Intermediate Accounting III Homework Chapter 18 with solutions

Accounting 305
Brief Exercise 18-3
Your answer is correct.
Travel Inc. sells tickets for a Caribbean cruise to Carmel Company employees. The total cruise package
costs Carmel $80,500 from ShipAway cruise liner. Travel Inc. receives a commission of 6% of the total
price. Travel Inc. therefore remits $75,670 to ShipAway.
Prepare the entry to record the revenue recognized by Travel Inc. on this transaction. (Credit
account titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation
Cash

Debit

Credit

4830

Sales Revenu

4830

Solution
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Brief Exercise 18-3

Cash = ($80,500 x 6%) = $4,830

Brief Exercise 18-6

Your answer is correct.
Telephone Sellers Inc. sells prepaid telephone cards to customers. Telephone Sellers then pays the
telecommunications company, TeleExpress, for the actual use of its telephone lines. Assume that
Telephone Sellers sells $5,300 of prepaid cards in January 2014. It then pays TeleExpress based on
usage, which turns out to be 48% in February, 26% in March, and 26% in April. The total payment by
Telephone Sellers for TeleExpress lines over the 3 months is $2,600.
Indicate how much income Telephone Sellers should recognize in January, February, March, and April.
January income
February income
March income
April income

Solution
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$
0

$
1296

$
702

$
702

Brief Exercise 18-6

January income

$0

February income ($5,300 $2,600) x 48%

$1,296

March income ($5,300 $2,600) x 26%

$702

April income ($5,300 $2,600) x 26%

$702

Brief Exercise 18-10

Your answer is correct.
Guillen, Inc. began work on a $6,310,000 contract in 2014 to construct an office building. Guillen uses
the completed-contract method. At December 31, 2014, the balances in certain accounts were
Construction in Process $2,123,000; Accounts Receivable $250,000; and Billings on Construction in
Process $999,100.
Indicate how these accounts would be reported in Guillens December 31, 2014, balance sheet.
Guillen, Inc.
Balance Sheet
December 31, 2014
Current Assets

Accounts Receivable

250000

Inventories
Construction in Process

$
2123000

:
Less

999100

Billings
Costs and Recognized Profit in Excess of Billings

Exercise 18-1
Your answer is correct.

$
1123900

Jupiter Company sells goods that have a cost of $410,000 to Danone Inc. for $670,000, with payment
due in 1 year. The cash price for these goods is $608,000, with payment due in 30 days. If Danone
paid immediately upon delivery, it would receive a cash discount of $15,000. Jupiter Company accepts
a note receivable from Danone Inc. to pay for the goods.
(a) Prepare the journal entry to record this transaction at the date of sale. (Jupiter records sales
discounts using the net method) (Credit account titles are automatically indented when
amount is entered. Do not indent manually.)
Account Titles and Explanation

Debit

Notes Receiva

Credit

593000

Sales Revenu

593000

(b) How much revenue should Jupiter report for the entire year?
$

Total revenue

670000

Solution
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Exercise 18-1

Sales Revenue = ($608,000 $15,000) = $593,000

Sales revenue
Interest revenue
Total revenue

$593,000
77,000
$670,000

Exercise 18-8
Your answer is correct.

Taylor Marina has 300 available slips that rent for $870 per season. Payments must be made in
full at the start of the boating season, April 1, 2015. Slips for the next season may be reserved if
paid for by December 31, 2014. Under a new policy, if payment is made by December 31, 2014,
a 7% discount is allowed. The boating season ends October 31, and the marina has a December
31 year-end. To provide cash flow for major dock repairs, the marina operator is also offering
a 20% discount to slip renters who pay for the 2016 season.
For the fiscal year ended December 31, 2014, all 300 slips were rented at full price. 184 slips
were reserved and paid for the 2015 boating season, and 71 slips for the 2016 boating season
were reserved and paid for.
(a)
Prepare the appropriate journal entries for fiscal 2014. (Round answers to 0 decimal places, e.g.

5,275. Credit account titles are automatically indented when amount is entered. Do not indent
manually.)
Account Titles and Explanation

Debit

Cash

Credit

261000

Rent Revenue

261000

(To record 2014 revenue.)

Cash

148874.4

Unearned Ren

148874.4

(To record 2015 revenue.)

Cash

49416

Unearned Ren

49416

(To record 2016 revenue.)

Solution
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Exercise 18-8
Rent Revenue

= (2014 slips 300 x $870)

= $261,000

Unearned Rent Revenue (current)

= [2015 slips 184 x $870 x (100 7)%]

= $148,874

Unearned Rent Revenue (noncurrent)

= [2016 slips 71 x $870 x (100 20)%]

$49,416

Exercise 18-12 (Part Level Submission)

During 2014, Nilsen Company started a construction job with a contract price of $1,797,000. The job
was completed in 2016. The following information is available.
2014
Costs incurred to date

2015

2016

$355,200

$846,300

$1,121,000

Estimated costs to complete

604,800

238,700

Billings to date

296,600

856,400

1,797,000

Collections to date

248,200

809,400

1,454,000

(a)

Your answer is partially correct. Try again.

