Chapter 5

Solutions

Exercise 5.1

Scenario 1: Amount to be received = $80 × 36 months = $2,880

Allocate using relative fair values:

Phone: [500 ÷ (500 + (600 × 3))] × 2,880 = 626
Air-time: [(600 × 3) ÷ (500 + (600 × 3))] × 2,880 = 2,254

Therefore, $626 will be recognized immediately and $2,254 will be deferred and recognized over the 3-year term of the contract.

Scenario 2: Amount to be received = ($100 × 24 months) + $300 = $2,700

Allocate using relative fair values:

Phone: [500 ÷ (500 + (600 × 2))] × 2,700 = 794
Air-time: [(600 × 2) ÷ (500 + (600 × 2))] × 2,700 = 1,906

Therefore, $794 will be recognized immediately and $1,906 will be deferred and recognized over the 2-year term of the contract.

Exercise 5.2

Scenario 1: Allocate using residual values:

Phone: 2,880 − (600 × 3) = 1,080
Air-time: 600 × 3 = 1,800

Therefore, $1,080 will be recognized immediately and $1,800 will be deferred and recognized over the 3-year term of the contract.

Scenario 2: Allocate using residual values:

Phone: 2,700 − (600 × 2) = 1,500
Air-time: 600 × 2 = 1,200

Therefore, $1,500 will be recognized immediately and $1,200 will be deferred and recognized over the 2-year term of the contract.

Exercise 5.3

Art Attack Ltd. (consignor)
General journal. To segregate consignment goods: Inventory on consignment 58,000 under debit; Finished goods inventory 58,000 under credit. To record freight: Inventory on consignment 2,200 under debit; cash 2,200 under credit. To record receipt of net sales: Cash 67,700 under debit; advertising expense 3,400 under debit; commission expense 7,900 under debit; consignment revenue 79,000 under credit. To record COGS [(58,000 + 2,200) x 80%]: cost of goods sold 48,160 under debit; inventory on consignment 481,60 under credit
The Print Haus. (consignee)

General journal. To record payment of advertising: Account receivable 3,400 under debit; cash 3,400 under credit. To record sales of consigned goods: cash 79,000 under debit; accounts payable 79,000 under credit. To record payment to consignor: Accounts payable 79,000 under debit; accounts receivable 3,400 under credit; revenue from consignment sales 7,900 under credit; cash 67,700 under credit.

Exercise 5.4

  1. General journal. Cash (800 × $3,000) 2,400,000 under debit; Sales revenue (800 × $3,000 × 99.5%) 2,388,000 under credit; Refund liability (800 × $3,000 × 0.5%) 12,000 under credit. Cost of goods sold (800 × $2,000 × 99.5%) 1,592,000 under debit; Refund asset (800 × $2,000 × 0.5%) 8,000 under debit; Inventory (800 × $2,000) 1,600,000 under credit.

  2. General journal. Refund liability (1 × $3,000) 3,000 under debit. Inventory (1 × $2,000) 2,000 under debit. Cash 3,000 under credit. Refund asset 2,000 under credit.

    At the time of sale, it was estimated that 4 desks would be returned during the refund period (800 × 0.5% = 4). If a further 3 desks are returned before the refund period ends, journal entries similar to the one above would be made. If the refund period expires and the number of desks returned differs from the original estimate, the refund asset and refund liability account will need to be adjusted through net income. As a practical matter, the company will likely review the balances of the refund asset and liability accounts as part of the year-end adjustment process.

Exercise 5.5

October journal entry:

General journal. Computer equipment 3,000 under debit. Unearned revenue 2,000 under credit. Unearned revenue 250 under debit. Service revenue 250 under credit.

November journal entry:

General journal. Unearned revenue 250 under debit. Service revenue 250 under credit.

December journal entry:

General journal. Unearned revenue 250 under debit. Service revenue 250 under credit.

