is This your WEBCOURSES assignment for chapters 17, 18 and 19. Please read these instructions.
You will need to work these problems (each problem is presented on a separate worksheet tab below) and then go into
Webcourses to answer questions. Webcourses will present you with various questions to answer based on your work. The
questions are mostly short answer (where you input a number) plus a few multiple choice and true/false questions. This
format does not lend itself well to guessing so be sure to complete each problem in a chapter before answering the
questions on Webcourses. The entire problems are not presented in Webcourses, only short questions based on these
problems. So this file is the only place you will see the entire problem. For example a question might ask "for Chapter 9
Exercise 1 what are total liabilities?" and you have to fill in a number.
PLEASE NOTE that the Webcourses assessments are broken up by each chapter. For this problem set you will see three
separate Webcourses assessments (one each for Chapter 14,15 and 16). This was done to make it easier to work on one
chapter at a time on Webcourses. You will have ONE attempt to answer the questions that are presented to you on the
assessment so make it count.
Do not wait until the last minute to work these problems. You need to complete each chapter as we work through the
material. With approximately a dozen exercises and problems, there is no way you can complete this task at the last minute.
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the sheets as they are already formated to work the problem.
In general the yellow highlighted cells are the cells where you will enter your work.
Other comments about the spreadsheet:
-Place the proper account title in the cell where the word "account title" appears in the template.
-Place the value in the cell where the word "Value" or "Amount" appears on the template. A formula may be placed in some of these
cells.
-Write a formula into cells where the word "Formula" appears. In these cells, an amount calculated can be entered. An amount can be
placed in these cells. But you can practice Excel by putting in a formula.
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-Insert the journal reference where "JOURN #" appears on the template during posting.
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-Negative values may be shown as ($400) or -$400.
-Consider using "Split" panes to assist in copy and paste of data.
Exercise: E21-1, Lessee Entries; Capital Lease with Executory
Costs and Unguaranteed Residual Value
Course:
Date:
Assume that on January 1, 2011, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement
to lease a storage building from Trevino Storage Company. The following information pertains to this
lease agreement:
1. The agreement requires equal rental payments of
$90,000
beginning on January 1, 2011.
2. The fair value of the building on January 1, 2011, is
$550,000
3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of
$10,000
Kimberly-Clark depreciates similar buildings on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5. Kimberly-Clark's incremental borrowing rate is 12% per year. The lessor's implicit rate is not known
by Kimberly-Clark.
6. The yearly rental payment includes
$3,088.14 of executory costs related to taxes on the
property.
Instructions:
Prepare the journal entries on the lessees books to reflect the signing of the lease agreement and to
record the payments and expenses related to this lease for the years 2011 and 2012. Kimberly-Clarks
corporate year end is December 31.
Capitalized amount of the lease:
Yearly payment
Executory costs
Minimum annual lease payment
Amount
Amount
Formula
Use the Excel Present Value (=PV) formula to determine the present value.
Jan 1, 11
Jan 1, 11
Dec 31, 11
Dec 31, 11
Jan 1, 12
Dec 31, 12
Dec 31, 12
Schedule 1:
Account Title
Account Title
Amount
Account Title
Account Title
Account Title
Amount
Amount
Account Title
Account Title
Amount
Account Title
Account Title
Amount
Account Title
Account Title
Account Title
Account Title
Amount
Amount
Amount
Account Title
Account Title
Amount
Account Title
Account Title
Amount
Amount
Amount
Amount
Amount
Amount
Amount
Amount
KIMBERLY-CLARK CORPORATION (Lessee)
Lease Amortization Schedule
Annual Payment Less Executory Costs
Annual
Reduction
Payment
Interest
of
Lease
Date
Less
(12%)
Lease
Liability
Executory
on Liability
Liability
Costs
Jan 1, 11
Amount
Jan 1, 11
Formula
Amount
Formula
Formula
Jan 1, 12
Amount
Formula
Formula
Formula
Jan 1, 13
Amount
Formula
Formula
Formula
Exercise 21-1, Page 2 of 13, 04/19/2012, 09:30:17
Exercise:
E21-2, Lessor Entries; Sales-Type Lease
Wadkins Company, a machinery dealer, leased a machine to Romero Corporation on January 1, 2011.
