BE18-8

Correct.   

Lazaro, Inc. sells goods on the installment basis and uses the installment-sales method. Due to a customer default, Lazaro repossessed merchandise that was originally sold for $800, resulting in a gross profit rate of 40%. At the time of repossession, the uncollected balance is $520, and the fair value of the repossessed merchandise is $275. Prepare Lazaro's entry to record the repossession. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

Description/Account Debit CreditRepossessed Merchandise 275  Deferred Gross Profit 208  Loss on Repossession 37            Installment Accounts Receivable   520

E18-1 (c, d)

Correct.   (Revenue Recognition on Book Sales with High Returns)

Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer's expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%, and the average collection period is 72 days.

(c) In late July, Uddin shipped books invoiced at $15,000,000. Prepare the journal entries to record this event that best conforms to generally accepted accounting principles.Description/Account Debit Credit

Accounts Receivable 15000000           Sales Revenue-Texts   15000000 Sales Returns 1800000            Allowance for Sales Returns   1800000 (d) In October, $2 million of the invoiced July sales were returned according to the return

policy, and the remaining $13 million was paid. Prepare the entries recording the return and payment. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)Description/Account Debit Credit

Allowance for Sales Returns 1800000  Sales Returns 200000             Accounts Receivable   2000000 (To record the return.)    Cash 13000000            Accounts Receivable   13000000 (To record the payment.)    

 

 

AE18-2

Correct.   (Sales Recorded Both Gross and Net)

On June 3, Hunt Company sold to Ann Mount merchandise having a sale price of $7,900 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $120, terms n/30, was received by Mount on June 8 from the Olympic Transport Service for the freight cost. Upon receipt of the goods, June 5, Mount notified Hunt Company that merchandise costing $700 contained flaws that rendered it worthless. The same day Hunt Company issued a credit memo covering the worthless merchandise and asked that it be returned at company expense. The freight on the returned merchandise was $32, paid by Hunt Company on June 7. On June 12, the company received a check for the balance due from Mount. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

(a) Prepare journal entries on Hunt Company books to record all the events noted above under each of the following bases.

  (1) Sales and receivables are entered at gross selling price.

Date   Description/Account Debit Credit

6/3 Accounts Receivable-Ann Mount 7900          Sales   7900 6/5 Sales Returns and Allowances 700          Accounts Receivable-Ann Mount   700 6/7 Transportation-Out 32          Cash   32 6/12 Cash 7056    Sales Discounts 144          Accounts Receivable-Ann Mount   7200   (2) Sales and receivables are entered net of cash discounts.

DateDescription/Account Debit Credit

6/3 Accounts Receivable-Ann Mount 7742          Sales   7742 6/5 Sales Returns and Allowances 686          Accounts Receivable-Ann Mount   686 6/7 Transportation-Out 32          Cash   32 6/12 Cash 7056          Accounts Receivable-Ann Mount   7056 (b) Prepare the journal entry under basis 2, assuming that Ann Mount did not remit payment

until August 5.

 

 

DateDescription/Account Debit Credit

8/5 Cash 7200          Accounts Receivable-Ann Mount   7056         Sales Discounts Forfeited   144

 

AE18-5

Correct.   (Analysis of Percentage-of-completion Financial Statements)

In 2010, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was $1,270,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2010, follow.

Balance SheetAccounts receivable-construction contract billings $22,860 Construction in progress $82,550 Less: Contract billings 78,105 Cost of uncompleted contract in excess of billings   4,445     

    Income StatementIncome (before tax) on the contract recognized in 2010

  $24,765

(a) How much cash was collected in 2010 on this contract?     $ 55245 (b) What was the initial estimated total income before tax on this contract?      $ 381000

AE18-5

(a) $55,245  Contract billings to date $78,105  Less: Accounts receivable 12/31/10 22,860  Portion of contract billings collected $55,245 (b) $381,000  $24,765 ÷ $82,550 = 30%   

 

  (The ratio of gross profit to revenue recognized in 2010.)     $1,270,000 × 30% = $381,000   

 (The initial estimated total gross profit before tax on the contract.)

E18-11

Correct.   (Installment-Sales Method Calculations, Entries)

Coffin Corporation appropriately uses the installment-sales method of accounting to recognize income in its financial statements. The following information is available for 2010 and 2011.

  2010 2011Installment sales $900,000   $1,000,000  Cost of installment sales 594,000   680,000  Cash collections on sales of 2010 370,000   350,000  Cash collections on sales of 2011 -0-   450,000  (a) Compute the amount of realized gross profit recognized in each year.

  2010 2011Realized gross profit recognized $ 125800 $ 263000 (b) Prepare all journal entries required in 2011.

Description/Account Debit CreditInstallment Accounts Receivable-2011 1000000         Installment Sales   1000000 Cost of Installment Sales 680000            Inventory   680000 Cash 800000           Installment Accounts Receivable -2010

  350000

         Installment Accounts Receivable -2011

  450000

Installment Sales 1000000           Cost of Installment Sales   680000          Defer. Gross Profit on Instal. Sales-2011

  320000

Defer. Gross Profit on Instal. Sales -2010 119000  Defer. Gross Profit on Instal. Sales -2011  144000  

 

 

 

           Real. Gross Profit on Instal. Sales   263000 Real. Gross Profit on Instal. Sales 263000            Income Summary   263000

AE18-16

Correct.   (Installment-Sales Method and Cost-Recovery Method) 

On January 1, 2010, Wetzel Company sold property for $200,000. The note will be collected as follows: $100,700 in 2010, $63,900 in 2011, and $35,400 in 2012. The property had cost Wetzel $150,000 when it was purchased in 2008. (If answer is zero, please enter 0, do not leave any fields blank.)

