# 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)

The Print Haus. (consignee)

### Exercise 5.4

1. 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:

November journal entry:

December journal entry:

### 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:2021 Journal Entry:

### 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

### 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
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
Sales 300,000
Cost of Goods Sold 255,000
Inventory on Consignment 255,000

Sales 300,000
Commission 10% 30,000
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
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