The lease is for an
8
-year period and requires equal annual payments of
$38,514
at the beginning of each year. The first payment is received on January 1, 2011.
Wadkins had purchased the machine during 2010 for
$170,000 Collectibility of lease
payments is reasonably predictable, and no important uncertainties surround the amount of costs yet
11%
to be incurred by Wadkins. Wadkins set the annual rental to ensure an
rate of return.
The machine has an economic life of 10 years with no residual value and reverts to Wadkins at the
termination of the lease.
Instructions:
(a) Compute the amount of the lease receivable. (Use the Excel Present Value formula "=PV(" to solve.)
Use this area to enter the Present Value formula
(b) Prepare all necessary journal entries for Wadkins for 2011.
Jan 1, 11
Jan 1, 11
Dec 31, 11
Account Title
Account Title
Account Title
Account Title
220,000
Amount
Account Title
Account Title
Amount
Account Title
Account Title
Amount
Amount
Amount
Amount
Amount
Exercise 21-2, Page 3 of 13, 04/19/2012, 09:30:17
Problem: P21-1, Balance Sheet and Income Statement
Disclosure - Lessee
The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee
Electronics, a lessee, for a computer system.
Inception date:
Lease term:
Economic life of lease equipment:
Fair value of asset at October 1, 2010:
Residual value at end of lease term:
Lessor's implicit rate:
Lessee's incremental borrowing rate:
Annual lease payment due at the beginning of each year,
beginning with October 1, 2010:
October 1, 2010
6 years
6 years
$300,383
0
10%
10%
$62,700
The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties
surrounding the costs yet to be incurred by the lessor. The lessee assumes
responsibility for all executory costs, which amount to
$5,500
per year, and are paid each
October 1, beginning October 1, 2010. (This $5,500 is not included in the rental payment of $62,700.) The asset
will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all
equipment.
Prepare the following amortization schedule for use by both the lessor and the lessee in accounting for this lease.
The lease is to be accounted for properly as a capital lease by the lessee and as a direct-finance lease by the
lessor.
Date:
Annual lease
Payment /
Receipt:
Interest (10%)
Reduction of
Balance of
on Unpaid
Lease Liability / Lease Liability /
Liabililty /
Receivable:
Receivable:
Receivable:
Instructions:
(a) Assuming the lessee's accounting period ends on September 30, answer the following questions
with respect to this lease agreement:
(1) What items and amounts will appear on the lessee's income statement for the year ending
September 30, 2011?
Account Title
Account Title
Account Title
Amount
Amount
Amount
(2) What items and amounts will appear on the lessee's balance sheet at September 30, 2011?
Current liabilities:
Account Title
Account Title
Amount
Amount
Long-term liabilities:
Account Title
Amount
Property, plant, and equipment:
Account Title
Account Title
Amount
Amount
(3) What items and amounts will appear on the lessee's income statement for the year ending
September 30, 2012?
Account Title
Account Title
Account Title
Amount
Amount
Amount
(4) What items and amounts will appear on the lessee's balance sheet at September 30, 2012?
Current liabilities:
Account Title
Account Title
Amount
Amount
Long-term liabilities:
Account Title
Amount
Property, plant, and equipment:
Account Title
Account Title
Amount
Amount
(b) Assuming the lessee's accounting period ends on December 31, answer the following questions
with respect to this lease agreement:
(1) What items and amounts will appear on the lessee's income statement for the year ending
December 31, 2010?
Account Title
Account Title
Account Title
Amount
Amount
Amount
(2) What items and amounts will appear on the lessee's balance sheet at December 31, 2010?
Current liabilities:
Account Title
Account Title
Amount
Amount
Long-term liabilities:
Account Title
Amount
Property, plant, and equipment:
Account Title
Account Title
Amount
Amount
Current assets:
Account Title
Amount
(3) What items and amounts will appear on the lessee's income statement for the year ending
December 31, 2011?
Account Title
Account Title
Account Title
Amount
Amount
Amount
(4) What items and amounts will appear on the lessee's balance sheet at December 31, 2011?
