CHAPTER 18

REVENUE RECOGNITION True-False Answers—Conceptual

TRUE-FALSE—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans.
1. Companies should recognize revenue when it is realized and when cash is received.
1. F 6. F 11. T 16. F
2. Revenues are realized when a company exchanges goods and services for cash or claims to cash. 2. T 7. T 12. F 17. T
3. T 8. T 13. F 18. T
3. Delayed recognition of revenue is appropriate if the sale does not represent substantial completion
of the earnings process. 4. F 9. F 14. T 19. F
5. T 10. F 15. F 20. T
4. If a company sells its product but gives the buyer the right to return it, the company should not
recognize revenue until the sale is collected. MULTIPLE CHOICE—Conceptual
21. The revenue recognition principle provides that revenue is recognized when
5. Companies can recognize revenue prior to completion and delivery of the product under certain a. it is realized.
circumstances. b. it is realizable.
c. it is realized or realizable and it is earned.
6. Companies must use the percentage-of-completion method when estimates of progress toward d. none of these.
completion are reasonably dependable.
22. When goods or services are exchanged for cash or claims to cash (receivables), revenues are
7. The most popular input measure used to determine the progress toward completion is the cost-to- a. earned.
cost basis. b. realized.
c. recognized.
8. If the difference between the Construction in Process and the Billings on Construction in Process d. all of these.
account balances is a debit, the difference is reported as a current asset.
23. When the entity has substantially accomplished what it must do to be entitled to the benefits
9. The Construction in Process account includes only construction costs under the percentage-of- represented by the revenues, revenues are
completion method. a. earned.
b. realized.
10. Under the completed-contract method, companies recognize revenue and costs only when the c. recognized.
contract is completed. d. all of these.

11. The principal advantage of the completed-contract method is that reported revenue reflects final S
24. Which of the following is not an accurate representation concerning revenue recognition?
results rather than estimates. a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean
the date of delivery to customers.
12. Companies must recognize a loss on an unprofitable contract under the percentage-of-completion b. Revenue from services rendered is recognized when cash is received or when services have
method but not the completed-contract method. been performed.
c. Revenue from permitting others to use enterprise assets is recognized as time passes or as
13. A loss in the current period on a profitable contract must be recognized under both the percentage- the assets are used.
of-completion and completed-contract method. d. Revenue from disposing of assets other than products is recognized at the date of sale.

14. Under the completion-of-production basis, companies recognize revenue when agricul-tural crops P
25. The process of formally recording or incorporating an item in the financial statements of an entity is
are harvested since the sales price is reasonably assured and no significant costs are involved in a. allocation.
product distribution. b. articulation.
c. realization.
15. The provision for a loss on an unprofitable contract may be combined with the Construction in d. recognition.
Process account balance under percentage-of-completion but not completed-contract.
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26. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each
16. Under the installment-sales method, companies defer revenue and income recognition until the appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts
period of cash collection. are cash sales at the time of purchase by the buyer. Collections received for service contracts
should be recorded as
17. The installment-sales method defers only the gross profit instead of both the sales price and cost of a. service revenue.
goods sold. b. deferred service revenue.
c. a reduction in installment accounts receivable.
18. Deferred gross profit is generally treated as an unearned revenue and classified as a current d. a direct addition to retained earnings
liability. 27. Which of the following is not a reason why revenue is recognized at time of sale?
19. Under the cost-recovery method, a company recognizes no revenue or profit until cash payments a. Realization has occurred.
by the buyer exceed the cost of the merchandise sold. b. The sale is the critical event.
c. Title legally passes from seller to buyer.
20. Companies recognize profit under the cost-recovery method only when cash collections exceed the d. All of these are reasons to recognize revenue at time of sale.
total cost of the goods sold.
28. An alternative available when the seller is exposed to continued risks of ownership through return of 36. How should earned but unbilled revenues at the balance sheet date on a long-term construction
the product is contract be disclosed if the percentage-of-completion method of revenue recognition is used?a.
a. recording the sale, and accounting for returns as they occur in future periods. As construction in process in the current asset section of the balance sheet.
b. not recording a sale until all return privileges have expired. b. As construction in process in the noncurrent asset section of the balance sheet.
c. recording the sale, but reducing sales by an estimate of future returns. c. As a receivable in the noncurrent asset section of the balance sheet.
d. all of these. d. In a note to the financial statements until the customer is formally billed for the portion of work
completed.
29. A sale should not be recognized as revenue by the seller at the time of sale if
a. payment was made by check. 37. The principal disadvantage of using the percentage-of-completion method of recognizing revenue
b. the selling price is less than the normal selling price. from long-term contracts is that it
c. the buyer has a right to return the product and the amount of future returns cannot be a. is unacceptable for income tax purposes.
reasonably estimated. b. gives results based upon estimates which may be subject to considerable uncertainty.
d. none of these. c. is likely to assign a small amount of revenue to a period during which much revenue was
actually earned.
30. The FASB concluded that if a company sells its product but gives the buyer the right to return the d. none of these.
product, revenue from the sales transaction shall be recognized at the time of sale only if all of six
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conditions have been met. Which of the following is not one of these six conditions? 38. One of the more popular input measures used to determine the progress toward completion in the
a. The amount of future returns can be reasonably estimated. percentage-of-completion method is
b. The seller's price is substantially fixed or determinable at time of sale. a. revenue-percentage basis.
c. The buyer's obligation to the seller would not be changed in the event of theft or damage of b. cost-percentage basis.
the product. c. progress completion basis.
d. The buyer is obligated to pay the seller upon resale of the product. d. cost-to-cost basis.
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31. In selecting an accounting method for a newly contracted long-term construction project, the 39. The principal advantage of the completed-contract method is that
principal factor to be considered should be a. reported revenue is based on final results rather than estimates of unperformed work.
a. the terms of payment in the contract. b. it reflects current performance when the period of a contract extends into more than one
b. the degree to which a reliable estimate of the costs to complete and extent of progress toward accounting period.
completion is practicable. c. it is not necessary to recognize revenue at the point of sale.
c. the method commonly used by the contractor to account for other long-term construc-tion d. a greater amount of gross profit and net income is reported than is the case when the
contracts. percentage-of-completion method is used.
d. the inherent nature of the contractor's technical facilities used in construction.
40. Under the completed-contract method
32. The percentage-of-completion method must be used when certain conditions exist. Which of the a. revenue, cost, and gross profit are recognized during the production cycle.
following is not one of those necessary conditions? b. revenue and cost are recognized during the production cycle, but gross profit recognition is
a. Estimates of progress toward completion, revenues, and costs are reasonably dependable. deferred until the contract is completed.
b. The contractor can be expected to perform the contractual obligation. c. revenue, cost, and gross profit are recognized at the time the contract is completed.
c. The buyer can be expected to satisfy some of the obligations under the contract. d. none of these.
d. The contract clearly specifies the enforceable rights of the parties, the consideration to be
exchanged, and the manner and terms of settlement. 41. Cost estimates on a long-term contract may indicate that a loss will result on completion of the
entire contract. In this case, the entire expected loss should b
33. When work to be done and costs to be incurred on a long-term contract can be estimated a. recognized in the current period, regardless of whether the percentage-of-completion or
dependably, which of the following methods of revenue recognition is preferable? completed-contract method is employed.
a. Installment-sales method b. recognized in the current period under the percentage-of-completion method, but the
b. Percentage-of-completion method completed-contract method should defer recognition of the loss to the time when the contract
c. Completed-contract method is completed.
d. None of these c. recognized in the current period under the completed-contract method, but the percentage-of-
completion method should defer the loss until the contract is completed.
34. How should the balances of progress billings and construction in process be shown at reporting d. deferred and recognized when the contract is completed, regardless of whether the
dates prior to the completion of a long-term contract? percentage-of-completion or completed-contract method is employed.
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory. 42. Cost estimates at the end of the second year indicate a loss will result on completion of the entire
c. Net, as a current asset if debit balance, and current liability if credit balance. contract. Which of the following statements is correct?
d. Net, as income from construction if credit balance, and loss from construction if debit balance. a. Under the completed-contract method, the loss is not recognized until the year the
construction is completed.
35. In accounting for a long-term construction-type contract using the percentage-of-completion b. Under the percentage-of-completion method, the gross profit recognized in the first year must
method, the gross profit recognized during the first year would be the estimated total gross profit not be changed.
from the contract, multiplied by the percentage of the costs incurred during the year to the c. Under the completed-contract method, when the billings exceed the accumulated costs, the
a. total costs incurred to date. amount of the estimated loss is reported as a current liability.
b. total estimated cost. d. Under the completed-contract method, when the Construction in Process balance exceeds the
c. unbilled portion of the contract price. billings, the estimated loss is added to the accumulated costs.
d. total contract price.
43. The criteria for recognition of revenue at the completion of production of precious metals and farm a. recognition of the difference between the cash collected on installment sales and the cash
products include expenses incurred.
a. an established market with quoted prices. b. deferring the net income related to installment sales and recognizing the income as cash is
b. low additional costs of completion and selling. collected.
c. units are interchangeable. c. deferring gross profit while recognizing operating or financial expenses in the period incurred.
d. all of these. d. deferring gross profit and all additional expenses related to installment sales until cash is
ultimately collected.
44. In certain cases, revenue is recognized at the completion of production even though no sale has
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been made. Which of the following statements is not true? 52. A manufacturer of large equipment sells on an installment basis to customers with questionable
a. Examples involve precious metals or farm equipment. credit ratings. Which of the following methods of revenue recognition is least likely to overstate the
b. The products possess immediate marketability at quoted prices. amount of gross profit reported?
c. No significant costs are involved in selling the product. a. At the time of completion of the equipment (completion of production method)
d. All of these statements are true. b. At the date of delivery (sales method)
c. The installment-sales method
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45. For which of the following products is it appropriate to recognize revenue at the completion of d. The cost–recovery method
production even though no sale has been made?
a. Automobiles 53. A seller is properly using the cost-recovery method for a sale. Interest will be earned on the future
b. Large appliances payments. Which of the following statements is not correct?
c. Single family residential units a. After all costs have been recovered, any additional cash collections are included in income.
d. Precious metals b. Interest revenue may be recognized before all costs have been recovered.
c. The deferred gross profit is offset against the related receivable on the balance sheet.
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46. When there is a significant increase in the estimated total contract costs but the increase does not d. Subsequent income statements report the gross profit as a separate item of revenue when it is
eliminate all profit on the contract, which of the following is correct? recognized as earned.
a. Under both the percentage-of-completion and the completed-contract methods, the estimated
cost increase requires a current period adjustment of excess gross profit recognized on the 54. Under the cost-recovery method of revenue recognition,
project in prior periods. a. income is recognized on a proportionate basis as the cash is received on the sale of the
b. Under the percentage-of-completion method only, the estimated cost increase requires a product.
current period adjustment of excess gross profit recognized on the project in prior periods. b. income is recognized when the cash received from the sale of the product is greater than the
c. Under the completed-contract method only, the estimated cost increase requires a current cost of the product.
period adjustment of excess gross profit recognized on the project in prior periods. c. income is recognized immediately.
d. No current period adjustment is required. d. none of these.

