________________________________________
Question 1: (10 points)
E 5-2 Installment sales method; journal entries LO2
Charter Corporation, which began business in 2006, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales during 2006 and 2007:
2006 2007
Installment sales $360,000 $350,000
Cost of installment sales 234,000 245,000
Cash collections on installment sales during:
2006 150,000 100,000
2007 — 120,000
Required:
Prepare summary journal entries for 2006 and 2007 to account for the installment sales and cash collections. The company uses the perpetual inventory system.
2006 To record installment sales
__________ ____________
__________ ____________
__________ ____________
2006 To record cash collections from installment sales
__________ ____________
__________ ____________
2006 To recognize gross profit from installment sales
__________ ____________
__________ ____________
2007 To record installment sales
__________ ____________
__________ ____________
__________ ____________
2007 To record cash collections from installment sales
__________ ____________
__________ ____________
2007 To recognize gross profit from installment sales
__________ ____________
__________ ____________
________________________________________
Question 2: (10 points)
E 5-3 Installment sales; alternative recognition methods LO2
On July 1, 2006, the Foster Company sold inventory to the Slate Corporation for $400,000. Terms of the sale called for a down payment of $100,000 and three annual installments of $100,000 due on each July 1, beginning July 1, 2007. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster $120,000. 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, and 2009 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.
Round final answers to nearest whole number, use unrounded numbers for interim calculations.
1. Year Income recognized
2006 $ ____________
2007 ____________
2008 ____________
2009 ____________
________________________________________
Total $ ____________
________________________________________________________________________________
2. Year Cash Collected Cost Recovery Gross Profit
2006 $ ____________ $ ____________ $ ____________
2007 ____________ ____________ ____________
2008 ____________ ____________ ____________
2009 ____________ ____________ ____________
________________________________________ ________________________________________ ________________________________________
Totals $ ____________ $ ____________ $ ____________
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
3. Year Cash Collected Cost Recovery Gross Profit
2006 $ ____________ $ ____________ $ ____________
2007 ____________ ____________ ____________
2008 ____________ ____________ ____________
2009 ____________ ____________ ____________
________________________________________ ________________________________________ ________________________________________
Totals $ ____________ $ ____________ $ ____________
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
________________________________________
Question 3: (15 points)
E 5-7 Long-term contract; percentage-of-completion and completed contract methods LO4
Nortel Networks contracted to provide a customer with Internet infrastructure for $2,000,000. The project began in 2006 and was completed in 2007. Data relating to the contract are summarized below:
2006 2007
Costs incurred during the year $ 300,000 $1,575,000
Estimated costs to complete as of 12/31 1,200,000 –0–
Billings during the year 380,000 1,620,000
Cash collections during the year 250,000 1,750,000
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.
1. Gross Profit Recognition: 2006 2007
2006: $ ____________
2007: $ ____________
2. Gross Profit Recognition:
2006 $ ____________
2007 $ ____________
3. Balance Sheet
At December 31, 2006
Current Assets:
Accounts Receivable $ ____________
Costs and Profit in Excess of Billings ____________
4. Balance Sheet
At December 31, 2006
Current Assets:
Accounts Receivable $ ____________
Current Liabilities:
Billings in Excess of Costs $ ____________
________________________________________
Question 4: (20 points)
E 5-10 Completed contract method; loss projected on entire project LO4
On February 1, 2006, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2006, costs of $2,000,000 were incurred with estimated costs of $4,000,000 yet to be incurred. Billings of $2,500,000 were sent and cash collected was $2,250,000.
In 2007, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2007 billings were $2,750,000 and $2,475,000 cash was collected. The project was completed in 2008 after additional costs of $3,800,000 were incurred. The company’s fiscal year-end is December 31. Arrow uses the completed contract 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.
Amounts in parenthesis do not require a minus sign.
1.
Year Gross profit (loss) recognized
2006 $ ____________
2007 ( ____________)
2008 ( ____________)
________________________________________
Total Project Loss $( ____________)
________________________________________________________________________________
2. 2006 2007
__________ ____________ ____________
Various Accounts ____________ ____________
To record construction costs.
__________ ____________ ____________
__________ ____________ ____________
To record progress billings.
__________ ____________ ____________
__________ ____________ ____________
To record cash collections.
__________ ____________
__________ ____________
To record an expected loss.
3. Balance Sheet 2006 2007
Current Assets:
Accounts Receivable $ ____________ $ ____________
Current Liabilities:
Billings in Excess of Costs $ ____________
Billings in Excess of Costs Less Loss $ ____________
________________________________________
Question 5: (50 points)
E 5-11 Income (loss) recognition; percentage-of-completion and completed contract methods compared LO4
Brady Construction Company contracted to build an apartment complex for a price of $5,000,000. Construction began in 2006 and was completed in 2008. The following are a series of independent situations, numbered 1 through 6, involving differing costs for the project. All costs are stated in thousands of dollars.
Estimated Costs to Complete
Costs Incurred During Year (As of the End of the Year)
Situation 2006 2007 2008 2006 2007 2008
1 1,500 2,100 900 3,000 900 —
2 1,500 900 2,400 3,000 2,400 —
3 1,500 2,100 1,600 3,000 1,500 —
4 500 3,000 1,000 3,500 875 —
5 500 3,000 1,300 3,500 1,500 —
6 500 3,000 1,800 4,600 1,700 —
Required:
Complete the following table.