Current liabilities:
Account Title
Account Title
Amount
Amount
Long-term liabilities:
Account Title
Amount
Property, plant, and equipment:
Account Title
Account Title
Amount
Amount
Current assets:
Account Title
Amount
Problem 21-1 , Page 4 of 13, 04/19/2012 , 09:30:17
Problem:
P21-2, Balance Sheet and Income Statement
Disclosure - Lessor
The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee
Electronics, a lessee, for a computer system.
Inception date:
Lease term:
Economic life of lease equipment:
Fair value of asset at October 1, 2007:
Residual value at end of lease term:
Lessor's implicit rate:
Lessee's incremental borrowing rate:
Annual lease payment due at the beginning of each year,
beginning with October 1, 2007:
October 1, 2010
6 years
6 years
$300,383
0
10%
10%
$62,700
The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the
costs yet to be incurred by the lessor. The lessee assumes
responsibility for all executory costs, which amount to
$5,500
per year, and are paid each
October 1, beginning October 1, 2010. (This $5,500 is not included in the rental payment of $62,700.) The asset will revert
to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.
Prepare the following amortization schedule for use by both the lessor and the lessee in accounting for this lease. The
lease is to be accounted for properly as a capital lease by the lessee and as a direct-finance lease by the lessor.
Date:
Annual lease
Payment /
Receipt:
Interest (10%)
on Unpaid
Liability /
Receivable:
Reduction of
Balance of
Lease Liability / Lease Liability /
Receivable:
Receivable:
Instructions:
(a) Assuming the lessor's accounting period ends on September 30, answer the following questions
with respect to this lease agreement:
(1) What items and amounts will appear on the lessor's income statement for the year ending
September 30, 2011?
Account Title
Amount
(2) What items and amounts will appear on the lessor's balance sheet at September 30, 2011?
Current assets:
Account Title
Amount
Account Title
Amount
Noncurrent assets:
Account Title
Amount
(3) What items and amounts will appear on the lessor's income statement for the year
ending September 30, 2012?
Account Title
Amount
(4) What items and amounts will appear on the lessor's balance sheet at September 30, 2012?
Current assets:
Account Title
Account Title
Amount
Amount
Noncurrent assets:
Account Title
Amount
(b) Assuming the lessor's accounting period ends on December 31, answer the following questions
with respect to this lease agreement:
(1) What items and amounts will appear on the lessor's income statement for the year ending
December 31, 2010?
Account Title
Amount
(2) What items and amounts will appear on the lessor's balance sheet at December 31, 2010?
Current assets:
Account Title
Account Title
Amount
Amount
Noncurrent assets:
Account Title
Amount
(3) What items and amounts will appear on the lessor's income statement for the year ending
December 31, 2011?
Account Title
Amount
(4) What items and amounts will appear on the lessor's balance sheet at December 31, 2011?
Current assets:
Account Title
Account Title
Amount
Amount
Noncurrent assets:
Account Title
Amount
Problem 21-2 , Page 5 of 13, 04/19/2012, 09:30:17
Exercise:
Date:
E17-1, Entries for Held-to-Maturity Securities
On January 1, 2010, Jennings Company purchased at par
10%
bonds having a maturity value
of
$300,000 They are dated January 1, 2010, and mature January 1, 2015, with
interest receivable December 31 of each year. The bonds are classified in the held-to-maturity category.
Instructions:
(a) Prepare the journal entry at the date of the bond purchase.
Jan 1, 10
Account Title
Account Title
Amount
Amount
(b) Prepare the journal entry to record the interest received for 2010.
Dec 31, 10
Account title
Account title
Amount
Amount
(c) Prepare the journal entry to record the interest received for 2011.
Dec 31, 11
Account Title
Account Title
Amount
Amount
Exercise 17-1, Page 6 of 13, 04/19/2012, 09:30:17
Exercise:
E17-2, Effective-Interest versus Straight-Line Bond
Amortization
On January 1, 2010, Morgan Company acquires
$300,000 of Nicklaus, Inc.,
9%
bonds at a price of
$278,384 The interest is payable each December 31,
and the bonds mature December 31, 2012. The investment will provide Morgan Company a
12%
yield. The bonds are classified as held-to-maturity.