47. Deferred gross profit on installment sales is generally treated as a(n) 55. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of water,
a. deduction from installment accounts receivable. Winser does not recognize any revenue from water sales until the sales exceed the costs of
b. deduction from installment sales. exploration, the basis of revenue recognition being employed is the
c. unearned revenue and classified as a current liability. a. production basis.
d. deduction from gross profit on sales. b. cash (or collection) basis.
c. sales (or accrual) basis.
48. The installment-sales method of recognizing profit for accounting purposes is acceptable if d. cost recovery basis.
a. collections in the year of sale do not exceed 30% of the total sales price.
b. an unrealized profit account is credited. *56. Some of the initial franchise fee may be allocated to
c. collection of the sales price is not reasonably assured. a. continuing franchise fees.
d. the method is consistently used for all sales of similar merchandise. b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
49. The method most commonly used to report defaults and repossessions is d. All of these may reduce the amount of the initial franchise fee that is recognized as revenue.
a. provide no basis for the repossessed asset thereby recognizing a loss.
b. record the repossessed merchandise at fair value, recording a gain or loss if appropriate. *57. Continuing franchise fees should be recorded by the franchisor
c. record the repossessed merchandise at book value, recording no gain or loss. a. as revenue when earned and receivable from the franchisee.
d. none of these. b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
50. Under the installment-sales method, d. as revenue only after the balance of the initial franchise fee has been collected.
a. revenue, costs, and gross profit are recognized proportionate to the cash that is received from
the sale of the product. *58. Occasionally a franchise agreement grants the franchisee the right to make future bargain
b. gross profit is deferred proportionate to cash uncollected from sale of the product, but total purchases of equipment or supplies. When recording the initial franchise fee, the franchisor should
revenues and costs are recognized at the point of sale. a. increase revenue recognized from the initial franchise fee by the amount of the expected
c. gross profit is not recognized until the amount of cash received exceeds the cost of the item future purchases.
sold. b. record a portion of the initial franchise fee as unearned revenue which will increase the selling
d. revenues and costs are recognized proportionate to the cash received from the sale of the price when the franchisee subsequently makes the bargain purchases.
product, but gross profit is deferred until all cash is received. c. defer recognition of any revenue from the initial franchise fee until the bargain purchases are
made.
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51. The realization of income on installment sales transactions involves d. None of these.
 *59. A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is Use the following information for questions 63 and 64.
probable that the option will be exercised. When recording the initial franchise fee, the franchisor
should In 2007, Crane Corporation began construction work under a three-year contract. The contract price is
a. record the entire initial franchise fee as a deferred credit which will reduce the franchisor's $2,400,000. Crane uses the percentage-of-completion method for financial accounting purposes. The income
investment in the purchased outlet when the option is exercised. to be recognized each year is based on the proportion of costs incurred to total estimated costs for
b. record the entire initial franchise fee as unearned revenue which will reduce the amount of completing the contract. The financial statement presentations relating to this contract at December 31, 2007,
cash paid when the option is exercised. follow:
c. record the portion of the initial franchise fee which is attributable to the bargain purchase
option as a reduction of the future amounts receivable from the franchisee. Balance Sheet
d. None of these. Accounts receivable—construction contract billings
$100,000
*60. Revenue is recognized by the consignor when the Construction in progress $300,000
a. goods are shipped to the consignee. Less contract billings 240,000
b. consignee receives the goods. Costs and recognized profit in excess of billings
c. consignor receives an advance from the consignee. 60,000
d. consignor receives an account sales from the consignee.
Income Statement
Multiple Choice Answers—Conceptual Income (before tax) on the contract recognized in 2007 $60,000
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
63. How much cash was collected in 2007 on this contract?
a. $100,000
21. c 27. d 33. b 39. a 45. d 51. c
b. $140,000
22. b 28. d 34. c 40. c 46. b 52. d c. $20,000
d. $240,000
23. a 29. c 35. b 41. a 47. c 53. b
24. b 30. d 36. a 42. c 48. c 54. b 64. What was the initial estimated total income before tax on this contract?
a. $300,000
25. d 31. b 37. b 43. d 49. b 55. d b. $320,000
26. b 32. c 38. d 44. a 50. b *56. d c. $400,000
d. $480,000

MULTIPLE CHOICE—Computational 65. Eaton Construction Co. uses the percentage-of-completion method. In 2007, Eaton began work on
a contract for $3,300,000 and it was completed in 2008. Data on the costs are:
61. Reese Construction Corporation contracted to construct a building for $1,500,000. Construction Year Ended December 31
began in 2007 and was completed in 2008. Data relating to the contract are summarized below: 2007 2008
Year ended Costs incurred $1,170,000 $840,000
December 31, Estimated costs to complete 780,000 —
2007 2008
Costs incurred $600,000 $450,000 For the years 2007 and 2008, Eaton should recognize gross profit of
Estimated costs to complete 400,000 — 2007 2008
Reese uses the percentage-of-completion method as the basis for income recognition. For the a. $0 $1,290,000
years ended December 31, 2007, and 2008, respectively, Reese should report gross profit of b. $774,000 $516,000
a. $270,000 and $180,000. c. $810,000 $480,000
b. $900,000 and $600,000. d. $810,000 $1,290,000
c. $300,000 and $150,000.
d. $0 and $450,000. Use the following information for questions 66 and 67.

