© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
I
n
Cost of Goods
Sales Revenue
Accounts R
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r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
8-53Solutions
8.49 b. continued.
To record the last four payments, Furniture Retailers
………………………………………
Assets = Liabilities +
Shareholders’
Equity (Class.)
8.50 (Appliance Sales and Service; revenue recognition when
collection is uncertain.) (amounts in US$)
a. Customer makes all 10
payments. (1) Installment
Method
July
2013
The customer will make 10 payments of $244 each, so the
total amount owed is $2,440. The gross margin
Margin…………………………………..
Assets = Liabilities +
Shareholders’
Equity (Class.)
+2,440 +220
–2,220
Solutions8-54
8.50 a. continued.
When Each Payment Is Received. When each monthly
payment is received, Appliance Sales and Service will
recognize $244 revenue and
To Record the Last Payment of $244. After the ninth payment,
Appliance Sales and Service has recognized $2,196 (= 9 X $244) of the
total cost of goods sold of $2,220. The remainder, $24, is recognized on
receipt of the last payment.
8.51 (J. C. Spangle; point-of-sale versus installment method
of income recognition.) (amounts in US$)
a. 2013 2012
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
All Other
Expenses…………………………..
4
4
,
00
0
3
2
, 00
0
Net Income…………………………………………. $
4
5
, 60
0 $
4
, 00
0
8.52 (Pickin Chicken, Inc., and Country Delight, Inc.; revenue
recognition for a franchise.) (amounts in US$)
a. Year Pickin Chicken,
I
nc
.
Country Delight,
I
nc
.
2011 $ 400,000 (= $50,000 X 8) $ 160,000 (= $20,000 X 8)
2012 250,000 (= $50,000 X 5) 148,000 (= $20,000 X 5 +
$6,000 X 8)
2013 0 78,000 (= $6,000 X 13)
2014 0 78,000 (= $6,000 X 13)
2015 0 78,000 (= $6,000 X 13)
2016 0 78,000 (= $6,000 X 13)
2017
0
3
0
,
00
0
(=
Solution8-58
8.52 continued.
b. The issue here is whether suficient uncertainty exists
8.53 (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 expenditures and the realization of sales
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
8-59Solutions
8.53 a. continued.
predictable, then Deere can reduce the amount of revenue recognized
each year for estimated returns. If dealers can return any unsold
Deere should accrue revenue from financing (interest)
and
insurance (premiums) services over time. To achieve
matching, Deere should capitalize and amortize any initial
administrative costs to check customer credit quality and
prepare legal documents.
Fluor—The appropriate timing of revenue recognition for
Golden West—Golden West should recognize interest
revenue from home mortgage loans as time passes. It
should provide for estimated uncollectible accounts each
year. The uncollectible amount should reflect the resale
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Solutions8-60
8.53 a. continued.
the reasoning that the points cover the cost of originating
the loan. Both the points and the administrative costs
would be recognized in full in the initial year of the loan.
An alternative view is that the points efectively reduce the
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 fair value. These assets and
liabilities generally have easily measured fair values and may be held
for short periods (days or weeks). Thus, one can argue that use of
Rockwell Collins—The absence of research and
development expense from the income statement suggests
that Rockwell Collins charges all such costs to specific
contracts. These costs become expenses as Rockwell
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
8-61Solutions
8.53 continued.
b. Amgen—Amgen realized the highest profit margin of the
seven companies. Its biotechnology products are
protected by patents. It therefore maintains a monopoly
position. Note that the cost of manufacturing its products
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)
Fluor—The low profit margin of Fluor reflects the relatively
8.53 b. continued.
Golden West—The 12% profit margin (ignoring an addback for interest
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Merrill Lynch—The lower profit margin for Merrill Lynch
relative to Golden West reflects in part the fact that both
Rockwell Collins—This profit margin is in the middle of the
8.54 (Understanding the purpose of the Allowance for Uncollectible
Accounts account.)
This case has the following history. Over the last several
8.54 continued.
to ask follow-up questions for correct, but only partial, answers.
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
a. This response does not address the question. Judging the
adequacy of the allowance account focuses on estimating
the portion of accounts receivable that a firm does not
c. This response demonstrates an understanding that the
d. This response demonstrates an accurate understanding of
Solutions8-64
8.54 continued.
e. This response does not address the question. The CFO
f. This confirmation of receivables simply evidences
g. This response demonstrates an understanding that the
allowance account should carry a suficient balance to equal
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
amounts from the current and prior periods’ sales that the
firm does not expect to collect. It also shows a need to
assess the adequacy of the balance in the allowance
account each period. Finally, it shows the use of external
benchmarks to assess the adequacy of the amount of
bad debt expense. The one remaining response that
would have demonstrated even more understanding about
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
8-53Solutions
8.49 b. continued.