Compute the amount of gross profit to be recognized each year, assuming the percentage-ofcompletion method is used.
$
108810

Gross profit recognized in 2014

$
Gross profit recognized in 2015

446550

$
Gross profit recognized in 2016

120640

Answer
CLOSE

Exercise 18-12 (Part Level Submission)

Compute the amount of gross profit to be recognized each year, assuming the percentage-ofcompletion method is used.
$
309,690

Gross profit recognized in 2014

$
Gross profit recognized in 2015

245,670

$
Gross profit recognized in 2016

120,640

Solution
CLOSE

Exercise 18-12 (Part Level Submission)

Construction in Process

= ($846,300 $355,200)

= $491,100

Accounts Receivable

= ($856,400 $296,600)

= $559,800

Cash

= ($809,400 $248,200)

= $561,200

Revenue from Long-Term Contracts

= $1,797,000 x (78% 37%)

= $736,770

Problem 18-5
Your answer is partially correct. Try again.
Reynolds Custom Builders (RCB) was established in 1987 by Avery Conway and initially built highquality customized homes under contract with specific buyers. In the 2002s, Conways two sons joined
the company and expanded RCBs activities into the high-rise apartment and industrial plant markets.
Upon the retirement of RCBs long-time financial manager, Conways sons recently hired Ed Borke as
controller for RCB. Borke, a former college friend of Conways sons, has been associated with a public
accounting firm for the last 6 years.
Upon reviewing RCBs accounting practices, Borke observed that RCB followed the completed-contract
method of revenue recognition, a carryover from the years when individual home building was the
majority of RCBs operations. Several years ago, the predominant portion of RCBs activities shifted to
the high-rise and industrial building areas. From land acquisition to the completion of construction,
most building contracts cover several years. Under the circumstances, Borke believes that RCB should
follow the percentage-of-completion method of accounting. From a typical building contract, Borke
developed the following data.
BLUESTEM TRACTOR PLANT
Contract price: $8,066,000
2014

2015

2016

Estimated costs

$1,900,080

$2,850,120

$2,035,800

Progress billings

2,456,000

3,107,000

2,503,000

Cash collections

2,318,000

2,814,000

2,368,000

Using the data provided for the Bluestem Tractor Plant and assuming the percentage-of-completion
method of revenue recognition is used, calculate RCBs revenue and gross profit for 2014, 2015, and
2016, under each of the following circumstances.
(1) Assume that all costs are incurred, all billings to customers are made, and all collections from
customers are received within 30 days of billing, as planned. (Round percentage of completion to
2 decimal places, e.g. 34.34% and final answers to 0 decimal places, e.g. 1,525.)

2014
2015
2016

Revenue
$

Gross profit / (Loss)

$
2688

269

$
6142

(50)

$
8066

(50)

(2) Further assume that, as a result of unforeseen local ordinances and the fact that the building site
was in a wetlands area, RCB experienced cost overruns of $888,000 in 2014 to bring the site into
compliance with the ordinances and to overcome wetlands barriers to construction. (Round
percentage of completion to 2 decimal places, e.g. 34.34% and final answers to 0 decimal
places, e.g. 1,525.)

2014

Revenue
$

Gross profit / (Loss)

$

2015
2016

(3) Further assume that, in addition to the cost overruns of $888,000 for this contract incurred under
part (b)(2), inflationary factors over and above those anticipated in the development of the original
contract cost have caused an additional cost overrun of $1,066,000 in 2015. It is not anticipated that
any cost overruns will occur in 2016. (Round percentage of completion to 2 decimal places, e.g.
34.35% and final answers to 0 decimal places, e.g. 1,250. Enter negative amounts using
either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

2014

Revenue
$

Gross profit / (Loss)

$

2015
2016

Answer
CLOSE

Problem 18-5

Reynolds Custom Builders (RCB) was established in 1987 by Avery Conway and initially built highquality customized homes under contract with specific buyers. In the 2002s, Conways two sons joined
the company and expanded RCBs activities into the high-rise apartment and industrial plant markets.
Upon the retirement of RCBs long-time financial manager, Conways sons recently hired Ed Borke as
controller for RCB. Borke, a former college friend of Conways sons, has been associated with a public
accounting firm for the last 6 years.
Upon reviewing RCBs accounting practices, Borke observed that RCB followed the completed-contract
method of revenue recognition, a carryover from the years when individual home building was the
majority of RCBs operations. Several years ago, the predominant portion of RCBs activities shifted to
the high-rise and industrial building areas. From land acquisition to the completion of construction,
most building contracts cover several years. Under the circumstances, Borke believes that RCB should
follow the percentage-of-completion method of accounting. From a typical building contract, Borke
developed the following data.
BLUESTEM TRACTOR PLANT
Contract price: $8,066,000
2014

