Revenue Recognition
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EXERCISES
Ex. 18-127—Allocate transaction price.
Windsor Windows manufactures and sells custom storm windows for enclosed porches. Windsor
also provides installation service for the windows. The installation process does not involve
changes in the windows, so this service can be provided by other vendors. Windsor enters into the
following contract on June 1, 2021, with a local homeowner. The customer purchases windows for
a price of $4,700 and chooses Windsor to do the installation. Windsor charges the same price for
the windows irrespective of whether it does the installation or not. The price of the installation
service is estimated to have a fair value of $1,200. The customer pays Windsor $4,000 (which
equals the fair value of the windows, which have a cost of $2,300) upon delivery and the
remaining balance upon installation of the windows. The windows are delivered on August 1,
2021, Windsor completes installation on September 15, 2021, and the customer pays the balance
due. Prepare the journal entries for Windsor in 2021. (Round amounts to nearest dollar.)
Test Bank for Intermediate Accounting, Seventeenth Edition
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Solution 18-127 (cont.)
Ex. 18-128—Sales with returns and discounts.
On July 2, 2021, Lake Company sold to Sue Black merchandise having a sales price of $9,000
(cost $5,400) with terms of 2/10. n/30. f.o.b. shipping point. Lake estimates that merchandise with
a sales value of $900 will be returned. An invoice totaling $120, terms n/30, was received by Black
on July 6 from Pacific Delivery Service for the freight cost. Upon receipt of the goods, on July 3,
Black notified Lake that $350 of merchandise contained flaws. The same day, Lake issued a credit
memo covering the defective merchandise and asked that it be returned at Lake’s expense. Lake
estimates the returned items to have a fair value of $140. The freight on the returned merchandise
was $20 paid by Lake on July 7. On July 12, the company received a check for the balance due
from Black.
Instructions
(a) Prepare journal entries for Lake Company to record all the events noted above assuming sales
and receivables are entered at gross selling price.
(b) Prepare the journal entry assuming that Sue Black did not remit payment until August 5.
Revenue Recognition
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Solution 18-128 (cont.)
Ex. 18-129—Allocate transaction price.
The Appliance Store is an experienced home appliance dealer. Appliance Store also offers a
number of services together with the home appliances that it sells. Assume that Appliance Store
sells dishwashers on a standalone basis. Appliance Store also sells installation services and
maintenance services for dishwashers. However, Appliance Store does not offer installation or
maintenance services to customers who buy dishwashers from other vendors. Pricing for
dishwashers is as follows.
Dishwasher only
$1,140
Dishwasher with Installation service
1,260
Dishwasher with maintenance services
1,380
Dishwasher with installation and maintenance services
1,450
In each instance in which maintenance services are provided, the maintenance service is
separately priced within the arrangement at $240. Additionally, the incremental amount charged by
Appliance Store for installation approximates the amount charged by independent third parties.
Dishwashers are sold subject to a general right of return. If a customer purchases a dishwasher
with installation and/or maintenance services, in the event Appliance Store does not complete the
service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds
$1,140.
Instructions
(a) Assume that a customer purchases a dishwasher with both installation and maintenance
services for $1,450. Based on its experience, Appliance Store believes that it is probable that
the installation of the equipment will be performed satisfactorily to the customer. Assume that
the maintenance services are priced separately. Identify the separate performance obligations
related to the Appliance Store revenue arrangement.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Ex. 18-129 (cont.)
(b) Indicate the amount of revenue that should be allocated to the dishwasher the installation, and
to the maintenance contract.
(c) Prepare the necessary journal entry for the Appliance Store.
Ex. 18-130—Warranty arrangement.
On December 31, 2020, Dieker Company sells equipment to Tabor Inc. for $125,000. Dieker
includes a 1-year assurance warranty service with the sale of all its equipment. The customer
receives and pays for the equipment on December 31, 2020. Dieker estimates the prices to be
$122,000 for the equipment and $3,000 for the cost of the warranty.
Instructions
(a) Prepare the journal entry to record this transaction on December 31, 2020.
(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Dieker
sold an extended warranty (service type warranty) for an additional 2 years (2022–2023) for
$2,000.
Revenue Recognition
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Ex. 18-131—Existence of a contract.
On July 1, 2021, Ellsbury Inc. entered into a contract to deliver one of its specialty machines to
Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of $3,000 in
advance on July 15, 2021. Kickapoo pays Ellsbury on July 15, 2021, and Ellsbury delivers the
machine (with cost of $1,900) on July 31, 2021.
Instructions
(a) Prepare the journal entry on July 1, 2021, for Ellsbury.