Exercise 5.6

a. Construction Contract

2020 2021
Costs to date (A) $20,000,000 $31,000,000
Estimated costs to complete project 10,000,000 0
Total estimated project costs (B) 30,000,000 31,000,000
Percent complete (C = A ÷ B) 66.67% 100.00%
Total contract price (D) 35,000,000 35,000,000
Revenue to date (C × D) 23,333,333 35,000,000
Less preciously recognized revenue – (23,333,333)
Revenue to recognize in the year 23,333,333 11,666,667
Costs incurred the year 20,000,000 11,000,000
Gross profit for the year $3,333,333 $666,667

b. 2020 Journal Entry:General journal. To record construction costs: Construction in progress 20,000,000 under debit; Materials, payables, cash, etc. 20,000,000 under credit. To record billings: accounts receivable 18,000,000 under debit; billings on construction 18,000,000 under credit. To record collections: cash 17,000,000 under debit; accounts receivable 17,000,000 under credit. To recognize revenue: Construction in progress 3,333,333 under debit; construction expenses 20,000,000 under debit; revenue 23,333,3332021 Journal Entry:General journal 1. To record construction costs: Construction in progress 11,000,000 under debit; Materials, payables, cash, etc. 11,000,000 under credit. To record billings: accounts receivable 17,000,000 under debit; billings on construction 17,000,000 under credit. To record collections: cash 15,000,000 under debit; accounts receivable 15,000,000 under credit. To recognize revenue: Construction in progress 666,667 under debit; construction expenses 11,000,000 under debit; revenue 11,666,667. General journal 2. To record completion: billings on construction 35,000,000 under debit. Construction in progress 35,000,000 under credit.

Exercise 5.7

  1. Construction Contract
    2021 2022 2023
    Costs to date (A) $1,100,000 $3,400,000 $4,500,000
    Estimated costs to complete project 3,200,000 1,000,000 –
    Total estimated project costs (B) 4,300,000 4,400,000 4,500,000
    Percent complete (C = A ÷ B) 25.58% 77.27% 100.00%
    Total contract price (D) 5,200,000 5,200,000 5,200,000
    Revenue to date (C × D) 1,330,160 4,018,040 5,200,000
    Less previously recognized revenue – (1,330,160) (4,018,960)
    Revenue to recognize in the year 1,330,160 2,687,880 1,181,960
    Costs incurred the year 1,100,000 2,300,000 1,100,000
    Gross profit for the year $230,160 $387,880 $81,960
  2. Balance Sheet

    Current assets

    Accounts receivable

    Recognized contract revenues in excess of billings

     

    300,000[1]

    718,040[2]

    Income Statement

    Contract revenues

    Contract costs

    Gross profit

    2,687,880

    2,300,000

    387,880

Exercise 5.8

  1. Construction Contract
    2020 2021 2022
    Costs to date (A) $800,000 $2,400,000 $3,900,000
    Estimated costs to complete project 2,100,000 1,600,000 –
    Total estimated project costs (B) 2,900,000 4,000,000 3,900,000
    Percent complete (C = A ÷ B) 27.59% 60.00% 100.00%
    Total contract price (D) 3,500,000 3,800,000 3,800,000
    Revenue to date (C × D) 965,650 1,314,350 1,520,00
    Less previously recognized revenue – (965,650) (2,280,000)
    Revenue to recognize in the year 965,650 1,314,350 1,520,000
    Costs incurred the year 800,000 1,600,000 1,500,000
    Gross profit (loss) for the year $165,650 (285,650) 20,000
    Additional loss to recognize (NOTE) (80,000) 80,000
    Gross profit (loss) for the year $365,650 $100,000

    NOTE: Additional loss represents the expected loss on work not yet completed (3,800,000 − 4,000,000) × 40% = 80,000

  2. Journal Entries
    General journal. To record construction costs: Construction in progress 1,600,000 under debit; Materials, payables, cash, etc. 1,600,000 under credit. To record billings: accounts receivable 1,100,000 under debit; billings on construction 1,100,000 under credit. To record collections: cash 1,000,000 under debit; accounts receivable 1,000,000 under credit. To recognize revenue: Construction expenses (includes actual costs incurred plus additional loss to recognize) 1,680,000 under debit; construction in progress 365,650 under debit; revenue 1,314,350.

