Income Measurement and Profitability Analysis

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Chapter 5 Income Measurement and Profitability Analysis

exercises

Exercise 5–1

Requirement 1
Alpine West should recognize revenue over the ski season on an anticipated usage basis, in this case equally throughout the season. The fact that the $450 price is nonrefundable is not relevant to the revenue recognition decision. Revenue should be recognized as it is earned, in this case as the services are provided during the ski season.

Requirement 2

November 6, 2013
Cash450
Unearned revenue450
To record the cash collection

December 31, 2013
Unearned revenue ($450 x 1/5)90
Revenue90
To recognize revenue earned in December (no revenue earned in November, as season starts on December 1).

Requirement 3
$90 is included in revenue in the 2013 income statement. The $360 remaining balance in unearned revenue is included in the current liability section of the 2013 balance sheet.

Exercise 5–3

Requirement 1
2013 cost recovery %:
$234,000
= 65% (gross profit % = 35%)
$360,000

2014 cost recovery %:
$245,000
= 70% (gross profit % = 30%) $350,000

2013 gross profit:
Cash collection from 2013 sales of $150,000 x 35%=$52,500

2014 gross profit:
Cash collection from 2013 sales of $100,000 x 35%=$ 35,000 +Cash collection from 2014 sales of $120,000 x 30%= 36,000
Total 2014 gross profit $71,000

Requirement 2
2013 deferred gross profit balance:
2013 initial gross profit ($360,000 – 234,000)$126,000
Less: Gross profit recognized in 2013 (52,500)
Balance in deferred gross profit account$73,500

2014 deferred gross profit balance:
2013 initial gross profit ($360,000 – 234,000)$ 126,000
Less: Gross profit recognized in 2013 (52,500)
Gross profit recognized in 2014(35,000)

2014 initial gross profit ($350,000 – 245,000)105,000
Less: Gross profit recognized in 2014 (36,000)
Balance in deferred gross profit account$107,500

Exercise 5–4

2013
Installment receivables360,000
Inventory234,000
Deferred gross profit126,000
To record installment sales

2013
Cash150,000
Installment receivables150,000
To record cash collections from installment sales

2013
Deferred gross profit52,500
Realized gross profit52,500
To recognize gross profit from installment sales

2014
Installment receivables350,000
Inventory245,000
Deferred gross profit105,000
To record installment sales

2014
Cash220,000
Installment receivables220,000
To record cash collections from installment sales

2014
Deferred gross profit71,000
Realized gross profit71,000
To recognize gross profit from installment sales

Exercise 5–5

Requirement 1
YearIncome recognized
2013$180,000 ($300,000 – 120,000)
2014- 0 -
2015- 0 -
2016 - 0 -
Total$180,000

Requirement 2
Cost recovery %:
$120,000
------------- = 40% (gross profit % = 60%) $300,000

| | | | | |Year |Cash Collected |Cost Recovery(40%) |Gross Profit(60%) | |2013 |$ 75,000 |$ 30,000 |$ 45,000 | |2014 | 75,000 | 30,000 | 45,000 | |2015 | 75,000 | 30,000 | 45,000 | |2016 |...
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