PROBLEM 18-1B
(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 18-1B (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
PROBLEM 18-1 (Continued)
Oracle Books Division
Sales—fiscal 2014 …………………………………………………. $15,000,000
Less: Sales returns and allowances (25%) ……………… 3,250,000
Net sales—revenue to be recognized in fiscal 2014 …. $11,750,000
PROBLEM 18-2B
(a)
2014
2016
Contract price
$3,000,000
$3,000,000
Less estimated cost:
Costs to date
800,000
2,580,000
Estimated cost to complete
—
Estimated total cost
Estimated total gross profit
$ 420,000
PROBLEM 18-3B
(a) Gross profit recognized in:
2014
2015
2016
Contract price
$7,800,000
$7,800,000
$7,800,000
Costs:
$2,000,000
$4,060,000
$6,200,000
0
Total estimated
profit
Total gross profit
recognized
Less: Gross profit
recognized in
previous years
0
600,000
1,400,000
Gross profit
recognized in
current year
$ 600,000
$ 800,000
$ 200,000
PROBLEM 18-3B (Continued)
(c) JIAQIAN COMPANY
Balance Sheet (Partial)
December 31, 2015
PROBLEM 18-4B
(a)
2014
2015
2016
Contract price
$40,000,000
$40,000,000
$39,900,000
Less estimated cost:
Costs to date
4,500,000
12,500,000
32,000,000
Estimated cost to complete
Estimated total cost
Estimated total gross profit
$10,000,000
Less 2014 recognized
gross profit
1,500,000
Gross profit in 2015
$2,000,000
2016:
Less 2014–2015 recognized
gross profit
3,500,000
Gross profit in 2016
PROBLEM 18-5B
(a) The completed-contract method of revenue recognition recognizes income
only upon completion of a project or shipment of a product. All associ–
ated costs are expensed at the point of sale, and there are no interim
1. Assuming that all costs are incurred, all billings to customers are
made, and all collections from customers are received within 30
days of billing, the Limerock’s revenue, cost of sales, and gross
(1)
(2)
(3)
(4)
(5)
(6)
2014
$12,000
$3,000
$10,000*
$2,000
30%
2015
72%
2016
PROBLEM 18-5B (Continued)
Revenue recognition
Year
Contract
Price
Percent
Complete
Revenue
Recognizable
Less Prior
Year(s)
Current
Year
3,360
2. Assuming the same facts as in Instruction (b)1., but that cost
overruns of $1,200,000 were experienced in 2014, Limerock’s
revenue, costs of sales, and gross profit for 2014, 2015, and 2016
(1)
(2)
(3)
(4)
(5)
(6)
2014
$12,000
$4,200
$11,200*
$800
37.5%
2015
12,000
8,400
11,200
800
75.0%
Contract
Percent
Revenue
$4,500
PROBLEM 18-B5 (Continued)
Profit recognition
3. Assuming the same facts as in Instructions (b)1. and (b)2., but that
additional cost overruns of $900,000 are experienced in 2015,
Limerock’s revenue, cost of sales, and gross profit for 2014, 2015,
(1)
(2)
(3)
(4)
(5)
(6)
2014
$12,000
$4,200
$11,200
$800
37.5%
2015
12,000
9,300*
12,100
(100)
76.9%
2016
12,000
12,100
12,100
(100)
100.0%
$3,000
9,228
$3,000
PROBLEM 18-6B
(a) Computation of Recognizable Profit/Loss
Percentage-of–Completion Method
2014
Costs to date (12/31/14) ……………………………………. $3,400,000
PROBLEM 18-6B (Continued)
*Alternative
Revenue recognized in 2016
($9,600,000 X 34.8%) …………………………………….. $3,341,000
PROBLEM 18-7B
(a) Computation of Recognizable Profit/Loss
Percentage-of–Completion Method
2014
Costs to date (12/31/14) …………………………………………. $ 600,000
PROBLEM 18-7 (Continued)
*2016 revenue
($2,600,000 – $650,000 – $796,000) ……………… $ 1,154,000
Less: 2016 estimated costs …………………………... 1,200,000
2016 loss …………………………………………….. $ (46,000)
(b) Computation of Recognizable Profit/Loss
Completed-Contract Method
2014—NONE
2015
Costs to date (12/31/15)…………………………………… $1,500,000
PROBLEM 18-8B
(a)
Rate of gross profit
(
Gross profit
Sales
)
2014
2015
2016
36%
34%
35%
Gross profit realized:
35% of $140,000
Cash ……………………………………………………….………… 290,000
Installment Accounts Receivable (2014) ………. 40,000
Installment Accounts Receivable (2015) ………. 110,000
Installment Accounts Receivable (2016) ………. 140,000
Cost of Installment Sales …………………………..………. 240,500
PROBLEM 18-9B
2014
2015
2016
Sales
$705,000
$780,000
$835,000
Cost of sales
491,000
525,000
549,000
Gross profit
214,000
255,000
286,000
Total gross profit
229,000
292,300
395,000
Selling expenses
Administrative expenses
Net income
Calculation of gross profit realized on installment sales:
Rate of gross profit
* 33%*
** 36%**
40%***
Gross profit realized:
30% of $ 50,000
$15,000
30% of $ 30,000
$ 9,000
35% of $ 80,000
28,000
30% of $ 20,000
35% of $140,000
33% of $162,000
$15,000
PROBLEM 18-10B
(a) Rate of gross profit on 2014 installment sales:
Deferred gross profit on repossessions
$14,000 – $2,600 – $6,500 = $4,900
$4,900 ÷ $14,000 = 35%
(b) Installment Sales Revenue …………………………..….. 180,000
Cost of Installment Sales ………………………….. 126,000
Deferred Gross Profit (2015) …………………….. 54,000
Deferred Gross Profit (2014) ……………………………. 36,400
Deferred Gross Profit (2015) ……………………………. 3,600
PROBLEM 18-10B (Continued)
(c) MATEY STORES
Income Statement