Exercise 5.9

  1. Zero Profit Method
    2020 2021 2022
    Revenues recognized 800,000 1,600,000 1,400,000
    Expenses 800,000 1,800,000 1,300,000
    Gross profit (200,000) 100,000
  2. Completed Contract Method
    2020 2021 2022
    Revenues recognized 0 0 3,800,000
    Expenses 0 0 3,700,000
    Gross profit 0 0 100,000
    Loss on unprofitable contract (200,000)

Exercise 5.10

Chang Industries (Consignor)
Mar 1, Y4 Inventory on Consignment 120,000
Finished Goods Inventory 120,000
to record reclassing inventory
the CONSIGNOR still maintains legal ownership (even though not in their possession)
Mar 1, Y4 Inventory on Consignment 5,000
Cash 5,000
freight is NOT an expense - it's added to the value of our inventory
Sept 30, Y4 Cash 128,000
Commission Expense 24,000
Advertising Expense 8,000
Cost of Goods Sold 93,750
Inventory on Consignment 93,750
Sales Revenue 160,000
sold 75% of inventory - cost of inventory
actual cost 120,000
freight 5,000
TOTAL COST 125,000
% sold 75%
VALUE OF ITEMS SOLD 93,750

XYZ Inc (Consignee)
sales Cash 160,000
Due to Consignor 160,000
note - these sales would be recorded each day/week
Sept 30, Y4 Due to Consignor 160,000
Commission Revenue 24,000
Advertising Revenue (could offset expense) 8,000
Cash 128,000

Exercise 5.11

Consignor (Iwanna Pass)
Feb 16, Y6 Inventory on Consignment 250,000
Merchandise Inventory 250,000
to reclass inventory sent on consignment
Feb 16, Y6 Inventory on Consignment 5,000
Cash 5,000
to pay for freight costs to ship the merchandise
March 31, Y6 Cash 261,000
Commission Expense 30,000
Advertising Expense 9,000
Sales 300,000
Cost of Goods Sold 255,000
Inventory on Consignment 255,000
Sales 300,000
Commission 10% 30,000
advertising 3% 9,000
net cash to consignor 261,000

Consignee (Bob's Tables n'Stuff)
sales Cash 300,000
Payable to Consignor 300,000
remember, sales are happening daily - this is an accumulation of all the sales entries
March 31, Y6 Payable to Consignor 300,000
Commission Revenue 30,000
Advertising Revenue/Expense 9,000
Cash 261,000
to record settlement of account with the consignor

Exercise 5.12

Requirement #1(a) Completed Contract

   

Y3

Y4

Y5
Construction in Progress 450,000 500,000 320,000
Cash / AP 450,000 500,000 320,000
to record the construction costs incurred during the year
Accounts receivable 500,000 400,000 600,000
Billings on Construction 500,000 400,000 600,000
to record progress billings during the year
Cash 485,000 365,000 650,000
Accounts receivable 485,000 365,000 650,000
to record cash collections during the year
Billings on Construction - - 1,500,000
Construction revenue - - 1,500,000
Construction Expenses - - 1,270,000
Construction in Progress - - 1,270,000
to record the completion of the project and recognize revenue

Requirement #1(b) Percentage of Completion

 

Y3

Y4

Y5
Construction in Progress 450,000 500,000 320,000
Cash / AP 450,000 500,000 320,000
to record the construction costs incurred during the year
Accounts receivable 500,000 400,000 600,000
Billings on Construction 500,000 400,000 600,000
to record progress billings during the year
Cash 485,000 365,000 650,000
Accounts receivable 485,000 365,000 650,000
to record cash collections during the year
Construction Expenses 450,000 500,000 320,000
Construction in Progress 163,650 49,600 16,750
Construction revenue (see below) 613,650 549,600 336,750
Billings on Construction 1,500,000
Construction in Progress 1,500,000
to record the completion of the project and recognize revenue

