289) In 2018, KP Building Inc. began work on a four-year construction project (called Cincy
One). The contract price is $300 million. KP recognizes revenue on this contract over time
according to percentage of completion. At the end of 2018, the following financial statement
information indicates the results to date for Cincy One:
INCOME STATEMENT:
Gross profit (before-taxes) recognized in 2018 $22 million
BALANCE SHEET:
Accounts receivable from construction billings $10 million
Construction in progress $66 million
Less: Billings on construction ($75 million)
Net billings in excess of construction in progress $9 million
Required:
Compute the following, placing your answer in the spaces provided and showing supporting
computations below.
Item to compute Answer
Cash collected by KP on Cincy One during 2018
Actual costs incurred by KP on Cincy One during 2018
At 12/31/2018, the estimated remaining costs to complete Cincy One
The percentage of Cincy One that was completed during 2018
Use this information to answer the following questions:
McCombs Contractors received a contract to construct a mental health facility for $2,500,000.
Construction was begun in 2017 and completed in 2018. Cost and other data are presented
below:
2017 2018
Costs incurred during the year $1,500,000 $1,300,000
Estimated costs to complete 1,200,000 0
Billings during the year 1,200,000 1,300,000
Cash collections during the year 1,000,000 1,500,000
290) Assume that McCombs recognizes revenue on this contract over time according to
percentage of completion.
Required:
Compute the amount of gross profit recognized during 2017 and 2018.
291) Assume that McCombs recognizes revenue on this contract over time according to
percentage of completion.
Required:
Prepare all journal entries to record costs, billings, collections, and profit (loss) recognition.
Round your answers to the nearest whole dollar.
292) Assume that McCombs recognizes revenue upon project completion.
Required:
Compute the amount of gross profit recognized by McCombs during 2017 and 2018.
293) Silica Corporation constructs highly specialized communication satellites. A customer in
Hong Kong recently placed an order for a cable TV satellite at a price of $20 million. The order
was placed in April 2018, and the satellite is to be delivered in one year. The customer has
guaranteed to pay in full at the end of 2018, regardless of progress or cancellation. Silica uses
“proportion of time” as its measure of progress toward completion.
Required:
When should Silica recognize revenue: at completion, or as the construction is performed?
294) Hans Cars & Trucks sells various types of used vehicles with a one-year warranty that
covers any defects. When customers make a purchase, they also receive a coupon for 10 free
engine oil changes and an option to change all of the tires for $50 after 30,000 miles. Typically,
customers pay $25 for an oil change and $250 for a new set of tires.
Required:
(a) Given the information above, how many performance obligations exist in the contract to
purchase a vehicle?
(b) Assume the same contract but that it offers customers an option to change all of the tires for
$250 after 30,000 miles. How many performance obligations exist in the contract to purchase a
vehicle?
295) Lexikon Pianos sells customized concert pianos throughout the U.S. Its grand concert piano
sells for $200,000, which includes delivery and installation. The product comes with a two-year
warranty that covers any product defects, and customers can choose to add an extended three–
year warranty for maintenance and repair at a price of $2,000. Customers also get an option to
upgrade traditional plastic keys to bone ones for an additional $20,000. The extended warranty
would normally sell for $3,500, and the installation of bone keys carries a standalone price of
$30,000.
Required:
(a) Given the information above, how many performance obligations exist in the contract to
purchase a grand concert piano?
(b) Now, assume that the standalone price of the extended warranty is $2,000, and that of the
bone key upgrade is $20,000. How many performance obligations exist in the contract to
purchase a grand concert piano?
296) Summerhill Construction builds luxury houses in remote areas. On June 1, 2018, the
company signed a contract to build a house in an undeveloped section of a mountainside, and
received $2 million in advance for the job. To complete the project, the company must construct
a pathway leading to the building lot, clear a large hillside, and construct a wooden house.
Normally, the company would charge $400,000, $1,400,000, and $500,000, respectively, for
each of these tasks if done separately.
Required:
Given the information above, how many performance obligations are included in this contract?
297) Optimus Pools, Inc. constructs outdoor swimming pools for wealthy individuals. Recently it
obtained an order to build a three-lane swimming pool of 25 yards in length in the customer’s
backyard. Under the contract, Optimus is also obligated to install a water heater and a filtration
system, which are necessary to make a swimming pool fully functional. Total price for the
construction was $55,000. Each of these smaller components would typically cost $40,000,
$10,000, and 20,000 if installed separately.
Required:
Given the information above, how many performance obligations are included in this contract?