To record the last four payments, Furniture Retailers
………………………………………
Assets = Liabilities +
Shareholders’
Equity (Class.)
8.50 (Appliance Sales and Service; revenue recognition when
collection is uncertain.) (amounts in US$)
a. Customer makes all 10
payments. (1) Installment
Method
July
2013
The customer will make 10 payments of $244 each, so the
total amount owed is $2,440. The gross margin
Margin…………………………………..
Assets = Liabilities +
Shareholders’
Equity (Class.)
+2,440 +220
–2,220
Solutions8-54
8.50 a. continued.
When Each Payment Is Received. When each monthly
payment is received, Appliance Sales and Service will
recognize $244 revenue and
To Record the Last Payment of $244. After the ninth payment,
Appliance Sales and Service has recognized $2,196 (= 9 X $244) of the
total cost of goods sold of $2,220. The remainder, $24, is recognized on
receipt of the last payment.
8.51 (J. C. Spangle; point-of-sale versus installment method
of income recognition.) (amounts in US$)
a. 2013 2012
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
All Other
Expenses…………………………..
4
4
,
00
0
3
2
, 00
0
Net Income…………………………………………. $
4
5
, 60
0 $
4
, 00
0
8.52 (Pickin Chicken, Inc., and Country Delight, Inc.; revenue
recognition for a franchise.) (amounts in US$)
a. Year Pickin Chicken,
I
nc
.
Country Delight,
I
nc
.
2011 $ 400,000 (= $50,000 X 8) $ 160,000 (= $20,000 X 8)
2012 250,000 (= $50,000 X 5) 148,000 (= $20,000 X 5 +
$6,000 X 8)
2013 0 78,000 (= $6,000 X 13)
2014 0 78,000 (= $6,000 X 13)
2015 0 78,000 (= $6,000 X 13)
2016 0 78,000 (= $6,000 X 13)
2017
0
3
0
,
00
0
(=
Solution8-58
8.52 continued.
b. The issue here is whether suficient uncertainty exists
8.53 (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 expenditures and the realization of sales
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
8-59Solutions
8.53 a. continued.
predictable, then Deere can reduce the amount of revenue recognized
each year for estimated returns. If dealers can return any unsold
Deere should accrue revenue from financing (interest)
and
insurance (premiums) services over time. To achieve
matching, Deere should capitalize and amortize any initial
administrative costs to check customer credit quality and
prepare legal documents.
Fluor—The appropriate timing of revenue recognition for
Golden West—Golden West should recognize interest
revenue from home mortgage loans as time passes. It
should provide for estimated uncollectible accounts each
year. The uncollectible amount should reflect the resale
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Solutions8-60
8.53 a. continued.
the reasoning that the points cover the cost of originating
the loan. Both the points and the administrative costs
would be recognized in full in the initial year of the loan.
An alternative view is that the points efectively reduce the
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 fair value. These assets and
liabilities generally have easily measured fair values and may be held
for short periods (days or weeks). Thus, one can argue that use of
Rockwell Collins—The absence of research and
development expense from the income statement suggests
that Rockwell Collins charges all such costs to specific
contracts. These costs become expenses as Rockwell
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
8-61Solutions
8.53 continued.
b. Amgen—Amgen realized the highest profit margin of the
seven companies. Its biotechnology products are
protected by patents. It therefore maintains a monopoly
position. Note that the cost of manufacturing its products
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)
Fluor—The low profit margin of Fluor reflects the relatively
8.53 b. continued.
Golden West—The 12% profit margin (ignoring an addback for interest
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Merrill Lynch—The lower profit margin for Merrill Lynch
relative to Golden West reflects in part the fact that both
Rockwell Collins—This profit margin is in the middle of the
8.54 (Understanding the purpose of the Allowance for Uncollectible
Accounts account.)
This case has the following history. Over the last several
8.54 continued.
to ask follow-up questions for correct, but only partial, answers.
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
a. This response does not address the question. Judging the
adequacy of the allowance account focuses on estimating
the portion of accounts receivable that a firm does not
c. This response demonstrates an understanding that the
d. This response demonstrates an accurate understanding of
Solutions8-64
8.54 continued.
e. This response does not address the question. The CFO
f. This confirmation of receivables simply evidences
g. This response demonstrates an understanding that the
allowance account should carry a suficient balance to equal
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
amounts from the current and prior periods’ sales that the
firm does not expect to collect. It also shows a need to
assess the adequacy of the balance in the allowance
account each period. Finally, it shows the use of external
benchmarks to assess the adequacy of the amount of
bad debt expense. The one remaining response that
would have demonstrated even more understanding about