62. Winsor Construction Company uses the percentage-of-completion method of accounting. In 2007, Ramos, Inc. began work in 2007 on contract #3814, which provided for a contract price of $7,200,000. Other
Winsor began work on a contract it had received which provided for a contract price of details follow:
$15,000,000. Other details follow: 2007 2008
2007 Costs incurred during the year $1,200,000 $3,675,000
Costs incurred during the year $7,200,000 Estimated costs to complete, as of December 31 3,600,000 0
Estimated costs to complete as of December 31 4,800,000 Billings during the year 1,350,000 5,400,000
Billings during the year 6,600,000 Collections during the year 900,000 5,850,000
Collections during the year 3,900,000
66. Assume that Ramos uses the percentage-of-completion method of accounting. The portion of the
What should be the gross profit recognized in 2007? total gross profit to be recognized as income in 2007 is
a. $600,000 a. $450,000.
b. $7,800,000 b. $600,000.
c. $1,800,000 c. $1,800,000.
d. $3,000,000 d. $2,400,000.
 67. Assume that Ramos uses the completed-contract method of accounting. The portion of the total The amount of construction costs incurred during 2008 was
gross profit to be recognized as income in 2008 is a. $15,000,000.
a. $900,000. b. $9,375,000.
b. $1,350,000. c. $5,625,000.
c. $2,325,000. d. $2,500,000.
d. $7,200,000.
Use the following information for questions 73 and 74.
Use the following information for questions 68 and 69.
Miley, Inc. began work in 2007 on a contract for $8,400,000. Other data are as follows: Carter Construction Company had a contract starting April 2008, to construct a $15,000,000 building that is
2007 2008 expected to be completed in September 2009, at an estimated cost of $13,750,000. At the end of 2008, the
Costs incurred to date $3,600,000 $5,600,000 costs to date were $6,325,000 and the estimated total costs to complete had not changed. The progress
Estimated costs to complete 2,400,000 — billings during 2008 were $3,000,000 and the cash collected during 2008 was $2,000,000. Carter uses the
Billings to date 2,800,000 8,400,000 percentage-of-completion method.
Collections to date 2,000,000 7,200,000
73. For the year ended December 31, 2008, Carter would recognize gross profit on the building of
68. If Miley uses the percentage-of-completion method, the gross profit to be recognized in 2007 is a. $0.
a. $1,440,000. b. $527,083.
b. $1,600,000. c. $575,000.
c. $2,160,000. d. $675,000.
d. $2,400,000.
74. At December 31, 2008, Carter would report Construction in Process in the amount of
69. If Miley uses the completed-contract method, the gross profit to be recognized in 2008 is a. $6,900,000.
a. $1,360,000. b. $6,325,000.
b. $2,800,000. c. $5,900,000.
c. $1,400,000. d. $575,000.
d. $5,600,000.
75. Kirby Builders, Inc. is using the completed-contract method for a $5,600,000 contract that will take
Use the following information for questions 70 and 71. two years to complete. Data at December 31, 2007, the end of the first year, are as follows:
Costs incurred to date $2,560,000
70. Parker Construction Co. uses the percentage-of-completion method. In 2007, Parker began work Estimated costs to complete 3,280,000
on a contract for $5,500,000; it was completed in 2008. The following cost data pertain to this Billings to date 2,400,000
contract: Collections to date 2,000,000
Year Ended December 31
The gross profit or loss that should be recognized for 2007 is
2007 2008
a. $0.
Cost incurred during the year $1,950,000 $1,400,000
b. a $240,000 loss.
Estimated costs to complete at the end of year 1,300,000 —
c. a $120,000 loss.
The amount of gross profit to be recognized on the income statement for the year ended December d. a $105,600 loss.
31, 2008 is
a. $800,000. Use the following information for questions 76 through 78.
b. $860,000. Melton Construction Co. began operations in 2007. Construction activity for 2007 is shown below. Melton
c. $900,000. uses the completed-contract method.
d. $2,150,000. Billings Collections Estimated
71. If the completed-contract method of accounting was used, the amount of gross profit to be Contract Through Through Costs to
recognized for years 2007 and 2008 would be Costs to
2007 2008 Contract Price 12/31/07 12/31/07 12/31/07 Complete
a. $2,250,000. $0. 1 $3,200,000 $3,150,000 $2,600,000 $2,150,000
b. $2,150,000. $(100,000).
c. $0. $2,150,000. 2 3,600,000 1,500,000 1,000,000 820,000
d. $0. $2,250,000. $1,880,000
3 3,300,000 1,900,000 1,800,000 2,250,000
72. Willingham Construction Company uses the percentage-of-completion method. During 2007, the 1,200,000
company entered into a fixed-price contract to construct a building for Richman Company for
$30,000,000. The following details pertain to the contract: 76. Which of the following should be shown on the income statement for 2007 related to Contract 1?
a. Gross profit, $450,000
At December 31, 2007 At December 31, 2008 b. Gross profit, $1,000,000
Percentage of completion 25% 60% c. Gross profit, $1,050,000
Estimated total cost of contract $22,500,000 $25,000,000 d. Gross profit, $600,000
Gross profit recognized to date 1,875,000 3,000,000
77. Which of the following should be shown on the balance sheet at December 31, 2007 related to b. $252,000.
Contract 2? c. $336,000.
a. Inventory, $680,000 d. $840,000.
b. Inventory, $820,000
c. Current liability, $680,000 84. Maris, Inc. appropriately used the installment method of accounting to recognize income in its
d. Current liability, $1,500,000 financial statement. Some pertinent data relating to this method of accounting include:
78. Which of the following should be shown on the balance sheet at December 31, 2007 related to 2007 2008
Contract 3? Installment sales $750,000 $900,00
a. Inventory, $200,000 Cost of sales 450,000 630,00
b. Inventory, $350,000 Gross profit $300,000 $270,00
c. Inventory, $2,100,000
d. Inventory, $2,250,000 Collections during year:
On 2007 sales 250,000 250,00
79. Harber Co. uses the installment-sales method. When an account had a balance of $8,400, no On 2008 sales 300,00
further collections could be made and the dining room set was repossessed. At that time, it was What amount to be realized gross profit should be reported on Maris’s income statement for 2008?
estimated that the dining room set could be sold for $2,400 as repossessed, or for $3,000 if the a. $165,000
company spent $300 reconditioning it. The gross profit rate on this sale was 70%. The gain or loss b. $190,000
on repossession was a c. $220,000
a. $5,880 loss. d. $270,000
b. $6,000 loss.
c. $600 gain. 85. Singer Company sells plasma-screen televisions on an installment basis and appropri-ately uses
d. $180 gain. the installment-sales method of accounting. A customer with an account balance of $5,600 refuses
to make any more payments and the merchandise is repossessed. The gross profit rate on the
80. Yarbow Corporation has a normal gross profit on installment sales of 30%. A 2006 sale resulted in a original sale is 40%. Singer estimates that the television can be sold as is for $1,750, or for $2,100
default early in 2008. At the date of default, the balance of the installment receivable was $24,000, if $140 is spent to refurbish it. The loss on repossession is
and the repossessed merchandise had a fair value of $13,500. Assuming the repossessed a. $3,850.
merchandise is to be recorded at fair value, the gain or loss on repossession should be b. $2,240.
a. $0. c. $1,610.
b. a $3,300 loss. d. $1,400.
c. a $3,300 gain.
d. a $7,500 loss. Use the following information for questions 86-88.
81. Seeman Furniture uses the installment-sales method. No further collections could be made on an During 2008, Steele Corporation sold merchandise costing $1,500,000 on an installment basis for
account with a balance of $18,000. It was estimated that the repossessed furniture could be sold as $2,000,000. The cash receipts related to these sales were collected as follows: 2008, $800,000; 2009,
is for $5,400, or for $6,300 if $300 were spent reconditioning it. The gross profit rate on the original $700,000; 2010, $500,000.
sale was 40%. The loss on repossession was
a. $4,800. 86. What is the rate of gross profit on the installment sales made by Steele Corporation during 2008?
b. $4,500. a. 75%
c. $12,000. b. 60%
d. $12,600. c. 40%
d. 25%
82. Wagner Company sold some machinery to Granger Company on January 1, 2007. The cash selling
price would have been $568,620. Granger entered into an installment sales contract which required 87. If expenses, other than the cost of the merchandise sold, related to the 2008 installment sales
annual payments of $150,000, including interest at 10%, over five years. The first payment was due amounted to $90,000, by what amount would Steele’s net income for 2008 increase as a result of
on December 31, 2007. What amount of interest income should be included in Wagner's 2008 installment sales?
income statement (the second year of the contract)? a. $110,000
a. $15,000 b. $177,500
b. $47,548 c. $200,000
c. $30,000 d. $710,000
d. $41,862
88. What amount would be shown in the December 31, 2009 financial statement for realized gross
83. Lamberson Company has used the installment method of accounting since it began operations at profit on 2008 installment sales, and deferred gross profit on 2008 installment sales, respectively?
the beginning of 2008. The following information pertains to its operations for 2008: a. $175,000 and $375,000
Installment sales $ 1,400,000 b. $325,000 and $175,000
Cost of installment sales 980,000 c. $375,000 and $125,000
Collections of installment sales 560,000 d. $175,000 and 125,000
General and administrative expenses 140,000
The amount to be reported on the December 31, 2008 balance sheet as Deferred Gross Profit 89. On January 1, 2007, Dole Co. sold land that cost $210,000 for $280,000, receiving a note bearing
should be interest at 10%. The note will be paid in three annual installments of $112,595 starting on
a. $168,000. December 31, 2007. Because collection of the note is very uncertain, Dole will use the cost-
recovery method. How much revenue from this sale should Dole recognize in 2007?
 a. $0 Freight $600
b. $21,000 Commission (20% of sales price) ?
c. $28,000 Advertising 390
d. $70,000 Delivery 210