(b) Prepare the journal entry on July 15, 2021, for Ellsbury.
(c) Prepare the journal entry on July 31, 2021, for Ellsbury.
*Ex. 18-132—Journal entries—percentage-of-completion.
Dixon Construction Company was awarded a contract to construct an interchange at the junction
of U.S. 94 and Highway 30 at a total contract price of $15,000,000. The estimated total costs to
complete the project were $12,000,000.
Instructions
(a) Make the entry to record construction costs of $7,200,000, on construction in process to date.
(b) Make the entry to record progress billings of $4,000,000.
(c) Make the entry to recognize the profit that can be recognized to date, on a percentage–of–
completion basis.
Test Bank for Intermediate Accounting, Seventeenth Edition
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*Ex. 18-133—Percentage-of-completion method.
Dalton Construction Co. contracted to build a bridge for $10,000,000. Construction began in 2021
and was completed in 2022. Data relating to the construction are:
2021 2022
Costs incurred during the year $3,300,000 $2,750,000
Estimated costs to complete 2,700,000 —
Dalton uses the percentage–of-completion method.
Instructions
(a) How much revenue should be reported for 2021? Show your computation.
(b) Make the entry to record progress billings of $4,100,000 during 2021.
(c) Make the entry to record the revenue and gross profit for 2021.
(d) How much gross profit should be reported for 2022? Show your computation.
Revenue Recognition
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*Ex. 18-134—Percentage-of-completion method.
Penner Builders contracted to build a high-rise for $35,000,000. Construction began in 2021 and is
expected to be completed in 2023. Data for 2021 and 2022 are:
2021 2022
Costs incurred to date $4,500,000 $13,000,000
Estimated costs to complete 18,000,000 12,000,000
Penner uses the percentage–of-completion method.
Instructions
(a) How much gross profit should be reported for 2021? Show your computation.
(b) How much gross profit should be reported for 2022?
(c) Make the journal entry to record the revenue and gross profit for 2022.
*Ex. 18-135—Percentage-of-completion and completed-contract methods.
On February 1, 2020, Marsh Contractors agreed to construct a building at a contract price of
$17,400,000. Marsh estimated total construction costs would be $12,000,000 and the project
would be finished in 2022. Information relating to the costs and billings for this contract is as
follows:
2020 2021 2022
Total costs incurred to date $4,500,000 $7,920,000 $13,800,000
Estimated costs to complete 7,500,000 5,280,000 -0-
Customer billings to date 6,600,000 12,000,000 16,800,000
Collections to date 6,000,000 10,500,000 16,500,000
Instructions
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting
and for completed-contract accounting, show the gross profit that should be recorded for 2020,
2021, and 2022.
Test Bank for Intermediate Accounting, Seventeenth Edition
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*Ex. 18-135 (cont.)
Percentage-of-Completion Completed-Contract
Gross Profit Gross Profit
2020 __________ 2020 __________
2021 __________ 2021 __________
2022 __________ 2022 __________
Revenue Recognition
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*Ex. 18-136—Franchises.
Pasta Inn charges an initial fee of $2,400,000 for a franchise, with $480,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the annual
payments, discounted at 10%, is $1,521,000. The franchisee has the right to purchase $90,000 of
kitchen equipment and supplies for $75,000. An additional part of the initial fee is for advertising to
be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a
month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the
initial services required by the contract.
Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in good form.
Test Bank for Intermediate Accounting, Seventeenth Edition
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PROBLEMS
Pr. 18-137—Allocate Transaction Price, Discounts, and Time Value.
Master Grill Company sells outdoor grilling products, providing gas and charcoal grills,
accessories, and installation services for custom patio grilling stations.
Instructions
Respond to the requirements related to the following independent revenue arrangements for
Master Grill products and services.
(a) Master Grill offers contract MG100 which is comprised of a free-standing gas grill for small
patio use plus installation to a customer’s gas line for a total price $950. On a standalone
basis, the grill sells for $800 (cost $470), and Master Grill estimates that the fair value of the
installation service (based on cost-plus estimation) is $200. Master Grill signed 15 MG100
contracts on May 30, 2021, and customers paid the contract price in cash. The grills were
delivered and installed on June 15, 2021. Prepare journal entries for Master Grill for MG100
in May and June 2021.
(b) Master Grill sells its specialty combination gas/wood-fired grills to local restaurants. Each grill
is sold for $1,200 (cost $670) on credit with terms 2/20, net/60. Prepare the journal entries for
the sale of 20 grills on August 1, 2021, and upon payment, assuming the customer paid on
(1) August 20, 2021, and (2) September 29, 2021. Assume the company records sales net.
