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B EXERCISES
(L0 1, 2)

E18-1B (Revenue Recognition on Book Sales with High Returns) Chester Books Co. publishes romance novels 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 90 days after shipment. The retailer may return a maximum of 20% of an order at the retailers expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 16%, and the average collection period is 97 days. Instructions (a) Identify alternative revenue recognition tests that Chester Books could employ concerning textbook sales. (b) Briefly discuss the reasoning for your answers in (a) above. (c) In late October, Chester shipped books invoiced at $6,500,000. Prepare the journal entry to record this event that best conforms to generally accepted accounting principles and your answer to part (b). (d) In January, $725,000 of the invoiced October sales were returned according to the return policy, and the remaining amounts were paid. Prepare the entry recording the return and payment.

(L0 1, 2)

E18-2B (Sales Recorded Both Gross and Net) On October 5, Veri-Wyn Company sold to Dunn & Brooks merchandise having a sale price of $23,000 with terms of 1/10, n/30, f.o.b. shipping point. Dunn & Brooks received the goods on October 9 and promptly notified Veri-Wyn Company that merchandise costing $2,400 contained flaws that rendered it worthless. The same day Veri-Wyn Company issued a credit memo covering the worthless merchandise and asked that it be returned at company expense. An invoice totaling $230, terms n/30, was received by Dunn & Brooks on October 8 from Sugarland Express for the freight cost. The freight on the returned merchandise was $36, paid by Veri-Wyn Company on October 25. Finally, Veri-Wyn received a check for the balance due from Dunn & Brooks on November 2. Instructions (a) Prepare journal entries on Veri-Wyn 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. (2) Sales and receivables are entered net of cash discounts. (b) Prepare the journal entry under basis 2, assuming that Dunn & Brooks remitted the payment the payment on October 14.

(L0 1, 2)

E18-3B (Revenue Recognition on Annual Country Club Dues with Discounts) KimoCo Country Club is an exclusive country club located in North Dakota that offers a maximum of 1,000 annual memberships that it sells for $16,000 per year. Payments must be made in full at the start of the golfing season, April 1. Memberships for the next season may be reserved if paid for by December 31. Under a new policy, if payment is made by December 31, a 10% discount is allowed. The golfing season ends September 30, and the country club has a December 31 year-end. To provide cash flow for construction of an indoor pool and fitness center, the Board of Directors is also offering a 20% discount to members who pay for a 2-year membership before December 31. For the fiscal year ended December 31, 2007, 900 memberships for 2008 were sold. Members reserved and paid for 400 single-season memberships and for 150 2-year memberships. The balance of the memberships was paid for on April 1, 2007. Instructions Prepare the appropriate journal entries for fiscal 2007 in connection with the advance payments for the 2008 season.

(L0 3, 4)

E18-4B (Recognition of Profit on Long-Term Contracts) During 2007 AFCO started a construction job with a contract price of $2,500,000. The job was completed in 2009. The following information is available.
2007 Costs incurred to date Estimated costs to complete Billings to date Collections to date $ 600,000 1,400,000 100,000 100,000 2008 $1,435,000 615,000 500,000 300,000 2009 $2,100,000 0 2,500,000 2,000,000

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Chapter 18 Revenue Recognition

Instructions (a) Compute the amount of gross profit to be recognized each year assuming the percentage-ofcompletion method is used. (b) Prepare all necessary journal entries for 2008. (c) Compute the amount of gross profit to be recognized each year assuming the completed-contract method is used.

(L0 3)

E18-5B (Analysis of Percentage-of-Completion Financial Statements) In 2007, Landers Construction Corp. began construction work under a 5-year contract. The contract price was $25,000,000. Landers 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, 2007, follow.
Balance Sheet Accounts receivableconstruction contract billings Construction in progress Less: Contract billings Cost of uncompleted contract in excess of billings Income Statement Income (before tax) on the contract recognized in 2007 $130,000 $150,500 $650,000 260,000 390,000

Instructions (a) How much cash was collected in 2007 on this contract? (b) What was the initial estimated total income before tax on this contract? (AICPA adapted)
(L0 3)