2015

2016

Estimated costs

$1,900,080

$2,850,120

$2,035,800

Progress billings

2,456,000

3,107,000

2,503,000

Cash collections

2,318,000

2,814,000

2,368,000

(b)

Using the data provided for the Bluestem Tractor Plant and assuming the percentage-of-completion
method of revenue recognition is used, calculate RCBs revenue and gross profit for 2014, 2015, and
2016, under each of the following circumstances.
(1) Assume that all costs are incurred, all billings to customers are made, and all collections from
customers are received within 30 days of billing, as planned. (Round percentage of completion to
2 decimal places, e.g. 34.34% and final answers to 0 decimal places, e.g. 1,525.)
Revenue

Gross profit / (Loss)

$
2014

$
2,258,480

$
2015

358,400

$
3,387,720

$
2016

537,600

$
2,419,800

384,000

(2) Further assume that, as a result of unforeseen local ordinances and the fact that the building site
was in a wetlands area, RCB experienced cost overruns of $888,000 in 2014 to bring the site into
compliance with the ordinances and to overcome wetlands barriers to construction. (Round
percentage of completion to 2 decimal places, e.g. 34.34% and final answers to 0 decimal
places, e.g. 1,525.)
Revenue

Gross profit / (Loss)

$
2014

$
2,930,378

$
2015

142,414

$
2,995,712

$
2016

145,589

$
2,139,910

103,998

(3) Further assume that, in addition to the cost overruns of $888,000 for this contract incurred under
part (b)(2), inflationary factors over and above those anticipated in the development of the original
contract cost have caused an additional cost overrun of $1,066,000 in 2015. It is not anticipated that
any cost overruns will occur in 2016. (Round percentage of completion to 2 decimal places, e.g.
34.35% and final answers to 0 decimal places, e.g. 1,250. Enter negative amounts using
either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Revenue

Gross profit / (Loss)

$
2014

$
2,930,378

142,414

$
2015

$
3,257,051

-816,414

$
2016

$
1,878,571

Solution
CLOSE

Problem 18-5
Using the data provided for the Bluestem Tractor Plant, and on the assumption that the percentage-ofcompletion method of revenue recognition is used, the calculations of RCBs revenue and gross profit
for 2014, 2015, and 2016 under three sets of circumstances are presented below.
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 RCBs revenue, cost of sales, and gross profit for
2014, 2015, and 2016, are calculated as follows:

Year

Contract
Price

Percentage-of-Completion
Estimated
Costs to
Estimated
Gross Profit
Date
Total Costs
(Col. 2Col. 4)

(1)

(2)

(3)

(4)

2014

$8,066,000

1,900,080

$6,786,000*

2015

8,066,000

4,750,200

2016

8,066,000

6,786,000

Percent
Complete
(Col. 3/Col. 4)

(5)

(6)

$1,280,000

28%

6,786,000

1,280,000

70%

6,786,000

1,280,000

100%

Revenue
Recognizable

Less Prior
Year(s)

Current
Year

*($1,900,080 + $2,850,120 + $2,035,800)

Revenue recognition
Contract
Year
Price

Percent
Complete

2014

$8,066,000

28%

$2,258,480

$2,258,480

2015

8,066,000

70%

5,646,200

$2,258,480

3,387,720

2016

8,066,000

100%

8,066,000

5,646,200

2,419,800

Profit recognition
Year

Estimated
Profit

Percent
Complete

Profit
Recognizable

2014

$1,280,000

28%

$358,400

2015

1,280,000

70%

896,000

Less Prior
Year(s)

$358,400

Current
Year
$358,400
537,600

2016

1,280,000

100%

1,280,000

896,000

384,000

2. Assuming the same facts as in Instruction (b)1., but that cost overruns of $888,000 were
experienced in 2014, RCBs revenue, costs of sales, and gross profit for 2014, 2015, and 2016 were
calculated as follows:

Year

Contract
Price

Percentage-of-Completion
Estimated
Costs
Estimated
Gross Profit
to Date
Total Costs
(Col. 2Col. 4)

(1)

(2)

(3)

2014

$8,066,000

$2,788,080

2015

8,066,000

5,638,200

2016

8,066,000

7,674,000

(4)

Percent
Complete
(Col. 3/Col. 4)

(5)

$7,674,000*

(6)