Revenue Recognition
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Solution 18-137 (cont.)
*Pr. 18-138—Long-term construction project accounting.
Dobson Construction specializes in the construction of commercial and industrial buildings. The
contractor is experienced in bidding long-term construction projects of this type, with the typical
project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion
method of revenue recognition since, given the characteristics of the contractor’s business and
contracts, it is the most appropriate method. Progress toward completion is measured on a cost–
to-cost basis. Dobson began work on a lump-sum contract at the beginning of 2021. As bid, the
statistics were as follows:
Lump-sum price (contract price) $8,000,000
Estimated costs
Labor $1,700,000
Materials and subcontractor 3,500,000
Indirect costs 800,000 6,000,000
$2,000,000
Test Bank for Intermediate Accounting, Seventeenth Edition
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Pr. 18-138 (cont.)
At the end of the first year, the following was the status of the contract:
Billings to date $4,500,000
Costs incurred to date
Labor $ 928,000
Materials and subcontractor 1,296,000
Indirect costs 386,000 2,610,000
Latest forecast total cost 6,000,000
It should be noted that included in the above costs incurred to date were standard electrical and
mechanical materials stored on the job site, but not yet installed, costing $210,000. These costs
should not be considered in the costs incurred to date.
Instructions
(a) Compute the percentage of completion on the contract at the end of 2021.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2021.
(c) Make the journal entry to record the income (loss) for 2021 on Dobson’s books.
(d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of
Dobson Construction at the end of 2021 related to its construction accounts. Also indicate
where these items would be classified on the balance sheet. Billings collected during the year
amounted to $3,800,000.
(e) Assume the latest forecast on total costs at the end of 2021 was $8,120,000. How much
income (loss) would Dobson report for the year 2021?
Revenue Recognition
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Solution 18-138 (cont.)
*Pr. 18-139—Accounting for long-term construction contracts.
The board of directors of Ogle Construction Company is meeting to choose between the
completed-contract method and the percentage-of-completion method of accounting for long-term
contracts in the company’s financial statements. You have been engaged to assist Ogle’s
controller in the preparation of a presentation to be given at the board meeting. The controller
provides you with the following information:
1. Ogle commenced doing business on January 1, 2021.
2. Construction activities for the year ended December 31, 2021, were as follows:
Total Contract Billings Through Cash Collections
Project Price 12/31/21 Through 12/31/21
A $ 500,000 $ 340,000 $ 310,000
B 720,000 210,000 210,000
C 475,000 475,000 390,000
D 200,000 100,000 65,000
E 450,000 400,000 400,000
$2,345,000 $1,525,000 $1,375,000
Contract Costs Estimated
Incurred Through Additional Costs to
Project 12/31/21 Complete Contracts
A $ 424,000 $101,000
B 195,000 455,000
C 350,000 -0-
D 123,000 97,000
E 320,000 80,000
$1,412,000 $733,000
3. Each contract is with a different customer.
4. Any work remaining to be done on the contracts is expected to be completed in 2022.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Pr. 18–139 (cont.)
Instructions
(a) Prepare a schedule by project, computing the amount of income (or loss) before selling,
general, and administrative expenses for the year ended December 31, 2021, which would
be reported under:
(1) The completed-contract method.
(2) The percentage–of-completion method (based on estimated costs).
(b) Prepare the general journal entry(ies) to record revenue and gross profit on project B (second
project) for 2021, assuming that the percentage-of-completion method is used.
(c) Indicate the balances that would appear in the balance sheet at December 31, 2021 for the
following accounts for Project D (fourth project), assuming that the percentage–of-completion
method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process
(d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D
(fourth project), if the completed-contract method is used?
Revenue Recognition
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Solution 18-139 (cont.)
*Pr. 18-140—Long-term contract accounting (completed-contract).
Evans Construction, Inc. experienced the following construction activity in 2021, the first year of
operations.
Cash Cost Estimated
Total Billings Collections Incurred Additional
Contract through through through Costs to
Contract Price 12/31/21 12/31/21 12/31/21 Complete
X $260,000 $170,000 $155,000 $182,000 $ 63,000
Y 330,000 125,000 125,000 105,000 252,000
Z 233,000 233,000 198,000 158,000 -0-
$823,000 $528,000 $478,000 $445,000 $315,000
Each of the above contracts is with a different customer, and any work remaining at December 31,
2021 is expected to be completed in 2022.
Instructions
Prepare a partial income statement and a partial balance sheet to indicate how the above contract
information would be reported. Evans uses the completed-contract method.
Test Bank for Intermediate Accounting, Seventeenth Edition
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