Note: Due to significant digits and rounding, there may be slight differences in values.
Instructions:
(a) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the
straight-line method.
Schedule of Interest Revenue and Bond Discount Amortization Straight-line Method
9% Bond Purchased to Yield 12%
Bond
Carrying
Cash
Interest
Discount
Amount
Date
Received
Revenue
Amortization
of Bonds
Jan 1, 10
Amount
Dec 31, 10
Formula
Formula
Formula
Formula
Dec 31, 11
Formula
Formula
Formula
Formula
Dec 31, 12
Formula
Formula
Formula
Formula
(b) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the
effective-interest method.
Schedule of Interest Revenue and Bond Discount Amortization Effective Interest Method
9% Bond Purchased to Yield 12%
Bond
Carrying
Cash
Interest
Date
Discount
Amount
Received
Revenue
Amortization
of Bonds
Jan 1, 10
Amount
Dec 31, 10
Formula
Formula
Formula
Formula
Dec 31, 11
Formula
Formula
Formula
Formula
Dec 31, 12
Formula
Formula
Formula
Formula
(c) Prepare the journal entry for the interest receipt of December 31, 2011, and the discount
amortization under the straight-line method.
Dec 31, 11
Account Title
Account Title
Account Title
Amount
Amount
Amount
(d) Prepare the journal entry for the interest receipt of December 31, 2011, and the discount
amortization under the effective-interest method.
Dec 31, 11
Account Title
Account Title
Account Title
Amount
Amount
Amount
Exercise Page 17-2, 7 of 13, 04/19/2012, 09:30:17
Problem:
Course:
Date:
P17-1, Equity Securities Entries and Disclosures
Parnevik Company has the following securities in its investment portfolio on December 31, 2010 (all
securities were purchased in 2010):
3,000
shares of Anderson Co. common stock which cost
$58,500
10,000
shares of Munter Ltd. common stock which cost
$580,000
6,000
shares of King Company preferred stock which cost
$255,000
The Securities Fair Value Adjustment account shows a credit of
$10,100
at the end
of 2010.
In 2011, Parnevik completed the following securities transactions.
1. On January 15, sold
3,000
shares of Andersons common stock at
$22
per share less fees of
$2,150
2. On April 17, purchased
1,000
shares of Castles common stock at
$33.50
per share plus fees of
$1,980
On December 31, 2011, the market values per share of these securities were:
Munter Ltd.
$61.00
King Co.
$40.00
Castle Co.
$29.00
In addition, the accounting supervisor of Parnevik told you that, even though all these securities have
readily determinable fair values, Parnevik will not actively trade these securities because the top
management intends to hold them for more than one year.
Instructions:
(a) Prepare the entry for the security sale on January 15, 2011.
Text Title
Text Title
Text Title
Text Title
Text Title
Jan 15, 11
Account Title
Account Title
Account Title
Amount
Amount
Formula
Amount
Formula
Amount
Amount
Amount
(b) Prepare the journal entry to record the security purchase on April 17, 2011.
Total purchase price is:
Text title
Text title
Text title
Text title
Text title
Apr 17, 11
Account Title
Account Title
Quantity
Amount
Formula
Amount
Formula
Amount
Amount
(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on
December 31, 2011.
Available-for-Sale PortfolioDecember 31, 2011
Securities
Cost
Fair
Unrealized
Value
Gain
(Loss)
Munter Ltd.
Amount
Amount
Formula
King Co.
Amount
Amount
Formula
Castle Co.
Amount
Amount
Formula
Total of portfolio
Formula
Formula
Formula
Previous securities fair value adjustment balanceCr.
Amount
Securities fair value adjustmentDr.
Formula
Dec 31, 11
Account Title
Account Title
Amount
Amount
(d) How should the unrealized gains or losses be reported on Parneviks balance sheet?
Enter text answer as appropriate.
Problem 17-1, Page 8 of 13, 04/19/2012 , 09:30:17
Problem:
Course:
Date:
P17-2, Equity Investments - Available for Sale
Castleman Holdings, Inc. had the following available-for-sale investment portfolio at January 1, 2010.
