hw chap 18

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Community College of Philadelphia *

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Apr 3, 2024

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CHAPTER 18 1. Carla Corp. enters into a contract with a customer to build an apartment building for $1,013,300. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $152,100 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $50,700 each week that completion is delayed. Carla commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability August 1, 2021 70 % August 8, 2021 20 August 15, 2021 5 After August 15, 2021 5 Determine the transaction price for this contract. Transaction Price 1142585 Solution The transaction price should include management’s estimate of the amount of consideration to which the entity will be entitled. Given the multiple outcomes and probabilities available based on prior experience, the probability-weighted method is the most predictive approach for estimating the variable consideration in this situation: Completion Date Probability Expected Value August 1 70% chance of $1,165,400 = $815,780 August 8 20% chance of $1,114,700 = 222,940

August 15 5% chance of $1,064,000 = 53,200 After August 15 5% chance of $1,013,300 = 50,665 $1,142,585 2. On May 1, 2020, Crane Inc. entered into a contract to deliver one of its specialty mowers to Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of $819 in advance on May 15, 2020. Kickapoo pays Crane on May 15, 2020, and Crane delivers the mower (with cost of $485) on May 31, 2020. (a) Prepare the journal entry on May 1, 2020, for Crane. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.) (b) Prepare the journal entry on May 15, 2020, for Crane. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.) 3. Nash Company sells goods to Danone Inc. by accepting a note receivable on January 2, 2020. The goods have a sales price of $599,300 (cost of $490,000). The terms are net 30. If Danone pays within 5 days, however, it receives a cash discount of $9,300. Past history indicates that the cash discount will be taken. On January 28, 2020, Danone makes payment to Nash for the full sales price.

a) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Nash Company on January 2, 2020, and the payment on January 28, 2020. Assume that Nash Company records the January 2, 2020, transaction using the net method. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.) Solution Sales Revenue ($599,300 − $9,300) = 590,000 Note that the time value of money is not considered because the contract is less than a year. Also if payment occurs within 5 days, under the net method, the entry would be: Date Account Titles and Explanation Debit Credit Jan. 28, 2020 Cash 590,000 Notes Receivable 590,000

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4. Stellar Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Stellar will receive a payment of $11,500,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Stellar determines it is 90% likely that the drug will gain approval and a 10% chance of denial. Determine the transaction price of the arrangement for Stellar Biotech. Transaction price 11500000 Solution Because the arrangement only has two possible outcomes (regulatory approval is achieved or not), Stellar determines the transaction price based on the most likely approach. Thus, the best measure for the transaction price is $11,500,000 . b) Assuming that regulatory approval was granted on December 20, 2020, and that Stellar received the payment from Pang on January 15, 2021, prepare the journal entries for Stellar. The license meets the criteria for point-in-time revenue recognition. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.) 5. Whispering’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of $120 on January 2, 2020. In addition, Whispering will receive an additional commission of $10 each year for as long as the policyholder does not cancel the policy. After selling the policy, Whispering does not have any remaining performance obligations. Based on Whispering’s signific ant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years, which results in an expected policy life of 5.5 years. It has no evidence to suggest that previous policyholder behavior will change. Determine the transaction price of the arrangement for Whispering, assuming 90 policies are sold. (Round answer to 0 decimal places, e.g. 5,125.) Transaction $14850 Solution Whispering determines that the transaction price for the 90 policies is $14,850 [( 90 x $ 120 ) + ($ 10 x 4.5 x 90 )]. b) Determine the revenue that Whispering will recognize in 2020. (Round answer to 0 decimal places, e.g. 5,125.)

Revenue $2700 Whispering will recognize revenue of $2,700 ($ 14,850 x 12/66), because on average, customers renew for 4.5 years, Whispering includes that amount in its estimate for the transaction price. As circumstances change, Whispering updates its estimate of the transaction price and recognizes revenue (or a reduction of revenue) for those changes in circumstances. 6. Larkspur Marina has 300 available slips that rent for $900 per season. Payments must be made in full by the start of the boating season, April 1, 2021. The boating season ends October 31, and the marina has a December 31 year-end. Slips for future seasons may be reserved if paid for by December 31, 2021. Under a new policy, if payment for 2022 season slips is made by December 31, 2021, a 5% discount is allowed. If payment for 2023 season slips is made by December 31, 2021, renters get a 18% discount (this promotion hopefully will provide cash flow for major dock repairs). On December 31, 2020, all 300 slips for the 2021 season were rented at full price. On December 31, 2021, 197 slips were reserved and paid for the 2022 boating season, and 65 slips were reserved and paid for the 2023 boating season. (a) Prepare the appropriate journal entries for December 31, 2020, and December 31, 2021. (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

