7-61 Solutions
7.48 continued.
c. The percentage-of-completion method probably gives the best measure
7.49 (Furniture Retailers; revenue recognition when payment is uncertain.)
a. Installment Method
(1) January 2008
Accounts Receivable ………………………………………… 8,400
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+8,400
–6,800
+1,600
(2) When Furniture Retailer Receives Each Payment
The customer will make 21 payments of $400 each. The gross margin
Cash ………………………………………………………………. 400
Deferred Gross Margin …………………………………….. 76
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+400
–76
–324
IncSt → RE
–400
+400
IncSt → RE
Solutions 7-62
7.49 continued.
b. Cost Recovery Method
(1) January 2008
Accounts Receivable ………………………………………… 8,400
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+8,400
+1,600
–6,800
(2) When Each Payment is Received
The customer will make 21 payments of $400 each. Furniture
Retailers will recover the $6,800 cost of furniture after the customer
has made seventeen payments (= $6,800/$400). To record the first
seventeen payments, Furniture Retailers makes the following journal
entry:
Cash ………………………………………………………………. 400
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+400
+400
IncSt → RE
–400
–400
IncSt → RE
To record the last four payments, Furniture Retailers makes the
following journal entry:
Cash ………………………………………………………………. 400
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+400
–400
+400
IncSt → RE
–400
7-63 Solutions
7.50 (Appliance Sales and Service; revenue recognition when payment is
uncertain.)
a. Customer makes all 10 payments.
(1) Installment Method
July 2008
The customer will make 10 payments of $244 each, so the total
Accounts Receivable ………………………………………… 2,440
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+2,440
+220
–2,220
When Each Payment Is Received. When each monthly payment is
Cash ………………………………………………………………. 244
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+244
–22
+244
IncSt → RE
–244
–222
IncSt → RE
(2) Cost Recovery Method
July 2008
The customer will make 10 payments of $244 each. Appliance Sales
Solutions 7-64
7-65 Solutions
7.50 a. continued.
Accounts Receivable ………………………………………… 2,440
Inventory …………………………………………………….. 2,220
Deferred Gross Margin …………………………………. 220
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+2,440
+220
–2,220
To Record the First Nine Payments of $244:
Cash ………………………………………………………………. 244
Cost of Goods Sold …………………………………………… 244
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+244
+244
IncSt → RE
–244
–244
IncSt → RE
To Record the Last Payment of $244. Note that after the ninth
payment, Appliance Sales and Service has recognized $2,196 (= 9 X
recognized on receipt of the last payment.
Cash ………………………………………………………………. 244
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+244
+220
+244
IncSt → RE
–244
–24
IncSt → RE
Solutions 7-66
7.50 continued.
b. Customer stops making payments after November 2008.
(1) Installment Method
Deferred Gross Margin …………………………………….. 110
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+980
–110
–130
IncSt → RE
–1,220
(2) Cost Recovery Method
The customer has made the first five payments (July–November,
2008) so the amount owed is $1,220 [= $2,440 – (5 X $244)].
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+980
–220
–20
IncSt → RE
–1,220
7-67 Solutions
7.51 (J. C. Spangle; point-of-sales versus installment method of income
recognition.)
a. 2008 2007
Sales …………………………………………………….. $ 300,000 $ 200,000
Expenses:
Cost of Goods Sold/Sales:
b. 2008 2007
Collections from Customers ……………………. $ 230,000 $ 90,000
*Calculation 2008 2007
Merchandise Cost of Collections:
Of Goods Sold:
An Alternative Presentation Would Be: 2008 2007
Solutions 7-68
7-69 Solutions
7.52 (Picking Chicken; revenue recognition for a franchise.)
a. Year Pickin Chicken, Inc. Country Delight, Inc.
2006 $ 400,000 (= $50,000 X 8) $ 160,000 (= $20,000 X 8)
b. The issue here is whether sufficient uncertainty exists regarding the
amount the firm will ultimately collect to justify postponing revenue
7.53 (Income recognition for various types of businesses.)
a. Amgen—The principal income recognition issue for Amgen is the
significant lag between the incurrence of research and development
Brown Forman—The principal revenue recognition issue for Brown
Forman is whether it should recognize the increase in value of hard
liquors while they are aging (that is, revalue the liquors to market
Solutions 7-70
7-71 Solutions
7.53 a. continued.
Deere—Deere faces issues of revenue recognition with respect to both
the sale of farm equipment to dealers and the provision of financing
services. The concern with respect to the sale of farm equipment to
Deere should accrue revenue from financing (interest) and
Fluor—The appropriate timing of revenue recognition for Fluor
depends on the basis for pricing its services. If the fee is fixed for any
particular construction project, then Fluor should recognize the fee in
Golden West—Golden West should recognize interest revenue from
home mortgage loans as time passes. It should provide for estimated
Solutions 7-72
7-73 Solutions
7.53 a. continued.
Merrill Lynch—The principal income recognition issue for Merrill
Lynch is whether it should report financial instruments held as assets
and liabilities at their acquisition cost or their current fair value.
These assets and liabilities generally have easily measured fair
values. They are typically held for short periods of time (days or
Rockwell—The absence of research and development expense from
the income statement suggests that Rockwell charges all such costs to
specific contracts. These costs become expenses as Rockwell
recognizes revenue from the contracts. The multi-year nature of its
b. Amgen—Amgen realized the highest profit margin of the seven
companies. Its biotechnology products are protected by patents. It
Solutions 7-74
7-75 Solutions
7.53 b. continued.
Brown Forman—Brown Forman realized the third highest profit
margin among the seven companies. If one views the excise taxes as a
reduction in revenues rather than as an expense, its profit margin is
Deere—Deere’s relatively low profit margin reflects (1) weaknesses in
the farming industry in recent years, which puts downward pressure
Fluor—The low profit margin of Fluor reflects the relatively low
thin.
Golden West—The 12% profit margin (ignoring an addback for
interest expense, which is common for financial services firms) seems
Solutions 7-76
Merrill Lynch—The lower profit margin for Merrill Lynch relative to
Golden West reflects in part the fact that both the investments and
financing of Merrill Lynch are short term. Merrill Lynch, however,
7-77 Solutions
7.53 b. continued.
Rockwell—Rockwell’s profit margin is in the middle of the seven
companies. Factors arguing for a high profit margin include
7.54 (Understanding the purpose of the Allowance for Uncollectible Accounts
account.)
This case has the following history. Over the last several years, we have
lectured to audit committee, and other board members, about the meaning
of the requirement that audit committee members be financially literate,
as specified by the New York Stock Exchange and the NASDAQ in its
a. This response does not address the question. Judging the adequacy of
the allowance account focuses on estimating the portion of accounts
b. This response demonstrates an understanding of the need to match
estimated uncollectibles with sales of the period. Although the
Solutions 7-78
7-79 Solutions
7.54 continued.
c. This response demonstrates an understanding that the allowance
account should reflect the estimated amounts of accounts receivable
that the firm does not expect to collect. It also shows that the CFO
d. This response demonstrates an accurate understanding of the purpose
e. This response does not address the question. The CFO addresses the
f. This confirmation of receivables simply evidences that a valid
g. This response demonstrates an understanding that the allowance
account should carry a sufficient balance to equal amounts from the
current and prior period’s sales that the firm does not expect to