250,000
Construction in Progress
154,819
Revenue on Construction Contracts

404,819
PRACTICE 816

MULTIPLE YEARS OF REVENUES AND COSTS: OUTPUT MEASURE

1.
Percentage of completion: [8,000/(8,000 + 16,200)] = 33.0579%
Cumulative revenue to be recognized:
$1,200,000  0.330579
Revenue recognized in previous years
Revenue to be recognized in Year 1

$396,695
0
$396,695

Cumulative cost to be recognized:
($200,000 + $550,000)  0.330579
Cost recognized in previous years
Cost to be recognized in Year 1

$247,934
0
$247,934

Cost of Construction Contracts

247,934

Construction in Progress
148,761
Revenue on Construction Contracts
396,695
PRACTICE 816 (Concluded)
2.
Percentage of completion: [(8,000 + 12,500)/(8,000 + 12,500 + 4,100)] = 83.3333%
Cumulative revenue to be recognized:
$1,200,000  0.833333
Revenue recognized in previous years
Revenue to be recognized in Year 2

$1,000,000
396,695
$ 603,305

Cumulative cost to be recognized:
($200,000 + $350,000 + $280,000)  0.833333$ 691,666
Cost recognized in previous years
247,934
Cost to be recognized in Year 2
$ 443,732
Cost of Construction Contracts
443,732
Construction in Progress
159,573
Revenue on Construction Contracts
603,305
3.
Percentage of completion: 100.000%

Cumulative revenue to be recognized:
$1,200,000  1.000000
Revenue recognized in previous years
Revenue to be recognized in Year 3

$1,200,000
1,000,000
$ 200,000

Cumulative cost to be recognized:
($200,000 + $350,000 + $250,000)  1.000000$ 800,000
Cost recognized in previous years
691,666
Cost to be recognized in Year 3
$ 108,334
Cost of Construction Contracts
108,334
Construction in Progress
91,666
Revenue on Construction Contracts
200,000
PRACTICE 817

MULTIPLE YEARS OF REVENUES AND COSTS: ANTICIPATED LOSS

1.
Percentage of completion: [$200,000/($200,000 + $1,150,000)] = 14.8148%
Cumulative revenue to be recognized:
$1,500,000  0.148148
Revenue recognized in previous years

Revenue to be recognized in Year 1

$222,222
0
$222,222

With the cost-to-cost method, the percentage of cost and the actual cost are the same,
unless the contract has an
anticipated loss as illustrated in Year 2.
Cost of Construction Contracts
Construction in Progress

200,000
22,222


Chapter 8

63

Revenue on Construction Contracts
PRACTICE 817

222,222

(Concluded)

2.
Percentage of completion: [($200,000 + $350,000)/($200,000 + $350,000 + $1,020,000)] =
35.0319%

However, the contract now has a total anticipated loss of $70,000 [$1,500,000 – ($200,000
+ $350,000 + $1,020,000)].
Cumulative revenue to be recognized:
$1,500,000  0.350319
Revenue recognized in previous years
Revenue to be recognized in Year 2

$525,479
222,222
$303,257

Cumulative cost to be recognized:
($525,479 + $70,000 anticipated loss) $595,479
Cost recognized in previous years
200,000
Cost to be recognized in Year 2
$395,479
Cost of Construction Contracts
395,479
Construction in Progress
92,222
Revenue on Construction Contracts
303,257
3.
Percentage of completion: 100.000%
Cumulative revenue to be recognized:
$1,500,000  1.000000
Revenue recognized in previous years
Revenue to be recognized in Year 3

$1,500,000
525,479
$ 974,521

Cumulative cost to be recognized:
($200,000 + $350,000 + $900,000)  1.000000$1,450,000
Cost recognized in previous years
595,479
Cost to be recognized in Year 3
$ 854,521
Cost of Construction Contracts
854,521
Construction in Progress
120,000
Revenue on Construction Contracts
974,521
PRACTICE 818

JOURNAL ENTRIES FOR THE PROPORTIONAL PERFORMANCE METHOD

1.

Cash (2,000  $500)
1,000,000
Unearned Season Ticket Revenue
1,000,000

2.

Deferred Initial Season Ticket Costs

Cash

3.

