5.8 Exercises
Chapter 5
Exercise 5.1
PhreeWire Phones offers a number of plans to its mobile telephone customers. For example, a customer can receive a free phone when signing a 3-year contract for airtime and data that requires a monthly payment of $80. Alternately, the customer could pay $300 for the telephone when signing a 2-year contract requiring monthly payments of $100.
Required:
Determine the amount of revenue to be recognized each year under the two different scenarios. Assume that the fair value of the telephone is $500 and the fair value of the airtime and data is $600 per year.
Exercise 5.2
Refer to the previous question.
Required:
Determine the amount of revenue to be recognized each year under the two different scenarios. Assume that the fair value of the telephone is indeterminable and the fair value of the airtime and data is as indicated.
Exercise 5.3
Art Attack Ltd. ships merchandise on consignment to The Print Haus, a retailer of fine art prints. The cost of the merchandise is $58,000, and Art Attack pays the freight cost of $2,200 to ship the goods to the retailer. At the end of the accounting period, The Print Haus notifies Art Attack Ltd. that 80% of the merchandise has been sold for $79,000. The Print Haus retains a 10% commission as well as $3,400, which represent advertising costs it paid, and remits the balance owing to Art Attack Ltd.
Required:
Complete the journal entries required by each company for the above transactions.
Exercise 5.4
Eames Fine Furniture sells high quality, roll-top desks. The company allows customers to return products for a full refund within 90 days of purchase. The desks sell for $3,000 and cost the company $2,000 to manufacture. The company expects that any returned desks can be resold for a profit. The company has reviewed historical financial data and determined that 0.5% of all desks sold are returned for a refund. During the month of January, the company sold 800 desks.
Required:
- Prepare all the required journal entries to record the January sales.
- Assume one desk was actually returned by the end of January. Prepare the journal entry required to record the return and describe the appropriate accounting treatment of any further returns.
Exercise 5.5
Frank Ledger, a non-designated accountant, has agreed to provide twelve months of bookkeeping services to Digital Dreams Inc. (DDI), a computer equipment and accessories retailer. Mr. Ledger will compile the accounting records of DDI every month and provide an unaudited financial statement. Mr. Ledger has agreed not to invoice DDI during the year, and DDI has agreed to provide Mr. Ledger with a free computer system. The computer would normally sell for $3,000. Mr. Ledger has indicated that he would typically charge approximately $250/month for similar bookkeeping services, although the actual amount invoiced per month would depend on the volume of transactions and a number of other factors.
Required:
Assume the contract described above is signed on October 1 and Mr. Ledger’s fiscal year end is December 31. Prepare all the required journal entries for Mr. Ledger between these two dates.
Exercise 5.6
Suarez Ltd. entered into a contract on January 1, 2020, to construct a small soccer stadium for a local team. The total fixed price for the contract is $35 million. The job was completed in December 2021. Details of the project are as follows:
| 2020 | 2021 | |
|---|---|---|
| Costs incurred in the period | $20,000,000 | $11,000,000 |
| Estimated costs to complete the project | 10,000,000 | – |
| Customer billings in the period | 18,000,000 | 17,000,000 |
| Cash collected in the period | 17,000,000 | 15,000,000 |
Required:
- Calculate the amount of gross profit to be recognized each year using the percentage- of-completion method.
- Prepare all the required journal entries for both years.
Exercise 5.7
In 2021, Gerrard Enterprises Inc. was contracted to build an apartment building for $5.2 million. The project was expected to take three years and Gerrard estimated the costs to be $4.3 million. Actual results from the project are as follows:
| 2021 | 2022 | 2023 | |
|---|---|---|---|
| Accumulated costs to date | $1,100,000 | $3,400,000 | $4,500,00 |
| Estimated costs to complete the project | 3,200,000 | 1,000,000 | – |
| Customer billings to date | 1,500,000 | 3,300,000 | 5,200,000 |
| Cash collected to date | 1,000,000 | 3,000,000 | 5,200,000 |
Required:
- Calculate the amount of gross profit to be recognized each year using the percentage- of-completion method.
- Show how the details of this contract would be disclosed on the balance sheet and income statement in 2022.
Exercise 5.8
On February 1, 2020, Sterling Structures Ltd. signed a $3.5 million contract to construct an office and warehouse for a small wholesale company. The project was originally expected to be completed in two years, but difficulties in hiring a sufficient pool of skilled workers extended the completion date by an extra year. As well, significant increases in the price of steel in the second year resulted in cost overruns on the project. Sterling was able to negotiate a partial recovery of these costs, and the total contract value was adjusted to $3.8 million in the second year. Additional information from the project is as follows:
| 2020 | 2021 | 2022 | |
|---|---|---|---|
| Total contract value | $3,500,000 | $3,800,000 | $3,800,000 |
| Accumulated costs to date | 800,000 | 2,400,000 | 3,900,000 |
| Estimated costs to complete the project | 2,100,000 | 1,600,000 | – |
| Customer billings to date | 1,000,000 | 2,100,000 | 3,800,000 |
| Cash collected to date | 1,000,000 | 2,000,000 | 3,800,000 |
Required:
- Calculate the amount of gross profit to be recognized each year using the percentage- of-completion method.