*90. On April 1, 2007 Reagan, Inc. entered into a franchise agreement with a local business-man. The *93. The total sales price of the TVs sold by AL's TV was
franchisee paid $240,000 and gave a $160,000, 8%, 3-year note payable with interest due annually a. $15,375.
on March 31. Reagan recorded the $400,000 initial franchise fee as revenue on April 1, 2007. On b. $16,125.
December 30, 2007, the franchisee decided not to open an outlet under Reagan's name. Reagan c. $16,388.
canceled the franchisee's note and refunded $128,000, less accrued interest on the note, of the d. $17,625.
$240,000 paid on April 1. What entry should Reagan make on December 30, 2007?
a. Loss on Repossessed Franchise................................................................128,000 *94. The inventory of TVs will be reported on whose balance sheet and at what amount?
Cash.......................................................................................................... 128,000
b. Loss on Repossessed Franchise.................................................................118,400 Balance Sheet of Amount of Inventory
Cash.......................................................................................................... 118,400 a. TV Inc. $13,875
c. Loss on Repossessed Franchise................................................................278,400 b. TV Inc. $13,500
Cash.......................................................................................................... 118,400 c. Al's TV $13,875
Note Receivable....................................................................................... 160,000 d. Al's TV $13,500
d. Revenue from Franchise Fees....................................................................400,000 Multiple Choice Answers—Computational
Interest Income......................................................................................... 9,600 Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans.
Cash.......................................................................................................... 118,400 . . . . . .
Note Receivable....................................................................................... 160,000 61. c 66. b 71. c 76. c 81. a 86. d *91. c
Revenue from Repossessed Franchise................................................... 112,000
62. c 67. c 72. b 77. c 82. b 87. a *92. b
*91. On January 1, 2007 Tasty Delight, Inc. entered into a franchise agreement with a company allowing
63. b 68. a 73. c 78. a 83. b 88. d *93. d
the company to do business under Tasty Delight's name. Tasty Delight had performed substantially
all required services by January 1, 2007, and the franchisee paid the initial franchise fee of 64. d 69. b 74. a 79. d 84. b 89. a *94. a
$560,000 in full on that date. The franchise agreement specifies that the franchisee must pay a
continuing franchise fee of $48,000 annually, of which 20% must be spent on advertising by Tasty 65. c 70. a 75. b 80. b 85. d *90. d
Delight. What entry should Tasty Delight make on January 1, 2007 to record receipt of the initial
franchise fee and the continuing franchise fee for 2007?
a. Cash.............................................................................................................608,000 MULTIPLE CHOICE—CPA Adapted
Franchise Fee Revenue........................................................................... 560,000
Revenue from Continuing Franchise Fees............................................... 48,000 95. According to the FASB's conceptual framework, the process of reporting an item in the financial
b. Cash.............................................................................................................608,000 statements of an entity is
Unearned Franchise Fees........................................................................ 608,000 a. recognition.
c. Cash.............................................................................................................608,000 b. realization.
Franchise Fee Revenue........................................................................... 560,000 c. allocation.
Revenue from Continuing Franchise Fees............................................... 38,400 d. matching.
Unearned Franchise Fees........................................................................ 9,600
d. Prepaid Advertising..........................................................................................9,600 96. Flynn Construction Co. has consistently used the percentage-of-completion method of recognizing
Cash.............................................................................................................608,000 revenue. During 2007, Flynn entered into a fixed-price contract to construct an office building for
Franchise Fee Revenue........................................................................... 560,000 $12,000,000. Information relating to the contract is as follows:
Revenue from Continuing Franchise Fees............................................... 48,000 At December 31
Unearned Franchise Fees........................................................................ 9,600

*92. Yount Inc. charges an initial franchise fee of $920,000, with $200,000 paid when the agreement is 2007 2008
signed and the balance in five annual payments. The present value of the future payments, Percentage of completion 15% 45%
discounted at 10%, is $545,872. The franchisee has the option to purchase $120,000 of equipment Estimated total cost at completion $9,000,000 $9,600,000
for $96,000. Yount has substantially provided all initial services required and collectibility of the Gross profit recognized (cumulative) 600,000 1,440,000
payments is reasonably assured. The amount of revenue from franchise fees is Contract costs incurred during 2008 were
a. $200,000. a. $2,880,000.
b. $721,872. b. $2,970,000.
c. $745,872. c. $3,150,000.
d. $920,000. d. $4,320,000.