150,000
150,000

Unearned Season Ticket Revenue
383,333
Season Ticket Revenue [$1,000,000  (23/60)]
Season Ticket Game Costs

92,000

383,333


Cash (2,000  $2  23)

92,000

Initial Season Ticket Costs [$150,000  (23/60)]57,500
Deferred Initial Season Ticket Costs
57,500
PRACTICE 819 INSTALLMENT SALES: BASIC JOURNAL ENTRIES
Installment Accounts Receivable
Installment Sales

350,000

Cost of Installment Sales ($350,000  0.80)
Inventory

280,000

Cash ($350,000  0.40)
Installment Accounts Receivable

140,000

Installment Sales
Cost of Installment Sales
Deferred Gross Profit

350,000

350,000
280,000
140,000

Deferred Gross Profit
Realized Gross Profit on Installment Sales

28,000

280,000
70,000
28,000

($140,000 collected  20% profit margin = $28,000)

or ($70,000 deferred gross profit  40% cash collected = $28,000)
PRACTICE 820

INSTALLMENT SALES: FINANCIAL STATEMENT REPORTING

Installment sales receivable: $350,000  $140,000 = $210,000
Deferred gross profit: $70,000  $28,000 = $42,000
Balance sheet reporting:
Installment sales receivable
$210,000
Less deferred gross profit
(42,000)
Net installment sales receivable$168,000
PRACTICE 821
1.

INSTALLMENT SALES: INTEREST ON RECEIVABLES

Installments Receivable
Installment Sales

100,000
100,000

Cost of Goods Sold
Inventory

60,000

Cash

40,000
Installments Receivable
Interest Revenue ($100,000  0.18)

60,000
22,000
18,000

Installment Sales
Cost of Goods Sold
Deferred Gross Profit

100,000

Deferred Gross Profit
Realized Gross Profit

8,800

60,000
40,000
8,800


Chapter 8

65

($22,000/$100,000)  $40,000

PRACTICE 821
2.

(Concluded)

Installments Receivable
Installment Sales

120,000
120,000

Cost of Goods Sold
Inventory

80,000

Cash

80,000

140,000
Installments Receivable
Interest Revenue

104,360
35,640

From Year 1: ($100,000  $22,000)  0.18 = $14,040

From Year 2: $120,000  0.18 = $21,600
$14,040 + $21,600 = $35,640
Installment Sales
Cost of Goods Sold
Deferred Gross Profit

120,000

Deferred Gross Profit
Realized Gross Profit

37,184

80,000
40,000
37,184

From Year 1: Principal cash collections = $50,000  $14,040 = $35,960
From Year 2: Principal cash collections = $90,000  $21,600 = $68,400
From Year 1: Realized gross profit = ($35,960/$100,000)  $40,000 = $14,384
From Year 2: Realized gross profit = ($68,400/$120,000)  $40,000 = $22,800
$14,384 + $22,800 = $37,184

PRACTICE 822

COST RECOVERY METHOD: BASIC JOURNAL ENTRIES

Cash
Collected
$140,000

Year 1
Sales = $350,000
Gross Profit % = 20%
COGS = $280,000

Year 1
Gross Profit
Recognized
$175,000
$
0

Year 2

Sales = $270,000
Gross Profit % = 25%
COGS = $202,500

108,000

Year 3

Sales = $210,000
Gross Profit % = 30%
COGS = $147,000







Year 2
Cash
Gross Profit
Collected
Recognized
$
0
$35,000

Year 3
Cash
Gross Profit
Collected Recognized
$

0

135,000

84,000

0

40,500



0


Chapter 8

67

PRACTICE 822
1.

(Concluded)

Installments ReceivableYear 1
Installment Sales

350,000

Cost of Goods Sold
Inventory

280,000

Cash

140,000

350,000

Installments Receivable Year 1

2.

140,000

Installment Sales
Cost of Goods Sold
Deferred Gross Profit Year 1

350,000

Installments Receivable Year 2
Installment Sales

270,000

Cost of Goods Sold
Inventory

202,500

Cash

108,000

280,000
70,000

270,000
202,500

Installments Receivable Year 2

108,000

Installment Sales
Cost of Goods Sold
Deferred Gross ProfitYear 2

270,000

Cash

175,000
Installments Receivable Year 1

3.

280,000

202,500
67,500

175,000

Deferred Gross Profit Year 1
Realized Gross Profit

35,000

Installments Receivable Year 3

Installment Sales

210,000

Cost of Goods Sold
Inventory

147,000

35,000

210,000

Cash

147,000

84,000
Installments Receivable Year 3

84,000

Installment Sales
Cost of Goods Sold
Deferred Gross Profit Year 3

210,000

Cash

135,000
Installments Receivable Year 2

Deferred Gross Profit Year 2
Realized Gross Profit

147,000
63,000

135,000
40,500
40,500

EXERCISES


8–23.

2006 Inventory on Consignment......................................
Retained Earnings (0.30  $45,000).........................
Accounts Receivable...........................................
To correct error made in 2005.

45,000
13,500

Receivable from Consignee ($12,000  1.3)...........
Consignment Sales..............................................

15,600

Cost of Consignment Goods Sold..........................
Inventory on Consignment..................................

12,000

Inventory....................................................................
Inventory on Consignment..................................

