3-16
Miscellaneous administrative expense 3,000
Interest expense 8,000 (13,250)
Net income $31,500
Alternate Solution
Production Basis
Selling and delivery expense: 15,000 bu. @ $.15 = 2,250
Miscellaneous administrative expense 3,000
Interest expense _8,000 (13,250)
Operating income 19,000
1Revenues should be recorded at net realizable value which is equal to the current selling price
Requirement 2: Income on sales basis
AgriPro
Income Statement
Sales Basis
Revenues: 15,000 bu. @ $3.00 = $45,000
Cost of goods sold:
000,5$
3-17
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Inventory carrying (book) value: 5,000 bu. @ $.85 = $4,250
Accounts receivable: 15,000 bu. @ $3.00 x 20% = $9,000
Requirement 3: Cash collection basis
AgriPro
Income Statement
Cash Collections Basis
Revenues:
15,000 bu. @ $3.00 = $45,000
Selling and delivery expense: 15,000 bu. x $.15 = $2,250
3-18
P3-3 Determining pre-tax income, inventory carrying value, and accounts
receivable under sales and production basis.
Requirement 1: Production basis
Production Basis
Barrels available 30,000
Ending inventory (6,000)
Barrels sold 24,000
Alternative Production Basis
Sales (24,000 barrels x $28.00) $672,000
3-19
Requirement 2: Sales Basis
Sales (completed transaction) Basis
Barrels available
30,000
Ending inventory
(6,000)
Barrels sold
24,000
Sales (24,000 x $28)
$672,000
Cost of oils produced:
Direct production costs (24,000 x $12)
(288,000)
Depreciation expense ($180/30 x 24,000)
(144,000)
Gross profit
240,000
Property taxes
(75,000)
Income before income taxes
$165,000
Accounts receivable ($672,000 x 40%)
$268,800
Inventory carrying value:
$108,000
((6,000 x $12) + ($180/30 x 6,000))
Requirement 3: Installment Basis
Installment Basis
Barrels available 30,000
Ending inventory (6,000)
Barrels sold 24,000
[(6,000 x $12) + ($180/30 x 6,000)]
3-20
P3-4. Income recognition on long-term contracts.
Requirement 1:
a. No income will be recognized in 2014 under the completed-contract
method as the project is not complete.
b.
Income for 2014
=
$8,000,000
x ($30,000,000 – $24,000,000)
$24,000,000
=
.33 x
$6,000,000 = $2,000,000
Note: Materials purchased but not used are not included in the numerator of
the cost percentage for 2014 but are included in the estimated total project
costs ($8,000,000 + $15,500,000 + $500,000).
Requirement 2:
Percentage of completion
Completed
contract
DR Construction in progress
$8,000,000
DR Material inventory
500,000
(same)
CR Cash
$8,500,000
DR Accounts receivable
$9,000,000
(same)
CR Billings on contract
$9,000,000
DR Cash
$7,500,000
(same)
CR Accounts receivable
$7,500,000
DR Construction in progress
$2,000,000
DR Construction expenses
8,000,000
(No entry)
CR Construction revenue
$10,000,000
P3-5. Long-term construction contract accounting
(AICPA adapted)
Completed–Contract Method
Year 2014
DR Construction in progress
CR Cash, payables, materials, etc.
$290,000
$290,000
DR Accounts receivable
CR Billings on contract
$260,000
$260,000
DR Cash
$240,000
CR Accounts receivable
$240,000
Since the project is incomplete, no revenue is recognized for the year
2014.
Balance Sheet Presentation at the End of 2014
Completed-Contract Method
Current Assets:
Construction in progress
Less: Billings on contract
Unbilled costs of construction
Accounts receivable
$290,000
(260,000)
$30,000
$20,000
Year 2015
DR Construction in progress
CR Cash, payables, materials, etc.
$150,000
$150,000
DR Accounts receivable
CR Billings on contract
$265,000
$265,000
DR Cash
CR Accounts receivable
$285,000
$285,000
DR Billings on contract
CR Construction in progress
CR Income on long-term
construction contracts
$525,000
$440,000
85,000
Alternate entry:
DR Construction expense
DR Billings on contract
CR Construction in progress
CR Construction revenue
$440,000
525,000
$440,000
525,000
Percentage-of-Completion Method
Year 2014
DR Construction in progress
CR Cash, payables, materials, etc.
$290,000
$290,000
DR Accounts receivable
CR Billings on contract
$260,000
$260,000
DR Cash
CR Accounts receivable
$240,000
$240,000
CR Income on long-term
construction contracts
$60,000
Alternate entry:
DR Construction in progress1
DR Construction expense
CR Construction revenue
$ 60,000
290,000
$350,000
1Contract price
$525,000
– Actual costs to date
($290,000)
– Estimated costs to complete
(145,000)
Total estimated costs of project
(435,000)
Estimated total gross margin
$90,000
Revenue earned during the period: ($290,000/$435,000) x $525,000 = $350,000
Gross margin earned during the period: ($290,000/$435,000) x $90,000 = $60,000
Balance Sheet Presentation at the End of 2014
Percentage-of-Completion Method
Current Assets:
Construction in progress
Less: Billings on contract
Unbilled costs of construction
Accounts receivable
$350,000
(260,000)
$90,000
$20,000
Year 2015
DR Construction in progress
CR Cash, payables, materials, etc.
