18–61
PROBLEM 18-13 (Continued)
Balance at repossession ………….. $360*
18–62
PROBLEM 18-14
(a) 1. SAPRANO COMPANY
Schedule to Compute Cost
of Goods Sold on Installments
For 2012, 2013, and 2014
2012
2013
2014
Purchases:
1,400 units at $130
($182,000
1,200 units at $112
$134,400
900 units at $136
*$122,400
*An alternative valuation of the repossessed merchandise would be
at an amount to earn the normal gross profit for the period.
**($122,400 + $3,000) ÷ (900 + 50) = $132
2. SAPRANO COMPANY
Schedule to Compute Average Unit Cost
of Goods Sold on Installments
For 2012, 2013, and 2014
2012 ($182,000 ÷ 1,400)
2014 ($125,400* ÷ 950**)
Repossessed:
50 units at $60
Inventory at December 31:
2014 (950 – 850) X $132**
Cost of goods sold
18–63
PROBLEM 18-14 (Continued)
(b) SAPRANO COMPANY
Schedule to Compute Gross Profit Percentages
For 2012, 2013, and 2014
2012
2013
2014
Sales:
1,100 units at $200
$220,000
1,500 units at $170
$255,000
800 units at $205
$164,000
$57,800 ÷ $170,000
34%
(c) SAPRANO COMPANY
Schedule to Compute Loss on Repossessions
For 2014
50 units at $120
6,000
Cost of goods sold
Gross profit
$ 77,000
$ 81,600
$ 57,800
Gross profit percentages:
$77,000 ÷ $220,000
$81,600 ÷ $255,000
PROBLEM 18-14 (Continued)
(d) SAPRANO COMPANY
Schedule to Compute Net Income
From Installment Sales
For 2014
Gross profit realized on installment sales:
2014 ($34,600 X 34%) ………………………………………… $11,764
18–65
(a) MONAT CONSTRUCTION COMPANY, INC.
Computation of Billings on Uncompleted Contract
In Excess of Related Costs
December 31, 2012
MONAT CONSTRUCTION COMPANY, INC.
Computation of Cost of Uncompleted Contract
In Excess of Related Billings
December 31, 2013
Balance, December 31, 2012—excess of
billings over costs …………………………..…………………. $ (260,000)
PROBLEM 18-15 (Continued)
MONAT CONSTRUCTION COMPANY, INC.
Computation of Costs Relating to Substantially
Completed Contract in Excess of Billings
December 31, 2014
Balance, December 31, 2014 …………………………………….. $ 100,000
(b) MONAT CONSTRUCTION COMPANY, INC.
Computation of Profit or Loss to be Recognized
On Uncompleted Contract
Year Ended December 31, 2012
18–67
PROBLEM 18-15 (Continued)
MONAT CONSTRUCTION COMPANY, INC.
Computation of Loss to be Recognized
On Uncompleted Contract
Year Ended December 31, 2013
Contract price ……………………………………… $4,400,000
Deduct contract costs:
(The completed-contract method requires that provision should be
made for an expected loss.)
MONAT CONSTRUCTION COMPANY, INC.
Computation of Loss to Be Recognized
On Substantially Completed Contract
Year Ended December 31, 2014
PROBLEM 18-16
Dear Sue:
This letter regards the revenue recognition matter which we discussed earlier.
By using a recognition method called percentage-of-completion, you will
show a profit in every year of the construction project, assuming, of course,
that no unexpected losses occur.
The percentage-of-completion method, on the other hand, presumes that,
as portions of the contract are completed, part of the gross profit is being
earned as well. Therefore, it attempts to measure the degree of the
project’s completion at each year-end. (This method assumes that the
contract will be completed.)
In succeeding periods, the above ratio becomes larger as the project nears
completion. (If the estimated costs to complete the contract have changed,
the ratio’s denominator as well as its numerator should be adjusted.) The
new ratio will still be applied to the total contract price or gross profit, this
time subtracting out the portion of revenue (or gross profit) already
recognized in earlier periods.
18–69
PROBLEM 18-16 (Continued)
2012 and 2013 actually allow you to show a profit before the project has been
finished. In addition, where applicable, generally accepted accounting princi-
ples require the use of the percentage-of-completion method in preference
to the completed-contract method.