$392,000

36.33%

7,674,000

392,000

73.47%

7,674,000

392,000

100%

*($2,788,080 + $2,850,120 + $2,035,800)

Revenue recognition
Contract
Year
Price

Percent
Complete

Revenue
Recognizable

Less Prior
Year(s)

Current
Year

2014

$8,066,000

36.33%

$2,930,378

$2,930,378

2015

8,066,000

73.47%

5,926,090

$2,930,378

2,995,712

2016

8,066,000

100%

8,066,000

5,926,090

2,139,910

Profit recognition
Year

Estimated
Profit

Percent
Complete

Profit
Recognizable

Less Prior
Year(s)

Current
Year

2014

$392,000

36.33%

$142,414

$142,414

2015

392,000

73.47%

288,003

$142,414

145,589

2016

392,000

100%

392,000

288,003

103,998

3. Assuming the same facts as in Instructions (b)1. and (b)2., but that additional cost overruns of
$1,066,000 are experienced in 2015, RCBs revenue, cost of sales, and gross profit for 2014, 2015,
and 2016 are calculated as follows:

Year

Contract
Price

Percentage-of-Completion
Estimated
Costs
Estimated
Gross Profit
to Date
Total Costs
(Col. 2Col. 4)

Percent
Complete
(Col. 3/Col. 4)

(1)

(2)

(3)

(4)

(5)

2014

$8,066,000

$2,788,080

$7,674,000

$392,000

36.33%

2015

8,066,000

(674,000)

76.71%

6,704,200*

8,740,000

(6)

2016

8,066,000

8,740,000

8,740,000

(674,000)

100%

Percent
Complete

Revenue
Recognizable

Less Prior
Year(s)

*($5,638,200 + $1,066,000)
Revenue recognition
Contract
Year
Price

Current
Year

2014

$8,066,000

36.33%

$2,930,378

$2,930,378

2015

8,066,000

76.71%

6,187,429

$2,930,378

3,257,051

2016

8,066,000

100%

8,066,000

6,187,429

1,878,571

Profit recognition
Year

Estimated
Profit

Percent
Complete

Profit
Recognizable

36.33%

Less Prior
Year(s)

2014

$392,000

$142,414

2015

(674,000)

100%a

(674,000)

$142,414

2016

(674,000)

100%

(674,000)

(674,000)

Current
Year
$142,414
(816,414)

When there is a projected loss at any time, it must be recognized in full in the period in which a loss
on the contract appears probable.
a

IFRS Multiple Choice Question 06

Your answer is correct.

The joint project of the Financial Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB) related to revenue recognition includes
I.
II.
III.

Evaluating a "customer-consideration" model.

Eliminating inconsistencies in the existing conceptual guidance.
Establishing a single, comprehensive standard.

II and III only.

Neither I, II, nor III are currently included in the joint project of the FASB and IASB.

I and II only.

I, II, and III.

IFRS Multiple Choice Question 07

Your answer is correct.
Belgium Co. is constructing a tunnel for $600 million. Construction began in 2013 and is estimated to
be completed in 2018. At December 31, 2015, Belgium has incurred costs totaling $267 million with
$64 million of that incurred in 2015, $107 million in 2014, and the remainder during 2013. Belgium
believes that it completed 30% of the tunnel during 2015, although that may change based on future
activity. Belgium Co. uses IFRS for its accounting and regards its cost numbers as very uncertain.
What amount of revenue should Belgium Co. recognize for the year ended December 31, 2016?

No revenue should be recognized until the contract is completed in 2018

$267 million

$64 million

$180 million

IFRS Multiple Choice Question 08

Your answer is correct.
Portugal, Inc. has the following amounts related to its activities for the year ended December 31,
2015:
Sales to customers

$6,250,000

Gain on sale of equipment

$ 450,000

Gain on sale of investments

$ 950,000

Loss on sale of land

$ 300,000

Portugal, Inc. uses IFRS for its external financial reporting. How much revenue should Portugal, Inc.
report on its income statement for the year ended December 31, 2015?

$6,250,000

$7,200,000

$7,650,000

$7,350,000

IFRS Multiple Choice Question 09

Your answer is correct.

Under IFRS, the standard for revenue recognition states that the
I.
II.
III.

Revenue be realized or realizable.

Economic benefits associated with the transaction will flow to the company selling the goods.
Costs must be capable of being reliably measured.

II and III only.

I and III only.

II only.

I, II, and III.

IFRS Multiple Choice Question 10

Your answer is correct.
IFRS for revenue recognition

is enforced by an international enforcement body, the IASB, which is comparable to the U.S.
SEC.

permits use of the completed-contract method when costs are difficult to estimate.

contains limited industry-specific guidance.

bases revenue recognition on the concepts of earned and realized or realizable.