ch18 - SOLUTIONS TO B EXERCISES E18-1B(1520 minutes(a...

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SOLUTIONS TO B EXERCISES E18-1B (15–20 minutes) (a) Chester Books could recognize revenue at the point of sale based upon the time of shipment because the books are sold f.o.b. shipping point. Because of the return policy, one might argue in favor of the cash collection basis. Because the returns can be estimated, one could argue for shipping point less estimated returns. (b) Based on the available information and lack of any information indicat- ing that any of the criteria in FASB Statement No. 48 were not met, the correct treatment is to report revenue at the time of shipment as the gross amount less the 16% normal return factor. This is supported by the legal test of transfer of title and the criteria in FASB No. 48 . One could be very conservative and use the 20% maximum return al- lowance. (c) October sale entry: Accounts Receivable ...................................... 6,500,000 Allowance for Returns ............................ 1,040,000 ($6,500,000 X 16%) Sales Revenue ......................................... 5,460,000 (d) January collection: Cash ................................................................. 5,775,000 Allowance for Returns .................................... 1,040,000 Sales Revenue ......................................... 315,000 Accounts Receivable .............................. 6,500,000 18-1
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E18-2B (15–20 minutes) (a) (1) 10/5 Accounts Receivable—Dunn & Brooks ........ 23,000 Sales ......................................................... 23,000 10/9 Sales Returns and Allowances ................... 2,400 Accounts Receivable—Dunn & Brooks... 2,400 10/25 Transportation-Out ....................................... 36 Cash ........................................................ 36 11/2 Cash ............................................................... 20,600 Accounts Receivable—Dunn & Brooks... 20,600 (2) 10/5 Accounts Receivable—Dunn & Brooks ...... 22,770 Sales [$23,000 – (1% X 23,000)] ........... 22,770 10/9 Sales Returns and Allowances ................... 2,376 Accounts Receivable—Dunn & Brooks... 2,376 [$2,400 – (1% X $2,400)] 10/25 Transportation-Out ....................................... 36 Cash ........................................................ 36 11/2 Cash ............................................................... 20,600 Accounts Receivable—Dunn & Brooks ...... 20,394 Sales Discounts Forfeited ............................ 206 (1% X $20,600) (b) 10/14 Cash ............................................................... 20,394 Accounts Receivable—Dunn & Brooks... 20,394 18-2
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E18-3B (10–15 minutes) Cash (2008 memberships) ................................... 5,760,000 [400 X $16,000 X (1.00 – 0.10)] Unearned Revenue (current) ........................ 5,760,000 Cash (2008 memberships) ................................... 1,920,000 [150 X $16,000 X (1.00 – .20)] Unearned Revenue (noncurrent) ................. 1,920,000 Cash (2009 memberships) ................................... 1,920,000 [150 X $16,000 X (1.00 – .20)] Unearned Revenue (noncurrent) ................. 1,920,000 18-3
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E18-4B (20–25 minutes) (a) Gross profit recognized in: 2007 2008 2009 Contract price $2,500,000 $2,500,000 $2,500,000 Costs: Costs to date $ 600,000 $1,435,000 $2,100,000 Estimated costs to complete 1,400,000 2,000,000 615,000 2,050,000 0 2,100,000 Total estimated profit 500,000 450,000 400,000 Percentage com- pleted to date 30% * 70% ** 100% Total gross profit recognized 150,000 315,000 400,000 Less: Gross profit recognized in previous years 0 150,000 315,000 Gross profit recognized in current year $ 150,000 $ 165,000 $ 85,000 * *$600,000 ÷ $2,000,000 **$1,435,000 ÷ $2,050,000 18-4
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E18-4B (Continued) (b) Construction in Process ........................................ 835,000 ($1,435,000 – $600,000) Materials, Cash, Payables, etc ................... 835,000 Accounts Receivable ($500,000 – $100,000) ........ 400,000 Billings and Construction in Process ........... 400,000 Cash ($300,000 – $100,000) ................................... 200,000 Accounts Receivable ...................................... 200,000 Construction Expenses ......................................... 835,000 Construction in Process ........................................ 165,000 Revenue from Long-term Contracts ............. 1,000,000* *$2,500,000 X (70% – 30%) (c) Gross profit recognized in: 2007 2008 2009 Gross profit $ –0– $ –0– $400,000* *$2,500,000 – $2,100,000 18-5
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E18-5B (10–15 minutes) (a) Contract billings to date $260,000 Less: Accounts receivable 12/31/07 150,500 Portion of contract billings collected $109,500 (b) The ratio of gross profit to revenue recognized in 2007: $130,000 = 20% $650,000 The initial estimated total gross profit before tax on the contract: $25,000,000 X .20 = $5,000,000 E18-6B (10–12 minutes) Welton, Inc.
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