construction contracts
c.
Cost of construction
2,000,000
Gross profit
1,000,000
Revenue from long-term
construction contracts
3,000,000
d.
Construction in progress
1,200,000
Cost of construction
600,000
Revenue from long-term
construction contracts
1,800,000
232. Summary data for Benedict Construction Co.’s (BCC) Job 1227, which was completed in
2016, are presented below:
Bid price
$450,000
Contract cost:
2015
(180,000
)
2016
(195,000
)
Gross profit:
75,000
Estimated cost to
complete:
12/31/2015 $200,000
12/31/2016 0
Assuming BCC used the cost recovery method to recognize revenue under IFRS, what
would gross profit have been in 2015 and 2016 (rounded to the nearest thousand)?
2015
2016
$36,000
$39,000
$30,000
$45,000
$70,000
$ 5,000
$ 0
$75,000
Use the following to answer questions 233–235:
Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus
operating fees of $500 per month. The initial fee covers site selection, training, computer and
accounting software, and on-site consulting and troubleshooting, as needed, over the first five
years. On March 15, 2015, Tim Cruise signed a franchise contract, paying the standard $6,000
down with the balance due over five years with interest.
233. Assuming that the initial services to be performed by Flapper Jack’s subsequent to the
signing are substantial and that collection of the receivable is reasonably assured, the
journal entry required at signing would include a credit to:
a. Unearned franchise fee revenue for $36,000.
b. Unearned franchise fee revenue for $30,000.
c. Franchise fee revenue for $36,000.
d. Franchise fee revenue for $ 6,000.
Cash
234. Assume that at the time of signing the contract, collection of the receivable was assured
and that service obligations were substantial. However, by October 20, 2015,
substantially all continuing obligations had been met. The journal entry required at
October 20, 2015 would include a:
a. Credit to franchise fee receivable for $27,000.
b. Debit to unearned franchise fee revenue for $36,000.
c. Credit to franchise fee revenue for $9,000.
d. Debit to unearned franchise fee revenue for $27,000.
235. Assume at March 15, 2015, the time of signing the contract, collection of the receivable
was reasonably assured and there were no significant continuing obligations. The journal
entry at signing would include a:
a. Credit to franchise fee revenue for $36,000.
b. Credit to franchise fee revenue for $9,000.
c. Credit to unearned franchise fee revenue for $36,000.
d. Credit to unearned franchise fee revenue for $27,000.
Use the following to answer questions 236–238:
The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000
for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and
administrative assistance. Steffi Hingis signs a franchise agreement with RS.
236. Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS
can recognize revenue associated with the $50,000:
a. When Steffi signs the agreement and pays the cash.
b. As soon as RS has assisted Steffi in setting up the store.
c. Gradually as RS provides advertising and administration services.
d. Only after the store has operated long enough for the chance of business failure to be
remote.
237. Assume that Steffi signed a $50,000 installment note when she signed the
franchise agreement. RS can recognize revenue associated with the $50,000:
a. When Steffi signs the agreement, so long as RS has sufficient experience with similar
arrangements to estimate uncollectible accounts.
b. As soon as RS has assisted Steffi in setting up the store, so long as RS has sufficient
experience with similar arrangements to estimate uncollectible accounts.
c. Gradually as RS provides advertising and administration services.
d. When RS receives installment payments from Steffi, so long as RS has sufficient
experience with similar arrangements to estimate uncollectible accounts.
238. Assume that Steffi signed a $50,000 installment note when she signed the franchise
agreement. RS has no experience estimating uncollectible accounts associated with these
sorts of notes. RS can recognize:
a. $50,000 of revenue when Steffi signs the agreement.
b. $50,000 of revenue as soon as it has assisted Steffi in setting up the store.
c. Revenue under the installment sales method, starting when Steffi signs the
agreement.
d. Revenue under the installment sales method, as soon as it has assisted Steffi in setting
up the store.
Use the following to answer questions 239–240:
Sullivan Software sells packages of a software program and one year’s worth of technical
support for $500. Its packaging lists the $500 sales price as comprised of a software program at a
price of $450 and technical support with a price of $100, with a $50 discount for the package
deal. All of Sullivan’s sales are for cash, and there are no returns. Sullivan sells the software
program separately for $475 and offers a year of technical support separately for $75.