33,000

Commission Expense ($15,600  0.15)...................
Cash...........................................................................
Receivable from Consignee................................

2,340
13,260

58,500

15,600
12,000
33,000

15,600

8–24.
a. No entry. Deception has received no order from Tally, so no sale should be
recognized no matter how much Deception segregates the inventory.
b. No entry. As explained in Question 1 of SAB 101, no sale should be recognized if

the sales agreement is unsigned and yet normal procedure includes the formal
signing of the sales agreement by both the buyer and the seller. In addition, a billand-hold arrangement should not be recognized as a sale in the absence of a
written request from the buyer.
c. This scenario describes a case in which a bill-and-hold arrangement can be
recognized as a sale. The appropriate journal entry is as follows:
Accounts Receivable.........................
Sales.........................................

175,000

Cost of Goods Sold...........................
Inventory..................................

100,000

175,000
100,000

d. No entry. No sale should be recognized until all substantive customer acceptance
provisions have been satisfied.


Chapter 8

8–25.

Cash (300  $2,000)........................................................
Unearned Lifetime Membership Fees................
Unearned Wellness Evaluation Fees.................

69

600,000
488,372
111,628

Lifetime membership fees: [$1,750/($1,750 + $400)]  $600,000 = $488,372
Wellness evaluation fees: [$400/($1,750 + $400)]  $600,000 = $111,628
Unearned Wellness Evaluation Fees............................
Wellness Evaluation Fees..................................

111,628

Cost of Wellness Evaluation Fees................................
Cash (300  $70)..................................................

21,000

Unearned Lifetime Membership Fees...........................
Lifetime Membership Fees ($488,372/5 years).

97,674

Cost of Lifetime Membership Fees...............................
Cash (300  $250)................................................

75,000

111,628
21,000

97,674
75,000

8–26.
1.

2.

Cash (20,000  $200)...................................................... 4,000,000
Customers’ Refundable Fees (20%)..................
800,000
Unearned Subscriber Fees (80%)......................
3,200,000
Deferred Initial Subscriber Costs (80%).......................
Administrative Expense (20%)......................................
Cash (20,000  $40).............................................

640,000
160,000

Unearned Subscriber Fees ($3,200,000/4 quarters)....
Subscriber Fee Revenue....................................

800,000

Initial Setup Expense ($640,000  3/12)........................
Deferred Initial Subscriber Costs......................

160,000

Cost of Subscriber Fee Revenue (80%).......................
Administrative Expense (20%)......................................
Cash [($80/4 quarters)  20,000 customers].....

320,000
80,000

800,000

800,000
160,000

400,000


8–26.
3.

4.

5.

(Concluded)
Unearned Subscriber Fees ($3,200,000/4 quarters)....
Subscriber Fee Revenue....................................

800,000

Initial Setup Expense ($640,000  3/12)........................
Deferred Initial Subscriber Costs......................

160,000

Cost of Subscriber Fee Revenue (80%).......................
Administrative Expense (20%)......................................
Cash [($80/4 quarters)  20,000 customers].....

320,000
80,000

Unearned Subscriber Fees ($3,200,000/4 quarters)....
Subscriber Fee Revenue....................................

800,000

Initial Setup Expense ($640,000  3/12)........................
Deferred Initial Subscriber Costs......................

160,000

Cost of Subscriber Fee Revenue (80%).......................
Administrative Expense (20%)......................................
Cash [($80/4 quarters)  20,000 customers].....

320,000
80,000

Unearned Subscriber Fees ($3,200,000/4 quarters)....
Subscriber Fee Revenue....................................

800,000

Initial Setup Expense ($640,000  3/12)........................
Deferred Initial Subscriber Costs......................

160,000

Cost of Subscriber Fee Revenue (80%).......................
Administrative Expense (20%)......................................
Cash [($80/4 quarters)  20,000 customers].....

320,000
80,000

Customers’ Refundable Fees........................................
Cash (3,800  $200).............................................

760,000

Customers’ Refundable Fees........................................
Subscriber Fee Revenue....................................

40,000

800,000
160,000

400,000

800,000

160,000

400,000

800,000
160,000

400,000
760,000
40,000

This final entry is necessary to close out the remaining balance in the estimated
amount of fees to be refunded. One could also make entries to retroactively
reclassify some administrative expense as cost of subscriber fee revenue; in this
example this reclassification would impact the classification of expenses but not the
amount of total expenses for the year.


Chapter 8

71

8–27.

2005
Construction in Progress.................
Materials, Labor, Cash, etc.........
To record costs incurred
on contract.

1,720,000

Accounts Receivable .......................
Progress Billings on
Construction Contracts............
To record contract billings.

1,350,000

Cash...................................................
Accounts Receivable..................
To record collections on
contract.

950,000

8–28.