$150,000
$150,000
DR Accounts receivable
CR Billings on contract
$265,000
$265,000
DR Cash
CR Accounts receivable
$285,000
$285,000
DR Construction in progress
CR Income on long-term
construction contracts
$25,000
$25,000
Alternate Entry:
DR Construction in progress
$ 25,000
3-23
CR Construction revenue
$175,000
Total
2014
2015
Construction revenue
$525,000
$350,000
$175,000
Construction expense
(440,000)
(290,000)
(150,000)
Gross margin
$ 85,000
$ 60,000
$ 25,000
P3-6. Determining income under installment sales method
(AICPA adapted)
Income before income taxes on installment sale contract:
Calculations to determine interest income on installment sale contract:
P3-7. Jensen Construction Company
Data for Jensen Construction Problem
2014
2015
2016
Actual construction costs incurred during the year
$
1,800,000
$ 1,255,000
$ 1,945,000
Actual construction costs incurred in prior years
–
–
1,800,000
3,055,000
Cumulative actual construction costs
1,800,000
3,055,000
5,000,000
Estimated costs to complete at end of year
$
2,700,000
$ 1,645,000
$ – –
Total construction costs
4,500,000
4,700,000
5,000,000
Billings made over the course of the year
$
1,750,000
$ 1,800,000
$ 2,450,000
Cash collections during the year
1,700,000
1,600,000
2,700,000
Percentage complete (actual costs ÷ estimated
total construction costs) (A)
40.0%
65.0%
100.0%
Estimated profit (contract price – total estimated
construction costs) (B)
$
1,500,000
$ 1,300,000
$ 1,000,000
Profits earned to date (C = A x B)
$
600,000
$ 845,000
$ 1,000,000
Profit recognized in current year (C − Profit
previously recognized)
$
600,000
$ 245,000
$ 155,000
year to recognize profit for the year.
3-26
P3-8. Construction accounting under both U.S. GAAP and IFRS when a
contract loss occurs.
2014
2015
2016
Actual construction costs incurred during the year
$ 1,800,000
$ 1,255,000
$ 3,045,000
Actual construction costs incurred in prior years
–
1,800,000
3,055,000
Cumulative actual construction costs
1,800,000
3,055,000
6,100,000
Estimated costs to complete at end of year
$ 2,700,000
$ 3,045,000
$ –
Total construction costs
4,500,000
6,100,000
6,100,000
Billings made over the course of the year
$ 1,750,000
$ 1,800,000
$ 2,450,000
Cash collections during the year
1,700,000
1,600,000
2,700,000
Percentage complete (actual costs ÷ estimated
total construction costs) (A)
40.0%
50.1%
100.0%
Estimated profit (contract price – total estimated
construction costs) (B)
$ 1,500,000
$ (100,000)
$ (100,000)
Profits earned to date (C = A x B)
$ 600,000
$ (100,000)
$ (100,000)
Profit recognized in current year (C − Profit
previously recognized)
$ 600,000
$ (700,000)
$ –
3-27
Jensen Construction Company
Computation of Recognizable Profit/Loss
Percentage of Completion Method
Total Estimated Loss in 2015 = $100,000
2014
Costs to date (12/31/14) $1,800,000
Estimated costs to complete 2,700,000
Estimated total costs $4,500,000
2016
Total revenue recognized $6,000,000
Less: Revenue recognized in 2015 and 2015 (3,006,000)
3-28
2015:
DR Construction expense
$1,306,000
CR Construction revenue
$606,000
CR Construction in progress (loss
recognized)
700,000
2016:
DR Construction expense
$2,994,000
CR Construction revenue
$2,994,000
3-29
P3-9. Accounting for installment sales under U.S. GAAP and IFRS.
Sales amount on 7/1/2014
$ 500,000
Cost of goods sold
$ 300,000
Cost %
60%
Gross margin %
40%
7/1/2014
7/1/2015
7/1/2016
7/1/2017
Cash collections
$ 125,000
$ 125,000
$100,000
$ 75,000
US GAAP:
Revenue1
125,000
125,000
100,000
75,000
Costs recognized as
expenses2
75,000
75,000
60,000
45,000
Profits recognized3
50,000
50,000
40,000
30,000
IFRS:
Revenue1
125,000
125,000
100,000
75,000
Costs recognized as
expenses
125,000
125,000
50,000
–
Profits recognized4
–
–
50,000
75,000
2014:
DR Cash
$125,000
DR Installment Accounts Receivable
375,000
CR Installment sales revenue
$500,000
DR Cost of installment goods sold
$300,000
CR Inventory
$300,000
DR Deferred gross profit
$150,000
CR Deferred gross profit—adjustment to
accounts receivable
$150,000
2015:
DR Cash
$125,000
CR Installment Accounts Receivable
$125,000
3-30
DR Deferred gross profit—adjustment to accounts
receivable
$50,000
CR Recognized gross profit on installment
sales
$50,000
2016:
DR Cash
$100,000
CR Installment Accounts Receivable
$100,000
DR Deferred gross profit—adjustment to accounts
receivable
$40,000
CR Recognized gross profit on installment
sales
$40,000
DR Cash
$75,000
CR Installment Accounts Receivable
$75,000
DR Deferred gross profit—adjustment to accounts
receivable
$30,000
CR Recognized gross profit on installment
sales
$30,000
DR Cash
$125,000
DR Installment Accounts Receivable
375,000
CR Inventory
$300,000
CR Deferred gross profit—adjustment to
accounts receivable
200,000
DR Cost of installment goods sold
$125,000
CR Installment sales revenue
$125,000
2015:
DR Cash
$125,000
CR Installment Accounts Receivable
$125,000
DR Cost of installment goods sold
$125,000
CR Installment sales revenue
$125,000