E18-6B (Gross Profit on Uncompleted Contract) On July 1, 2007, Welton Inc. entered into a cost-plusfixed-fee contract to construct a prototype robotic assembly line for New Car Corporation. At the contract date, Welton estimated that it would take 2 years to complete the project at a cost of $4,200,000. The fixed fee stipulated in the contract is $750,000. Welton appropriately accounts for this contract under the percentage-of-completion method. During 2007 Welton incurred costs of $1,600,000 related to the project. The estimated cost at December 31, 2007, to complete the contract is $2,400,000. New Car was billed $1,200,000 under the contract. Instructions Prepare a schedule to compute the amount of gross profit to be recognized by Welton under the contract for the year ended December 31, 2007. Show supporting computations in good form. (AICPA adapted)

(L0 3, 5)

E18-7B (Recognition of Loss, Percentage-of-Completion) In 2007 Norcraft Sisters Construction agreed to construct a residence hall at University of the North at a price of $8,500,000. The information relating to the costs and billings for this contract is shown below.
2006 Costs incurred to date Estimated costs yet to be incurred Customer billings to date Collection of billings to date $ 800,000 7,200,000 500,000 200,000 2007 $4,050,000 4,950,000 4,000,000 3,200,000 2008 $8,950,000 0 8,500,000 8,000,000

Instructions (a) Assuming that the percentage-of-completion method is used, (1) compute the amount of gross profit to be recognized in 2007 and 2008, and (2) prepare journal entries for 2008. (b) For 2008, show how the details related to this construction contract would be disclosed on the balance sheet and on the income statement.
(L0 3, 4)

E18-8B (Recognition of Revenue on Long-Term Contract and Entries) Young Tree Construction Company uses the percentage-of-completion method of accounting. In 2007, Young Tree began work under a contract with a contract price of $1,500,000. Other details follow:
2007 Costs incurred during the year Estimated costs to complete, as of December 31 Billings to date Collections to date $980,000 420,000 800,000 250,000 2008 $1,375,000 0 1,500,000 1,500,000

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B Exercises
Instructions (a) What portion of the total contract price would be recognized as revenue in 2007? In 2008? (b) Assuming the same facts as those above except that Young Tree uses the completed-contract method of accounting, what portion of the total contract price would be recognized as revenue in 2008? (c) Prepare a complete set of journal entries for 2007 (using percentage-of-completion).
(L0 3, 4)

E18-9B (Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts) Harman Construction Company began operations January 1, 2007. During the year, Harman Construction entered into a contract with Kardon Corp. to construct a retail showcase facility. At that time, Harman estimated that it would take 2 years to complete the facility, at a total cost of $7,500,000. The total contract price for construction of the facility is $9,000,000. During the year, Harman incurred $3,040,000 in construction costs related to the construction project. The estimated cost to complete the contract is $4,560,000. Kardon Corp. was billed and paid 20% of the contract price. Instructions Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2007, and the amount to be shown as costs and unrecognized profit on uncompleted contract in excess of related billings or billings on uncompleted contract in excess of related costs and recognized profit at December 31, 2007, under each of the following methods. (a) Completed-contract method. (b) Percentage-of-completion method. Show supporting computations in good form. (AICPA adapted)

(L0 4, 5)

E18-10B (Long-Term Contract Reporting) Bearing Construction Company began operations in 2007. Construction activity for the first year is shown below. All contracts are with different customers, and any work remaining at December 31, 2007, is expected to be completed by the end of 2008.
Total Contract Price $ 450,000 200,000 360,000 $1,010,000 Billings through 12/31/07 $ 80,000 200,000 210,000 $490,000 Cash Collections through 12/31/07 $ 70,000 180,000 210,000 $460,000 Contract Costs Incurred through 12/31/07 $115,000 191,000 79,000 $385,000 Estimated Additional Costs to Complete $276,500 0 310,000 $586,500

Project X Y Z

Instructions Prepare a partial income statement and balance sheet to indicate how the above information would be reported for financial statement purposes. Bearing Construction Company uses the completed-contract method.
(L0 6)

E18-11B (Installment-Sales Method Calculations, Entries) Mandarin Partners appropriately uses the installment-sales method of accounting to recognize income in its financial statements. The following information is available for 2007 and 2008.
2007 Installment sales Cost of installment sales Cash collections on 2007 sales Cash collections on 2008 sales $300,000 255,000 70,000 0 2008 $750,000 660,000 201,000 216,000

Instructions (a) Compute the amount of realized gross profit recognized in each year. (b) Prepare all journal entries required in 2008.
(L0 6)

E18-12B (Analysis of Installment-Sales Accounts) Republic Distributors. appropriately uses the installment-sales method of accounting. On December 31, 2007, the books show balances as follows.
Installment Receivables 2005 2006 2007 $ 85,000 140,000 60,000 Deferred Gross Profit $56,800 80,200 45,000 Gross Profit on Sales 26% 22% 25%

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Chapter 18 Revenue Recognition

Instructions (a) Prepare the adjusting entry or entries required on December 31, 2007, to recognize 2007 realized gross profit. (Installment receivables have already been credited for cash receipts during 2007.) (b) Compute the amount of cash collected in 2007 on accounts receivable each year.