1,000 shares of Evers Company at
$15.00 per share
$15,000
900 shares of Rogers Company at
$20.00 per share
$18,000
500 shares of Chance Company at
$9.00 per share
$4,500
Available-for-sale securities at cost:
$37,500
Securities fair value adjustment-Available-for-sale - Credit balance
($7,500)
Available-for-sale securities at fair value:
$30,000
During 2010, the following transactions took place:
1. On March 1, Rogers Company paid a
$2.00
per share dividend.
2. On April 30, Castleman Holdings, Inc. sold
300
shares of Chance Company
for
$11.00
per share
3. On May 15, Castleman Holding, Inc. purchased
100
more shares of Evers Co.
stock at
$16.00
per share
4. At December 31, 2010, the stocks had the following price per share values:
Evers Company
$17.00
Rogers Company
$19.00
Chance Company
$8.00
During 2011, the following transactions took place:
5. On February 1, Castleman Holding, Inc. sold the remaining Chance shares for
$8
per share.
6. On March 1, Rogers Company paid a
$2
per share dividend.
7. On December 21, Evers Company declared a cash dividend of
$3
per share to be
paid in the next month.
8. At December 31, 2011, the stocks had the following price per share values:
Evers Company
$19
Rogers Company
$21.00
Instructions:
(a) Prepare journal entries for each of the above transactions.
1
2
3
4
Mar 1, 10
Account Title
Dividend Revenue
Amount
Amount
Apr 30, 10 Account Title
Account Title
Account Title
Amount
May 15, 10 Account Title
Account Title
Amount
Amount
Amount
Amount
Dec 31, 10 Account Title
Amount
Account Title
Amount
Security
Cost
Fair
Value
Evers Company
Formula
Calculation as desired
Rogers Company
Formula
Calculation as desired
Chance Company
Formula
Calculation as desired
Total of Portfolio
Formula
Previous securities fair value adjustment bal..
Securities fair value adjustment
5
6
7
8
Feb 1, 11
Unrealized
Gain (Loss)
Formula
Formula
Formula
Formula
Formula
Formula
Formula
Formula
Amount
Formula
Account Title
Account Title
Account Title
Amount
Amount
Account Title
Account Title
Amount
Dec 21, 11 Account Title
Account Title
Amount
Mar 1, 11
Amount
Amount
Amount
Dec 31, 11 Account Title
Amount
Account Title
Amount
Security
Cost
Fair
Value
Evers Company
Formula
Calculation as desired
Rogers Company
Formula
Calculation as desired
Total of Portfolio
Formula
Previous securities fair value adjustment bal.
Securities fair value adjustment
Unrealized
Gain (Loss)
Formula
Formula
Formula
Formula
Formula
Formula
Amount
Formula
(b) Prepare a partial balance sheet showing the Investments account at December 31, 2010 and 2011.
Partial Balance Sheet as of:
Current Assets - Dividends Receivable
Investments:
Available-for-sale securities, at fair value
Stockholders' equity:
Accumulated other comprehensive gain
December 31, 2010
Amount
December 31, 2011
Amount
Amount
Amount
Amount
Amount
Problem 17-2, Page 9 of 13, 04/19/2012 , 09:30:17
Exercise:
Course:
Date:
E18-1, Sales Recorded Both Gross and Net
On June 3, Hunt Company sold to Ann Mount merchandise having a sale price of
$8,000
with terms 2/10, n/60, f.o.b. shipping point. An invoice totaling
$120
terms n/30, was received by Mount on June 8 from the Olympic Transport Service for the freight cost.
Upon receipt of the goods, June 5, Mount notified Hunt Company that merchandise costing
$600
contained flaws that rendered it worthless. The same day Hunt Company issued a
credit memo covering the worthless merchandise and asked that it be returned at company expense.
The freight on the returned merchandise was
$24
paid by Hunt Company on June 7. On
June 12, the company received a check for the balance due from Mount.
Instructions:
(a) Prepare journal entries on Hunt Company books to record all the events noted above under each
of the following bases.
(1) Sales and receivables are entered at gross selling price.
