Exercise 5-2

2006 To record installment salesInstallment receivables................................................... 360,000

Inventory..................................................................... 234,000Deferred gross profit................................................... 126,000

2006 To record cash collections from installment salesCash................................................................................ 150,000

Installment receivables............................................... 150,000

2006 To recognize gross profit from installment salesDeferred gross profit....................................................... 52,500

Realized gross profit................................................... 52,500

2007 To record installment salesInstallment receivables................................................... 350,000

Inventory..................................................................... 245,000Deferred gross profit................................................... 105,000

2007 To record cash collections from installment salesCash................................................................................ 220,000

Installment receivables............................................... 220,000

2007 To recognize gross profit from installment salesDeferred gross profit....................................................... 71,000

Realized gross profit................................................... 71,000

Exercise 5-7Requirement 1

2006 2007Contract price $2,000,000 $2,000,000Actual costs to date 300,000 1,875,000Estimated costs to complete 1,200,000 - 0 -

Total estimated costs 1,500,000 1,875,000Gross profit (estimated in 2006) $ 500,000 $ 125,000

Gross profit recognition:2006: $ 300,000

= 20% x $500,000 = $100,000$1,500,000

2007: $125,000 - $100,000 = $25,000

Requirement 22006 $ - 0 -2007 $125,000

Requirement 3

Balance SheetAt December 31, 2006

Current assets:Accounts receivable $ 130,000Costs and profit ($400,000*) in excess of billings ($380,000) 20,000

* Costs ($300,000) + profit ($100,000)

Exercise 5-7 (concluded)

Requirement 4

Balance SheetAt December 31, 2006

Current assets:Accounts receivable $ 130,000

Current liabilities:Billings ($380,000) in excess of costs ($300,000) $ 80,000

Problem 5-2Requirement 1

2006 Cost recovery % :

$180,000 = 60% (gross profit % = 40%)

$300,000

2007 Cost recovery %:

$280,000 = 70% (gross profit % = 30%)

$400,000

2006 gross profit:

Cash collection from 2006 sales = $120,000 x 40% = $48,000

2007 gross profit:

Cash collection from 2006 sales = $100,000 x 40% = $ 40,000 + Cash collection from 2007 sales = $150,000 x 30% = 45,000

Total 2007 gross profit $85,000

Requirement 2

2006 To record installment salesInstallment receivables................................................... 300,000

Inventory..................................................................... 180,000Deferred gross profit................................................... 120,000

2006 To record cash collections from installment salesCash................................................................................ 120,000

Installment receivables............................................... 120,000

2006 To recognize gross profit from installment salesDeferred gross profit....................................................... 48,000

Realized gross profit................................................... 48,000

Problem 5-2 (continued)

2007 To record installment salesInstallment receivables................................................... 400,000

Inventory..................................................................... 280,000Deferred gross profit................................................... 120,000

2007 To record cash collections from installment salesCash................................................................................ 250,000

Installment receivables............................................... 250,000

2007 To recognize gross profit from installment salesDeferred gross profit....................................................... 85,000

Realized gross profit................................................... 85,000

Requirement 3

Date Cash Collected Cost Recovery Gross Profit

20062006 sales $120,000 $120,000 - 0 -

20072006 sales $100,000 $ 60,000 $40,0002007 sales 150,000 150,000 - 0 -

2007 totals $250,000 $210,000 $40,000

Problem 5-2 (concluded)

2006 To record installment salesInstallment receivables................................................... 300,000

Inventory..................................................................... 180,000Deferred gross profit................................................... 120,000

2006 To record cash collection from installment salesCash................................................................................ 120,000

Installment receivables............................................... 120,000

2007 To record installment salesInstallment receivables................................................... 400,000

Inventory..................................................................... 280,000Deferred gross profit................................................... 120,000

2007 To record cash collection from installment salesCash................................................................................ 250,000

Installment receivables............................................... 250,000

2007 To recognize gross profit from installment salesDeferred gross profit....................................................... 40,000

Realized gross profit................................................... 40,000

Problem 5-3Requirement 1Total profit = $500,000 - 300,000 = $200,000

Installment sales method: Gross profit % = $200,000 ÷ $500,000 = 40%

8/31/06 8/31/07 8/31/08 8/31/09 8/31/10

Cash collections $100,000 $100,000 $100,000 $100,000 $100,000

a. Point of delivery method $200,000 - 0 - - 0 - - 0 - - 0 -

b. Installment sales method (40% x cash collected) $ 40,000 $ 40,000 $ 40,000 $ 40,000 $40,000

c. Cost recovery method - 0 - - 0 - - 0 - $100,000 $100,000

Problem 5-3 (continued)

Requirement 2

Point of Delivery

Installment Sales Cost Recovery

Installment receivable 500,000 Sales revenue 500,000Cost of goods sold 300,000 Inventory 300,000To record sale on 8/31/06.

Installment receivable 500,000 500,000 Inventory 300,000 300,000 Deferred gross profitTo record sale on 8/31/06.

200,000 200,000

Cash 100,000 100,000 100,000 Installment receivable 100,000 100,000 100,000Entry made each Aug. 31.