Use the following information for questions 93 and 94. 97. Noland Constructors, Inc. has consistently used the percentage-of-completion method of
recognizing income. In 2007, Noland started work on a $35,000,000 construction contract that was
On May 1, 2007, TV Inc. consigned 80 TVs to Al's TV. The TVs cost $270. Freight on the shipment paid by completed in 2008. The following information was taken from Noland's 2007 accounting records:
Al’s TV was $600. On July 10, TV Inc. received an account sales and $12,900 from Al's TV. Thirty TVs had
Progress billings $11,000,000
been sold and the following expenses were deducted:
Costs incurred 10,500,000
 Collections 7,000,000 101. Neber Co., which began operations on January 1, 2007, appropriately uses the installment-sales
Estimated costs to complete 21,000,000 method of accounting. The following information pertains to Neber's operations for the year 2007:
Installment sales $1,200,000
Regular sales 480,000
Cost of installment sales 720,000
What amount of gross profit should Noland have recognized in 2007 on this contract? Cost of regular sales 288,000
a. $3,500,000 General and administrative expenses 96,000
b. $2,333,334 Collections on installment sales 288,000
c. $1,750,000
d. $1,166,667 The deferred gross profit account in Neber's December 31, 2007 balance sheet should be
a. $115,200.
98. During 2007, Eaton Corp. started a construction job with a total contract price of $3,500,000. The job b. $192,000.
was completed on December 15, 2008. Additional data are as follows: c. $364,800.
d. $480,000.
2007 2008
Actual costs incurred $1,350,000 $1,525,000
102. On January 1, 2007, Stein Co. sold a used machine to Mays, Inc. for $350,000. On this date, the
Estimated remaining costs 1,350,000 —
machine had a depreciated cost of $245,000. Mays paid $50,000 cash on January 1, 2007 and
Billed to customer 1,200,000 2,300,000
signed a $300,000 note bearing interest at 10%. The note was payable in three annual installments
Received from customer 1,000,000 2,400,000
of $100,000 beginning January 1, 2008. Stein appropriately accounted for the sale under the
Under the completed-contract method, what amount should Eaton recognize as gross profit for installment method. Mays made a timely payment of the first installment on January 1, 2008 of
2008? $130,000, which included interest of $30,000 to date of payment. At December 31, 2008, Stein has
a. $225,000 deferred gross profit of
b. $312,500 a. $70,000.
c. $475,000 b. $66,000.
d. $625,000 c. $60,000.
d. $51,000.
99. Penny Farms produced 800,000 pounds of cotton during the 2007 season. Penny sells all of its
cotton to Bye Co., which has agreed to purchase Penny's entire production at the prevailing market 103. Grant Co. began operations on January 1, 2007 and appropriately uses the installment method of
price. Recent legislation assures that the market price will not fall below $.70 per pound during the accounting. The following information pertains to Grant's operations for 2007:
next two years. Penny's costs of selling and distributing the cotton are immaterial and can be Installment sales 1,800,000
reasonably estimated. Penny reports its inventory at expected exit value. During 2007, Penny sold Cost of installment sales 1,080,000
and delivered to Bye 600,000 pounds at the market price of $.70. Penny sold the remaining General and administrative expenses 180,000
200,000 pounds during 2008 at the market price of $.72. What amount of revenue should Penny Collections on installment sales 825,000
recognize in 2007?
a. $420,000 The balance in the deferred gross profit account at December 31, 2007 should be
b. $432,000 a. $330,000.
c. $560,000 b. $495,000.
d. $576,000 c. $390,000.
d. $720,000.
100. Klugg, Inc. appropriately uses the installment-sales method of accounting to recognize income in its
financial statements. Some pertinent data relating to this method of accounting include: 104. Lott Co. records all sales using the installment method of accounting. Installment sales contracts
2007 2008 call for 36 equal monthly cash payments. According to the FASB's conceptual framework, the
Installment sales $750,000 $720,000 amount of deferred gross profit relating to collections 12 months beyond the balance sheet date
Cost of installment sales 570,000 504,000 should be reported in the
Gross profit $180,000 $216,000 a. current liabilities section as a deferred revenue.
b. noncurrent liabilities section as a deferred revenue.
Rate of gross profit 24% 30% c. current assets section as a contra account.
d. noncurrent assets section as a contra account.
Balance of deferred gross profit at year end:
2007 $108,000 $ 36,000 105. Alton, Inc. is a retailer of home appliances and offers a service contract on each appliance sold.
2008 Alton sells appliances on installment contracts, but all service contracts must be paid in full at the
198,000 time of sale. Collections received for service contracts should be recorded as an increase in a
Total $108,000 $234,000 a. deferred revenue account.
b. sales contracts receivable valuation account.
What amount of installment accounts receivable should be presented in Klugg's December 31, c. stockholders' valuation account.
2008 balance sheet? d. service revenue account.
a. $720,000
b. $810,000
c. $780,000 Multiple Choice Answers—CPA Adapted
d. $866,666 Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
 95. a 97. d 99. c 101. c 103. c 105. a
76. c $3,200,000 – $2,150,000 = $1,050,000.
96. b 98. d 100. b 102. c 104. c
77. c $1,500,000 – $820,000 = $680,000.

78. a ($2,250,000 – $150,000) – $1,900,000 = $200,000.

DERIVATIONS — Computational
79. d $8,400 – $5,880 = $2,520
No. Answer Derivation ($3,000 – $300) – $2,520 = $180 gain.
61. c $600,000
—————————— ×($1,500,000 – $1,000,000) = $300,000 80. b $24,000 – $7,200 = $16,800
$600,000 + $400,000 $16,800 – $13,500 = $3,300 loss.

($1,500,000 – $1,050,000) – $300,000 = $150,000. 81. a $18,000 – $7,200 = $10,800

($6,300 – $300) – $10,800 = $4,800 loss.
62. c $7,200,000
——————————— ×($15,000,000 – $12,000,000) = $1,800,000. 82. b 2007: $150,000 – ($568,620 × 10%) = $93,138.
$7,200,000 + $4,800,000 2008: ($568,620 – $93,138) × 10% = $47,548.

63. b $240,000 – $100,000 = $140,000. 83. b [($1,400,000 – $980,000) ÷ $1,400,000] × $840,000 = $252,000.

64. d $300,000 – $60,000 = $240,000 84. b ($300,000 ÷ $750,000) × $250,000 = $100,000

[($270,000 ÷ $900,000) × $300,000] + $100,000 = $190,000.
$240,000
————————— ×($2,400,000 – Total estimated cost) = $60,000 85. d [$5,600 × (1 – .40)] – ($2,100 – $140) = $1,400.
Total estimated cost
86. d ($2,000,000 – $1,500,000) ÷ $2,000,000 = 25%
Total estimated cost = $1,920,000
$2,400,000 – $1,920,000 = $480,000. 87. a ($800,000 × .25) – $90,000 = $110,000,

65. c $1,170,000 88. d $700,000 × .25 = $175,000; $500,000 × .25 = $125,000.

—————- ×($3,300,000 – $1,950,000) = $810,000
$1,950,000 89. a $0.

($3,300,000 – $2,010,000) – $810,000 = $480,000. *90. d Revenue = $400,000

Interest income = $160,000 ×8% ×9/12 = $9,600
66. b $1,200,000 Cash = $128,000 – $9,600 = $118,400
————— ×($7,200,000 – $4,800,000) = $600,000. Repossession revenue: $240,000 – $128,000 = $112,000.
$4,800,000
*91. c Cash = $560,000 + $48,000 = $608,000
67. c $7,200,000 – $4,875,000 = $2,325,000. Franchise Fee Revenue = $560,000
Unearned Franchise Fees = $48,000 ×20% = $9,600
68. a $3,600,000 Revenue from Continuing Franchise Fees = $48,000 – $9,600 = $38,400.
————— ×($8,400,000 – $6,000,000) = $1,440,000.
$6,000,000 *92. b $200,000 + $545,872 – $24,000 = $721,872.

69. b $8,400,000 – $5,600,000 = $2,800,000. *93. d Sales – (Sales ×20%) – $600 – $390 – $210 = $12,900
.8 Sales = $14,100
70. a [$1,950,000 ÷ ($1,950,000 + $1,300,000)] × $2,250,000 = $1,350,000 Sales = $17,625.
($5,500,000 – $3,350,000) – $1,350,00 = $800,000. *94. a ($270 ×50) + [($600 ÷ 80) ×50] = $13,875.

71. c $5,500,000 – $3,350,000 = $2,150,000. 95. a Conceptual.

72. b ($25,000,000 × .60) – ($22,500,000 × .25) = $9,375,000. 96. b ($9,600,000 ×45%) – ($9,000,000 ×15%) = $2,970,000.

73. c ($6,325,000 ÷ $13,750,000) × $1,250,000 = $575,000. $10,500,000

97. d —————— ×($35,000,000 – $31,500,000) = $1,166,667.
74. a ($6,325,000 ÷ $13,750,000) × $1,250,000 = $575,000. $31,500,000
$6,325,000 + $575,000 = $6,900.000.
98. d $3,500,000 – $1,350,000 – $1,525,000 = $625,000.
75. b $5,600,000 – ($2,560,000 + $3,280,000) = –$240,000.
 99. c 800,000 lbs. ×$.70 = $560,000. In accounting for long-term construction contracts (those taking longer than one year to complete), the two
methods commonly followed are percentage-of-completion and completed-contract.
100. b ($36,000 ÷ 24%) + ($198,000 ÷ 30%) = $810,000.

