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PRactice Final Solution

# PRactice Final Solution - Accounting 381(SOLUTION Practice...

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Question I: Revenue 1. ( 17 points ) Salerno Construction, Inc. has consistently used the percentage-of-completion method to recognize revenue on its long-term construction contracts. During 2004, Salerno started work on a \$1,200,000 construction contract, which it plans to complete in 2006. The following information was taken from Salerno’s accounting records: 2004 2005 Cumulative costs incurred as of year-end 204,000 812,500 Estimated costs to complete at year-end 816,000 437,500 Total estimated costs at year-end 1,020,000 1,250,000 Progress billings during year 400,000 400,000 Collections during year 300,000 500,000 a. What amount of revenue, expense, and gross profit should Salerno have recognized on this contract for the year ended 12/31/04? 2004 Revenue: ___________240,000______________ 2 pts 2004 Expense: ___________204,000_______________ 2 pts 2004 Gross Profit: __________36,000_______________ 2 pts b. Prepare the December 31, 2004 balance sheet disclosure of construction in process and related billings. Be sure to indicate whether the amount is an asset or a liability. Billings in excess of CIP (1/2 pt for title) (400K – 240K) = 160,000 (1 1/2 pt. for amount) 2
Question I, continued c. Calculate the amount of revenue, expense, and gross profit that Salerno will report in 2005. 2005 Revenue: __________540,000_______________ 2 pts 2005 Expense: __________626,000_______________ 2 pts 2005 Gross Profit: __________(86,000)_______________ 2 pts d. What would be the effect on income (if any) for 2005 if Salerno used the Completed Contract Method to account for its long-term construction contracts instead of the Percent Completion Method? If Salerno used the Completed Contract Method, they would not report any revenue in 2005 but they would report a loss on the contract of \$50,000 because there is an overall contract loss. Since they reported expenses greater than revenues (86,000 – 50,000 for overall contract loss and 36,000 for previously recognized gross profit) under the percentage completion method, net income would be higher if they used the completed contract method (this method only reports expenses greater than revenue of 50,000.). 3 pts Completed contract % completion Net loss 2005 -50,000 -86,000 3

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Question I, continued 2. (10 points) Riccolo, Inc. makes all sales on installment. The following information is provided for Riccolo, Inc. in 2007: Inventory on hand at end of year \$ 120,000 Inventory on hand, beginning of year \$ 325,000 Installment sales in 2007 \$1,000,000 2007 Collections on 2007 installment sales \$ 580,000 2007 Purchases \$ 300,000 Instructions i)
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