exercises Exercise 5-1 Installment sales; alternative recognition methods ( LO1 LO2 On June 1, 2006, the Luttman and Dowd Company sold inventory to the Ushman Corporation for $400,000. Terms of the sale called for a down payment of $100,000 and four annual installments of $75,000 due on each June 1, beginning June 1, 2007. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster $150,000. The company uses the perpetual inventory system. Required: 1.
Compute the amount of gross profit to be recognized from the installment sale in 2006, 2007, 2008, 2009, and 2010 using point of delivery revenue recognition. Ignore interest charges. 2. Repeat requirement 1 applying the installment sales method. 3. Repeat requirement 1 applying the cost recovery method. Exercise 5-2 Construction accounting; percentage-of-completion and completed contract methods ( LO4 The Ugenti Construction Company contracted to construct a warehouse building for $2,600,000. Construction began in 2006 and was completed in 2007. Data relating to the contract are summarized below: 20062007Order now
Costs incurred during the year$ 360,000$1,650,000 Estimated costs to complete as of 12/311,560,000 – Billings during the year 430,000 2,130,000 Cash collections during the year320,000 2,280,000 Required: 1. Compute the amount of gross profit or loss to be recognized in 2006 and 2007 using the percentage-of-completion method. 2. Compute the amount of gross profit or loss to be recognized in 2006 and 2007 using the completed contract method. 3. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2006 using the percentage-of completion method. 4.
Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2006 using the completed contract method. Exercise 5-3 Percentage-of-completion method; loss projected on entire project ( LO4 On April 13, 2006, the Pagano Construction Company entered into a three-year construction contract to build a mall for a price of $12,000,000. During 2006, costs of $3,000,000 were incurred with estimated costs of $6,000,000 yet to be incurred. Billings of $3,800,000 were sent and cash collected was $3,250,000. In 2007, costs incurred were $4,000,000 with remaining costs estimated to be $5,600,000. 007 billings were $3,500,000 and $3,600,000 cash was collected. The project was completed in 2008 after additional costs of $5,800,000 were incurred. The company’s fiscal year-end is December 31. Arrow uses the percentage-of-completion method. Required: 1. Calculate the amount of gross profit or loss to be recognized in each of the three years. 2. Prepare journal entries for 2006 and 2007 to record the transactions described (credit “Various accounts” for construction costs incurred). 3. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2006 and 2007. Exercise 5-4
Franchise sales; revenue recognition ( LO5 On November 15, 2006, the Coldstone Ice Cream Company entered into a franchise agreement with an individual. In exchange for an initial franchise fee of $25,000, Coldstone will provide initial services to the franchisee to include assistance in design and construction of the building, help in training employees, help in obtaining financing, and management advice over the first five years of the ten-year franchise agreement. 50% of the initial franchise fee is payable on November 15, 2006, with the remaining $12,500 payable in five equal annual installments beginning on November 15, 2007.
These installments will include interest at an appropriate rate. The franchise opened for business on February 15, 2007. Required: Assume that the initial services to be performed by Coldstone subsequent to November 15, 2006, are substantial and that collectibility of the installment receivable is reasonably certain. Substantial performance of the initial services is deemed to have occurred when the franchise opened. Prepare the necessary journal entries for the following dates (ignoring interest charges): 1. November 15, 2006, and 2. February 15, 2007. Exercise 5-5
Evaluating efficiency of asset management ( LO6 The year 2006 income statement of Garret & Sons Music Company reported net sales of $10 million, cost of goods sold of $6 million, and net income of $1 million. The following table shows the company’s comparative balance sheets for 2006 and 2005: ($ in 000s) Assets:20062005 Cash$ 240$ 280 Accounts receivable800600 Inventory850700 Property, plant, and equipment (net) 2,600 2,520 Total assets$4,490$4,100 Liabilities and Shareholders’ Equity: Current liabilities$ 720$ 650 Notes payable 6001,000 Paid-in capital 2,0002,000
Retained earnings 1,170 450 Total liabilities and shareholders equity$4,490$4,100 Some industry averages for the company’s line of business are: _______________________________________ inventory turnover 6 times average collection period 28 days asset turnover 2times _______________________________________ Required: Assess Garret & Son’s asset management relative to its industry. Exercise 5-6 Profitability ratios ( LO6 The following condensed information was reported by Sanders Manufacturing, Inc. for 2006 and 2005: ($ in 000s) 20062005
Income statement information: Net sales$7,200$6,800 Net income 360 408 Balance Sheet information: Current assets$ 800$ 750 Property, plant, and equipment (net) 2,100 1,950 Total assets$2,900$2,700 Current liabilities$ 250$ 400 Long-term liabilities 950 750 Paid-in capital 1,000 1,000 Retained earnings 700 550 Liabilities and shareholders’ equity$2,900$2,700 Required: 1. Determine the following ratios for 2006: a. profit margin on sales b. return on assets c. return on shareholders’ equity 2. Determine the amount of dividends paid to shareholders during 2006. PROBLEMS Problem 5-1
Installment sales; alternative recognition methods ( LO1 LO2 On October 31, 2006, the Dionne Company sold merchandise to the Parker Corporation for $800,000. Terms of the sale called for a down payment of $200,000 and three annual installments of $200,000 due on each October 31, beginning October 31, 2007. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The book value of the merchandise on Dionne’s books on the date of sale was $400,000. The perpetual inventory system is used. The company’s fiscal year end is December 31. Required: 1.
Prepare a table showing the amount of gross profit to be recognized in each of the four years of the installment sale applying each of the following methods: a. Point of delivery revenue recognition. b. Installment sales method. c. Cost recovery method. 2. Prepare journal entries for each of the four years applying the three revenue recognition methods listed in requirement 1. Ignore interest charges. 3. Prepare a partial balance sheet as of the end of 2006 and 2007 listing the items related to the installment sale applying each of the three methods listed in requirement 1. Problem 5-2 Percentage-of-completion method LO4 In the year 2006, the Malinkrodt Construction Company entered into a contract to construct a road for Dade County for $15,000,000. The road was completed in 2008. Information related to the contract is as follows: 200620072008 Costs incurred during the year$4,000,000$4,800,000$4,200,000 Estimated costs to complete as of year-end8,000,000 4,000,000 – Billings during the year 3,500,000 5,000,000 6,500,000 Cash collections during the year2,800,000 5,600,000 6,600,000 Malinkrodt uses the percentage-of-completion method of accounting for long-term construction contracts. Required: 1.
Calculate the amount of gross profit to be recognized in each of the three years. 2. Prepare all necessary journal entries for each of the years (credit “Various accounts” for construction costs incurred). 3. Prepare a partial balance sheet for 2006 and 2007 showing any items related to the contract. 4. Calculate the amount of gross profit to be recognized in each of the three years assuming the following costs incurred and costs to complete information: 20062007 2008 Costs incurred during the year$4,000,000$4,200,000$7,200,000 Estimated costs to complete as of year-end8,000,000 7,100,000 –