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Ch13HWSo(6th)l - Chapter 13 HW Assignment E13-4 6 7 8 10 14...

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Chapter 13 HW Assignment: E13-4, 6, 7, 8, 10, 14, 15, 17, 19, 20, 21, 22; P13-4, 5, 10, 21 (1 – 12) Solutions E13-4 a. In general, San Miguel should not recognize revenue until: i. It has completed most of the activities necessary to produce and sell the goods or services, ii. It has incurred the costs associated with producing and selling the goods or services, iii. It can objectively measure the amount of revenue it has earned, and iv. It is reasonably sure that it is going to collect cash from the purchaser. In other words, revenue cannot be recognized until the company has performed those activities that earn it the right to receive payment from the buyer. Also, the amount of revenue and collectibility must be reasonably determinable. The critical point for the sale of equipment appears to be when title passes to the purchaser. At this point, San Miguel has performed those activities necessary to earn the revenue and is reasonably assured of receiving payment (otherwise they wouldn’t turn over the equipment). Payment of cash prior to or subsequent to the passage of title normally does not affect revenue recognition unless substantial uncertainty about receipt of the cash exists. b. San Miguel’s service contracts provide for service over a period of time. Therefore, service revenue should be recognized as time passes. For example, if a three-year contract is sold for $6,000, San Miguel would recognize $2,000 of service revenue during the first year of the contract. Other types of contracts might result in a different recognition process. E13-6 a. ASSETS = LIABILITIES + OWNERS' EQUITY Date Accounts Cash Other Assets Contrib- uted Capital Retained Earnings Accounts Receivable 18,600,000 Sales Revenue 18,600,000 Cash 18,750,000 Accounts Receivable –18,750,000 Accounts Receivable - 165,000 Allowance for Doubtful Accounts 165,000 Allowance for Doubtful Accounts - 273,000 Doubtful Accounts Expense - 273,000 Chapter 13 HW Solutions Page 1
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Calculation of doubtful accounts expense: Allowance for doubtful accounts, beginning of 2008 $ 450,000 Account written off (165,000 ) Balance after write-off $ 285,000 Allowance required at end of 2008 ($18,600,000 × 0.03) $ 558,000 Balance after write-off (285,000 ) Amount of additional allowance required $ 273,000 b. Accounts receivable, net, at 12/31/08: Accounts receivable, 1/1/08 ($3,200,000 + $450,000) $ 3,650,000 Credit sales 18,600,000 Cash collected (18,750,000) Accounts written off (165,000 ) Accounts receivable, 12/31/08 $ 3,335,000 Allowance for doubtful accounts ($18,600,000 × 0.03) (558,000 ) Accounts receivable, net, 12/31/08 $ 2,777,000 E13-7 a. The entire amount should be recognized as a sale in April, when the machine is delivered to the customer and the earnings process is completed. b. The cost of the components should be recognized in April, as part of cost of goods sold, to match the expense with the recognition of the related revenue. c. The labor costs, including health and pension benefits, would also become part of cost of goods sold in April, to match the expense with the recognition of the related revenue.
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