Accounting 557

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Problem 1:
You are the Senior Accountant for the Patty Corporation which has several divisions. They each keep their own accounting books and have chosen the appropriate method of revenue recognition based on their operations. | |

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Pat's Electronics Division|  |
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Pat's Electronics Division sells computers through agents in various cities. Agents send orders and down payments to our company. The division then ships the goods F.O.B. shipping point directly to the customers. Revenue is recognized at the point of sale.| |

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Additional Financial Data:|  |
 | Orders for fiscal year 2012| $ 3,000,000 |  | Down Payments collected in 2012| $ 300,000 |  | Billed and shipped in 2012| $ 2,400,000 |  | Freight billed in 2012| $ 70,000 |  | Commissions paid to Agents (after ship to customer)| 10%|  | Warranty Returns as % of Sales| 1%|

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Pickle Construction Division|  |
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The Pickle construction division was working on one project for the 2012 fiscal year. They use the percentage of completion revenue recognition method.| |
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Contract for new administration building|  |
 | Total Contract Amount| $ 60,000,000 |  | Contract Grant Date| August 14, 2012|
 | Construction Began| September 1, 2012|
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 | Estimated Cost to Complete at beginning of contract| $ 52,000,000 |  | Estimated Time to Complete Project| 2 years|
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As of Dec 31, 2012|  |
 | Construction Costs incurred to date| $ 14,140,000 |  | Billings to date| $ 19,500,000 |  | Expected costs to complete| $ 36,360,000 |  |  |  |

Peace Book Distribution Division|  |
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Our book distribution division sells to national bookstores. Our division allows for up to 25% of sales in returns. For the past 4 years, returns have averaged 20%. We record revenue based on revenue recognition when the right of return exists.| |

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 | Total Sales for 2012| $ 9,000,000 |  | Sales Still Available for return for six months| $ 2,000,000 |  | Actual Returns on Sales not returnable| 21%|

 | 2011 Sales collected in 2012| $ 2,500,000 |  | 2011 Sales returned in 2012| 19%|
Required:|  |
 | (a) We have studied several methods of revenue recognition. Define and describe each of the following methods of revenue recognition, and indicate whether each is in accordance with generally accepted accounting principles.|  | - Point of sale.|  |

 | - Completion-of-production.|  |
 | - Percentage-of-completion.|  |
 | - Installment-sales.|  |
 | (b) Calculate the revenue to be recognized in fiscal year 2012 for each division of Patty Corporation in accordance with generally accepted accounting principles. Show all calculations for full credit.|

Problem 1 Answer:
Pat's Electronics Division Answer:|  |  |
 | Revenue for 2012|  | $ 2,400,000 |
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 | Notes:|  |  |  |
 |  | Revenue is the amount of goods shipped actually billed and shipped when revenue is recognized at the point of sale (F.O.B. shipping point). Orders and down payments are not Sales. Actual freight costs are expenses made by the seller that will be reimbursed by the buyer at the time of payment and are not revenue. Commissions and warranty returns are selling expenses and will be part of the income statement as operating expenses.|  |  | |

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Pickle Construction Division Answer:|  |  |
 | Contract Price|  | $ 60,000,000...
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