(L0 6)

E18-13B (Gross Profit Calculations and Repossessed Merchandise) Duke Corporation appropriately uses the installment-sales method of accounting. The following data were obtained for the years 2007 and 2008. Duke did not make any installment sales prior to 2007.
2007 Installment sales Cost of installment sales General & administrative expenses Cash collections on sales of 2007 Cash collections on sales of 2008 $600,000 480,000 25,000 250,000 0 2008 $530,000 434,600 30,000 285,000 168,000

Instructions (a) Compute the balance in the deferred gross profit accounts on December 31, 2007, and on December 31, 2008. (b) A 2007 sale resulted in default in 2009. At the date of default, the balance on the installment receivable was $12,000, and the repossessed merchandise had a fair value of $8,000. Prepare the entry to record the repossession. (AICPA adapted)
(L0 6)

E18-14B (Interest Revenue from Installment Sale) Upper World Corporation sells tractor trailers on the installment plan. On October 1, 2007, Upper World entered into an installment-sale contract with Lower Sky Inc. for a 5-year period. Equal annual payments under the installment sale are $250,000 and are due beginning October 1, 2007. Additional information 1. The amount that would be realized on an outright sale of similar trailer is $965,000. 2. The cost of the trailer sold to Lower Sky, Inc. is $786,000. 3. The finance charges relating to the installment period are $285,000 based on an effective interest rate of 14.9%, which is appropriate. 4. Circumstances are such that the collection of the installments due under the contract is reasonably assured. Instructions What income or loss before income taxes should Upper World record for the year ended December 31, 2007, as a result of the transaction above? (AICPA adapted)

(L0 6, 7)

E18-15B (Installment-Sales Method and Cost Recovery) Eagle Flyer Corp. operates on a calendaryear basis, and began making installment sales in 2006; the company usese the installment-sales method of profit recognition in accounting. The following data were taken from the 2006 and 2007 records.
2006 Installment sales Gross profit as a percent of costs Cash collections on sales of 2006 Cash collections on sales of 2007 $750,000 18% $340,000 0 2007 $1,350,000 20% $340,000 $580,000

The amounts given for cash collections exclude amounts collected for interest charges. Instructions (a) Compute the amount of realized gross profit to be recognized on the 2007 income statement, prepared using the installment-sales method. (b) State where the balance of Deferred Gross Profit would be reported on the financial statements for 2007. (c) Compute the amount of realized gross profit to be recognized on the 2007 income statement, prepared using the cost-recovery method. (CIA adapted)
(L0 6, 7)

E18-16B (Installment-Sales Method and Cost-Recovery Method) On April 1, 2006, Joy Ltd. sold land for $600,000. The note will be collected as follows: $100,000 in 2006, $200,000 in 2007, and $300,000 in 2008. The property had cost Joy $122,000 when it was purchased in 1995.

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B Exercises
Instructions (a) Compute the amount of gross profit realized each year, assuming Joy uses the cost-recovery method. (b) Compute the amount of gross profit realized each year, assuming Joy uses the installment-sales method.
(L0 7)

E18-17B (Cost-Recovery Method) On January 1, 2007, Pioneer Capital sold real estate that cost $1,380,000 to Hi-sony for $1,560,000. Beginning on January 1, 2007, Hi-sony agrees to make 4 annual payments of $458,576 that include 12% interest. Shortly after the sale, Pioneer Capital learns distressing news about Hi-sonys financial circumstances and because collection is so uncertain decides to account for the sale using the cost-recovery method. Instructions Applying the cost-recovery method, prepare a schedule showing the amounts of cash collected, the increase (decrease) in deferred interest revenue, the balance of the receivable, the balance of the unrecovered cost, the gross profit realized, and the interest revenue realized for each of the years, assuming the payments are made as agreed.