Deferred gross profit 40,000 Realized gross profitTo record gross profit.(entry made each Aug. 31)

40,000

Deferred gross profit 100,000 Realized gross profitTo record gross profit.(entry made 8/31/09 & 8/31/10)

100,000

Problem 5-3 (concluded)

Requirement 3

Point of Delivery

Installment Sales

Cost Recovery

December 31, 2006AssetsInstallment receivablesLess: Deferred gross profitInstallment receivables, net

400,000 400,000(160,000)240,000

400,000(200,000)200,000

December 31, 2007AssetsInstallment receivablesLess: Deferred gross profitInstallment receivables, net

300,000 300,000(120,000)180,000

300,000(200,000)100,000

Problem 5-4Requirement 1

2006 2007 2008Contract price $10,000,000 $10,000,000 $10,000,000Actual costs to date 2,400,000 6,000,000 8,200,000Estimated costs to complete 5,600,000 2,000,000 - 0 - Total estimated costs 8,000,000 8,000,000 8,200,000Estimated gross profit (loss) (actual in 2008) $ 2,000,000 $ 2,000,000 $ 1,800,000

Gross profit (loss) recognition:

2006: $2,400,000 = 30.0% x $2,000,000 = $600,000$8,000,000

2007: $6,000,000 = 75.0% x $2,000,000 = $1,500,000 - 600,000 = $900,000$8,000,000

2008: $1,800,000 - 1,500,000 = $300,000

Requirement 2

2006 2007 2008

Construction in progress 2,400,000 3,600,000 2,200,000 Various accounts 2,400,000 3,600,000 2,200,000To record construction costs.

Accounts receivable 2,000,000 4,000,000 4,000,000 Billings on construction contract 2,000,000 4,000,000 4,000,000To record progress billings.

Cash 1,800,000 3,600,000 4,600,000 Accounts receivable 1,800,000 3,600,000 4,600,000To record cash collections.

Construction in progress (gross profit) 600,000 900,000 300,000Cost of construction (cost incurred) 2,400,000 3,600,000 2,200,000 Revenue from long-term contracts (1) 3,000,000 4,500,000 2,500,000To record gross profit.

Problem 5-4 (continued)

(1) Revenue recognized:2006: 30% x $10,000,000 = $3,000,0002007: 75% x $10,000,000 = $7,500,000

Less: Revenue recognized in 2006 (3,000,000)Revenue recognized in 2007 $4,500,0002008: 100% x $10,000,000 = $10,000,000

Less: Revenue recognized in 2006 & 2007 (7,500,000)Revenue recognized in 2008 $2,500,000

Requirement 3

Balance Sheet 2006 2007

Current assets:Accounts receivable $ 200,000 $600,000Construction in progress $3,000,000 $7,500,000

Less: Billings (2,000,000 ) (6,000,000 )Costs and profit in excess of billings 1,000,000 1,500,000

Requirement 42006 2007 2008

Costs incurred during the year $2,400,000 $3,800,000 $3,200,000Estimated costs to complete

as of year-end 5,600,000 3,100,000 -

2006 2007 2008Contract price $10,000,000 $10,000,000 $10,000,000Actual costs to date 2,400,000 6,200,000 9,400,000Estimated costs to complete 5,600,000 3,100,000 - 0 - Total estimated costs 8,000,000 9,300,000 9,400,000Estimated gross profit (actual in 2008) $ 2,000,000 $ 700,000 $ 600,000

Problem 5-4 (concluded)

Gross profit (loss) recognition:2006: $2,400,000

= 30.0% x $2,000,000 = $600,000$8,000,000

2007: $6,200,000 = 66.6667% x $700,000 = $466,667 - 600,000 = $(133,333)$9,300,000

2008: $600,000 - 466,667 = $133,333

Requirement 52006 2007 2008

Costs incurred during the year $2,400,000 $3,800,000 $3,900,000Estimated costs to complete

as of year-end 5,600,000 4,100,000 -

2006 2007 2008Contract price $10,000,000 $10,000,000 $10,000,000Actual costs to date 2,400,000 6,200,000 10,100,000Estimated costs to complete 5,600,000 4,100,000 - 0 - Total estimated costs 8,000,000 10,300,000 10,100,000Estimated gross profit (loss) (actual in 2008) $ 2,000,000 $ (300,000 ) $ (100,000 )

Gross profit (loss) recognition:

2006: $2,400,000 = 30.0% x $2,000,000 = $600,000

$8,000,000

2007: $(300,000) - 600,000 = $(900,000)

2008: $(100,000) - (300,000) = $200,000

Problem 5-7Requirement 1a. January 30, 2006

Cash ............................................................................... 200,000Note receivable .............................................................. 1,000,000

Unearned franchise fee revenue..................................1,200,000

b. September 1, 2006

Unearned franchise fee revenue...................................... 1,200,000Franchise fee revenue ................................................1,200,000

c. September 30, 2006

Accounts receivable ($40,000 x 3%) ................................. 1,200Service revenue .......................................................... 1,200

d. January 30, 2007

Cash................................................................................ 100,000Note receivable .......................................................... 100,000

Problem 5-7 (concluded)

Requirement 2a. January 30, 2006

Cash ............................................................................... 200,000Note receivable .............................................................. 1,000,000

Deferred franchise fee revenue...................................1,200,000

b. September 1, 2006

Deferred franchise fee revenue ...................................... 200,000Franchise fee revenue (cash collected)........................... 200,000

c. September 30, 2006

Accounts receivable ($40,000 x 3%) ................................. 1,200Service revenue .......................................................... 1,200

d. January 30, 2007

Cash................................................................................ 100,000Note receivable .......................................................... 100,000

Deferred franchise fee revenue ...................................... 100,000Franchise fee revenue ................................................ 100,000