Jun 3
Jun 5
Jun 7
Jun 12
Account Title
Account Title
Amount
Account Title
Account Title
Amount
Account Title
Account Title
Amount
Account Title
Account Title
Account Title
Amount
Amount
Amount
Amount
Amount
Amount
(2) Sales and receivables are entered net of cash discounts.
Jun 3
Jun 5
Jun 7
Jun 12
Account Title
Account Title
Amount
Account Title
Account Title
Amount
Account Title
Account Title
Amount
Account Title
Account Title
Amount
Amount
Amount
Amount
Amount
(b) Prepare the journal entry under basis 2, assuming that Ann Mount did not remit payment until
August 5.
Aug 5
Account Title
Amount
Account Title
Amount
Account Title
Amount
Exercise 18-1, Page 10 of 13, 04/19/2012, 09:30:17
Exercise:
Course:
Date:
E18-2, Gross Profit on Uncompleted Contract
On April 1, 2010, Dougherty Inc. entered into a cost plus-fixed-fee contract to construct an electric
generator for Altom Corporation. At the contract date, Dougherty estimated that it would take
2 years to complete the project at a cost of
$2,000,000 The fixed fee stipulated in the contract is
$450,000
Dougherty appropriately accounts for this contract under the percentage-ofcompletion method. During 2010 Dougherty incurred costs of
$800,000 related to the
project. The estimated cost at December 31, 2010, to complete the contract is
$1,200,000
Altom was billed
$600,000 under the contract.
Instructions:
Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the
contract for the year ended December 31, 2010. Show supporting computations in good form.
DOUGHERTY INC.
Computation of Gross Profit to Be Recognized on Uncompleted Contract
For The Year Ended December 31, 2010
Total contract price
Estimated contract cost at completion
Fixed fee
Total
Amount
Amount
Formula
Total estimated cost
Gross profit
Percentage of completion
Gross profit to be recognized
Amount
Amount
Formula
Formula
Exercise 18-2, Page 11 of 13, 04/19/2012, 09:30:17
Problem:
Course:
Date:
P18-1, Recognition of Profit and Entries on Long-term Contract
On March 1, 2010, Chance Company entered into a contract to build an apartment building. It is estimated that the building will
cost
$2,000,000
and will take 3 years to complete. The contract price was
$3,000,000 The
information that follows pertains to the construction period:
Costs to date:
Estimated costs to complete:
Progress billing to date:
Cash collected to date:
2010
$600,000
1,400,000
1,050,000
950,000
2011
$1,560,000
520,000
2,000,000
1,950,000
2012
$2,100,000
0
3,000,000
2,850,000
Instructions:
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
Gross profit recognized in:
2010
$3,000,000
Contract price
Costs:
Costs to date
Estimated costs to complete
Total estimated profit
Percentage completed to date
Total gross profit recognized
Less: GP recognized in previous years
Gross profit recognized in current year
$600,000
1,400,000
2,000,000
1,000,000
30%
300,000
0
$300,000
2011
2012
$3,000,000
$1,560,000
520,000
$3,000,000
$2,100,000
2,080,000
920,000
75%
690,000
300,000
$390,000
2,100,000
900,000
100%
900,000
690,000
$210,000
(b) Prepare all necessary journal entries for 2012.
540,000
Construction in Process
Materials,Cash,Payable
540,000
1,000,000
Accounts Receivable
Billings on Construction in Process
1,000,000
Cash
Accounts Receivable
900,000
Construction Expenses
Construction in Process
Revenue from Long-term contracts
540,000
210,000
900,000
750,000
3,000,000
Billings on Construction in Process
Construction in Process
3,000,000
(c) Prepare a partial balance sheet for December 31, 2011, showing the balances in the receivables and inventory accounts.
CHANCE COMPANY
Balance Sheet (Partial)
December 31, 2011
Current assets:
Accounts receivable
Inventories
Construction in Process
Less: Billings
Costs and recognized gross profit in excess of billings
$50,000
$2,250,000
2,000,000
Problem 18-1, Page 12 of 13, 04/19/2012, 09:30:17
$250,000
Problem:
P18-2, Completed Contract and Percentage of
Completion with Interim Loss
Course:
Date:
Reynolds Custom Builders (RCB) was established in 1985 by Avery Conway and initially built high-quality
customized homes under contract with specific buyers. In the 1990s, 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.
