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P3–16. General Motors restatement
Requirement 1
Requirement 2
Requirement 3
Requirement 4
Requirement 5
Recognizing the entire amount in the year of receipt (or credit being granted) of a
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P3–17. Solution— Onerous Performance Obligations
Requirement 1:
Allocate the bundle price as follows:
Software 80/100 x $85,000 = $68,000
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Financial Reporting and Analysis (6th Edition)
Chapter 3 Solutions
Additional Topics in Income Determination
Cases
C3–1. Criswell’s Farm: Alternate bases of income determination
Requirement 1:
Production Sales Collection
Realized revenue $162,000 $162,000 $108,000
Cost of goods sold (31,500) _(31,500) (21,000)
Requirement 2:
Ending inventory
($3.60 – $.20) x 15,000 bu. $ 51,000
$.50 x 15,000 bu. $7,500 $7,500
Requirement 3:
Production Sales
Realized revenues $ 42,000 $42,000
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The $31,500 profit on the sales basis is more difficult to explain. It can’t be
attributable to 2015 farming profit since Criswell didn’t farm in 2015. Similarly,
it can’t be considered speculative profit since Criswell incurred a 2015 loss of
$12,000 on speculation. The $31,500 figure is really a mixture of $43,500 of
C3–2. Determining gross profit under the percentage-of-completion method
Requirement 1:
London, Inc.
Schedule of Gross Profit (Loss)
Beta Gamma
For the Year Ended September 30, 2015:
For year ended September 30, 2016:
Estimated gross profit (loss):
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Percent complete 100% 80%
Requirement 2:
London Inc.
Schedule of Selected Balance Sheet Accounts
September 30, 2015
Accounts receivable $115,000
($315,000 + $440,000 – $275,000 – $365,000 = $115,000)
Costs and estimated earnings in excess of billings for Beta:
Requirement 3:
Under the completed-contract method London would recognize a loss of
$20,000 on the Gamma project in 2015. In 2016, London would recognize
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C3-3. Earnings management
The ethical issues involved are integrity and honesty in financial reporting, full
disclosure, and accountant’s professionalism. In violating GAAP, the Chief
Accounting Officer also violated the AICPA’s Code of Professional Conduct.
Various parties were affected by the conduct of the Chief Accounting Officer
false and misleading financial statements.
• Mystery Technologies’ auditors were named in shareholder lawsuits filed
as a result of the false and misleading financial statements. The firm’s
professional reputation cannot be enhanced by the fact that the firm did
not detect earnings management schemes involving millions of dollars.
share price may have been purely the result of a down market at the time,
suits were filed that allege otherwise.)
C3-4. Franchise sales
Requirement 1:
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by the phrase “substantially performed all material services” in the company’s
revenue recognition policy. The franchisee’s restaurant had opened by the
Requirement 2:
Entries for 2014:
(1) To record signing of the franchise agreement and receipt of the initial
payment.
DR Installment receivables
$225,000
DR
Cash
75,000
CR Deferred franchise revenue
$300,000
(2) To record revenue when Big Daddy’s has substantially performed all
DR Deferred franchise revenue
$300,000
CR Franchise revenue
$300,000
(3) To accrue royalty revenue for the 4th quarter
DR Royalty revenue receivable
$4,300
CR Royalty revenue
$4,300
Royalty revenue = $215,000 franchisee sales in 4th quarter x .02 = $4,300
(4) To record accrued interest on the installment receivable at December 31,
2014
DR Interest receivable
$5,625
CR Interest revenue
$5,625
Interest revenue = Installment receivable balance x .05 x 6/12
= $225,000 x .05 x 6/12 = $5,625
(5) To record costs of providing franchise services
DR Franchise expenses
$28,000
CR Cash/various accounts
$28,000
Entries for 2015:
(1) To record receipt of royalty revenue accrued during the 4th quarter of 2014
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DR Cash
$4,300
CR Royalty revenue receivable
$4,300
(2) To record receipt of payment and interest on installment receivable
DR Cash
$33,750
CR Installment receivables
$22,500
CR Interest receivable
5,625
CR Interest revenue
5,625
Installment receivable ÷ term of agreement = Annual payment
= $225,000 ÷ 10 years = $22,500
(3) To record accrued interest on the installment receivable at December 31,
2015
DR Interest receivable
$5,063
CR Interest revenue
$5,063
(4) To record royalty revenue for the first 3 quarters
DR Cash
$13,460
CR Royalty revenue
$13,460
Royalty revenue collected
= $673,000 franchisee sales in first 3 quarters x .02 = $13,460
(5) To accrue royalty revenue for the 4th quarter
DR Royalty revenue receivable
$5,260
CR Royalty revenue
$5,260