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has used debt to finance its assets).Question 5-19These perspectives are referred to as the discrete and integral part approaches. Current interimreporting requirements and existing practice generally view interim reports as integral parts ofannual statements. However, the discrete approach is applied to some items. Most revenues andexpenses are recognized in interim periods as incurred. However, if an expenditure clearly benefitsmore than just the period in which it is incurred, the expense should be spread among the periodsbenefited. Examples include annual repair expenses, property tax expense, and advertising expensesincurred in one quarter that clearly benefit later quarters. These are assigned to each quarter throughthe use of accruals and deferrals. On the other hand, major events such as discontinued operations,extraordinary items, and unusual or infrequent items should be reported separately in the interimperiod in which they occur. 5-5
Chapter 05 - Income Measurement and Profitability AnalysisBRIEF EXERCISESBrief Exercise 5-12011 gross profit = $3,000,000 – 1,200,000 = $1,800,0002012 gross profit = 0Brief Exercise 5-22011 Cost recovery % = Cost Sales:$1,200,000= 40% (implying a gross profit % = 60%)$3,000,000 2011 gross profit = 2011 cash collection of $150,000 x 60% = $90,000 2012 gross profit = 2012 cash collection of $150,000 x 60% = $90,000 Brief Exercise 5-3No gross profit will be recognized in either 2011 or 2012. Gross profit will notbe recognized until the entire $1,200,000 cost of the land is recovered. In this case, itwill take 8 payments to recover the cost of the land ($1,200,000 $150,000 = 8), sogross profit recognition will equal 100% of the cash collected beginning with the ninthinstallment payment.Brief Exercise 5-4Initial deferred gross profit ($3,000,000 – 1,200,000)$1,800,000Less gross profit recognized in 2011 ($150,000 x 60%)(90,000)Less gross profit recognized in 2012 ($150,000 x 60%)(90,000)Deferred gross profit at the end of 2012$1,620,0005-6
Chapter 05 - Income Measurement and Profitability AnalysisBrief Exercise 5-5The seller must meet certain criteria before revenue can be recognized insituations when the right of return exists. The most critical of these criteria is that theseller must be able to make reliable estimates of future returns. If Meyer’smanagement can make reliable estimates of the furniture that will be returned, revenuecan be recognized when the product is delivered, assuming the company has noadditional obligations to the buyer. If reliable estimates cannot be made because ofsignificant uncertainty, revenue and related cost recognition is delayed until theuncertainty is resolved.Brief Exercise 5-6Total estimated cost to complete = $6 million + $9 million = $15 million% of completion = $6 million $15 million = 40%Total estimated gross profit ($20 million – 15 million) =$5,000,000multiplied by the % of completion40%Gross profit recognized the first year$2,000,000First year revenue = $20,000,000 x 40% = $8,000,000Brief Exercise 5-7Assets:Accounts receivable ($7 million – 5 million)$2,000,000Cost plus profit ($6 million + $2 million*)in excess of billings ($7 million)1,000,000* Total estimated gross profit ($20 million – 15 million) =$5,000,000multiplied by the % of completion40%Gross profit recognized in the first year$2,000,0005-7