101. c $1,200,000 – $720,000 = $480,000 gross profit (40% gross profit rate)
$480,000 – ($288,000 ×.4) = $364,800. Instructions
(a) Discuss how earnings on long-term construction contracts are recognized and computed under these
102. c $300,000 + $50,000 = $350,000 two methods.
$350,000 – $245,000 = $105,000 gross profit (30% gross profit rate)
(b) Under what circumstances should one method be used over the other?
($300,000 – $100,000) × 30% = $60,000.
(c) How are job costs and interim billings reflected on the balance sheet under the percentage-of-
103. c $1,800,000 – $1,080,000 = $720,000 (40% gross profit rate) completion method and the completed-contract method?
$720,000 – ($825,000 ×40%) = $390,000. Solution 18-108

104. c Conceptual. (a) The revenue recognized on a long-term construction contract under the percentage-of-completion
method is determined by applying a percentage representing the degree of completion to the total
105. a Conceptual. contract price at the end of the accounting period. The percentage may be derived by dividing the
EXERCISES costs incurred to date by the total estimated costs of the entire contract based on the most recent
information. The revenue so derived is then reduced by the direct contract costs to determine the
Ex. 18-106— Revenue recognition (essay). gross profit recognized in the initial period.

The revenue recognition principle provides that revenue is recognized when (1) it is realized or realizable and In subsequent periods, since the percentage-of-completion method described produces cumulative
(2) it is earned. results, revenue and gross profit recognized in prior periods must be subtracted to obtain current
revenue and gross profit to be recognized.
Instructions Under the completed-contract method, no earnings are recognized until the contract is substantially
Explain when revenues are (a) realized, (b) realizable, and (c) earned. completed. For the period in which completion occurs, gross revenues include the total contract price.
Total job costs incurred are deducted from gross revenues, resulting in recognition of the entire
Solution 18-106 amount of gross profit in the completion period. If it is expected that a loss will occur on the contract, a
(a) Revenues are realized when goods or services are exchanged for cash or claims to cash (receivables). provision for loss should be recognized immediately under both the completed-contract method and
(b) Revenues are realizable when assets received in exchange are readily convertible to known amounts the percentage-of-completion method.
of cash or claims to cash.
(c) Revenues are earned when the earnings process is complete or virtually complete. (b) The percentage-of-completion method should be used when estimates of the bases upon which
progress is measured are reasonably dependable and all the following conditions exist:
Ex. 18-107—Revenue recognition (essay). 1. The contract clearly specifies the enforceable rights regarding goods or services to be provided
and received by the parties, the consideration to be exchanged, and the manner and terms of
The earning of revenue by a business is recognized for accounting purposes when the transaction is settlement.
recorded. Revenue is often recognized at time of sale. 2. The buyer can be expected to satisfy all obligations under the contract.
3. The contractor can be expected to perform the contractual obligation.
Instructions
At what times, other than at time of sale, may it be appropriate to recognize revenue? Explain and justify The completed-contract method should be used when inherent hazards or lack of depend-able
each of these times. estimates cause the forecasts to be of doubtful value.

Solution 18-107 (c) Under the percentage-of-completion method, a schedule is made of the contracts in process, showing
the total costs incurred as of the end of a given period, the estimated gross profit recognized based on
Revenue is also recognized (1) during production, (2) at completion, and (3) at collection. the degree of completion, and the total billings rendered on each individual contract. If costs incurred
plus recognized profits exceed the related billings on a contract, this net figure is shown as a current
(1) During production. The most common situation is the use of the percentage-of-completion method for
asset. This treatment shows that the contractor has not fully billed the customer for work performed to
long-term construction contracts. The point of sale is much less significant than production activity. If
date and has a claim against the customer for that portion of work completed but not yet billed. If
the contractor can expect to perform the contractual obligation, the revenue is assured by the contract.
billings on a contract exceed costs incurred plus estimated profits, this net figure is shown as a current
To defer recognition until completion of the entire contract misrepresents the efforts (costs) and
liability, which means that the contractor has overbilled the customer for work done to date and must
accomplishments (revenues) of the interim periods. If progress toward completion can be estimated
complete the work represented by the excess billings.
with reasonable accuracy, the percentage-of-completion method should be used.
(2) At completion. Examples of revenue recognition at completion of production involve precious metals Under the completed-contract method, the treatment of excess costs and billings is the same as under
and agricultural products with quoted prices. These sales prices are reasonably assured, there are low the percentage-of-completion method except that estimated profits are not computed because profit
additional costs of distribution, and unit costs cannot be determined because of joint costs. recognition is deferred until a contract is completed. The excess of costs over related billings on a
contract is a current asset while the excess of billings over related costs on a contract is a current
(3) At collection. When collection is highly uncertain and there is no reasonably objective basis for liability.
estimating the degree of collectibility, revenue should not be recognized until cash is received. In
addition, if collection costs and bad debts are expected to be high and their amount cannot be
reasonably estimated, revenue recognition should be deferred. Ex. 18-109—Journal entries—percentage-of-completion.

Ex. 18-108—Long-term construction contracts (essay).

Grant Construction Company was awarded a contract to construct an interchange at the junction of U.S. 94 Recognized in 2008 $ 875,000
and Highway 30 at a total contract price of $8,000,000. The estimated total costs to complete the project were Or
$6,000,000. Total revenue $5,000,000
Recognized in 2007 (2,750,000)
Recognized in 2008 2,250,000
Costs in 2008 (1,375,000)
Instructions Gross profit in 2008 $ 875,000
(a) Make the entry to record construction costs of $3,600,000, on construction in process to date.
Ex. 18-111—Percentage-of-completion method.
(b) Make the entry to record progress billings of $2,000,000.
Stiner Builders contracted to build a high-rise for $14,000,000. Construction began in 2007 and is expected to
(c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-completion
be completed in 2010. Data for 2007 and 2008 are:
basis.
2007 2008
Costs incurred to date $1,800,000 $5,200,000
Estimated costs to complete 7,200,000 4,800,000
Solution 18-109
Stiner uses the percentage-of-completion method.
(a) Construction in Process........................................................................................................ 3,600,000
Materials, Cash, Payables, Etc.............................................................................
3,600,000 Instructions
(a) How much gross profit should be reported for 2007? Show your computation.
(b) Accounts Receivable............................................................................................................. 2,000,000 (b) How much gross profit should be reported for 2008?
Billings on Construction in Process...................................................................... (c) Make the journal entry to record the revenue and gross profit for 2008.
2,000,000
Solution 18-111
(c) Construction Expenses......................................................................................................... 3,600,000
Construction in Process (60% complete).............................................................................. 1,200,000 (a) $1,800,000
Revenue from Long-Term Contracts..................................................................... ————— × $5,000,000 = $1,000,000
4,800,000 $9,000,000

