EXERCISE 18-7 (Continued)
2. 6/3 Accounts Receivable (Ann Mount) ………… 7,840
Sales Revenue
[$8,000 – (2% X $8,000)] ………………. 7,840
6/5 Sales Returns and Allowances ……………… 588
EXERCISE 18-8 (10–15 minutes)
(a) Cash ……………………………………………………………………… 240,000
Rent Revenue
EXERCISE 18-8 (continued)
(b) The marina operator should recognize that advance rentals generated
$190,400 ($152,000 + $38,400) of cash in exchange for the marina’s
EXERCISE 18-9 (15–20 minutes)
(a) Inventoriable costs:
80 units shipped at cost of $500 each ………… $40,000
Freight ……………………………………………………… 840
Total inventoriable cost ………………………. $40,840
EXERCISE 18-10 (10–15 minutes)
(a) The conditions for a multiple-deliverable arrangement exist for Appliance
Center since the delivered item has value to the customer on a stand–
EXERCISE 18-11 (5–10 minutes)
(a) Cash …………………………………………………………………. 50,000
EXERCISE 18-12 (20–25 minutes)
(a) Gross profit recognized in:
2014
2015
2016
Contract price
$1,600,000
$1,600,000
$1,600,000
Costs:
$400,000
$825,000
Total estimated profit
to date
recognized
years
EXERCISE 18-12 (Continued)
(b) Construction in Process ($825,000 – $400,000) …. 425,000
Materials, Cash, Payables …………………………. 425,000
Accounts Receivable ($900,000 – $300,000) ……… 600,000
EXERCISE 18-13 (10–15 minutes)
(a) Contract billings to date ………………………………….. $61,500
Less: Accounts receivable 12/31/14 ………………… 18,000
EXERCISE 18-14 (10–12 minutes)
DOUGHERTY INC.
Computation of Gross Profit to be
Recognized on Uncompleted Contract
EXERCISE 18-15 (25–30 minutes)
(a) 1. Gross profit recognized in 2014:
Contract price ………………………………………… $1,200,000
Costs:
Costs to date …………………………………… $280,000
2. Construction in Process ($600,000 – $280,000) … 320,000
Materials, Cash, Payables ……………………….. 320,000
Accounts Receivable ($500,000 – $150,000) ……. 350,000
Billings on Construction in Process ………… 350,000
Cash ($320,000 – $120,000) ……………………………. 200,000
EXERCISE 18-16 (15–20 minutes)
in 2014) = $1,320,000 (revenue recognized in 2015).
EXERCISE 18-16 (Continued)
(b) All $2,200,000 of the contract price is recognized as revenue in 2015.
(c) Using the percentage-of-completion method, the following entries
would be made:
EXERCISE 18-17 (15–25 minutes)
(a) Computation of Gross Profit to Be Recognized under Completed–
Contract Method.
EXERCISE 18-17 (Continued)
(b) Computation of Gross Profit to Be Recognized under Percentage–of–
Completion Method.
Total contract price ……………………………………………………. $6,000,000
EXERCISE 18-18 (15–25 minutes)
BERSTLER CONSTRUCTION COMPANY
Partial Income Statement
Year Ended December 31, 2014
EXERCISE 18-18 (Continued)
BERSTLER CONSTRUCTION COMPANY
Partial Balance Sheet
December 31, 2014
EXERCISE 18-19 (15–20 minutes)
(a) Computation of gross profit recognized:
2014
2015
$370,000 X 34%*
$125,800
$450,000 X 32%**
$125,800
EXERCISE 18-19 (Continued)
Cash ………………………………………………………………. 800,000
Installment Accounts Receivable, 2014 ………… 350,000
EXERCISE 18-20 (15–20 minutes)
(a) Deferred Gross Profit, 2014 ……………………………… 2,800*
Deferred Gross Profit, 2015 ……………………………… 12,800**
Deferred Gross Profit, 2016 ……………………………… 69,400***
Realized Gross Profit ……………………………….. 85,000
EXERCISE 18-20 (Continued)
(b) Cash collected in 2016 on accounts receivable of 2014:
EXERCISE 18-21 (15–20 minutes)
Gross Profit Rate—2014: ($750,000 – $510,000) ÷ $750,000 = 32%
Gross Profit Rate—2015: ($840,000 – $588,000) ÷ $840,000 = 30%
(a) Balance, December 31, 2014:
Deferred Gross Profit Account—2014 Installment Sales
EXERCISE 18-21 (Continued)
(b) Repossessed Merchandise ……………………………….. 8,000
EXERCISE 18-22 (10–15 minutes)
BECKER CORPORATION
Income before Income Taxes on Installment-Sale Contract
For the Year Ended December 31, 2014
EXERCISE 18-23 (10–15 minutes)
(a) Realized gross profit recognized in 2015 under the installment-sales
and 21.875% respectively.