239. Sullivan should recognize revenue for the two parts of the arrangement as follows:
a. Recognize the entire $500 when the customer pays cash to buy the package.
b. Recognize the portion of the $500 attributable to the software program when the
customer pays cash to buy the package; defer the portion attributable to technical
support and recognize over the support period.
c. Defer the entire $500 and recognize over the support period.
d. Recognize the entire $500 upon conclusion of the support period.
240. The amount of revenue that GAAP, regarding software revenue recognition, would
require Sullivan to attribute to the software program (as opposed to the technical
support) is (rounded):
a. $450.
b. $475.
c. $432.
d. $400.
241. GAAP that covers revenue recognition for multiple-element arrangements requires that a
seller recognize revenue for a particular part if:
a. The part has value on a stand-alone basis.
b. Customer acceptance of the part is not contingent on successful delivery of a later
part.
c. The part constitutes at least a “preponderance of the fair value” of the total
arrangement.
d. Both the part has value on stand-alone basis and customer acceptance of the part is
not contingent on successful delivery of a later part are required.
242. Under GAAP, with respect to multiple-element arrangements, if the revenue for a
particular part of a multiple-element arrangement does not qualify for separate
recognition, it is:
a. Never recognized.
b. Recognized when the contract is signed or persuasive evidence of an arrangement
exists.
c. Recognized when revenue for the other parts is recognized.
d. Recognized at the end of the contract.
243. “VSOE” stands for:
a. “Vendor–specific objective evidence.”
b. “Vendor substantiation of earnings.”
c. “Value–specified operating earnings.”
d. “Variable set overhead earned.”
244. “VSOE” is necessary to separately recognize revenue in multiple-element contracts for:
a. All service contracts.
b. All product contracts.
c. All contracts that involve at least one non-software element.
d. Software contracts.
Problems
244. Squeaky Shine provides car washing services in Jersey City, New Jersey. A
three-month pass for automatic car wash sells for $60, which entitles the customer for an
unlimited number of car washes during the contract period. Squeaky Shine estimates that pass
holders wash their cars equally throughout the three-month period. On December 1st,
customers purchased $1,260 of the three-month passes, with purchases of the passes
occurring evenly throughout December.
Required:
1) Prepare the journal entries that Squeaky Shine would record on December 1 and on December
31, 2016, with respect to this transaction.
2) State the account titles and amounts that will be included in Squeaky Shine’s 2016 income
statement and balance sheet.
245. Assume that a customer enrolls in AAA’s Premier Membership, which provides 12
months of roadside assistance for $120. On August 1, 2016, a customer purchases a contract
that runs from that date through July 31, 2017. Given that roadside assistance requests occur
equally throughout the contract period, AAA uses “proportion of time” as its measure of
progress toward completion.
Required:
1) Prepare the journal entries that AAA would record on August 1 and on December 31, 2016,
with respect to this transaction.
2) State the amounts included in relevant accounts in AAA’s 2016 income statement and
balance sheet.
246. Lux Hotels, Inc. has signed a service outsourcing contract with Deluxe Rooms, Inc. for
$3 million, which was received in cash at contract inception. Under the agreement, Deluxe
Rooms is obligated to clean and prepare over 5,000 hotels rooms managed by Lux Hotel on a
daily basis from August 1, 2016 to July 31, 2017.
Required: Prepare any journal entry that Delux would record:
(1) at inception of the contract and
(2) at the end of 2016 to recognize all revenue associated with this contract that should be
recognized in 2016.
247. Poseidon Corporation, based in Greece, specializes in painting cargo ships. On
December 1, 2016 Poseidon received $300,000 in advance from Worldwide Shipping, Inc. to
paint a 40,000-ton cargo vessel. The painting process is scheduled to begin on December 1,
2016, and the ship is to be returned to Worldwide in four months. Worldwide retains legal
title to the ship during the contract period, and can sell the ship to another shipper during the
contract period if it so chooses.
Required: Assuming Poseidon uses “proportion of time” as its measure of progress toward
completion, prepare any journal entry that Poseidon would record:
(1) at inception of the contract
(2) at the end of 2016 to recognize all revenue associated with this contract that should be
recognized in 2016. Ignore any costs associated with providing the painting service.