(L0 6)

E18-18B (Installment SalesDefault and Repossession) Green Acres Ltd. was involved in two default and repossession cases during the year: 1. A home theatre system was sold to Jonathan Quick for $2,400, including a 40% markup on selling price. Quick made a down payment of 10% plus four of the remaining 24 equal payments of $90, and then defaulted on further payments. The home theatre system was repossessed, at which time the fair value was determined to be $475. 2. A TV that cost $1,500 was sold to Haji Jari for $3,180 on the installment basis. Jari made a down payment of $300 and paid $160 a month for 10 months, after which he defaulted. The TV was repossessed, and the estimated value at time of repossession was determined to be $850. Instructions Prepare journal entries to record each of these repossessions. (Ignore interest charges.)

(L0 6)

E18-19B (Installment SalesDefault and Repossession) X-Run Inc. uses the installment-sales method in accounting for its installment sales. On January 1, 2007, X-Run had an installment account receivable from Herman Pringle with a balance of $3,900. During 2007, $700 was collected from Pringle. When no further collection could be made, the merchandise sold to Pringle was repossessed. The merchandise had a fair market value of $2,150 after the company spent $110 for reconditioning of the merchandise. The merchandise was originally sold with a gross profit rate of 20%. Instructions Prepare the entries on the books of X-Run, Inc. to record all transactions related to Pringle during 2007. (Ignore interest charges.)

(L0 7)

E18-20B (Cost-Recovery Method) On July 1, 2007, Four Cross sells 200 acres of timberland for $2,500,000, taking in exchange a 6% interest-bearing note. Four Cross purchased the land in 1995 at a cost of $2,000,000. The note will be paid in three installments of $935,274 each on June 30, 2008, 2009, and 2010. Collectibility of the note is uncertain; Four Cross, therefore, uses the cost-recovery method. Instructions Prepare for Four Cross a 3-year installment payment schedule (under the cost-recovery method) that shows cash collections, deferred interest revenue, installment receivable balances, unrecovered cost, realized gross profit, and realized interest revenue by year. Four Cross reports on a calendar-year basis.

(L0 8)

*E18-21B (Franchise Entries) Burger Universe charges an initial franchise fee of $225,000. Upon the
signing of the agreement, a payment of $25,000 is due. Thereafter, five annual payments of $40,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 12% to borrow money. Instructions Prepare the entries to record the initial franchise fee on the books of the franchisor under the following assumptions. (a) The franchisor has minimal services to perform, the down payment is refundable, and the collection of the note is certain. (b) The down payment is not refundable, substantial future services are required by the franchisor, and collection of the note is reasonably certain. (c) The down payment is not refundable, collection of the note is reasonably certain; the franchisor has performed approximately one-half of the required services.

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Chapter 18 Revenue Recognition *E18-22B (Franchise Fee, Initial Down Payment) On January 1, 2007, Shaw & Shaw signed an agreement to operate as a franchisee of World Premiere Salons for an initial franchise fee of $130,000. The amount of $20,000 was paid when the agreement was signed, and the balance is payable in four annual payments of $27,500 each, beginning January 1, 2008. The agreement provides that the down payment is not refundable and that no future services are required of the franchisor. Shaw & Shaws credit rating indicates that the company can borrow money at 10% for a loan of this type. Instructions (a) How much should World Premiere Salons record as revenue from franchise fees on January 1, 2007? At what amount should Shaw & Shaw record the acquisition cost of the franchise on January 1, 2007? (b) What entry would be made by World Premiere Salons on January 1, 2007, if the down payment is refundable and substantial future services remain to be performed by World Premiere Salons? (c) How much revenue from franchise fees would be recorded by World Premiere Salons on January 1, 2007, under the following conditions? (1) The initial down payment is not refundable, it represents a fair measure of the services already provided, a significant amount of services is still to be performed by World Premiere Salons in future periods, and collectibility of the note is reasonably assured. (2) The initial down payment is not refundable and no future services are required by the franchisor, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted. (3) The initial down payment has not been earned and collection of the note is so uncertain that recognition of the note as an asset is unwarranted.

(L0 8)

(L0 8)

*E18-23B (Consignment Computations) On August 15, 2007, Japan Ideas consigned 500 electronic play
systems, costing $100 each, to YoYo Toys Company. The cost of shipping the play systems amounted to $1,250 and was paid by Japan Ideas. On December 31, 2007, an account sales summary was received from the consignee, reporting that 420 play systems had been sold for $160 each. Remittance was made by the consignee for the amount due, after deducting a commission of 20% commission. Instructions Compute the following at December 31, 2007: (a) The inventory value of the units unsold in the hands of the consignee. (b) The profit for the consignor for the units sold. (c) The amount of cash that will be remitted by the consignee.