Question 5 19 these perspectives are referred to as

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has used debt to finance its assets). Question 5-19 These perspectives are referred to as the discrete and integral part approaches. Current interim reporting requirements and existing practice generally view interim reports as integral parts of annual statements. However, the discrete approach is applied to some items. Most revenues and expenses are recognized in interim periods as incurred. However, if an expenditure clearly benefits more than just the period in which it is incurred, the expense should be spread among the periods benefited. Examples include annual repair expenses, property tax expense, and advertising expenses incurred in one quarter that clearly benefit later quarters. These are assigned to each quarter through the 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 interim period in which they occur. 5-5
Chapter 05 - Income Measurement and Profitability Analysis BRIEF EXERCISES Brief Exercise 5-1 2011 gross profit = $3,000,000 – 1,200,000 = $1,800,000 2012 gross profit = 0 Brief Exercise 5-2 2011 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 5-3 No gross profit will be recognized in either 2011 or 2012. Gross profit will not be recognized until the entire $1,200,000 cost of the land is recovered. In this case, it will take 8 payments to recover the cost of the land ($1,200,000 $150,000 = 8), so gross profit recognition will equal 100% of the cash collected beginning with the ninth installment payment. Brief Exercise 5-4 Initial deferred gross profit ($3,000,000 – 1,200,000) $1,800,000 Less 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 $1,620,000 5-6
Chapter 05 - Income Measurement and Profitability Analysis Brief Exercise 5-5 The seller must meet certain criteria before revenue can be recognized in situations when the right of return exists. The most critical of these criteria is that the seller must be able to make reliable estimates of future returns. If Meyer’s management can make reliable estimates of the furniture that will be returned, revenue can be recognized when the product is delivered, assuming the company has no additional obligations to the buyer. If reliable estimates cannot be made because of significant uncertainty, revenue and related cost recognition is delayed until the uncertainty is resolved. Brief Exercise 5-6 Total 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) = $5,000,000 multiplied by the % of completion 40 % Gross profit recognized the first year $2,000,000 First year revenue = $20,000,000 x 40% = $8,000,000 Brief Exercise 5-7 Assets: Accounts receivable ($7 million – 5 million) $2,000,000 Cost plus profit ($6 million + $2 million*) in excess of billings ($7 million) 1,000,000 * Total estimated gross profit ($20 million – 15 million) = $5,000,000 multiplied by the % of completion 40 % Gross profit recognized in the first year $2,000,000 5-7

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