(a) Compute the amount of gross profit realized each year, assuming Wetzel uses the cost-recovery method.

Year Gross Profit Realized2010 $ 0 2011 $ 14600 2012 $ 35400

(b) Compute the amount of gross profit realized each year, assuming Wetzel uses the installment-sales method.

Year Gross Profit Realized2010 $ 25175 2011 $ 15975 2012 $ 8850

AE18-16

Year Gross Profit Realized2010 $02011 $14,6002012 $35,400

       Computation of gross profit realized—cost-recovery method:

(a)

 

 

YearCash

Received

OriginalCost

Recovered

Balance ofUnrecovered

Cost

GrossProfit

RealizedBeginning balance — — $150,000 —

2010 $100,700 $100,700     49,300 $02011    63,900     49,300 0 14,6002012    35,400 0 0 35,400

(b) Computation of gross profit realized—installment-sales method:Year Gross Profit Realized

2010 $25,1752011 $15,9752012 $8,850

  Gross profit rate: ($200,000 – $150,000) ÷ $200,000 = 25%  2010 Gross profit realized: $100,700 × 25% = $25,175  2011 Gross profit realized: $63,900 × 25% = $15,975  2012 Gross profit realized: $35,400 × 25% = $8,850

 

 

P18-2

(Recognition of Profit on Long-Term Contract)

Shanahan Construction Company has entered into a contract beginning January 1, 2010, to build a parking complex. It has been estimated that the complex will cost $600,000 and will take 3 years to construct. The complex will be billed to the purchasing company at $900,000. The following data pertain to the construction period.

    2010 2011 2012  Costs to date $270,000 $450,000 $610,000  Estimated costs to complete   330,000   150,000 -0-  Progress billings to date   270,000   550,000   900,000  Cash collected to date   240,000   500,000   900,000

Correct.   Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year of the construction period.

2010 $ 135000 2011 $ 90000 2012 $ 65000

Correct.   Using the completed-contract method, compute the estimated gross profit that would be recognized during each year of the construction period. (If answer is zero please enter 0, do

not leave any fields blank.)2010 $ 0 2011 $ 0 2012 $ 290000

P18-2

  2010 2011 2012Contract price $900,000   $900,000   $900,000  Less estimated cost:                  Costs to date   270,000     450,000     610,000        Estimated cost to complete 330,000   150,000   -        Estimated total cost 600,000   600,000   610,000            Estimated total gross profit $300,000   $300,000   $290,000  Gross Profit recognized in -

 2010:

$270,000× $300,000 = $135,000   

  $600,000                    

2011:$450,000

× $300,000 = 

$225,000 

  $600,000                         Less 2010 recognized gross profit 135,000      Gross profit in 2011 $90,000                     2012: Less 2010 - 2011 recognized gross profit   225,000    Gross profit in 2012   $65,000

P18-2

In 2010 and 2011, no gross profit would be recognized.   Total billings $900,000  Total cost 610,000

 Gross profit recognized in 2012

$290,000

P18-6

(Long-Term Contract with Interim Loss)

On March 1, 2010, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by October 31, 2012. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2010, 2011, and 2012 are given below.

    2010 2011 2012  Contract costs incurred during the year $2,880,000 $2,230,000 $2,190,000

 Estimated costs to complete the contract at 12/31

3,520,000 2,190,000 -0-

  Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000

Correct.   Using the percentage-of-completion method, complete the schedules below to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. (Ignore income taxes.) (For negative numbers use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).)

2010Costs to date (12/31/10) $ 2880000 Estimated costs to complete 3520000      Estimated total costs $ 6400000    Percent complete 45 %   Revenue recognized $ 3780000 Costs incurred 2880000

Profit recognized in 2010 $ 900000    

2011Costs to date (12/31/11) $ 5110000 Estimated costs to complete 2190000      Estimated total costs $ 7300000    Percent complete 70 %   Revenue recognized in 2011 $ 2100000 Costs incurred in 2011 2230000 Loss recognized in 2011 $ (130000)    

2012Total revenue recognized $ 8400000 Total costs incurred 7300000 Total profit on contract 1100000 Deduct profit previously recognized 770000 Profit recognized in 2012 $ 330000

Correct.   Using the completed-contract method, complete the schedule below to compute the profit or loss to be recognized as a result of this contract for the years ended December 2010, 2011, and 2012. (Ignore incomes taxes.) (If answer is zero please enter 0, do not leave any fields blank.)

2010 $ 0 2011 $ 0 2012 $ 1100000

P18-6

Computation of Recognizable Profit/Loss Percentage-of-Completion Method

2010Costs to date (12/31/10) $2,880,000

Estimated costs to complete 3,520,000     Estimated total costs $6,400,000   Percent complete ($2,880,000 ÷ $6,400,000) 45%   Revenue recognized ($8,400,000 × 45%) $3,780,000Costs incurred 2,880,000Profit recognized in 2010 $900,000   

2011Costs to date (12/31/11) ($2,880,000 + $2,230,000) $5,110,000Estimated costs to complete 2,190,000     Estimated total costs $7,300,000   Percent complete ($5,110,000 ÷ $7,300,000) 70%   Revenue recognized in 2011 ($8,400,000 × 70%) - $3,780,000

$2,100,000 

Costs incurred in 2011 2,230,000 Loss recognized in 2011 $(130,000)   

2012Total revenue recognized $8,400,000Total costs incurred 7,300,000Total profit on contract 1,100,000Deduct profit previously recognized ($900,000 - $130,000) 770,000Profit recognized in 2012 * $330,000

P18-6

Computation of Recognizable Profit/Loss Completed-Contract Method. 2010 $02011 $0

2012Total revenue recognized $8,400,000Total costs incurred 7,300,000Profit recognized in 2012 $1,100,000