Contract price
Estimated costs
Progress billings
Cash collections
BLUESTEM TRACTOR PLANT
$8,000,000
2010
2011
$1,600,000 $2,880,000
1,000,000
2,500,000
800,000
2,300,000
2012
$1,920,000
4,500,000
4,900,000
Instructions:
(a) Explain the difference between completed-contract revenue recognition and percentageof-completion revenue recognition.
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 charges or credits to income. Completed-contract revenue recognition is used for long-term
projects when estimates of revenue and costs are not reliable.
The percentage-of-completion method of revenue recognition recognizes income and associated costs in
each accounting period based upon progress. This method is preferred for long-term projects when
estimates of revenues and costs are reasonably dependable. Under the percentage-of-completion method,
the current status
(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 2010, 2011, and
2012, 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.
Year
2010
2011
2012
Year
2010
2011
2012
Year
2010
2011
2012
Percentage-of-Completion (Cost-to-Cost Basis)
($000 omitted)
Estimated
Costs
Estimated
Gross
to Date
Total Costs
Profit
8,000
1,600
6,400
1,600
8,000
4,480
6,400
1,600
8,000
6,400
6,400
1,600
Contract
Price
Percent
Complete
25.00%
70.00%
100.00%
Contract
Price
8,000
8,000
8,000
Revenue recognition
Percent
Revenue
Complete Recognizable
25.00%
2,000
70.00%
5,600
100.00%
8,000
Less Prior
Year(s)
0
2,000
5,600
Current
Year
2,000
3,600
2,400
Estimated
Profit
1,600
1,600
1,600
Profit recognition
Percent
Profit
Complete Recognizable
25.00%
400
70.00%
1,120
100.00%
1,600
Less Prior
Year(s)
0
400
1,120
Current
Year
400
720
480
(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
$800,000 in 2010 to bring
the site into compliance with the ordinances and to overcome wetlands barriers to construction.
Year
2010
2011
2012
Year
2010
2011
2012
Year
2010
2011
2012
Percentage-of-Completion (Cost-to-Cost Basis)
($000 omitted)
Estimated
Contract
Costs
Estimated
Gross
Price
to Date
Total Costs
Profit
8,000
2,400
7,200
800
8,000
5,280
7,200
800
8,000
7,200
7,200
800
Percent
Complete
33.33%
73.33%
100.00%
Contract
Price
8,000
8,000
8,000
Revenue recognition
Percent
Revenue
Complete Recognizable
33.33%
2,666
73.33%
5,866
100.00%
8,000
Less Prior
Year(s)
0
2,666
5,866
Current
Year
2,666
3,200
2,134
Estimated
Profit
800
800
800
Profit recognition
Percent
Profit
Complete Recognizable
33.33%
267
73.33%
587
100.00%
800
Less Prior
Year(s)
0
267
587
Current
Year
267
320
213
(3) Further assume that, in addition to the cost overruns of
$800,000 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
$850,000 in 2011. It is
not anticipated that any cost overruns will occur in 2012.
Year
2010
2011
2012
Year
2010
2011
2012
Year
2010
2011
2012
Percentage-of-Completion (Cost-to-Cost Basis)
($000 omitted)
Estimated
Costs
Estimated
Gross
to Date
Total Costs
Profit
8,000
2,400
7,200
800
8,000
6,130
8,050
(50)
8,000
8,050
8,050
(50)
Contract
Price
Contract
Price
8,000
8,000
8,000
Estimated
Profit
800
(50)
(50)
Revenue recognition
Percent
Revenue
Complete Recognizable
33.33%
2,666
76.15%
6,092
100.00%
8,000
Percent
Complete
33.33%
76.15%
100.00%
Less Prior
Year(s)
0
2,666
6,092
Current
Year
2,666
3,426
1,908
Profit recognition
Percent
Profit
Less Prior
Complete Recognizable
Year(s)
33.33%
267
0
100.00%
(50)
267
100.00%
(50)
(50)
Current
Year
267
(317)
0
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.
Problem 18-2 , Page 13 of 13, 04/19/2012 , 09:30:17