7. Blossom Windows manufactures and sells custom storm windows for three-season porches. Blossom also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Blossom enters into the following contract on July 1, 2020, with a local homeowner. The customer purchases windows for a price of $2,420 and chooses Blossom to do the installation. Blossom charges the same price for the windows irrespective of whether it does the installation or not. The installation service is estimated to have a standalone selling price of $580. The customer pays Blossom $1,920 (which equals the standalone selling price of the windows, which have a cost of $1,100) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2020, Blossom completes installation on October 15, 2020, and the customer pays the balance due. Prepare the journal entries for Blossom in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Round answer to 0 decimal places, e.g. 5,125.)

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Solution On September 1, 2020, Blossom has two performance obligations: (1) the delivery of the windows and (2) the installation of the windows. Windows $1,920 Installation 580 Total $ 2,500 Allocation Windows ($1,920 ÷ $2,500) x $2,420 = $1,859 Installation ($580 ÷ $2,500) x $2,420 = 561 Revenue recognized $ 2,420 The sale of the windows is recognized once delivered. The installation fee is recognized when the windows are installed.

8. During 2020, Flounder Company started a construction job with a contract price of $1,610,000. The job was completed in 2022. The following information is available. 2020 2021 2022 Costs incurred to date $434,300 $859,560 $1,073,000 Estimated costs to complete 575,700 242,440 – 0 – Billings to date 301,000 897,000 1,610,000 Collections to date 271,000 817,000 1,428,000 a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of- completion method is used. Gross profit recognized in: 2020 2021 2022 Contract price $1,610, 000 $1,610, 000 $1,610, 000 Costs:

Costs to date $434, 300 $859, 560 $1,073, 000 Estim ated costs to complete 575,7 00 1,010,0 00 242,4 40 1,102,0 00 0 1,073,0 00 Total estimate d profit 600,000 508,000 537,000 Percenta ge complete d to date x 0.43 * x 0.78 * * x 1.00 Total gross profit recogniz ed 258,000 396,240 537,000 Less: Gross profit recogniz ed in previous years 0 258,000 396,240 Gross profit recogniz ed in current year $258,00 0 $138,24 0 $140,76 0

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*$434,300 ÷ $1,010,000 = 43% **$859,560 ÷ $1,102,000 = 78% b) Prepare all necessary journal entries for 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. For costs incurred use account Materials, Cash, Payables.) Solution Construction in Process = ($859,560 – $434,300) = $425,260 Accounts Receivable = ($897,000 – $301,000) = $596,000 Cash = ($817,000 – $271,000) = $546,000

Revenue from Long-Term Contracts = $1,610,000 x (0.78 – 0.43) = $563,500 c) Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used. Solution Gross profit recognized in 2022 = $1,610,000 – $1,073,000 = $537,000 9) In 2020, Pearl Construction Corp. began construction work under a 3-year contract. The contract price was $1,090,000. Pearl 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, 2020, are shown below. Balance Sheet Accounts receivable $16,600 Construction in process $62,600 Less: Billings 58,000 Costs and recognized profit in excess of billings 4,600 Income Statement Income (before tax) on the contract recognized in 2020 $20,032 (a) How much cash was collected in 2020 on this contract? (b) What was the initial estimated total income before tax on this contract?

Solution 10. On April 1, 2020, Sage Inc. entered into a cost plus fixed fee contract to construct an electric generator for Altom Corporation. At the contract date, Sage estimated that it would take 2 years to complete the project at a cost of $2,200,000. The fixed fee stipulated in the contract is $443,000. Sage appropriately accounts for this contract under the percentage-of-completion method. During 2020, Sage incurred costs of $946,000 related to the project. The estimated cost at December 31, 2020, to complete the contract is $1,254,000. Altom was billed $555,000 under the contract. Prepare a schedule to compute the amount of gross profit to be recognized by Sage under the contract for the year ended December 31, 2020. (If an amount reduces the account balance then enter with negative sign., e.g. -45 or parentheses e.g. (45).)

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SAGE INC. Computation of Gross Profit to be Recognized on Uncompleted Contract Year Ended December 31, 2020 Total Contract Price Estimated Contract Cost at Completion $2200000 Fixed Fee $443000 Total $2643000 Total Estimated Cost $2200000 Gross Profit $443000 Percentage of Completion 43% Gross Profit to be Recognized $190490 Solution Estimated contract cost at completion = ($946,000 + $1,254,000) = $2,200,000 Percentage of completion = ($946,000 ÷ $2,200,000) = 0.43