Round all answers to the nearest whole dollar. Amounts in parenthesis do not require a minus sign.
Gross Profit (Loss) Recognized
Percentage-of-Completion Completed Contract
Situation 2006 2007 2008 2006 2007 2008
1 $ ____________ $ ____________ $ ____________ $ ____________ $ ____________ $ ____________
2 ____________ ( ____________) ____________ ____________ ____________ ____________
3 ____________ ( ____________) ( ____________) ____________ ( ____________) ( ____________)
4 ____________ ____________ ____________ ____________ ____________ ____________
5 ____________ ( ____________) ____________ ____________ ____________ ____________
6 ( ____________) ( ____________) ( ____________) ( ____________) ( ____________) ( ____________)
________________________________________
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Question 3
1.1. 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.
1. Gross Profit Recognition: 2006 2007
Question 3
1.1. 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.
Question 1: (10 points)
To answer this question, we need to prepare summary journal entries for 2006 and 2007 to account for the installment sales and cash collections. The company uses the perpetual inventory system.
2006 To record installment sales:
- Debit Installment Accounts Receivable for $360,000 (the amount of installment sales in 2006)
- Credit Sales Revenue for $360,000
To record cash collections from installment sales:
- Debit Cash for $150,000 (the cash collected in 2006)
- Credit Installment Accounts Receivable for $150,000
To recognize gross profit from installment sales:
- Debit Cost of Installment Sales for $234,000 (the cost of installment sales in 2006)
- Credit Gross Profit for $126,000 ($360,000 - $234,000)
2007 To record installment sales:
- Debit Installment Accounts Receivable for $350,000 (the amount of installment sales in 2007)
- Credit Sales Revenue for $350,000
To record cash collections from installment sales:
- Debit Cash for $120,000 (the cash collected in 2007)
- Credit Installment Accounts Receivable for $120,000
To recognize gross profit from installment sales:
- Debit Cost of Installment Sales for $245,000 (the cost of installment sales in 2007)
- Credit Gross Profit for $105,000 ($350,000 - $245,000)
Question 2: (10 points)
1. To compute the amount of gross profit to be recognized from the installment sale in 2006, 2007, 2008, and 2009 using the point of delivery revenue recognition method, we need to use the following formula: (Cash Collections / Total Cash Collections) * Total Gross Profit.
2006: ($100,000 / ($100,000 + $100,000)) * $280,000 = $140,000
2007: ($100,000 / ($100,000 + $100,000)) * $280,000 = $140,000
2008: ($0 / ($100,000 + $100,000)) * $280,000 = $0
2009: ($0 / ($100,000 + $100,000)) * $280,000 = $0
2. To compute the amount of gross profit to be recognized from the installment sale in 2006, 2007, 2008, and 2009 using the installment sales method, we need to use the following formula: (Cash Collections / Total Cash Collections) * Total Gross Profit.
2006: ($100,000 / ($100,000 + $100,000)) * $280,000 = $140,000
2007: ($100,000 / ($100,000 + $100,000)) * $280,000 = $140,000
2008: ($100,000 / ($100,000 + $100,000)) * $280,000 = $140,000
2009: ($0 / ($100,000 + $100,000)) * $280,000 = $0
3. To compute the amount of gross profit to be recognized from the installment sale in 2006, 2007, 2008, and 2009 using the cost recovery method, we need to use the following formula: (Cash Collections / Total Cash Collections) * Total Gross Profit.
2006: ($100,000 / ($100,000 + $100,000)) * $280,000 = $140,000
2007: ($100,000 / ($100,000 + $100,000)) * $280,000 = $140,000
2008: ($100,000 / ($100,000 + $100,000)) * $280,000 = $140,000
2009: ($100,000 / ($100,000 + $100,000)) * $280,000 = $140,000
Question 3: (15 points)
1. To compute the amount of gross profit or loss to be recognized in 2006 and 2007 using the percentage-of-completion method, we need to use the following formula: (Costs Incurred / Estimated Total Costs) * Contract Price.
2006: ($300,000 / ($300,000 + $1,200,000)) * $2,000,000 = $400,000
2007: ($1,575,000 / ($1,575,000)) * $2,000,000 = $2,000,000
2. To compute the amount of gross profit or loss to be recognized in 2006 and 2007 using the completed contract method, we need to use the following formula: Contract Price - Total Costs Incurred.
2006: $2,000,000 - $300,000 = $1,700,000
2007: $2,000,000 - $1,575,000 = $425,000
3. To 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, we need to list the relevant accounts and their respective amounts.
Balance Sheet
At December 31, 2006
Current Assets:
Accounts Receivable: $400,000
Costs and Profit in Excess of Billings: $400,000
4. To 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, we need to list the relevant accounts and their respective amounts.
Balance Sheet
At December 31, 2006
Current Assets:
Accounts Receivable: $2,000,000
Question 4: (20 points)
1. To calculate the amount of gross profit or loss to be recognized in each of the three years, we need to use the following formula: Contract Price - Total Costs Incurred.
2006: $2,250,000 - $2,000,000 = $250,000
2007: $2,475,000 - $2,500,000 = ($25,000)
2008: $0 - $3,800,000 = ($3,800,000)
2.