Ex. 18-110—Percentage-of-completion method. (b) $5,200,000

—————— × $4,000,000 = $2,080,000
Garnet Construction Co. contracted to build a bridge for $5,000,000. Construction began in 2007 and was $10,000,000
completed in 2008. Data relating to the construction are:
2007 2008 Less 2007 gross profit 1,000,000
Costs incurred $1,650,000 $1,375,000 Gross profit in 2008 $1,080,000
Estimated costs to complete 1,350,000 —
(c) Construction in Process........................................................................................1,080,000
Garnet uses the percentage-of-completion method. Construction Expenses.........................................................................................3,400,000
Instructions Revenue from Long-Term Contracts..................................................................... 4,480,000
(a) How much revenue should be reported for 2007? Show your computation.
(b) Make the entry to record progress billings of $1,650,000 during 2007. Ex. 18-112—Percentage-of-completion and completed-contract methods.
(c) Make the entry to record the revenue and gross profit for 2007. On February 1, 2007, Nance Contractors agreed to construct a building at a contract price of $6,000,000.
(d) How much gross profit should be reported for 2008? Show your computation. Nance estimated total construction costs would be $4,000,000 and the project would be finished in 2009.
Information relating to the costs and billings for this contract is as follows:
Solution 18-110 2007 2008 2009
(a) $1,650,000 Total costs incurred to date $1,500,000 $2,640,000 $4,600,000
————— × $5,000,000 = $2,750,000 Estimated costs to complete 2,500,000 1,760,000 -0-
$3,000,000 Customer billings to date 2,200,000 4,000,000 5,600,000
Collections to date 2,000,000 3,500,000 5,500,000
(b) Accounts Receivable.............................................................................................1,650,000 Instructions
Billings on Construction in Process ..................................................................... 1,650,000 Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and for
completed-contract accounting, show the gross profit that should be recorded for 2007, 2008, and 2009.
(c) Construction Expenses.........................................................................................1,650,000 Percentage-of-Completion Completed-Contract
Construction in Process........................................................................................1,100,000 Gross Profit Gross Profit
Revenue from Long-Term Contracts..................................................................... 2,750,000
2007 ________________ 2007 ________________
(d) Revenue $5,000,000
Costs 3,025,000 2008 ________________ 2008 ________________
Total gross profit 1,975,000
Recognized in 2007 (1,100,000) 2009 ________________ 2009 ________________
 Solution 18-114
Solution 18-112
(a) Installment Accounts Receivable.............................................................................800,000
Percentage-of-Completion Completed-Contract Installment Sales................................................................................................... 800,000
Gross Profit Gross Profit
2007 $750,000a 2007 — Cash.........................................................................................................................300,000
2008 $210,000b 2008 — Installment Accounts Receivable.......................................................................... 300,000
2009 $440,000c 2009 $1,400,000d
(b) Cost of Installment Sales ($400,000 – $80,000)......................................................320,000
a
$1,500,000 Inventory............................................................................................................... 320,000
————— × $2,000,000 = $750,000
$4,000,000 (c) Installment Sales......................................................................................................800,000
Cost of Installment Sales...................................................................................... 320,000
b
$2,640,000 Deferred Gross Profit (60%)................................................................................. 480,000
————— × $1,600,000 = $960,000
$4,400,000 (d) Deferred Gross Profit (60% × $300,000).................................................................180,000
Realized Gross Profit on Installment Sales.......................................................... 180,000
Less 2007 gross profit (750,000)
2008 gross profit $210,000 Ex. 18-115—Installment sales.
c
Total revenue $6,000,000 Edmond Company sells office equipment. On January 1, 2008, Edmond entered into an installment sale
Total costs 4,600,000 contract with Miller Company for a six-year period expiring January 1, 2014. Equal annual payments under
Total gross profit 1,400,000 the installment sale are $936,000 and are due on January 1. The first payment was made on January 1,
Recognized to date (960,000) 2008.
2009 gross profit $ 440,000
Additional information is as follows:
d
Total revenue $6,000,000 The cash selling price of the equipment, i.e., the amount that would be realized on an outright sale, is
Total costs 4,600,000 $4,584,000.
Total gross profit $1,400,000
Ex. 18-113—Installment sales. The cost of sales relating to the equipment is $3,825,000.

Carlin Co. had installment sales of $1,000,000 and cost of installment sales of $700,000 in 2007. A 2007 sale The finance charges relating to the installment period are $1,032,000 based on a stated interest rate
resulted in a default in 2009, at which time the balance of the installment receivable was $30,000. The of 9% which is appropriate. For tax purposes, Edmond appropriately uses the accrual basis for
repossessed merchandise had a fair value of $15,000. recording finance charges.
Circumstances are such that the collection of the installment sale is reasonably assured.
Instructions
(a) Calculate the rate of gross profit on 2007 installment sales. The installment sale qualified for the installment method of reporting for tax purposes.
(b) Make the entry to record the repossession. Assume that the income tax rate is 30%.
Instructions
What income (loss) before income taxes should Edmond appropriately record as a result of this transaction
Solution 18-113 for the year ended December 31, 2008? Show supporting computations in good form.

(a) $300,000 ÷ $1,000,000 = 30% Solution 18-115

(b) Repossessed Merchandise..........................................................................................15,000 (Note: For financial accounting purposes, the installment-sales method is not used, and the full gross profit is
Deferred Gross Profit, 2007(.30 × $30,000)..................................................................9,000 recognized in the year of sale, because collection of the receivable is reasonably assured.)
Loss on Repossession...................................................................................................6,000
Installment Accounts Receivable, 2007 ....................................................................... 30,000
Ex. 18-114—Installment sales. Edmond Company
Computation of Income Before Income Taxes
Tanner Furniture Company concluded its first year of operations in which it made sales of $800,000, all on On Installment Sale Contract
installment. Collections during the year from down payments and installments totaled $300,000. Purchases For the Year Ended December 31, 2008
for the year totaled $400,000; the cost of merchandise on hand at the end of the year was $80,000. Sales
Cost of Sales
Instructions Gross Profit
Using the installment-sales method, make summary entries to record: Interest Revenue (Schedule I)
(a) the installment sales and cash collections; Income before Income Taxes
(b) the cost of installment sales;
(c) the unrealized gross profit;
(d) the realized gross profit.

Schedule I
 Computation of Interest Revenue on Materials and subcontractor 1,098,000
Installment Sale Contract Indirect costs 193,000
Cash selling price (sales) 1,755,000
Payment made on January 1, 2008 Latest forecast total cost
Balance outstanding at 12/31/08 3,000,000
Interest rate
Interest Revenue $ 328,320 It should be noted that included in the above costs incurred to date were standard electrical and mechanical
materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered
*Ex. 18-116—Franchises. in the costs incurred to date.
Pasta Inn charges an initial fee of $800,000 for a franchise, with $160,000 paid when the agreement is signed Instructions
and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is (a) Compute the percentage of completion on the contract at the end of 2008.
$507,200. The franchisee has the right to purchase $60,000 of kitchen equipment and supplies for $50,000.
An additional part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The (b) Indicate the amount of gross profit that would be reported on this contract at the end of 2008.
value of the advertising is $1,000 a month. Collectibility of the payments is reasonably assured and Pasta Inn (c) Make the journal entry to record the income (loss) for 2008 on Benson's books.
has performed all the initial services required by the contract.
(d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Benson
Instructions Construction at the end of 2008 related to its construction accounts. Also indicate where these items
Prepare the entry to record the initial franchise fee. Show supporting computations in good form. would be classified on the balance sheet. Billings collected during the year amounted to $1,980,000.
(e) Assume the latest forecast on total costs at the end of 2008 was $4,050,000. How much income (loss)
*Solution 18-116 would Benson report for the year 2008?
Total fee $800,000 Solution 18-117
Discount $ 640,000
(507,200) (a) Costs to date $1,755,000
(132,800) Less materials on job site (105,000)
Bargain purchase (10,000) $1,650,000
Advertising ($1,000 × 60)
(60,000) Costs Incurred to Date
—————————— = Percentage of Completion
$597,200 Total Estimated Costs

Cash.....................................................................................................................160,000 $1,650,000
Notes Receivable .............................................................................................640,000 ————— = 55%
Discount on Notes Receivable ......................................................................... 132,800 $3,000,000
Revenue from Franchise Fees ........................................................................ 597,200
Unearned Franchise Fees ............................................................................... 70,000 (b) 55% × $4,000,000 = $2,200,000
Costs incurred 1,650,000
PROBLEMS Gross profit $ 550,000
Pr. 18-117—Long-term construction project accounting.
(c) Construction Expense...........................................................................................1,650,000
Benson Construction specializes in the construction of commercial and industrial buildings. The contractor is Construction in Process...........................................................................................550,000
experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to Revenue from Long-Term Project......................................................................... 2,200,000
twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since,
given the characteristics of the contractor's business and contracts, it is the most appropriate method. (d) Current Assets
Progress toward completion is measured on a cost to cost basis. Benson began work on a lump-sum contract Accounts receivable $250,000 ($2,230,000 – $1,980,000)
at the beginning of 2008. As bid, the statistics were as follows:
Lump-sum price (contract price) Current Liability
$4,000,000 Billings in excess of contract costs and
Estimated costs recognized profit $30,000 ($2,230,000 – $2,200,000)
Labor $ 850,000
Materials and subcontractor 1,750,000 (e) Total loss reported in 2008
Indirect costs 400,000 Contract price $4,000,000
3,000,000 Estimated cost to complete 4,050,000
Amount of loss to be reported $ (50,000)

$1,000,000 Pr. 18-118—Accounting for long-term construction contracts.