298) FlexMotors, Inc. manufactures a variety of electronic drills and grass cutters. Recently, it
introduced a new line of handheld drills that generates much less noise and consumes much less
energy, but carries a much higher price tag. The company is currently considering whether it
should record $1.2 million of revenue upon shipment. Under the contract, FlexMotors is
obligated to accept any products from the distributors if they are not sold within 6 months. The
company is confident that the new model will sell, but is unable to accurately estimate returns,
because it has never sold anything quite like it.
Required:
How much revenue should FlexMotors recognize upon shipment to distributors?
299) Horowitz Paint Shop sold $3,000 of paint to a local construction company for cash on June
25, 2018. Because of a flood in the area, the customer requested that Horowitz not ship the items
from its warehouse until July 3, 2018, so Horowitz set aside the paint on June 25, packaged and
ready to ship on July 3.
Required:
For the second quarter ending on June 30, how much revenue should Horowitz
recognize for the sale to the local construction company? Explain your answer.
300) On December 28, 2018, Omega Steel, Inc. sold $100,000 of steel sheets to a car
manufacturer. Due to holidays, Omega was unable to find a truck driver to deliver the product.
Delivery was finally made on January 5, 2019.
Required:
How much revenue should Omega recognize in 2018 for the sale to the car manufacturer?
Explain your answer.
301) The following disclosure note appeared in a recent annual report to stockholders of Dell
Inc., the computer manufacturer: “Net revenue includes sales of hardware, software and
peripherals, and services (including extended service contracts and professional services). These
products and services are sold either separately or as part of a multiple-element arrangement.
Dell allocates fees from multiple-element arrangements to the elements based on the relative fair
value of each element, which is generally based on the relative list price of each element. For
sales of extended warranties with a separate contract price, Dell defers revenue equal to the
separately stated price. Revenue associated with undelivered elements is deferred and recorded
when delivery occurs. Product revenue is recognized, net of an allowance for estimated returns,
when both title and risk of loss transfer to the customer, provided that no significant obligations
remain. Revenue from extended warranty and service contracts, for which Dell is obligated to
perform, is recorded as deferred revenue and subsequently recognized over the term of the
contract or when the service is completed. Revenue from sales of third-party extended warranty
and service contracts, for which Dell is not obligated to perform, is recognized on a net basis at
the time of sale.”
Briefly explain why Dell Computer recognizes revenue at different times for (a) product sales,
(b) extended warranty and service contracts for which Dell is obligated to perform, and (c)
extended warranty and service contracts for which a third party is obligated to perform.
302) Are the following separate performance obligations: prepayments, quality-assurance
warranty, extended warranty, right of return? For each, indicate yes or no, and explain.
303) Explain two approaches a seller can use to estimate variable consideration, and when each
approach is likely to be more appropriate.
304) Are sellers ever constrained from including variable consideration in the transaction price
used to estimate revenue? Explain, providing indicators of circumstances that could require that
constraint.
305) Briefly describe at least two indicators that can be used to distinguish whether a seller is a
principal or an agent according to GAAP.
306) Explain the differences between how a principal and agent would show a sale of a product
that has gross revenues of $1,000, cost of goods sold of $750, and a commission paid by the
principle of 10% of gross sales on their respective income statements.
307) Explain briefly how a company who sells to distributors with a right of return might
manage earnings if the company was falling short of profit projections. What sort of ethical
problems could result from that earnings management?
308) Many high-tech companies sell products with the opportunity for retailers to return the
merchandise if it is unsold after a certain period. This reduces the retailer’s risk of inventory
obsolescence. Explain the implications on revenue recognition under this kind of policy. Include
a specific example.
309) Briefly explain the circumstances in which license revenue is recognized over time versus
at a point in time. Provide an example of each.
310) Briefly explain the circumstances that indicate the seller has a bill-and-hold sale and a
consignment sale, and how that affects the timing of revenue recognition for each.
311) Briefly explain the difference between an account receivable, a contract asset, and a
contract liability, with respect to balance sheet disclosure.
312) What is the objective of disclosures about revenue recognition? Indicate at least two
common types of important revenue recognition disclosures.
313) Imagine that the Ace Construction Company (ACC) concludes that it must switch from
recognizing revenue on long-term contracts over time according to percentage of completion to
recognizing revenue upon completion of each contract. Assume that none of their construction
projects are going to produce a loss. Is it possible that, in a particular year, ACC will show
higher gross profit under the new approach (recognizing revenue upon contract completion) than
they did under the old approach (recognizing revenue over time according to percentage of
completion)? Explain.
314) Briefly explain how a company that recognized revenue over time by estimating percentage
of completion using a cost-to-cost ratio could manage earnings upward to meet a profit
projection. What sort of ethical problems could result from that earnings management?
315) Briefly explain how gross profit is recorded when revenue on long-term construction
projects is recognized over time according to percentage of completion.
316) Under what circumstances can revenue on long-term construction contracts be recognized
over time according to percentage of completion?