Session 2 Practice Set - Revenue Recognition, Accounts Receivable, Inventory

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ISB FADM 2021 Mohali Campus

Practice Set 2

Revenue Recognition, Accounts Receivable, Inventory

QUESTION 1

SOLUTION

Company Revenue recognition

a. GAP The performance obligation is fulfilled when the customer takes the
merchandise and the right of return period has expired or costs of returns
can be reasonably estimated.

b. Merck The performance obligation is fulfilled when the customer takes delivery
of the merchandise and the right of return period, if any, has expired or
costs of returns can be reasonably estimated. The company will also
establish a reserve and recognize expense for uncollectible accounts
receivable when revenue is recognized.

c. Deere & Co. The performance obligation is fulfilled when the customer takes the
merchandise and the right of return period, if any, has expired or costs of
returns can be reasonably estimated. The company will also establish a
reserve and recognize expense for uncollectible accounts receivable and
anticipated warranty costs at the time the sale is recorded. Revenues for
financial or insurance services are recognized when the services are
provided.

d. Bank of The performance obligation is fulfilled with the passage of time. Interest
America is earned by the passage of time. Each period Bank of America accrues
income on each of its loans and establishes an account receivable on its
balance sheet.

e. Johnson The performance obligation is to build and complete projects. Revenue


Controls is recognized for long-term construction contracts under the percentage-
of-completion method, typically using cost-to-cost method to identify the
percentage of the project that is complete.
QUESTION 2

SOLUTION

c. Accounts receivable, net = $200,000 - $6,900 = $193,100

Reported in the balance sheet as follows:


Accounts receivable, net of allowance of $6,900 $193,100
QUESTION 3

SOLUTION

The ending balance of Penman’s accounts receivable and allowance accounts are as
follows.

Accounts receivable $385,700


Less allowance for uncollectible accounts 24,172 $361,528

Computations

Allowance for
Accounts Receivable Uncollectible Accounts
Beginning balance $ 356,000 $ 21,400
Sales 2,008,000
Collections (1,963,000)
Write-offs* (15,300) (15,300)
Bad debts expense** ________ 18,072
Ending balance $ 385,700 $ 24,172

* Write offs = $8,200 + $4,800 + $2,300 = $15,300


** Bad debts expense = $2,008,000  0.9% = $18,072
QUESTION 4

SOLUTION

a. FIFO cost of goods sold = 400 @ $12 + 200 @ $14 = $7,600


FIFO ending inventories = $14,600 – $7,600 = $7,000

b. LIFO cost of goods sold = 600 @ $14 = $8,400


LIFO ending inventories = $14,600 – $8,400 = $6,200

c. Average cost of goods sold = 600 @ $14,600 / 1,100 = $7,964


Average cost ending inventories = $14,600 – $7,964 = $6,636
QUESTION 5

SOLUTION

Units Cost
Beginning Inventory @ 32 1,000 $ 32,000
Purchases: #1 @ 34 1,800 61,200
#2 @ 38 800 30,400
#3 @ 41 1,200 49,200
Goods available for sale 4,800 $172,800

Units in ending inventory = 4,800 – 2,800 = 2,000

a. First-in, first-out

Units Cost Total


1,200 @ $41 = $49,200
800 @ $38 = 30,400
Ending Inventory 2,000 $79,600

Cost of goods available for sale $172,800

Less: Ending inventory 79,600

Cost of goods sold $ 93,200


Balance Sheet Income Statement

Liabil- Earned Rev- Expen- Net


Cash Noncash Contrib.
Transaction + = + + – =
Asset Assets Capital
ities Capital enues ses Income

COGS 93,200

INV 93,200
-93,200
+93,200
Record FIFO -93,200
cost of goods = Retained – = -93,200
Cost of
COGS sold Inventory
93,200
Goods Sold
Earnings

INV
93,200

b. Last-in, first-out

Units Cost Total


1,000 @ $32 = $32,000
1,000 @ $34 = 34,000
Ending Inventory 2,000 $66,000

Cost of goods available for sale $172,800

Less: Ending inventory 66,000

Cost of goods sold $ 106,800

c. Average cost

$172,800 / 4,800 = $36 average unit cost

2,000 × $36 = $72,000 ending inventory

$172,800 - $72,000 = $100,800 cost of goods sold (or $100,800 = 2,800 × $36)
QUESTION 6

SOLUTION

a. The Illinois Tool Works 2018 balance sheet reported $1,318, which is the LIFO
inventory value reported in the footnotes.

b. Illinois Tool Works balance sheet includes the following inventory at FIFO cost:
$ millions 2018 2017

Raw material $523 $465

Work-in-process 161 141

Finished goods 731 703

Total inventory reported on the balance sheet $1,415 $1,309

c. Cumulative pretax income (as of the end of fiscal 2018) has been decreased by $97
million, the amount of the LIFO reserve, since Illinois Tool Works initially adopted LIFO
inventory costing.
d. The LIFO reserve in 2016 was $86 million. Assuming a 35% tax rate, the company
saved taxes of $30.1 million through 2016. From 2016 to 2018, the LIFO reserve
increased by $11 million from $86 million to $97 million. Assuming a 21% tax rate, the
company saved an additional $2.3 million since 2017. The total taxes saved by using
LIFO for inventory is $32.4 million ($30.1 + $2.3).

e. For 2018 only, the LIFO reserve increased by $8 million, from $89 million to $97 million.
Consequently, 2015 LIFO pretax income is $8 million lower than under the FIFO
method. This means that LIFO income taxes are lower by $1.7 million, computed as
$8 million × 0.21. In sum, for fiscal 2018, the use of LIFO inventory costing saved a
small amount.

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