2,020,000
1,720,000

2,020,000

2,630,000
1,350,000

2,630,000
3,030,000

950,000

Progress Billings on
Construction Contracts..................
Revenue from Long-Term
Construction Contracts............
To record recognition
of revenue.
Cost of Long-Term
Construction Contracts.................
Construction in Progress...........
To record recognition
of expenses.

2006

3,030,000

3,980,000
no entry

no entry

3,980,000

3,740,000
3,740,000

1. Total gross profit recognized on contract:
2004.......................................... $ 75,000
2005..........................................

140,000
2006..........................................
(20,000)
$195,000
Total cost incurred on contract:
Contract price.............................................
Less gross profit recognized.....................
Total cost incurred.............................................
Total cost incurred in 2005:
Total cost incurred—contract....................
1,805,000
Less cost incurred:
2004.........................................................
2006..........................................................
Total cost incurred—2005.................................

$2,000,000
195,000
$1,805,000
$
$ 360,000
820,000

1,180,000
$ 625,000


8–28.

(Concluded)

2. Total cost incurred and gross profit recognized to the end of 2005:

2004....................................
2005....................................

Cost
Incurred
$360,000
625,000
$ 985,000

Gross Profit
Recognized
Total
$ 75,000
$ 435,000
140,000
765,000
$ 215,000
$1,200,000

Percentage of job completed at the end of 2005:
Total cost incurred and gross profit recognized
to end of 2005....................................................................
1,200,000
Total contract price..............................................................

$

2,000,000

8–29.

Percentage of project completed by the end of 2005.......

60%

3. Total gross profit recognized to end of 2005 ..........................
Percentage of project completed by end of 2005 ...................
Total estimated gross profit on project as of end of 2005. . .

$ 215,000
÷
60%
$ 358,333

4. Total cost incurred to end of 2005.............................................
Percentage of project completed by end of 2005 ...................
Total estimated cost on contract as of end of 2005..............
1,641,667
Less cost incurred to date.........................................................
Estimated cost to complete contract as of end of 2005.......

$ 985,000
÷
60%
$

2004
1. Actual cost incurred to date......... $2,500,000

2. Estimated cost to complete
contract........................................ 3,500,000
3. Total estimated cost...................... $ 6,000,000
Percentage of completion
to date [(1)/(3)].............................

41.67%

To Date
2004—(41.67% completed):
Recognized revenue
($7,000,000  41.67%)............. $2,916,900
Cost (rounded to actual cost)....... 2,500,000
Gross profit.................................. $ 416,900
2005—(93.55% completed):
Recognized revenue
($6,700,000  93.55%)............. $6,267,850
Cost (rounded to actual cost)....... 5,800,000
Gross profit.................................. $ 467,850

985,000
$ 656,667

2005
$5,800,000

2006
$6,210,000

400,000

$ 6,200,000

0
$6,210,000

93.55%

100%

Recognized Recognized
in
in
Prior Years Current Year
$2,916,900
2,500,000
$ 416,900

$2,916,900
2,500,000
$ 416,900

$3,350,950
3,300,000
$ 50,950


Chapter 8

8–29.

73

(Concluded)
2006—(100% completed):
Recognized revenue...................... $6,700,000
Cost................................................. 6,210,000
Gross profit.................................. $ 490,000

8–30.

1.
2.
3.
4.
5.
6.

$6,267,850
5,800,000
$ 467,850

$ 432,150
410,000
$ 22,150

$20,000 ($220,000 – $200,000)
$260,000 ($250,000 + $10,000)
$370,000 [$850,000 – ($220,000 + $260,000)]
$380,000 ($370,000 + $10,000)
$830,000 ($200,000 + $250,000 + $380,000)

$226,092
2005: 450/640 = 0.7031; 0.7031  $210,000 = $147,651

Cumulative gross
profit
2004: 200/650 = 0.3077; 0.3077  $200,000 = (61,540) Gross profit
recognized—2004
$ 86,111 Gross profit
recognized—2005
8–31.

1. Percentage-of-completion method:
2005 Contract price.............................................
Less estimated cost:
Cost to date ............................................
Estimated cost to complete project.....
Estimated gross profit...........................
Percentage completed ($59,000/$100,000)
Estimated gross profit—2005
($20,000  59%).......................................
Balance sheet:
Current assets:
Accounts receivable
($70,000 billed – $45,000 received)
Construction in progress..................
Less: Progress billings on
construction contracts...................

$120,000
$59,000

41,000

100,000
$ 20,000
59%
$ 11,800

$25,000
$70,800*
70,000

800

*$59,000 cost to date + $11,800 income = $70,800
Income statement:
Revenue ($120,000  0.59).....................
Cost of construction..............................
Gross profit.............................................

$70,800
59,000
$11,800