EXERCISE 18-23 (Continued)
Sale Year
Gross Profit Percentage
2015
Collections
2015
Realized Profit
1. As a current liability on the theory that it is related to Installment
Accounts Receivables that are normally treated as current assets;
3. As an adjustment or offset to the related Installment Accounts
Receivable. This is because the deferred gross profit is a part of reve–
nue from installment sales not yet realized. The related receivable
will be overstated unless the deferred gross profit is deducted.
EXERCISE 18-24 (15–20 minutes)
(a) Computation of gross profit realized—cost-recovery method:
Cash
Original
Cost
Balance of
Unrecovered
Gross
Profit
EXERCISE 18-25 (10–15 minutes)
1. Repossessed Merchandise …………………………………… 800
Deferred Gross Profit (30% X $1,080*)……………………. 324
Installment Accounts Receivable ……………………. 1,080*
2. Repossessed Merchandise …………………………………… 750
Deferred Gross Profit (20% X $780*) ……………………… 156
Installment Accounts Receivable ……………………. 780*
EXERCISE 18-26 (15–20 minutes)
Cash ………………………………………………………………………… 500
Installment Accounts Receivable ………………………… 500
Deferred Gross Profit (30% X $500) ……………………………. 150
Realized Gross Profit …………………………………………. 150
Discount on Notes Receivable
[$42,000 – (2.48685* X $14,000)] ……………….. 7,184
Revenue from Franchise Fees …………………….. 62,816
(b) Cash …………………………………………………………………. 28,000
Unearned Franchise Fees ……………………………. 28,000
Present value of an ordinary annuity
($8,000 X 3.69590) ……………………………….. 29,567.20
Total revenue recorded by Campbell and
total acquisition cost recorded by
Lesley Benjamin ………………………………….. $39,567.20
2. $10,000 cash received from down payment.
TIME AND PURPOSE OF PROBLEMS
Problem 18-1 (Time 30–45 minutes)
Purpose—the student defines and describes the point of sale, completion of production, percentage-of–
Problem 18-2 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of both the percentage-of-completion and
Problem 18-3 (Time 25–35 minutes)
Purpose—to provide the student with an understanding of the percentage-of-completion method of
Problem 18-4 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of both the accounting procedures involved
Problem 18-5 (Time 25–30 minutes)
Problem 18-6 (Time 20–25 minutes)
Purpose—to provide the student with a long-term construction contract problem that requires the
Problem 18-7 (Time 20–25 minutes)
Purpose—to provide the student with a long-term construction contract problem that requires the
Problem 18-8 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the proper accounting under the installment-
Problem 18-9 (Time 30–35 minutes)
Purpose—to provide the student with an understanding of the installment-sales method of accounting
Problem 18-10 (Time 30–40 minutes)
Purpose—to provide the student with an understanding of the applications of the installment-sales
Problem 18-11 (Time 20–25 minutes)
Problem 18-12 (Time 40–50 minutes)
Purpose—to provide the student with an understanding of the applications of the installment-sales
Problem 18-13 (Time 20–25 minutes)
Problem 18-14 (Time 50–60 minutes)
Purpose—to provide the student with an understanding of the installment-sales method of accounting
Problem 18-15 (Time 20–30 minutes)
Purpose—to provide the student with a problem requiring the computation of “cost of uncompleted
Problem 18-16 (Time 40–50 minutes)
Problem 18-17 (Time 50–60 minutes)
PROBLEM 18-1
(a) 1. The point of sale method recognizes revenue when the earnings
2. The completion-of-production method recognizes revenue only when
the project is complete and the contract is completed. This is used
primarily with short-term contracts, or with long–term contracts when
3. The percentage-of-completion method of revenue recognition is
used on long-term projects, usually construction. To apply it, the
following conditions must exist:
(i) A firm contract price with a high probability of collection.
PROBLEM 18-1 (Continued)
recognized to that date. That total less the income that was recog–
4. The installment-sales method may be applicable when the sales
price is received over an extended period of time. The installment–
sales method recognizes revenue as the cash is collected and is used
when the collection of the sales price is not reasonably assured.
This method is commonly used for tax purposes, but it is not in