248. Accorsi & Sons specializes in selling and installing upscale home theater systems. On
March 1, 2016, Accorsi sold a premium home theater package that includes a projector, set of
surround speakers, and high quality leather seats, along with complete installation service, for
$32,500. If sold separately, each of these goods and services would have cost $15,000
(projector), $12,500 (speakers), $17,500 (seats), and $3,000 (installation), respectively.
Required:, How much of the transaction price would be allocated to the projector, the speakers,
the leather seats, and the installation service, assuming that each of these four parts of the
contract is a separate performance obligation? Show your work.
249. Baldi Piano manufactures customized pianos for concert halls. On July 1, 2016, Baldi
signed a contract to deliver a concert piano for $150,000. Under the contract, Baldi is also
obligated to provide a one-year maintenance service. If sold separately, the piano and the
maintenance service would have cost $140,000 and $20,000, respectively.
Required: How much of the transaction price would be allocated to the piano and the
maintenance service, assuming they are separate performance obligations? Show your work.
Use the following information for questions 250-251:
The Rink offers annual $200 memberships that entitle members to unlimited use of ice-skating
facilities and locker rooms. Each new membership also entitles the member to receive ten “20%
off a $5 meal” coupons that are redeemable at the Rink’s snack bar. The Rink estimates that
approximately 80% of the coupons will be redeemed, and that, if the coupons weren’t redeemed,
$5 meals still would be discounted by 5% because of ongoing promotions.
250. Calculate how much of the transaction price should be allocated to each performance
obligation in the contract. Show your work.
251. Prepare the journal entry to recognize the sale of a new membership. Clearly identify
revenue or deferred revenue associated with each performance obligation.
252. Antonio’s Car Services provides maintenance services for motorized vehicles. In
March 2016, Rick placed an order for a new set of tires for $350. When a customer purchases
goods and services in excess of $300, Antonio’s gives the customer a 25% discount coupon
for future purchases made in the next three months. Antonio’s estimates that approximately
80% of customers utilize the coupon and that on average those customers will purchase goods
and services that typically sell for $75.
Required:
(a) How many performance obligations are in Rick’s contract? Explain the reasons for your
answer.
(b) Prepare a journal entry to record revenue for this transaction, assuming that Antonio’s uses
the residual method to estimate the stand-alone selling price of new tires sold without the
discount coupon.
253. DGA Associates, Inc. sells computer workstations designed for architects. In 2016, it sold
120 workstations for $360,000. For each workstation sold, DGA distributed a 40% discount
coupon for any additional future purchases made in the next 12 months. Based on historical
experience, DGA expects that approximately 30% of the coupons will be utilized, and the
goods purchased with the coupons would normally sell for $350.
Required:
(a) How many performance obligations are in a contract to purchase a computer workstation?
Explain the reasons for your answer.
(b) Prepare a journal entry to record revenue for the sale of 120 computer workstations,
assuming that DGA uses the residual method to estimate the stand-alone selling price of the
workstations sold without the discount coupon.
254. On February 12, 2016, Mohawk Home and Garden enters into contract with a local
business to provide weekly grass-cutting services between May and September of that year,
and receives $2,000 in advance. As part of a local business promotion, Mohawk offers a 50%
discount on any barbecue grill with a list price in excess of $200. In the past, Mohawk
charged the same amount ($2,000) for the same weekly grass-cutting service, but without the
grill discount coupon. Based on historical experience with other clients, Mohawk estimates
that about 40% of the coupons will be redeemed, purchasing grills with an average total list
price of $400.
Required:
(a) How many performance obligations are in this contract? Explain the reasons for your
answer.
(b) Prepare the journal entry to account for the transaction as of February 12, 2016, clearly
identifying the revenue or deferred revenue associated with each performance obligation.
255. Mammoth Publishing, Inc. owns a weekly magazine called “Nova Health,” and sells
annual subscriptions for $96. Customers prepay their subscription fee and receive 52 issues
starting in the following month. The company also offers new subscribers a 25% discount
coupon on its other weekly magazine called “Fishing & Camping,” which has a list price of
$84 for an annual subscription. Mammoth estimates that approximately 10% of the discount
coupons will be redeemed.
Required:
(a) How many performance obligations are in a single subscription contract? Explain the
reasons for your answer.
(b) Prepare the journal entry to account for one new subscription of “Nova Health,” clearly
identifying the revenue or deferred revenue associated with each performance obligation.