Installment sales; alternative recognition methods
( LO1 LO2
On June 1, 2006, the Luttman and Dowd Company sold inventory to the Ushman Corporation for $400,000. Terms of the sale called for a down payment of $100,000 and four annual installments of $75,000 due on each June 1, beginning June 1, 2007. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster $150,000. The company uses the perpetual inventory system.
1.Compute the amount of gross profit to be recognized from the installment sale in 2006, 2007, 2008, 2009, and 2010 using point of delivery revenue recognition. Ignore interest charges. 2.Repeat requirement 1 applying the installment sales method. 3.Repeat requirement 1 applying the cost recovery method.
Construction accounting; percentage-of-completion and completed contract methods
The Ugenti Construction Company contracted to construct a warehouse building for $2,600,000. Construction began in 2006 and was completed in 2007. Data relating to the contract are summarized below:
Costs incurred during the year$ 360,000$1,650,000
Estimated costs to complete as of 12/311,560,000 -
Billings during the year 430,000 2,130,000
Cash collections during the year320,000 2,280,000
1.Compute the amount of gross profit or loss to be recognized in 2006 and 2007 using the percentage-of-completion method. 2.Compute the amount of gross profit or loss to be recognized in 2006 and 2007 using the completed contract method. 3.Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2006 using the percentage-of completion method. 4.Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2006 using the completed contract method.
Percentage-of-completion method; loss projected on entire project
On April 13, 2006, the Pagano Construction Company entered into a three-year construction contract to build a mall for a price of $12,000,000. During 2006, costs of $3,000,000 were incurred with estimated costs of $6,000,000 yet to be incurred. Billings of $3,800,000 were sent and cash collected was $3,250,000. In 2007, costs incurred were $4,000,000 with remaining costs estimated to be $5,600,000. 2007 billings were $3,500,000 and $3,600,000 cash was collected. The project was completed in 2008 after additional costs of $5,800,000 were incurred. The company’s fiscal year-end is December 31. Arrow uses the percentage-of-completion method.
1.Calculate the amount of gross profit or loss to be recognized in each of the three years. 2.Prepare journal entries for 2006 and 2007 to record the transactions described (credit “Various accounts” for construction costs incurred). 3.Prepare a partial balance sheet to show the presentation of the project as of December 31, 2006 and 2007.
Franchise sales; revenue recognition
On November 15, 2006, the Coldstone Ice Cream Company entered into a franchise agreement with an individual. In exchange for an initial franchise fee of $25,000, Coldstone will provide initial services to the franchisee to include assistance in design and construction of the building, help in training employees, help in obtaining financing, and management advice over the first five years of the ten-year franchise agreement. 50% of the initial franchise fee is payable on November 15, 2006, with the remaining $12,500 payable in five equal annual installments beginning on November 15, 2007. These installments will include interest at an appropriate rate. The franchise opened for business on February 15, 2007.
Assume that the initial services to be performed by Coldstone subsequent to November 15, 2006,...