PROBLEM 18-16 (Continued)
Percentage-of–Completion Method
Three-Year Schedule of Gross Profit Recognition
Gross profit recognized in 2012:
Contract price ……………………………………… $1,100,000
Gross profit recognized in 2013:
Contract price ……………………………………… $1,100,000
Costs:
Costs to date …………………………..…………… $600,000
Estimated additional costs ……………………. 200,000 800,000
Total estimated profit …………………………... 300,000
Percentage completion to date
($600,000/$800,000) …………………………... X 75%
Total gross profit recognized ………………… 225,000
Less: Gross profit recognized in 2012 ….. 90,000
Gross profit recognized in 2013 …………….. $ 135,000
18–71
(a) Schedule to Compute Gross Profit for 2012
A
B
C
D
E
Estimated profit (loss):
A: ($300,000 – $320,000)
$(20,000)
B: ($350,000 – $339,000)
$11,000
C: ($280,000 – $186,000)
$94,000
D: ($200,000 – $205,000)
$(5,000)
E: ($240,000 – $200,000)
$40,000
Schedule to Compute Unbilled Contract Costs
and Recognized Profit and Billings
in Excess of Costs and Recognized Profit
Costs and
Estimated Profits
or Losses
Related
Billings
Costs and
Estimated Profits
in Excess of Billings
Billings in Excess
of Costs and Estimated
Profits
A
D
A: (not applicable)
B: ($67,800 ÷ $339,000)
C: ($186,000 ÷ $186,000)
D: (not applicable)
E: ($190,000 ÷ $200,000)
Gross profit (loss) recognized
$(20,000)
$94,000
PROBLEM 18-17 (Continued)
(b) Partial Income Statement
Revenue from long-term contracts …………………………………. $925,622*
Costs of construction
($252,500 + $67,800 + $186,000 + $120,122 + $190,000) …. 816,422
Gross profit ……………………………………………………….………….. $109,200
Partial Balance Sheet
Current assets:
Accounts receivable
($830,000 – $765,000) ………………………….. $ 65,000
Inventories
Construction in process …………………………. $569,000***
Less: Billings ………………………………………… 440,000***
Costs and recognized profits
in excess of billings
(project A, D, and E) ……………………….. 129,000
18–73
PROBLEM 18-17 (Continued)
(c) Schedule to Compute Gross Profit for 2012
A
B
C
D
E
A: ($300,000 – $320,000)
$(20,000)
B: Not completed
–0–
Schedule to Compute Unbilled Contract Costs
and Billings in Excess of Costs
Costs and
Estimated Profits
or Losses
Related
Billings
Costs and
Estimated Losses
in Excess of Billings
Billings in Excess
of Costs
a$248,000 – $20,000
b$118,000 – $ 5,000
(d) The principal advantage of the completed-contract method is that it
reports revenue based on the final results and not on estimates made
PROBLEM 18-17 (Continued)
On the other hand, the percentage–of–completion method does recog-
nize revenue and gross profit before the completion of a project. If Buhl
can determine reliable estimates of its progress and meets the other
picture one year and the next year present a picture that is not as good.
The end results will be the same under either method and so the differ–
ence is simply one of timing. Therefore, if a company can determine
18–75
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 18-1 (Time 20–30 minutes)
Purpose—to provide a situation that requires an examination and application of the earning and
realization elements of three revenue recognition methods. The three business situations require the
computation of revenue to be recognized.
CA 18-2 (Time 35–45 minutes)
Purpose—to provide the student with an understanding of the conceptual merits of recognizing revenue
at the point of sale. The student is required to explain and defend the reasons why the point of sale is
usually used as the basis for the timing of revenue recognition, plus describe the situations where
revenue would be recognized during production or when cash is received, and the accounting merits of
utilizing each of these bases of timing revenue recognition.
CA 18-3 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the conceptual factors underlying the
recognition of revenue. The student is required to explain and justify why revenue is often recognized
as earned at the time of sale, the situations when it would be appropriate to recognize revenue as the
productive activity takes place, and any other times that may be appropriate to recognize revenue.
CA 18-4 (Time 30–35 minutes)
Purpose—to provide the student with an understanding of the criteria and applications utilized in the
determination of the proper accounting for revenue recognition. The student is required to discuss the
factors to be considered in determining when revenue should be recognized, plus apply these factors in
discussing the accounting alternatives that should be considered for the recognition of revenues and
related expenses with regard to the information presented in the case.
CA 18-5 (Time 35–45 minutes)
Purpose—to provide the student an opportunity to explain how a magazine publisher should recognize
subscription revenue. The case is complicated by a 25% return rate and a premium offered to
subscribers. The effect on the current ratio must be discussed.
CA 18-6 (Time 20–25 minutes)
Purpose—to provide the student an opportunity to discuss the theoretical justification for use of the
percentage-of-completion method. The student explains how progress billings are accounted for and
how to determine the income recognized in the second year of a contract by the percentage-
of-completion method. The student indicates the effect on earnings per share in the second year of
a four-year contract from using the percentage-of-completion method instead of the completed-contract
method.
CA 18-7 (Time 30–40 minutes)
Purpose—provides the student a recreational real estate development for which revenue recognition
requires analysis and good judgment. The sale of lake lots is the basic transaction.