Construction Expenses (costs incurred) 450,000 40.91% 950,000 77.55% 1,270,000 100.00%
Total estimated cost of the project 1,100,000 1,225,000 1,270,000
Revenue to recognize based on contract price 613,650 1,163,250 1,500,000
Less revenue recognized in prior period - 613,650 1,163,250
Revenue to recognize in current year 613,650 549,600 336,750
Y3 = $1,500,000 × 40.91% = $613,650
Y4 = $1,500,000 × 77.55% = $1,163,250
Y5 = $1,500,000 × 100.00% = $1,500,000 note - if using excel, may be out due to rounding

Requirement #2(a) Completed Contract

 

Y3

Y4

Y5
Balance Sheet
Accounts Receivable 15,000 50,000 -
Construction in Progress 450,000 950,000 -
Billings on Construction 500,000 900,000 -
Income Statement
Construction Revenue - - 1,500,000
Less: Construction Expenses - - -1,270,000
Net income - - 230,000

Requirement #2(b) Percentage of Completion

 

Y3

Y4

Y5
Balance Sheet
Accounts Receivable 15,000 50,000 -
Construction in Progress 613,650 1,163,250 -
Billings on Construction 500,000 900,000 -
Income Statement
Construction Revenue 613,650 549,600 336,750
Less: Construction Expenses -450,000 -500,000 -320,000
Net income 163,650 49,600 16,750

Exercise 5.13

Part 1

1. Percent completion method
Construction in Progress 13,750,000
Cash / A/P 13,750,000
Accounts Receivable 12,500,000
Billings on Construction 12,500,000
Cash 12,000,000
Accounts Receivable 12,000,000
Construction Expense 13,750,000
Construction in Progress 2,187,500
Construction Revenue 15,937,500

Costs incurred to date 13,750,000 62.50%
Total Estimated Costs 22,000,000
Revenue to recognize 15,937,500 ($25,500,000 × 62.50%)
Revenue recognized in prior year -
Revenue to recognize in current year 15,937,500

2. Completed contract method
Construction in Progress 13,750,000
Cash / A/P 13,750,000
Accounts Receivable 12,500,000
Billings on Construction 12,500,000
Cash 12,000,000
Accounts Receivable 12,000,000

Part 2

1. Percent of completion method
Construction in Progress 8,250,000
Cash / A/P 8,250,000
Accounts Receivable 13,000,000
Billings on Construction 13,000,000
Cash 12,000,000
Accounts Receivable 12,000,000
Construction Expense 8,250,000
Construction in Progress 1,312,500
Revenue 9,562,500
Billings on Construction 25,500,000
Construction in Progress 25,500,000

Costs incurred to date 22,000,000 100.00%
Total Estimated Costs 22,000,000
Revenue to recognize 25,500,000 ($25,500,000 × 100.00%)
Revenue recognized in prior year 15,937,500
Revenue to recognize in current year 9,562,500

2. Completed contract method
Construction in Progress 8,250,000
Cash / A/P 8,250,000
Accounts Receivable 13,000,000
Billings on Construction 13,000,000
Cash 12,000,000
Accounts Receivable 12,000,000
Construction Expense 22,000,000
Billings on Construction 25,500,000
Revenue 25,500,000
Construction in Progress 22,000,000

Exercise 5.14

Requirement 1 – Completed Contract

 

Y2

Y3

Y4
Construction in Progress 175,000 678,000 316,000
Cash/ A/P 175,000 678,000 316,000
Accounts Receivable 150,000 700,000 650,000
Billings on Construction 150,000 700,000 650,000
Cash 125,000 710,000 665,000
Accounts Receivable 125,000 710,000 665,000
Construction Expense 1,169,000
Billings on Construction 1,500,000
Construction Revenue 1,500,000
Construction in Progress 1,169,000

Requirement 2 – Percent of Completion

     

Y2

Y3

Y4
Construction in Progress 175,000 678,000 316,000
Cash/ A/P 175,000 678,000 316,000
Accounts Receivable 150,000 700,000 650,000
Billings on Construction 150,000 700,000 650,000
Cash 125,000 710,000 665,000
Accounts Receivable 125,000 710,000 665,000
Construction Expense 175,000 678,000 316,000
Construction in Progress 87,500 150,293 93,207
Construction Revenue 262,500 828,293 409,207
Billings on Construction 1,500,000
Construction in Progress 1,500,000