- Prepare all the required journal entries for 2021.
Exercise 5.9
Take the same set of facts as described in the previous question, except assume that there is no reasonable way to estimate progress on the contract.
Required:
- Using the zero-margin method (IFRS), determine the amount of revenue and expense to report each year.
- Using the completed-contract method (ASPE), determine the amount of revenue and expense to report each year.
Exercise 5.10
On March 1, Y4 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 3rd quarter (Sept 30, Y4), XYZ notifies Chang that 75% of the merchandise has been sold for $160,000.
Required:
Record all the appropriate entries required by the two companies for this consignment transaction.
Exercise 5.11
On February 16, Y6 Iwanna Pass Inc sent merchandise to Bob’s Tables n’ Stuff on consignment. Iwanna Pass pays freight to send the merchandise to Bob’s and agrees to pay commission to Bob’s of 10% and a 3% allowance for advertising costs. On March 31, Y6 Bob’s lets Iwanna Pass know they have sold all the merchandise sent to them. Additional information is as follows:
| Value of merchandise on consignment | $250,000 |
| Freight paid to ship the merchandise | $5,000 |
| Sales price of inventory | $300,000 |
Required:
- Record the entries required by Iwanna Pass Inc
- Record the entries required by Bob’s Tables n’ Stuff
Exercise 5.12
Assume that Gurt’s Gazebos has agreed to a contract with a developer to put multiple gazebo’s into all the new subdivision the developer is building. The contract spans over a 3 year period and the relevant information on the contract is listed below.
| Contract revenue – total agree upon contract price | $1,500,000 |
|
Y3 |
Y4 |
Y5 |
|
|---|---|---|---|
| Estimated total costs of project | 1,100,000 | 1,225,000 | 1,270,000 |
| Costs incurred to date | 450,000 | 950,000 | 1,270,000 |
| Progress payments received this period | 485,000 | 365,000 | 650,000 |
| Progress billings this period | 500,000 | 400,000 | 600,000 |
| Estimated costs to complete at year-end | 650,000 | 275,00 | – |
| Costs incurred during the period | $450,000 | $500,000 | $320,000 |
Required:
- Complete the journal entries for all 3 years assuming Gurt’s Gazebos uses:
- The completed contract method
- The percentage of completion method
- Show the relevant balance sheet and income statement items for all three years assuming:
- The completed contract method
- The percentage of completion method
Exercise 5.13
Part 1
Aloha Cabanas has been contracted to build 30 luxury villas on a beach resort.
The project is expected to take 2 years. In Year 1 Aloha incurs project costs of $13,750,000. The customer is billed for a total of $12,500,000 during Year 1 and pays $12,000,000.
The total contract price is $25,500,000.
Required:
- Prepare the required journal entries using the percent of completion method.
- Prepare the required journal entries using the completed contract method.
Part 2
During Year 2 Aloha Cabanas completes the project. An additional $8,250,000 in costs are incurred during the year. The customer is billed $13,000,000 during year 2 and pays $12,000,000 before the end of the year.
Required:
- Prepare the required journal entries using the percent of completion method.
- Prepare the required journal entries using the completed contract method.
Exercise 5.14
| Contract revenue | $1,500,000 |
|
Y2 |
Y3 |
Y4 |
|
|---|---|---|---|
| Costs incurred during the year | 175,000 | 678,000 | 316,000 |
| Total Costs Incurred to date | 175,000 | 853,000 | 1,169,000 |
| Estimated costs to complete the project | 825,000 | 320,000 | - |
| Total estimated cost of the project | 1,000,000 | 1,173,000 | 1,169,000 |
| Project billings invoiced during the year | 150,000 | 700,000 | 650,000 |
| Cash reciepts from customers during the year | 125,000 | 710,000 | 665,000 |
Required:
- Record all appropriate entries using completed contract.
- Record all appropriate entries using percent of completion.
Exercise 5.15
Ahola Cabanas has been contracted to build 30 luxury villas on a beach resort. Ahola uses the completed contract method of revenue recognition and the project is expected to take 3 years. Data on costs incurred, estimated costs to complete,progress billings, and progress payments over the period of construction are as
follows:
| Contract revenue | $15,500,000 |
|
Y5 |
Y6 |
Y7 |
|
|---|---|---|---|
| Costs incurred during the period | 1,875,000 | 5,875,000 | 6,962,500 |
| Costs incurred to date | 1,875,000 | 7,750,000 | 14,712,500 |
| Estimated costs to complete at year-end | 12,475,000 | 6,750,000 | - |
| Estimated total costs of project | 14,350,000 | 14,500,000 | 14,712,500 |
| Progress billings this period | 1,750,000 | 5,800,000 | 7,950,000 |
| Progress payments received this period | 1,600,000 | 5,750,000 | 8,150,000 |
Required:
- Complete the journal entries for all 3 years assuming Ahola Cabana uses:
- The completed contract method
- The percent of completion method
- Show the relevant balance sheet and income statement items assuming:
- The completed contract method
- The percent of completion method
