Midterm Comm293

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Sauder School of Business COMM 293 Midterm Examination Question Booklet

Answer all questions in the other (answer) booklet, this booklet WILL NOT BE REVIEWED FOR GRADING PURPOSES Time: 110 minutes Total Marks: 100
No programmable calculators are permitted. Please show all calculations in an orderly and clear format for part marks. Time management is crucial. Be sure to attempt each question. No questions will be permitted during this examination. If you need to make an assumption, state it and continue. Read the questions carefully before making any assumptions. Question 1 (18 marks; suggested time 18 minutes) Revenue Recognition

Part A Brigante Construction Ltd. entered into a contract on October 1, 2002 with the province of British Columbia to construct a multi-unit residential complex in Whistler. The contract price is fixed at $500 million and Brigante expects that the project will be complete by the end of 2005. Other information re: the contract is provided below. Brigante has a December 31st year-end. In $ millions Costs incurred (during the year) Estimated costs to complete at the end of the year 2002 $ 80 320 2003 $ 125 235 2004 $ 140 130 2005 $ 75 0

Required: (a) Determine the amount of revenue and gross profit that Brigante would record in each of the four years using the Completed Contract method. (4 marks) (b) Determine the amount of revenue and gross profit that Brigante would record in each of the four years using the Percentage of Completion method. Please round to the nearest million. (10 marks) Part B Costless Ltd. is a nationwide wholesaler who sells directly to consumers through its warehouse stores. While customers generally pay cash at the time of sale for most purchases, Costless sells some of its more expensive items (e.g., televisions) on “layaway”. Under a layaway arrangement, an individual contractually agrees to make a down payment equal to 20% of the purchase price. The customer then pays the remaining 80% two months later. Costless will deliever the item only when full payment has been received. During the two months, Costless

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agrees not to sell the item to another party. If the customer decides not to take delivery of the good, or is unable to pay the balance owing, Costless is entitled to keep the down payment as compensation. Restated, the 20% is a non-refundable deposit. Once Costless releases the good to the customer, the company has no further obligations. Required: (c) Based on your understanding of revenue recognition and accounting principles, how do you think the 20% down payment (non-refundable deposit) should be accounted for by Costless? Restated, should the revenue be recorded when the cash is received or delayed (deferred) until all the cash has been received? Give two reasons that support your position. (4 marks) Question 2 (18 marks; suggested time 18 minutes) Accounts Receivable

Elway Ltd. is a publicly traded company who sells athletic gear to several professional sports leagues. All of the company’s sales are made on credit and payment is required within 30 days after the sale. The following information is available for Elway’s fiscal year ended December 31, 2005 (prior to any year end adjusting entries for bad debts): Credit sales Accounts receivable (1/1/2005) Accounts receivable (12/31/2005) Allowance for doubtful accounts (1/1/2005) Bad debts expense (12/31/2005) Writeoffs of accounts receivable Recoveries of accounts previously written off $ 5,580,000 CR 520,000 DR 641,200 DR 31,000 CR -041,000 7,500

Elway’s CFO estimates that bad debts expense is normally 1.5% of credit sales. However, the company is considering a switch to the aging method for the current period. Under the aging method, the company would apply the following percentages to accounts receivable on 12/31/2005: Current 1 – 30 days late 31 – 60 days late 61 – 90 days late 91+ days late $ 512,000 69,200 26,000 12,000 22,000 $ 641,200 4% 10% 20% 40% 80%

Required: (a) Determine the...
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