At the end of the first year, the following was the status of the contract:
The board of directors of Dodd Construction Company is meeting to choose between the completed-contract
Billings to date
method and the percentage-of-completion method of accounting for long-term contracts in the company's
$2,230,000
financial statements. You have been engaged to assist Dodd's controller in the preparation of a presentation
Costs incurred to date
to be given at the board meeting. The controller provides you with the following information:
Labor $ 464,000
1. Dodd commenced doing business on January 1, 2008. Total gross profit
2. Construction activities for the year ended December 31, 2008, were as follows: or (loss) $ (10,000) $ 40,000 $125,000 $ (20,000)
$ 80,000

The amount reported as income (loss) under the completed-contract method for 2008 is:
Total Contract Billings Through Cash Collections
Project Price 12/31/08 Through Project A $(10,000)
12/31/08 B -0-
A $ 515,000 $ 340,000 $ 310,000 C 125,000
B 690,000 210,000 210,000 D (20,000)
C 475,000 475,000 390,000 E -0-
D 200,000 100,000 65,000 $ 95,000
E 480,000 400,000 400,000
$2,360,000 $1,525,000 $1,375,000 The amount reported as income (loss) under the percentage-of-completion method for 2008 is:

Contract Costs Estimated Project A $(10,000)

Incurred Through Additional Costs to B 12,000 $40,000 × ($195,000 ÷ $650,000)
Project 12/31/08 Complete Contracts C 125,000
A $ 424,000 $101,000 D (20,000)
B 195,000 455,000 E 64,000 $80,000 × ($320,000 ÷ $400,000)
C 350,000 -0- $171,000
D 123,000 97,000
E 320,000 80,000 (b) Construction in Process.............................................................................................12,000
$1,412,000 $733,000 Construction Expenses............................................................................................195,000
Revenue from Long-term Contracts..................................................................... 207,000
3. Each contract is with a different customer.
4. Any work remaining to be done on the contracts is expected to be completed in 2009. Solution 18-118 (cont.)

Instructions (c) Billings $100,000

(a) Prepare a schedule by project, computing the amount of income (or loss) before selling, general, and Cash collections 65,000
administrative expenses for the year ended December 31, 2008, which would be reported under: Accounts receivable $ 35,000
(1) The completed-contract method. Billings on Construction in Process 100,000
(2) The percentage-of-completion method (based on estimated costs).
Costs incurred $123,000
Pr. 18-118 (cont.) Loss reported (20,000)
Construction in process $103,000
(b) Prepare the general journal entry(ies) to record revenue and gross profit on project B (second project)
for 2008, assuming that the percentage-of-completion method is used. (d) The account balances would be the same.

(c) Indicate the balances that would appear in the balance sheet at December 31, 2008 for the following Pr. 18-119—Long-term contract accounting (completed-contract).
accounts for Project D (fourth project), assuming that the percentage-of-completion method is used.
Accounts Receivable Ponce Construction, Inc. experienced the following construction activity in 2008, the first year of operations.
Billings on Construction in Process Cash Cost
Construction in Process Estimated
Total BillingsCollections Incurred Additional
(d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D (fourth Contract through through through
project), if the completed-contract method is used? Costs to
Contract Price 12/31/08 12/31/08 12/31/08
Solution 18-118 Complete
X $260,000 $165,000 $155,000 $182,000
(a) (1) and (2) 63,000
Projects A B C D Y 330,000 115,000 115,000 100,000
E 247,000
Contract price $515,000 $690,000 $475,000 $200,000 Z 233,000 233,000 198,000 158,000
$480,000 -0-
Contract costs incurred 424,000 195,000 350,000 123,000 $823,000 $513,000 $468,000 $440,000
320,000 $310,000
Additional costs
to complete 101,000 455,000 -0- 97,000 Each of the above contracts is with a different customer, and any work remaining at December 31, 2008 is
80,000 expected to be completed in 2009.
Total cost 525,000 650,000 350,000 220,000
400,000 Instructions
Prepare a partial income statement and a partial balance sheet to indicate how the above contract information Repossessed merchandise 4,600
would be reported. Ponce uses the completed-contract method. Accounts payable
37,600
Solution 18-119 Deferred gross profit—2007
Ponce Construction, Inc.
Income Statement Deferred gross profit—2008
For the Year 2008
Common stock
Revenue from long-term contracts (contract Z) 125,000
$233,000 Retained earnings
Cost of construction (contract Z)
158,000 Installment sales
Gross profit $ 75,000 120,000
Provision for loss (contract Y)* Cost of installment sales 78,000
17,000 Loss on repossessions 3,000
*Contract costs through 12/31/08 $100,000 Operating expenses 13,000
Estimated costs to complete 247,000 $331,000
Total estimated costs 347,000 $331,000
Total contract price 330,000
Loss recognized in 2008 $ 17,000 Additional information:
2007 gross profit rate: 25%
Total cash receipts during 2009: $118,000
Merchandise sold in 2008 was repossessed in 2009 and the following entry was prepared:

Deferred Gross Profit—2008...................................................................................2,400

Repossessed Merchandise......................................................................................4,600
Loss on Repossessions...........................................................................................3,000
Installment Accounts Receivable—2008.......................................................... 10,000

Solution 18-119 (cont.) Pr. 18-120 (cont.)

Ponce Construction, Inc. Instructions
Balance Sheet (a) What is the gross profit rate for 2008? Show supporting computations.
As of 12/31/08
Current assets: (b) What is the gross profit rate for 2009? Show supporting computations.
Accounts receivable ($513,000 – $468,000) (c) Of the total cash receipts in 2009, how much represents collections from installment sales of: (Show
$ 45,000 supporting computations.)
Inventories (1) 2007?
Construction in process (contract X) $182,000 (2) 2008?
Less: Billings 165,000
Unbilled contract costs (3) 2009?
17,000
Current liabilities: (d) What is the total realized gross profit in 2009? Show supporting computations.
Billings ($115,000) in excess of contract costs ($100,000)
15,000
Estimated loss from long-term contracts
17,000 Solution 18-120
(a) Determined from the repossession entry:
Deferred gross profit $2,400
———— = 24%
Pr. 18-120—Installment sales. Installment accounts receivable $10,000
Dexter Appliances accounts for all sales of its merchandise on the installment basis. Following is the
unadjusted trial balance at 12/31/09. b) Installment sales $120,000
Cost of sales 78,000
Cash $45,000 Gross profit $ 42,000
Installment accounts receivable—2007 20,000
Installment accounts receivable—2008 50,000 Gross profit $42,000
Installment accounts receivable—2009 90,000 ————- = 35% gross profit rate
Inventory 27,400 Installment sales $120,000
(c) 2007 Deferred gross profit balance $ 12,000
Gross profit rate ÷ 25%
Beginning accounts receivable $ 48,000
Beginning accounts receivable $ 48,000
Ending accounts receivable (20,000)
Cash collected $ 28,000

2008 Deferred gross profit balance $ 26,400

Gross profit rate ÷ 24%
Beginning accounts receivable* $110,000
Beginning accounts receivable* $110,000
Ending accounts receivable* (50,000)
Cash collected $ 60,000

2009 Installment sales—2009 $120,000

Accounts receivable—2009 (90,000)
Cash collected $ 30,000

(d) Total realized gross profit in 2009

From 2007 $28,000 × 25% = $ 7,000
2008 $60,000 × 24% = 14,400
2009 $30,000 × 35% = 10,500
$31,900
*Excluding accounts receivable for repossessed merchandise.