# The percentage of completion method is not

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The percentage-of-completion method is not appropriate in this case. There is no contract in place and until the completion of the home, the transfer of title, and the receipt of the full sales price, the earnings process is not virtually complete and there is still significant uncertainty as to cash collection. Also, the sales price is not fixed.Requirement 6Income statement:Sales revenue (3 x \$600,000)\$1,800,000Cost of goods sold (3 x \$450,000)1,350,000Gross profit\$ 450,000Balance sheet:Current assets:Inventory (work in process)\$2,700,000Current liabilities:Customer deposits (or unearned revenue)300,000**\$600,000 x 10% = \$60,000 x 5 = \$300,000Requirement 15-67Problem 5-10
Chapter 05 - Income Measurement and Profitability Analysisa.January 30, 2011Cash ...........................................................................200,000Note receivable ..........................................................1,000,000..................................Unearned franchise fee revenue.....................................................................1,200,000b.September 1, 2011Unearned franchise fee revenue..................................1,200,000................................................Franchise fee revenue .....................................................................1,200,000c.September 30, 2011Accounts receivable (\$40,000 x 3%)............................1,200..........................................................Service revenue ...........................................................................1,200d.January 30, 2012Cash............................................................................100,000..........................................................Note receivable .......................................................................100,0005-68
Chapter 05 - Income Measurement and Profitability AnalysisProblem 5-10 (continued)Requirement 2a.January 30, 2011Cash ...........................................................................200,000Note receivable ..........................................................1,000,000...................................Deferred franchise fee revenue.....................................................................1,200,000Note: Could also show as:Cash ...........................................................................200,000Note receivable ..........................................................1,000,000...................................Deferred franchise fee revenue.....................................................................1,000,000..................................Unearned franchise fee revenue.......................................................................200,000b.September 1, 2011Deferred franchise fee revenue ..................................200,000..........................Franchise fee revenue(cash collected).......................................................................200,000c.September 30, 2011Accounts receivable (\$40,000 x 3%)............................1,200..........................................................Service revenue ...........................................................................1,200d.January 30, 20125-69
Chapter 05 - Income Measurement and Profitability AnalysisCash............................................................................100,000..........................................................Note receivable .......................................................................100,000Deferred franchise fee revenue ..................................100,000................................................Franchise fee revenue .......................................................................100,0005-70
Chapter 05 - Income Measurement and Profitability AnalysisProblem 5-10 (concluded)Requirement 3Balance SheetAt December 31, 2011Current assets:Installment notes receivable (\$1,000,000) less deferred franchise fee revenue (\$1,000,000)Current liabilities:\$ -0-Unearned franchise fee revenue\$200,000Explanation: Revenue recognition on the entire note receivable is deferred. In addition, \$200,000 of unearned revenue must be shown as a liability.1. Inventory turnover ratio\$6,300 ÷ [(\$800 + 600) ÷ 2] = 9.02. Average days in inventory365 ÷ 9.0 = 40.56 days3.Receivables turnover ratio \$9,000 ÷ [(\$600 + 400) ÷ 2] = 18.04.Average collection period365 ÷ 18.0 = 20.28 days5.Asset turnover ratio \$9,000 ÷ [(\$4,000 + 3,600) ÷ 2] = 2.376.Profit margin on sales \$300 ÷ \$9,000 = 3.33%7.Return on assets \$300 ÷ [(\$4,000 + 3,600) ÷ 2] = 7.89%or: 3.33% x 2.37 times = 7.89%8.Return on shareholders’ equity \$300 ÷ [(\$1,500 + 1,350) ÷ 2] = 21.1%9.Equity multiplier[(\$4,000 + 3,600) ÷ 2] ÷ [(\$1,500 + 1,350) ÷ 2] = 2.6710. DuPont framework3.33% x 2.37 x 2.67 = 21.1%5-71Problem 5-11
Chapter 05 - Income Measurement and Profitability AnalysisRequirement 1On average, J&J collects its receivables in 14 days less than Pfizer.On average, J&J sells its inventory twice as fast as Pfizer.5-72Problem 5-12Receivables turnover=Net sales Accounts receivableJ&J=\$41,862 =6.37 times\$6,574Pfizer=\$45,188 =5.15 times\$8,775Average collection period =365 Receivables turnoverJ&J=365=57 days6.37Pfizer=365 =71 days5.15Inventory turnover=Cost of goods sold InventoriesJ&J=\$12,176 =3.39 times\$3,588Pfizer=\$9,832 =1.68 times\$5,837Average days in inventory =365 Inventory turnoverJ&J=365=108 days3.39Pfizer=365 =217 days1.68
Chapter 05 - Income Measurement and Profitability AnalysisProblem 5-12 (continued)Requirement 2Thereturn on assetsindicates a company's overall