CA 18-8 (Time 25–30 minutes)
Purpose—to provide the student an ethical situation concerning revenue related to various transactions.
Issues include membership fees, down payments, and sales with guarantees.
CA 18-9 (Time 20–25 minutes)
Purpose—to provide the student an ethical situation related to the recognition of revenue from
membership fees.
18–76
Time and Purpose of Concepts for Analysis (Continued)
*CA 18-10 (Time 35–45 minutes)
Purpose—to provide the student with an understanding of the accounting treatment accorded franchis-
ing operations. The student is required to discuss the alternatives that the franchisor might use to
account for the initial franchise fee, evaluate each by applying generally accepted accounting principles
to the case situation, and give an illustrative journal entry for each alternative. The student is also asked
to apply the above concepts in determining when revenue should be recognized, given the nature of
the franchisor’s agreement with its franchisees.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 18-1
(a) Definitions and descriptions of each of the three noted revenue recognition methods, and an
indication as to whether they are in accordance with generally accepted accounting principles
(GAAP), are presented below.
1. The completion-of-production method allows revenue to be recognized when production
is complete even though a sale has not yet been made. The circumstances that justify
revenue recognition at this point are:
2. The percentage-of-completion method is used on long-term projects and the following
conditions must exist for its use:
• A firm contract price with a high probability of collection.
• A reasonably accurate estimate of costs.
• A way to reasonably estimate the extent of progress to the completion of the project.
3. The installment-sales method allows revenue to be recognized when cash is collected
rather than at the point of sale. Due, in part, to improved credit procedures that increase the
likelihood of collection, the installment-sales method of recognizing revenue is generally
1. Farber Mining would recognize as revenue the market value of metals mined during the
year.
CA 18-1 (Continued)
2. Enyart Paperbacks would recognize revenue of $5,600,000, calculated as follows.
Sales in fiscal 2012 ………………………………. $7,000,000
Less: Estimated sales returns
3. Glesen Protection Devices would recognize revenue of $5,000,000. Revenue to be recog-
nized represents the amount of goods actually billed and shipped when the method of
recognizing revenue is at the point of sale (terms are F.O.B. shipping point).
CA 18-2
(a) The point of sale is the most widely used basis for the timing of revenue recognition because in
most cases it provides the degree of objective evidence accountants consider necessary to reliably
measure periodic business income. In other words, sales transactions with outsiders represent
the point in the revenue-generating process when most of the uncertainty about the final outcome
of business activity has been alleviated.
(b) 1. Though it is recognized that revenue is earned throughout the entire production process,
generally it is not feasible to measure revenue on the basis of operating activity. It is not
feasible because of the absence of suitable criteria for consistently and objectively arriving
at a periodic determination of the amount of revenue to recognize.
18–79
CA 18-2 (Continued)
factor in the earnings process and substitutes for it the administrative function of managing
and collecting receivables. In other words, the investment of funds in receivables should be
regarded as a policy designed to increase total revenues, properly recognized at the point
of sale, and the cost of managing receivables (e.g., bad debts and collection costs) should
major source of revenue is long-term construction projects. For these firms the point of sale
is far less significant to the earnings process than is production activity because the sale is
assured under the contract (except of course where performance is not substantially in
accordance with the contract terms).
To defer revenue recognition until the completion of long-term construction projects could
2. When cash is received. The most common application of this basis for the timing of
revenue recognition is in connection with installment-sales contracts. Its use is justified on
the grounds that, due to the length of the collection period, increased risks of default, and
CA 18-3
(a) Most merchandising concerns deal in finished products and would recognize revenue at the point
of sale. This is often identified as the moment when the title legally passes from seller to purchaser.
At the point of sale, there is an arm’s–length transaction to objectively measure the amount of
revenue to be recognized. With accounting theory based heavily on objective measurement, it is
logical that point-of-sale transaction revenue recognition would be used by many firms, especially
merchandising concerns.
(b) For service-type transactions, revenue is generally recognized on the basis of the seller’s perform–
ance of the transaction with performance being the execution of a defined act or acts or the passage
of time. Service-type firms may select from recommended methods to recognize revenue:
(1) specific performance method, (2) completed performance method, (3) proportional performance
method, and (4) collection method.
In some non-service firms, revenue can be recognized as the productive activity takes place
instead of at a later period (as at point of sale). The most common situation where revenue is
recognized as production takes place has been through the application of percentage-of–
(c) Revenue is sometimes recognized at completion of the production activity, or after the point of
sale. The recognition of revenue at completion of production is justified only if certain conditions
are present. The necessary conditions are that there must be a relatively stable market for the
product, marketing costs must be nominal, and the units must be homogeneous. These three
necessary conditions are not often present except in the case of certain precious metals and
agricultural products. In these situations it has been considered appropriate to recognize revenue
at the completion of production.