 

Y2

Y3

Y4
Contract Revenue 1,500,000 1,500,000 1,500,000
Costs incurred to date 175,000 853,000 1,169,000
Total cost of project 1,000,000 1,173,000 1,169,000
Percent 17.50% 72.72% 100.00%
% of Revenue 262,500 1,090,793 1,500,000
Prior Recognized - 262,500 1,090,793
Revenue to Recognize 262,500 828,293 409,207

Exercise 5.15

Requirement #1(a) Completed Contract

   

Y5

Y6

Y7
Construction in Progress 1,875,000 5,875,000 6,962,500
Cash / AP 1,875,000 5,875,000 6,962,500
to record the construction costs incurred during the year
Accounts receivable 1,750,000 5,800,000 7,950,000
Billings on Construction 1,750,000 5,800,000 7,950,000
to record progress billings during the year
Cash 1,600,000 5,750,000 8,150,000
Accounts receivable 1,600,000 5,750,000 8,150,000
to record cash collections during the year
Billings on Construction - - 15,500,000
Construction revenue - - 15,500,000
Construction Expenses - - 14,712,500
Construction in Progress - - 14,712,500
to record the completion of the project and recognize revenue

Requirement #1(b) Percent of Completion

     

Y5

Y6

Y7
Construction in Progress 1,875,000 5,875,000 6,962,500
Cash / AP 1,875,000 5,875,000 6,962,500
to record the construction costs incurred during the year
Accounts receivable 1,750,000 5,800,000 7,950,000
Billings on Construction 1,750,000 5,800,000 7,950,000
to record progress billings during the year
Cash 1,600,000 5,750,000 8,150,000
Accounts receivable 1,600,000 5,750,000 8,150,000
to record cash collections during the year
Percentage of project completed 13.07% 53.45% 100.00%
Revenue to recognize 2,025,261 6,259,221 7,215,517
Construction Expenses 1,875,000 5,875,000 6,962,500
Construction in Progress 150,850 383,900 252,750
Construction revenue 2,025,850 6,258,900 7,215,250
Billings on Construction 15,500,000
Construction in Progress 15,500,000
to record the completion of the project and recognize revenue
Construction Expenses (costs incurred) 1,875,000 13.07% 7,750,000 53.45% 14,712,500 100.00%
Total estimated cost of the project 14,350,000 14,500,000 14,712,500
Revenue to recognize based on contract price 2,025,850 8,284,750 15,500,000
Less revenue recognized in prior period - 2,025,850 8,284,750
Revenue to recognize in current year 2,025,850 6,258,900 7,215,250
Y5 = $15,500,000 × 13.07% = $2,025,850
Y6 = $15,500,000 × 53.45% = $8,284,750
Y7 = $15,500,000 × 100.00% = $15,500,000 note - if using excel, may be out due to rounding

Requirement #2(a) Completed Contract

 

Y5

Y6

Y7
Balance Sheet
Accounts Receivable 150,000 200,000 -
Construction in Progress 1,875,000 7,750,000 -
Billings on Construction 1,750,000 7,550,000 -
Income Statement
Construction Revenue - - 15,500,000
Less: Construction Expenses - - -14,712,500
Net income - - 787,500

Requirement #2(b) Percent of Completion

 

Y5

Y6

Y7
Balance Sheet
Accounts Receivable 150,000 200,000 -
Construction in Progress 2,025,850 8,284,750 -
Billings on Construction 1,750,000 7,550,000 -
Income Statement
Construction Revenue 2,025,850 6,258,900 7,215,250
Less: Construction Expenses -1,875,000 -5,875,000 -6,962,500
Net income 150,850 383,900 252,750

  1. calculated as 3,300,000 − 3,000,000 = 300,000 ↵
  2. calculated as (3,400,000 + 230,160 + 387,880) − 3,300,000 = 718,040 ↵

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